It is now 22 years since the first reforms. That is not very long in politics. Many politicians who would have been young men in their twenties and thirties in the 1980s would be mature men today. In Europe and America, they would have retired or been eased out by competition. In our country, politicians last longer. For one thing, our respect for age makes parties reluctant to throw out old men; for another, the structure of our parties is feudal, and competition is frowned upon.
P. Chidambaram, who was an energetic young newcomer in the 1980s, is an estimable senior politician today. He has been there and done it. I still remember how I admired him for the trade policy of 1992. The government bureaucracy was still steeped in old-style socialism, which gave it ample scope for corruption. He could not trust any of his subordinates; he wrote the trade policy himself and gave it in for printing. He was right in his assessment of the bureaucrats; when the trade policy came out, the babus of the directorate general of technical development found that imports no longer required their stamps. Enraged that they had lost lucrative bribes, they went to attack him; luckily, he escaped unharmed. He crossed swords with the then finance minister, and no doubt also with P.V. Narasimha Rao, the then prime minister, who eased him out when a convenient opportunity presented itself. He tried out other parties; but eventually he found that he fitted best into the Congress and came back. It has rewarded him well; he has been finance minister or home minister throughout the current Congress regime. He might have made it to the prime ministership if Manmohan Singh had not chosen to last; he may still make it.
When one has risen so high, when the fruit is so close, one must take care not to tumble off oneís perch. So it is not surprising that Chidambaramís sword has been sheathed, his rudeness has been controlled, and his temper reined. He has learnt to make insipid speeches, though he will never be the prime ministerís match in that field. And now, he is working on a set of measures to tackle the balance of payments that belong to the pre-reform era, and will please old-style bureaucrats no end.
He had already imposed a small duty on gold; now he has raised it, and taxed imports of silver, edible oil and other ďnonessentialĒ goods. This is classic retrogression to old-style nationalism. Chidambaramís revered political ancestors inherited severe import controls that the British introduced in World War II, and used them to discriminate in favour of capital goods, industrial inputs, public enterprises and so on and against consumer goods, especially those they considered nonessential. They thought they were thereby improving the balance of payments; but throughout their rule, the balance of payments remained in deficit. For what import restrictions do is to appreciate the rupee (in comparison to a state in which there are no import restrictions) and make exports more expensive. East Asian states, which were much less protectionist and which used the exchange rate more actively, became export powerhouses, while India shrank into itself and became an island of high costs. It is Chidambaramís ambition to return India to that eminence. As it is, India is running a huge payments deficit. It is clear evidence that the rupee is overvalued. Chidambaramís proposed import controls can make it only more overvalued.
He may consider this an exaggeration; he plans to restrict imports of only a limited range of goods. But those goods will become scarce; import licences for them will become prized, and will attract bribes and politicking. Surely, Chidambaram cannot have any illusions about this; even today, his customs department is the most corrupt department of the Central government.
Under his orders, the Reserve Bank of India has asked banks to raise interest rates on nonresident Indiansí schemes. In the early 1990s, the RBI used to decree dozens of interest rates. The idea was to reward virtuous savers and investors, and to give incentives to approved ones. But there never was any evidence that those manipulations served any purpose. Nor will higher NRI deposit rates. If the government wants to attract funds, it should aim to do so at the lowest cost. India would get far more funds if it invited funds from the entire world, and not just from NRIs. There is an argument that a large proportion of the NRI deposits are eventually converted into rupees and are therefore a cash transfer rather than a loan. If they are, the interest rate is irrelevant; the money will come in whatever the interest.
Chidambaram is going to order government oil companies to get credit on their oil imports, and government financial companies to borrow abroad. This too has happened before. In the 1980s, oil companies were delaying payments as much as they could; and PSUs were forced to take foreign loans they did not need. Such money is not without cost. Oil companies will pay more for oil if they delay payments; and their sources will shrink to those suppliers who can or would give credit. Public sector units borrowed abroad in the 1980s, parked the money in government banks, and asked them to give high rates of interest. The banks could not find borrowers for the money. So they called Harshad Mehta, and asked him to speculate with the money. It was all hush-hush; everyone could see that Harshad Mehta had lots of money, but no one knew where it came from. When the truth came out, the RBI went out of its mind. It told banks to call back the loans. Harshad Mehta had to sell his shares. Their prices fell, and he could not repay the loans. Then the government hounded him; he went bankrupt and died.
There is no reason to think that the government will find another fall guy and that history will repeat itself. But Chidambaram is pursuing pointless ends. There is no virtue in borrowing. It only raises the RBIís reserves, on which it earns a pittance, while the loans Chidambaram is forcing PSUs to take will cost much more.
The only way to repair the balance of payments is to export more and import less; the way to ensure that is to devalue, and to assure traders that the devaluation is durable. The current account responds only slowly to exchange rate changes; but the RBI has the reserves, and Chidambaram has the time. Instead of talking too much and thinking too little, Chidambaram should ask the hundreds of industrialists he meets what it would take for them to raise their exports and reduce their imports. Amongst what they will tell him is: close the customs department, and the commerce ministry. He may not be strong enough to close down either. But the functions as well as the manpower of both ministries are excessive; a bit of dieting would do neither much harm. Meanwhile, dieting should be extended to the entire government; if its fiscal deficit were turned into a fiscal surplus, I guarantee that the balance of payments will be dramatically improved.