The occasion of 30 years of Indian Reforms, discusses how India has changes in the last 30years.
Q: How did it feel on June 30 1991? Were there butterflies in the stomach? On July 1 1991 were there second thoughts? How did you feel when the devaluation was actually done?
A: The decision was taken to devalue the rupee and one striking thing about devaluation of the rupee that was done on July 1 and subsequently on July 3rd was that the responsibility to do it was given over to the Reserve Bank of India (RBI). Previous devaluations had been announced by the government.
What we did was to announce the change in the value of the rupee as part of our daily announcement regarding the value of the rupee and that came as a big shock to the markets. Everybody was expecting a change in the value of the rupee by a few paise or something like that but suddenly the value of the rupee was devalued by a big amount.
Q: Were there any second thoughts in between those two days? Did the Prime Minister say no this is too much or did you get this fear that India would collapse like a house of cards, India would like an Argentina, any such fears?
A: No. The decision was taken and it was to be done in two steps and that is why it was called hop skip and jump. Of course there were questions about why we were trying to do it in two because in a sense we wanted to watch the situation and then jump. However we had taken the decision that it should be about 17 percent in terms of intervention in currency.
There was news later on but the point really was that I was not approached. I was approached only on the morning of July 3rd a little later around 9:30am. The finance minister Dr Manmohan Singh called me to ask, what is the situation? The answer that I gave was, I have jumped – in the sense that both steps I have taken. Then he said, fine and left it there. Of course later on we heard that the Prime Minister had some reservations because there were others who were telling them that why do you want to devalue so much and so on. However the finance minister told the Prime Minister that I am getting in touch with Dr Rangarajan but I am not able to get in touch with him and so on. Finally we did what we wanted to do because we wanted to show two things – one, we are capable of a strong decision at that point in time and second, we really devalued the rupee to the extent to which we wanted that to happen.
Q: What was the most difficult decision? You had also brought an interest rate market, reduced the fiscal deficit, removed some subsidies or at least reduced subsidies, industrial delicensing, bringing down the tariffs from 300 percent to 30 percent, which was the most difficult of all the decisions?
A: Every one of those decisions at that particular point in time was a difficult one. One had to really be bold and once we started being bold then things started coming one after the other. Devaluation decision for example was a difficult decision. The extent of devaluation was so high but we had to do it and that was done.
Even the shipping of the gold that we did was a difficult decision and that was also done. Later on series of decisions were taken – lifting all the controls etc. Many people ask, whether PV Narasimha Rao was only a spectator or was he really deeply involved? Please remember that Narasimha Rao was not only the Prime Minister, the industries department was under his direct charge. Therefore the decision to remove all the controls was announced by the industries ministry which was totally under him.
Then there was a decision on the exchange regime for example - moving away from the RBI determining the exchange rate every day to leaving it to the market to decide it. For example we moved first to a dual exchange rate system and then came the finer question whether it should be made 60:40, it should be made 80:20 so on and so forth. However we took a very bold decision that we move away and let the market decide and we will intervene wherever necessary and that was done. I think that was again a very bold decision taken by the new government.
Over the distance of time all of these things may look not so difficult but I can tell you that every one of that decision was difficult and it required a great deal of courage at that particular point to take those decisions.
Q: Coming to banking reforms, you all listed the banks, then gave private bank licences in 1994 but after that it has taken all these years and right now we going to privatise two banks - do you think in hindsight we were bold in 1991 but somewhere we seem to have got cold feet with respect to banking reforms?
A: This was part of series of decisions that were taken in early 1990s and certainly we thought at that particular time that the banking system needed change. While we were taking a number of decisions in order to improve the efficiency or the functioning of the banking system, introducing prudential norms of various types and so on and so forth, we also thought that one of the elements in the liberalisation programme, which is to increase the level of competition in the system, we should actually allow the private sector banks to come in.
But I would also tell you there were two decisions taken at that time, one was to allow new private sector banks to come in. It did not require any legislative change because the Act actually gave the power to the RBI to give licences. Only for several decades it was not acted upon. So that was one of the important decisions taken.
Another important decision that was taken was the ownership of the government can be reduced upto 51 percent in public sector banks and that is literally a very important decision and it required a lot of courage because for the Congress party, the nationalisation of commercial banks is highly emotional decision and they attached a great deal of importance to it - so to amend that and to state that the public ownership can be reduced to 51 percent was also an important decision.
Q: It was like repudiating the past.
A: I think that was also a very difficult decision and it required the approval of the parliament and that could not be done just by administrative decision. We had to talk to the parliamentarians - we did say that 51 percent means that it is in the hands of the government but we had to convince the parliament for that change.
Q: At that time we delicensed a lot - no public sector bank was set up after that day, no steel company was set up in the public sector after 1991 but what we didn’t do was we did not walk back the step - we didn’t sell off Steel Authority of India, we did not sell off any of the public sector banks into the private sector and we are doing it now after 30 years, and 50 years after nationalisation - do you think that was the weakness. We took good decisions but we did not undo the wrong decisions?
A: Some of these things take time - the validity of all of that is something that can give rise to many arguments. The fact was that in early 1991, the thinking was if we create enough competition in the system then the public sector banks and private sector banks can function simultaneously and the private sector will give enough competition to the public sector banks.
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