Regarded by some as the father of second-generation reforms, Mr. Vajpayee, who died on 16th August at age 93, was decisive and pursued his reforms agenda with vigour without getting ruffled by criticism. He built India’s most famous highway project, started privatisation to cut the government’s role in running businesses and made big-ticket overseas acquisitions to secure energy supplies. Here’s a rundown on some of his major economic and energy reforms.
1. A proposal to lower the shareholding in PSBs
It was a bold decision from the BJP-led NDA government when they talked about reducing the minimum government holding in PSBs (Public Sector Banks) from 55 percent to 33 percent. There was a heavy burden on the government budget to keep pumping capital into PSBs, so he decided to allow wider public shareholding. But this idea never saw the light of the day, as it was politically suicidal, with bank unions up in arms. The government also had a thin majority in the house, so couldn’t pass such a proposal without discussion or protest in the parliament.
2. Setting up of credit information bureaus
India never had credit bureaus to collect the information from all banks and keep a record of defaulters and good borrowers at one place. The bank defaulters had a free run, as they moved from one bank to another, without banks knowing their credit history. The government then set in motion a proposal to set up credit information bureaus. CIBIL was set up in 2000 and later more credit bureaus came up. Over the years, the credit bureaus have helped in creating a good credit culture, especially amongst the retail borrowers. Today, borrowers with good track record get a good deal from banks, whereas bad borrowers have to clear their names before they get loans.
3. Setting up of ARCs
The Vajpayee government also set up an institutional framework for dealing with bad loans in the banking system. The banks were not very successful in their recovery efforts, whereas courts were also not helping in faster recovery of the bad assets. The government allowed the creation of specialised asset reconstruction companies (ARCs), to buy assets from banks at a discount, by paying a marginal amount upfront and the balance in security receipts (SRs). ARCs are still relevant today and many reforms have been done to make ARCs more effective. ARCIL was the first ARC that was set up in 2002. Today, there are dozens of ARCs active in India.
4. Increasing foreign investment limits in banks from 49 to 74 percent
There were many reforms in relaxing the investment limits for foreign institutional investors in debt as well as equity. One such big reform was the higher limit of 74 percent equity in banks. The limit was enhanced big time from 49 percent to 74 percent during the BJP-led NDA Government. This brought more liquidity in the stocks of Indian banks as domestic institutions were not very active.
5. Privatisation of state-owned companies
Arguably the biggest reform of Vajpayee’s tenure was the privatisation drive that saw 32 state-owned companies and hotels being sold to private firms in five years. For the first time ever, a Department of Disinvestment to process privatisation candidates was created and a Cabinet Committee on Disinvestment formed to accord expeditious approvals.
Beginning with sale of Modern Food Industries to Hindustan Unilever (HUL) in 1999-2000, his government went on to sell Bharat Aluminium Company Ltd (Balco) and Hindustan Zinc Ltd to mining baron Anil Agarwal’s Sterlite Industries, IT firm CMC Ltd and Videsh Sanchar Nigam Ltd (VSNL) to Tatas, fuel retailer IBP Ltd to Indian Oil Corp (IOC) and Indian Petrochemicals Corp Ltd (IPCL) to Reliance Industries Ltd.
But the privatisation drive wasn’t easy. He faced opposition and the decision to privatise Balco was challenged right up to the Supreme Court, which upheld the move.
Energy and Infrastructure Reforms
1. Building highways for development
Modeled loosely around the National Highway System of the US, he launched the Golden Quadrilateral in 2001. The North-South, East-West corridor connected the four top metropolitan cities of Delhi, Mumbai, Chennai and Kolkata as well as from Srinagar to Kanyakumari and Porbandar to Silchar. It gave Indian the taste of world-class highways and enabled easy transport and development. Subsequent governments have only expanded on that theme.
2. Private and overseas energy producers
It was Vajpayee’s leadership that allowed the NDA-I government to abolish subsidy by freeing up government control on petrol and diesel prices in April 2002 without evoking any public outcry. This changed the market complexion with private sector Reliance, Essar, and Shell investing in creating a chain of outlets and thousands of jobs.
He was also ahead of times when his government made a diplomatic push to acquire a 20 percent stake in the gigantic Sakhalin-I oil and gas fields in far east Russia for USD 1.7 billion in 2001. This was India’s single largest investment abroad. This was followed up with a 25 percent stake in an oilfield in Sudan for USD 720 million.
His model of energy security by investing in overseas projects has since then been followed vigorously with footprint now expanded to 20 countries and energy diplomacy part of India’s engagements with other countries.
3. Clean and cost-free fuels
His government introduced clean-burning CNG in Delhi and laid the roadmap of improving the quality of India’s motor fuels to European standards. This was done not only to make transport safe but also improve environment quality.
Vajpayee will also be remembered for introducing doping of sugarcane-extracted ethanol in petrol to cut import costs.
Many of these reforms fell prey to political expediency during the UPA’s decade-long rule, though there were some efforts to revive them towards the end. It is now that the Modi government has revived, refined and taken many of them forward, though they are not fully immune to politics.
Think Vajpayee’s contribution will come up in a debate soon? Read our article about how to start a political argument, 2019 edition.