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Excerpts from Sanjeev Sanyal’s talk at PMI. Sanjeev Sanyal is the Principle Economic Advisor to the government of India.
India Before 1991
The first 45 years after independence were spent in a particular economic framework. Post independence, there was split between preference for a socialist type economy and market based economy amongst the economic thinkers. There were arguments against acceptance of socialist economy, but Prime Minister Nehru had inclination towards the socialist approach. There were great economist opposing this idea which included Dr Ambedkar, Rajagopal Acharya and many others, but they failed and we ended up in a socialist economy.
But soon with the time it was realised not in less than a decade the socialist economy was a failure. Right in the beginning Mundra Scandal hit India in 1956 when LIC was nationalized. Infact Soviet inspired Licence Raj came into existence in the beginning of this period.
By early 1990s, it was high time to open up the economy. In the regime of Prime Minister Narsimha Rao and Manmohan Singh, the Indian economy started to open up and was amongst the fast growing countries. It was after hundreds of years that India’s share in Global economy started to rise!
Now its time to think about maximum governance, before the withdrawal of this government. In Prime Minister Modi’s government, they tried to shift India from an economy that is patronage and rent seeking to a Rule Based economy.
Although India liberalized in 1991, it didn’t change its policy but continued to be a patronage and rent seeking and capturing resources. Before 1991 it was capturing licences and now it captures natural resources, loan from banking sectors, spectrum etc. After 1991 mining licencing, loans from banks with unsaid that this money is not to be paid back, etc. continued which lead us into a softer version of oligarchy. A small elite continues to control India’s business.
This softer version of oligarchy which was seen in Russia, it was taking undue advantage and so rather than innovation and progress their focus shifted to who knew, how well you know and how much land bank you can create, how many large loans you can grab, once you grab it how much you can milk it.
So now our purpose is to run a rule-based economy. Why we are trying to shift to a rule-based economy?
The same Indian when in abroad will drive perfectly well but while in India he will drive like a lunatic. Reason is lack of governance and business culture. As everyone else is doing, it is fine to do this!
Building A Rule Based Economy – Sanjeev Sanyal
India Between 1991-2014
India was considered to be a country with high inflation with occasionally inflation levels coming down. Inflation levels in the range of 8 to 10% were normal for us. Occasionally there were dharnas for onion prices, but by and large everyone accepted it. Inflation is very costly thing for poor sections and also leads to a high cost of capital. For a permanent solution or reduction in inflation, we created monetary policy committee which is independent body, independent of government and partly independent of RBI as part of its members were non-reserve bank members. They were given clear mandate to hold inflation rate between 2 to 6%. And due to that we really controlled our inflation till today despite of having high oil prices and other external factors.
This is very big deal today that inflation is at 4%, while maintaining a reasonable high-level growth. It is a very big achievement! The latest GDP growth that is not done by RBI or our government but by IMF states that indies growth will be around 7.3% – 7.5% this calendar year and next year.
This makes India the fastest growing economy in the world, faster than China and significantly faster than the U.S and more than double the world growth rate. This is what India did to lower the inflation rate by 500 basis points in the course of 3 years. Any country other than India in the same situation would have faced the recession. And the fact that we have kept the highest growth rate during this transition is a real testimony not only for government but for all the businessmen.
And in result to this, our structural interest rate will also fall by 300-400 basis points by 2022. And this is possible because India has already gone through such transition before. A sharp reduction in cost of capital will allow India to stay high growth rate country into the next generation.
India After 2014
When it was decided to come up with a single tax structure, there were arguments and debates as well. It was easier for Mumbai to trade with Shanghai than for Mumbai to trade with Delhi. But no matter what, we never arrived to any implementation of any uniform tax system until 2017. India being such a large country and this being the single biggest tax reform, it was going to be challenging but, in the end, India was unified into one GST system. How much ever prepared we would have been, there were going to be some unintended consequences. It is interesting that what went wrong were not the things everybody had told us would go wrong. Eg: Nobody told us that the refunds to the exporters would suddenly get stuck, nobody had told us that the error correction button on the website would break down, etc. Through a process of iteration we have managed to correct many of these things and now we have a fairly manageable GST system functioning.
Another change before 1991 India had socialism and only lucky few got their licences to do business. After 1991 we allowed entry to everyone, but we had capitalism without exit. Not talking about frauds, but due to genuine mistakes if a businessman goes wrong and if it is not allowed an exit, overtime we will accumulate these mistakes and we will get stuck. And this was the biggest challenge as it damaged the economy, it was an obstacle in innovation. This is a major reason our banking system kept accumulating all the bad loans. There were huge bad loans on banks due to restricted exit of business which exponentially increased the tax burden on overall banking system. By 2015-16 it was decided to do something about all the bad loans. So, we decided to use completely brand-new insolvency and bankruptcy code to try clean up the banks.
A possible solution was to create a bad bank, which would be a warehouse for all the bad loans and recapitalize the existing banks. But this would have not brought any business culture change. IBC was the biggest gutsy step that was taken by government. Again, it was going to be tough, but this transition was necessary. Just top 50 cases of NPA accounted for 2/3rd of the NPAs. So the restructuring of such companies started and for the first time in independent India we are seeing creative destruction taking place. This is very important moment in India’s economic history. These are some of the major moments that will be remembered 100 years from now. They were really painful but necessary.
Post 2019 – If Present Government Comes Back in Power
- We need to get our legal system back to work again. We cannot consider ourselves a functioning democratic market-based economy in which 330 million cases are stuck in our legal system.
- We will seriously need to think about our administrative and bureaucratic reforms. The current bureaucratic system is a combination of colonial system overlaid by socialist system and although we have withdrawn their powers away from controlling every aspect of government, it is still underlying. It is still fundamentally unsuited for 21st century economy.
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