Thoughts on Indian Economy (1990-2000, Pt.2)

Satellite Television of Asian Region headquarters in Hong Kong - an anxious 40-year old has been waiting a long time for a meeting with its owner, Richard Li. His executives tell Li that this man has been waiting for hours for the meeting; he has a plan to present - to start an entertainment channel in an Indian language! Li is dismissive - ‘India! There is no money in India. I have no interest in India!’ But the Indian wouldn’t give up; he has been taught to be persistent by his father, a grain merchant. Having overcome odds several times in his life earlier, Mr Subhash Chandra would convince Li to enter into a joint venture that led to the birth of India’s first private channel, Zee. Doordarshan’s monopoly finally ended. The company that he partnered with is also popularly known as STAR TV. The year was 1992 & everything in India seemed new. Maybe that exuberance flowed from the historic 1991 Budget.

As I’ve written in the previous article, a lot of material is already available on the Budget 1991. ‘Liberalisation’ and ‘Globalisation’ have become household names. But in addition to these two major policy changes, there were others that deserve equal respect.?

There was the Narasimham Committee Report which laid the foundation for remarkable changes in the banking system. The Committee made several recommendations, including (a) phased reduction in SLR and CRR to enable banks to have more funds available for lending to the private sector, (b) deregulation of interest rates to allow market forces to determine the rates rather than being controlled by the government, (c) setting up Asset Reconstruction Companies to take over bad debts from banks, and (d) introduction of prudential norms, including capital adequacy norms, income recognition, asset classification, and provisioning for bad debts.?

It was this Committee that pushed for the entry of private sector banks. An excerpt from the report is as follows “The Committee recommends that freedom of entry into the financial system should be liberalised and the Reserve Bank should now permit the establishment of new banks in the private sector, provided they conform to the minimum start-up capital and other requirements and the set of prudential norms with regard to accounting, provisioning, and other aspects of operations”. The result was that in a short period of time several new banks would take birth - HDFC, ICICI, Axis (previously UTI Bank), Induslnd were all established in this decade.

In addition to the foreign exchange reserves and the external debt crisis, India in the early part of 1990s also faced a NPA crisis. NPA, or Non-performing Asset are loans that do not generate any income to the bank due to the borrower’s failure to pay interest, or even repay the principal. At the beginning of the decade, nearly 23% of the gross advances of public sector banks were classified as NPAs! We desperately needed a mechanism to recover or settle these bad loans. In 1993, the Banks and Financial Institutions Debt Collection Act was amended to create the Debt Recovery Tribunal. DRT would operate as a specialised court to settle bad loans, and would empower financial institutions to seek faster redressal of long pending issues. DRT would eventually give way to the Insolvency & Bankruptcy Board of India, which under the Insolvency & Bankruptcy Code, has the power to restructure businesses, enabling them to settle with banks and financial institutions.?

India also started moving towards a more liberal foreign exchange market. The first step in the direction was the introduction of the Liberalised Exchange Rate Management System (LERMS), under which a dual exchange rate system was introduced. This was also known as the 40:60 partial convertibility. 40% of the foreign exchange earnings had to be surrendered to the Reserve Bank of India (RBI) at an official exchange rate, which was lower than the market rate. The remaining 60% of the foreign exchange earnings could be converted at market-determined rates through banks. LERMS encouraged private businesses to earn in foreign exchange and retain 60% of the exchange earnings. The next step was to move India towards a unified exchange rate system- this happened in 1993.The dual rate mechanism was abolished, and the Indian rupee was fully allowed to be determined by market forces.?

A side note: while much is made of the depreciation of the Indian rupee against the US Dollar, maybe we should not pay as much attention to it as we do. Think of currencies as ‘goods’ in their own right. The principles of demand and supply will naturally apply here as well. The US Dollar attracts money from across the world, especially during recessions. There is a belief that the US, as the world’s largest economy, will not default on the ‘promise to pay the bearer’ - not to forget, it came close though when it got close to the “debt ceiling” last year. The flow of money towards the US$ ironically does more harm to countries at the receiving end, making their imports dearer. Thus, rather than focusing on the rate itself, maybe we must focus on strengthening our exports. The dependence of other economies on India should be on the strength of its ability to produce high quality goods or services. I sometimes feel our policymakers give extraordinary importance to the numeric ratio (even going as far as saying that the depreciating rupee is on its deathbed & urgently needs a doctor), rather than the underlying current that will help improve this ratio. It is a contradiction to say that in a ‘free-market/progressive economy’, the government must intervene to fix exchange rates - that would take us back to the pre-90s.?

The Securities and Exchange Board of India (SEBI) was constituted in 1988. But it truly got its powers in 1992. The force behind it was the Janakiraman Committee report, which was itself established to investigate the biggest financial scandal that independent India had seen till that time - the Harshad Mehta scam. The web-series Scam 1992 wonderfully portrays the intricacies and the ‘behind-the-scenes’ events, even going as far as to present the humane aspects of people involved (which made the series all the more remarkable!). I will not go into the details of the financial irregularities - most of you already know about it.

But I will touch upon its impact on SEBI, which is now, in my eyes, one of the most respectable institutions that India has produced. SEBI was given extraordinary powers in the aftermath of the Harshad Mehta scam. The Janakiraman Committee set up by the RBI in 1992 to investigate the irregularities, made several observations. Key amongst them (a) fraudulent use of bank receipts to divert funds to manipulate stock prices, (b) inadequate regulatory frameworks, with poor coordination between banks and the stock market, (c) lack of transparency and disclosures by market participants, and (d) deficiencies in the functioning of stock exchanges, which allowed brokers to engage in unethical practices.?

Soon after, SEBI was made a statutory body, with far reaching powers, including (a) power to regulate stock exchanges, including their functioning, operations, and management, (b) mandatory registration of various market intermediaries such as brokers, sub-brokers, merchant bankers, (c) prescribing guidelines to curb insider trading, (d) enforcing stricter disclosures to protect interest of investors and even (e) the power to investigate & probe market irregularities and violations of securities laws.?

At around the same time, we see the birth of the National Stock Exchange (1992). NSE was established to provide a modern, fully automated screen-based trading system - it was called National Exchange for Automated Trading (NEAT). NSE began its operations in 1994, with the launch of the wholesale debt market segment in June 1994 and the equity segment in November 1994. It was NEAT that marked a significant shift from the traditional open outcry system used in other exchanges. NSE introduced NIFTY 50 in April 1996, an index of the top 50 stocks that became one of the most widely followed benchmarks for the Indian equity market. By the early 2000s, NSE (less than 10 years old) had overtaken BSE (almost 125 years by then) in trading volume. In many respects, NSE was India’s first fintech

What makes these developments all the more stunning is the social backdrop against which they took birth. India was in flames in the years 1992-93. In December, 1992 the country witnessed the demolition of the Babri Masjid, with it demolishing its credibility as a peace loving nation. Prime Minister PV Narasimha Rao’s reaction was summed up by his personal doctor who recalled much later, ‘As I expected, his heart was racing away… pulse was very fast… BP had risen. His face was glowing red, he was agitated.’ Within 3 months, Bombay would witness the worst terrorist attack that India had seen. 12 bombs ripped the beautiful city apart, causing immense misery. I cannot fathom the depths of the resilience of Bombay - she was soon back on her feet, ready to rise again. As much as villainous people through their dastardly attacks tried, attempt after attempt, the cosmopolitan fabric of Bombay couldn’t (& I’m certain will never) be destroyed.?

Understandably, it takes great courage for a company to go public during these times. But the men leading Infosys were blessed with sufficient quantities of not just courage, but also an extraordinary vision. Infosys was going public (1993-94); the IPO was “for creating a campus for 1,000 people, along with state of the art computing systems costing in all 16.58 crore, more than the revenue of the previous year of 8.66 crore”. All this at a time when a small fraction of the country understood what software meant. The public offer was undersubscribed & Morgan Stanley stepped in by picking up nearly 13% of the equity. Its shares were listed at Rs. 145 as against the issue price of Rs. 95. By end of the day, the shares closed at Rs 160, a gain of nearly 70% in a single day! Of course, the number hides the immense strength and perseverance of Sri Narayana Murthy (& the founding team, of course), without whom Bangalore would never have been the same.?

The remaining term of PVN would see other major reforms. The National Telecom Policy was introduced in 1994 with the idea of providing basic telecommunication services across the country. The targets were (a) telephones should be available on demand, (b) all villages should be covered, and (c) Public Call Offices (PCOs) should be provided for every 500 persons. The Telecom Regulatory Authority of India would be established at the end of his tenure in 1996. On 15th August 1995, Indians were given access to the internet by state-owned Videsh Sanchar Nigam Limited. The internet service, known as the Gateway Internet Access Service (GIAS), provided a speed of 10 kbps and was priced at Rs. 5,200 for 250 hours for individuals. Today, that price would cover a full year’s subscription at nearly 3,000 times the speed.?

The year 1995 would see the launch of the PM POSHAN or the mid-day meal scheme, that was aimed to improve the enrolment rate at primary schools. As Dr Anand Ranganathan said at a talk at WMG Group yesterday, the mid-day meal scheme could be the backbone supporting the growth of the Indian economy for decades to come.?

India was set on a trajectory of growth and prosperity. We achieved so much in such a short period of time. India will forever be grateful to the two men who were at the helm of this paradigm shift. How I wish we could have treated them better.