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Rajiv Gandhi govt started India’s fiscal indiscipline and it has only gotten worse

Policymaking during Rajiv Gandhi’s tenure left an indelible impact on all governments that followed.

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What led to the first set of disruptions that caused India’s fiscal indiscipline to reach an unsustainably high level and the balance of payments deteriorate to a precarious situation? The root cause of the problems was the pace of growth that was pursued by the Rajiv Gandhi government between 1985 and 1989. Gandhi had finalized an ambitious plan for investments to boost growth. aiming at an annual growth target of 5 per cent, the Seventh Five-year plan (1985–90) had hugely relied on borrowing to fund the requisite investments. While the five years of the plan indeed saw the growth rate at 6 per cent per annum, exceeding the target by a clear margin of one percentage point, pressures on the government’s fiscal situation and on the balance of payments were becoming too obvious to be ignored. By 1988–89, the union government’s fiscal deficit had deteriorated to over 7 per cent of the GDP. The current account deficit, too, widened to 2.7 per cent of GDP. With no recourse to any support from the capital account (foreign investment flows those days were almost negligible, and foreign institutional investors were not allowed to invest in India’s stock markets), even that level of current account gap became difficult to meet without drawing down foreign-exchange reserves. Not surprisingly, the economy had hit a major roadblock as it faced difficulty in meeting its import needs and honouring its past international payment obligations.

Three factors could be identified as the cause of this disruption. One was a borrowing-led pursuit of growth. Two, political uncertainty that got deeper with the V.P. Singh government falling less than a year after its formation and then the Chandra Shekhar government falling in just four months. And three, the emergency measures that were needed to prevent further deterioration of the economy. If Rajiv Gandhi was responsible for the first two disruptions, then Chandra Shekhar was the key force behind the third disruption. Qualitatively, these three disruptions are of different types, although there are strong causal connections between them.

Gandhi, of course, has been accused of having led an economic policy in the 1980s which relied on borrowings to boost growth and contributed to the economic crisis in 1991. The World Bank in a report in 1991 observed: ‘in this environment, the shift in the stance of macro-policy from the conservative management of aggregate demand in the 1960s and 1970s to the fiscal expansionism of 1980s resulted in large and potentially unsustainable accumulations of domestic and foreign debt.’ imagine a situation where Gandhi had been less ambitious about his growth projections and had ensured adequate availability of resources for investment without relying excessively on borrowing, or had preceded that investment-led growth drive with basic reforms by at least partially opening up the economy to foreign investment and by liberalizing trade and industrial policies! The consequences for the economy would certainly have been far less severe. indeed, that phase of policymaking has left an indelible impact on all governments that followed it.


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The idea of a fiscal deficit had not yet made its debut in media discussions or even in a national debate. it was only after the economic reforms of 1991 that the concept of a fiscal deficit came into vogue. Till then, what constituted Budget deficit was broadly equivalent to net credit from the RBI. By its very nature, there was no check on such deficit financing as the government was not made adequately responsible for its borrowing excesses. After the concept of the fiscal deficit was introduced, the next big reform in this area was when over a period of three years starting from 1994 and ending in 1997, the government’s recourse to the issuance of ad hoc treasury bills to finance its deficit was completely stopped. These bills were issued by the government to raise resources to meet its budget deficit. An agreement between the RBI and the government was signed on 9 September 1994 that stipulated that ad hoc treasury bills would be discontinued from 1 April 1997. In order to help the government meet its temporary mismatches in its receipts and payments, the RBI introduced a scheme of Ways and Means advances (WMA). The new scheme of WMA helped the government obtain necessary cash at a mutually agreed interest rate to meet its temporary payment needs. Any cash withdrawal by the government from the RBI in excess of the WMA limit was allowed only for ten consecutive days. The day the government used up 75 per cent of this limit, the RBI would start floatation of a fresh round of government securities. With the discontinuation of ad hoc treasury bills and the introduction of WMA, the idea of the government’s budget deficit became irrelevant and the practice of gross fiscal deficit, capturing the government’s total borrowing requirements in a year, became the key indicator of the deficit or the gap between the government’s total revenues and expenditure.

The excesses committed by the Gandhi government between 1985 and 1989 proved to be so costly that they led to a new awakening in the minds of India’s economic administrators to introduce durable fiscal reforms for the union government enforcing, thereby, curbs on the government’s borrowings. It is quite ironical that Finance Minister S.B. Chavan said with unconcealed pride in his 1989–90 Budget speech that the Seventh Five-year plan would be spending an amount that was 150 per cent more than what was envisaged. The outlay target was exceeded, but at the cost of the government’s financial discipline. Finance Minister Madhu Dandavate, who presented the next Budget—for 1990–91—did not mince his words when he described the state of the economy as his government had inherited from Gandhi in these words:

Let me, at the outset, deal with the economic situation that we inherited from the previous Government. I do so not in a spirit of acrimony, but with a view to revealing to the house the ground realities. The Central government’s Budgetary deficit was Rs 13,790 crore as on 1st December 1989, a level nearly double the deficit projected for the whole year in the 1989–90 Budget. Wholesale prices had risen by 6.6 per cent since the beginning of the financial year. The balance of payment was under strain and the foreign-exchange reserves (excluding gold and Special Drawing rights) were down to around Rs 5,000 crore. Stocks of food grains had fallen to 11 million tonnes. 

There was yet another consequence of the disruption caused by the political uncertainty in the years before India’s economic crisis blew up in 1991. Both the fall of the National Front government, led by Vishwanath Pratap Singh, in November 1990 and the collapse of the Chandra Shekhar government just four months later in March 1991 were caused largely due to political adventurism of a few leaders. The sixty-nine Lok Sabha members of the Janata Dal who defected to form a new party, brought about the fall of the Singh government and formed a new government with the outside support of the Congress were as guilty of such adventurism for political gains as Rajiv Gandhi, who decided to withdraw his party’s support to Chandra Shekhar, once again in the hope of securing some political gains.


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The collateral damage of such political adventurism for the Indian economy was huge. The disruption that those two incidents caused has taught such a long-term and enduring lesson for India’s political class for the next few decades that such narrow, opportunistic political adventurism has never been used so brazenly by any political party after the 1990s, particularly when it is perceived that such actions would entail heavy damage for the economy. Thus, no elections were forced on the nation at the end of the thirteen-day government of Atal Bihari Vajpayee in 1996, and instead, regional opposition parties got together and formed a coalition government that ran for about two years. And when elections had to be called after the sudden fall of the BJP government in 1998, all opposition political parties got together and agreed to first pass the Budget before the Lok Sabha could be dissolved. Similarly, governments that did not enjoy full majority were not usually disallowed from passing economic laws that by common consensus would benefit the economy. While there would be opposition to laws such as opening up foreign direct investment in insurance sector or retail outlets, eventually they would receive the green signal of parliament with some modifications in the original proposal, after some political give and take. But economic laws would not always be a casualty of political gamesmanship. This certainly is one of the big consequences of the disruption that Rajiv Gandhi’s decision had caused in 1991.

This extract from The Rise of Goliath: Twelve Disruptions That Changed India by A.K. Bhattacharya has been published with permission from Penguin Random House.

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6 COMMENTS

  1. This is a good example of an article whose title has no connection to the contents. Maybe the editor wants to test how many commentators have bothered to read it. Seems like most haven’t.

  2. Rajiv Gandhi died nearly 30 years ago. If he had irredeemably sealed India’s economic fate, then why did AB Vajpeyi fight an election? Why did Narendra Modi fight two elections? Did these people think they were going out on a picnic? Propensity of the BJP leaders and sympathizers like AK Bhattacharya to pass the blame on others, dead or alive, is phenomenal.

    • In 30 years from 1978, China hosted the Beijing Olympics. A coming out party, which told the world the dragon was a force to be reckoned with. Coincidentally, that was the year of the global financial crisis, when the paramountcy of the West came under a shadow.

  3. We can go far back in time. Sometimes there is a context or a special set of circumstances that justified things that now appear ill advised. As a practical matter, one would day that a government which comes to power for a period of five years should go no further back in time than a couple of years, and then get down to doing seriously good stuff. Else, what starts as, You gave them sixty years, give us sixty months, slowly morphs into, How can we clean up in sixty months the mess that was created over sixty years. Guillotine the past, focus on the present, create a better future.

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