Reforms galore since 1991, but execution weak: Ex-RBI governor Bimal Jalan

(This story originally appeared in on July 23, 2021)

Bimal Jalan, a former Reserve Bank of India governor and former finance secretary, has been a key player in the reforms announced over the years. A veteran policymaker, Jalan said in an interview with TOI that India has introduced enough reforms and now the focus should be on reality. Excerpt:

What is your assessment of the economic reforms that were implemented 30 years ago?

They worked very well. There are several steps to making the economy more open, and that has helped. There’s no doubt about the year 1991 liberalization extremely positive. The 1990s crisis with India’s balance of payments made liberalization absolutely necessary. Otherwise, it’s old thinking, everything is controlled.

What do you think helped politicians and policymakers reach consensus?

Before 1991, total foreign exchange reserves were very small. To increase reserves, India arranged a loan from IMF. Then the economy started to work. After 1991, India began a major liberalization process and it was successful. It has the full support of politicians. Then Prime Minister Narasimha Rao, and later Atal Bihari Vajpayee, completely reformed the economy.


Were there any objections to the reforms at the time?

Opposition to these reforms must have come from the corporate sector. There is a limited number of companies that cannot stand the competition. When there is competition, there is always that problem. During the 1970s and 1980s, the system of Raj . License, and the competition is very limited.

How do you see the next 30 years of reform, given that Covid has affected growth?

There have been a lot of reforms. There is no doubt about that. The only question is implementation. There are many things we announce but the implementation is very weak. About 80% of government spending is on administrative setup. We have a lot of departments and all of them will have a large amount of paid staff. So the amount that you can invest to help those below the poverty line will be much less. This is simply because the number of ministries has increased, so has the number of administrative staff.

So should spending reform be the focus?

Yes, it should be the focus and how is it actually done when budget deficit high. In terms of spending, India has to spend money but the fiscal deficit should not be too high. If it is high, there is inflation. When inflation is high, the RBI must take measures to reduce the money supply.

There’s an argument that we should get rid of the fear of fiscal deficits and spend to get out of a recession…

There cannot be two views on this.

What is the impact of the fiscal deficit?
Fiscal deficits are demand-side, and when rupees are spent, demand for the product increases and prices rise. We must ensure that fiscal deficits are not out of control. India’s debt-to-GDP ratio is already high. Now, assuming it exceeds, what does it mean? It means we have to pay off more debt than we can in terms of investment.

Do you think the constituency for reforms has expanded over the years, delivering the benefits we’ve seen?

There is no doubt about that. Now, there is a large premium as well. Governments should make policies, but enforcement should be left to the private and public sectors. There is also much discussion about how the public sector and government have implemented certain reforms, such as through reducing investment. Privatizing the public sector is also a very good move. The policy framework is extremely active, and the only question is its administrative part.

Besides spending reform, what other reforms are important in the coming years?

What matters is what’s really going on on the ground. In terms of policy reform, we’ve done enough. The Prime Minister and Finance Minister have announced important policies, however, the implementation must be better.