The high point of the Vajpayee era

Another major courageous reform undertaken during the Vajpayee period was the significant reduction in small savings interest rates. While nominal levels of small savings interest rates had been changed over the 1990s, a significant decline in inflation since the mid-1990s meant a large increase in real interest rates on these popular savings instruments widely used by the middle- and low-income classes. High real interest rates on savings accounts constrained the downward movement of both market and bank interest rates along with policy rates set by the Reserve Bank, thereby severely constraining the resurgence of economic activity and investment. 

Finance Minister Yashwant Sinha set up an expert committee under then Deputy Governor of RBI, YV Reddy, which recommended the reduction of these rates based on a certain degree of market discipline. The government implemented these recommendations with alacrity, despite widespread popular and political opposition. This reform set in motion a low interest rate regime for the many following years, and also made the overall interest rate structure more market determined, making monetary policy making and transmission much more effective.


On the trade front, the Vajpayee government continued the liberalisation process begun by Prime Minister Narasimha Rao in 1991. Quantitative restrictions on imports, including consumer goods, were almost eliminated by 2004; and customs duties continued to be reduced. The ‘peak’ customs duty was reduced from 45 per cent in the 1998-99 Budget speech to 20 per cent in 2004-05 (It came to rest at 10 per cent in 2008). This continued throughout the Vajpayee regime even in the face of significant opposition from Indian business. The subsequent rapid expansion of Indian trade in the following eight years or so provides ample evidence to support the wisdom of this policy. Regrettably, some of these reforms have been reversed recently and protectionism has once again reared its ugly head. 

In its quest to open the Indian economy and to promote trade the Vajpayee government also began the process of participating in bilateral and other regional trade agreements. He set up the Joint Study Group with the government of Singapore with the intention of establishing the India Singapore Comprehensive Economic Cooperation Agreement (CECA), and another one with the government of Sri Lanka to establish a Comprehensive Economic Partnership Agreement. I was privileged to be appointed as the joint chair from the Indian side in both those study groups. The India Singapore CECA was later implemented by the UPA I government soon after coming into power. These initial discussions set the stage for later initiatives by successive governments on similar free-trade agreements with ASEAN and others. They also served as a signal of India’s confidence and that it was open for business.


The singular contribution of the Vajpayee government to the Indian economic reform process was the actual privatisation of public sector enterprises (PSEs). Former Prime Minister Narasimha Rao had begun the process of disinvestment that had essentially been done with the purpose of raising resources for the government, rather than restructuring or reform of the PSEs. This was a bold initiative, so much so that it has yet to be repeated by successor governments of Prime Ministers Manmohan Singh and Narendra Modi. Although it did generate a certain degree of controversy, on the whole, the privatisation of nine significant PSEs  and 19 hotels was accomplished successfully without scandal or any allegations of wrongdoing. Once again, the fact that this could have been done in a relatively smooth manner is a tribute to Prime Minister Vajpayee’s political sagacity and skillful management. There was also an attempt to bring down government equity in public sector banks to 33 per cent, as announced in the year 2000 Budget speech by Finance Minister Yashwant Sinha, but this proved to be a nonstarter and has remained one till today. With the demonstrated success of this privatisation process it remains a puzzle why successive governments have not carried it forward.

Had the major labour market reforms in 2001 been implemented, the Indian industry could have seen increased investment in labour-using manufacturing
Some failed initiatives

Inevitably, there were also a number of failed reform announcements, some of which continue to hobble the Indian economy today. Few remember that the 2001 Budget speech announced major labour market reforms through a proposed amendment of the Industrial Disputes Act that would have increased the floor level of firms subject to the provisions of Section VB the Act from hundred workers to 1,000. It had also provided for 45 days of wages for each year served as compensation to any worker who would have to be laid off. Had this announcement been implemented the course of Indian industry might have changed for much better, with increased investment in labour-using manufacturing. Employment in organised sector manufacturing may not have stagnated as it has and Indian exports could have exhibited a much greater presence in the world of trade. Alas, this reform is yet to see the light of day. Similarly, petroleum price deregulation, decontrol of the sugar and fertiliser industries were also announced. Of these, only the petroleum price deregulation has finally been implemented by the current government; other reforms remain in abeyance. 

The Vajpayee government exemplified the determined continuity of the economic reform process initiated by Prime Minister Narasimha Rao in 1991, after the 1996-99 interregnum due to political instability. Many of the reforms would not have succeeded without sagacious political leadership reaching out across the aisle to engage in consultation, discussion, and compromise. The design of the reforms was also aided by seeking out all available economic expertise. Economic technocrats were given the space to provide advice without fear or favour. If the Indian economy is to move forward, a similar atmosphere of consultation, discussion and utilisation of technical expertise by the political and civil service leadership is indispensable. 
The author is senior fellow, Jackson Institute for Global Affairs, Yale University; and distinguished fellow, Brookings India