A record of salutary economic reforms

Former PM Vajpayee's large heartedness and ability to transcend ideological barriers enabled him to implement far-reaching economic reforms, says the author in the first of a three-part series

Former Prime Minister Atal Bihari Vajpayee, who passed away two weeks ago, was noted by his friends and political foes alike for his large heartedness and ability to transcend ideological barriers across the political spectrum. It was these qualities, perhaps, that enabled him to carry out far-reaching economic reforms. Such reforms could not have been implemented successfully without achieving the kind of broad consensus that he always sought across party lines, since his party did not enjoy an absolute majority at any time during his prime ministership. 

I did not have the privilege of knowing Prime Minister Vajpayee personally although I was appointed to a whole host of positions by him, including, among others, chief economic advisor to the finance ministry and deputy governor in the Reserve Bank of India. Having chaired the expert committee on infrastructure in the mid-1990s I was also associated with a number of initiatives carried out in the infrastructure sector by his government. In this piece I sketch out the broad sweep of economic reforms carried out his government. Let me start with infrastructure.

Infrastructure

The Vajpayee government undertook major infrastructure initiatives and the transformation of Indian roads can be attributed to him, as a number of commentators have noted. The National Highway Development Project (NHDP), which began with the conceptualisation of the Golden Quadrilateral and the north-south and east-west highways, has already transformed the Indian transportation sector. Investment in this expanded highway programme continues till today. As a complementary initiative, the Prime Minister’s Gram Sadak Yojana (PMGSY) was also started almost at the same time. Thus the needs of the metropolitan national as well as the local rural economy were addressed simultaneously. Both these ambitious programmes could be undertaken simultaneously because they were financed by the bold decision to introduce a fuel cess. Without the cess, funding of these investment programmes would not have been available. Perhaps coincidentally, the infrastructure committee that I had chaired had recommended such a cess as the source of a non-lapsable fund for this purpose. Earmarking tax revenues for any purpose is against normal fiscal orthodoxy: I had argued that the cess was really a user charge, and that won the day against the fiscal purists.

Illustration by Binay Sinha

Similarly, a number of commentators have recalled the very significant telecom reform carried out by Vajpayee’s government. Ironically, the problem that occurred in the late 1990s was not dissimilar to some of the problems in recent years. In the initial auction for mobile telephony, a number of companies had bid clearly unrealistically high amounts in order to just capture the available licences. It had become obvious that these companies would not be able to pay their committed obligations: if the government had insisted that they comply with their commitments they would have gone bankrupt and the progress of telecom connectivity would have suffered a severe setback. So the government was faced with a conundrum: re-contract with the same companies, giving rise to obvious moral hazard, or restart the telecom allocation process to new companies and set back the telecom rollout. The actual bold solution implemented was to shift to a revenue sharing framework with the same companies: it is a measure of Vajpayee’s political skills that this could be done very smoothly without any accusations of corruption and wrongdoing. The result is now obvious with telecom being the most successful infrastructure story: tele-density in India now exceeds 90 percent, something that we could not even dream of at the turn of the century.

Membership of the TRAI, among the various appointments that Vajpayee had bestowed on me, allows me to add a footnote to the story. Just after this episode, the issue of allotting licences for new private sector landline companies arose. Whereas the majority of the Authority voted to again recommend an auction for these new licences I issued a dissent note arguing for a fixed license fee and allotment of many licences so that the new tariffs would not be burdened by the obligation of these new companies to pay off high licence fees. Vajpayee’s Prime Minister’s office happened to agree with my dissent note and that was the policy adopted. This was perhaps the root of the later first-come–first-served policy with which the UPA I government ran into great trouble in the 2G spectrum allocation process. The subsequent adoption of auction processes for spectrum allocation, once again, has resulted in excessively high bids which are now resulting in significant difficulties for the spectrum winners in the form of high debts, which are also inhibiting new infrastructure investment in the sector.

The Vajpayee government initiated broad electricity reform with enactment of the new Electricity Act 2003 which replaced an almost hundred-year-old 1910 Act. I was somewhat associated with this reform as well since the then electricity minister, the late Rangarajan Kumaramangalam, asked me as the director general of NCAER to have the act drafted. NCAER was reluctant, having no expertise in drafting legislation. This was a bold departure from standard practice where almost all acts of drafted within the government. But Minister Kumaramangalam felt that his ministry’s bureaucracy was unwilling and incapable of an exercise that would result in significant reform, and insisted on NCAER taking up the exercise. We took up the challenge, with the help of the redoubtable Gajendra Haldea who conducted extensive consultations with all stakeholders and submitted a draft to the ministry in less than two years. Unfortunately, Kumaramangalam passed away suddenly after a brief unexpected illness, but was ably succeeded by Suresh Prabhu who piloted the Bill successfully and got it passed in Parliament in 2003 after a lengthy consultative process across party lines and many shades of expert opinion. Among other far reaching provisions, this Act subsumed the earlier legislation that had established electricity regulatory commissions at both the central and state levels. This was yet another example of farsightedness and cross party consultations which resulted in the enactment of forward looking legislation that could modernise the Indian electricity sector. Although the intentions of the Act have not been fully realised, it will remain a landmark legislation in the Indian infrastructure sector for decades to come. 

 (To be continued)

The author is senior fellow, Jackson Institute for Global Affairs, Yale University; and distinguished fellow, Brookings India.