Union Budget 1992-93 by Nani Palkhivala

Source: https://www.youtube.com/watch?v=br2z9rOkPbE Duration: 372.9s

Nani Palkhivala (00:00): Balance of trade deficit arises from the fact that we import goods worth 33,000 crores as we did in this year, and we export goods worth 28,000 crores. So there is a deficit of 5,000 crores. But it’s not the deficit of one year. It has been going on year after year after year. If you ask me, is this country capable of exporting more? I think there is not the slightest doubt that it can, provided we follow the right policies. This country, I’m never tired of saying, is not poor by nature, but it is poor by policy.

Narrator (00:42): Today, we are going to talk about Nani Palkhivala’s take on the Union Budget nineteen ninety two ninety three, which was done as part of India’s liberalization reforms. He mentioned that the four main thrusts of this budget were liberalization, integration of India into the global economy, reduction of taxes, and a stable and healthy balance of payment situation. He called this a watershed budget, which indeed it was, and that it marked the beginning of a new chapter in India’s economic history. Of course, it did. He believed that India’s poverty since independence was a result of our ideological socialism. He made his point by comparing India’s economic indicators with other similar countries. Back then, we had 15% of the world’s population, but less than 1.5% of the world’s income. While South Korea, Hong Kong, and India started at the same level, South Korea’s per capita income was 13 times, and Hong Kong’s per capita income was 30 times higher than that of India’s. India’s per capita income did not even double since it became a republic. He also addressed unjustified criticism made about this budget. While some said this budget was dictated by the World Bank and IMF, Nani Palkhivala said that he believed in the potential of this country and that the government was capable of thinking by itself after forty years of mistaken policy. He rebutted the fears of being swamped by the multinationals, saying that the entire world is not East India Company and that the emerging world economy was erasing the national boundaries. While some complained that the budget did not do enough to counter inflation, he said that inflation was a worldwide phenomenon in the context of the then ongoing recession. He explained why this budget made sense through various macroeconomic indicators. First, India was facing a balance of payments crisis before this budget. Let us try to understand this in a simple manner. Balance of payments of a country is an account statement of its transactions with respect to the rest of the world. It comprises of current account and capital account. The current account comprises imports and exports of goods and services, grants, transfer payments, etcetera, while the capital account comprises foreign investments, loans, assets, and so on. The sum of these two should be zero for the balance of payments to be in equilibrium. By June 1991, our imports far exceeded our exports, and our foreign reserves were insufficient to pay for our imports. In addition, India saw withdrawal of non-resident deposits, a rise in oil prices due to the Iraq war, and lackluster exports. This was called the balance of payments crisis. In this article, Nani Palkhivala pointed out that the balance of payments was restored to less than critical level. Second, Nani Palkhivala called the partial convertibility of the rupee a sensible step. Convertibility of a currency means the ease at which the currency can be converted into international currencies at market exchange rates. When we say a particular country’s currency is fully convertible, it means that it can be converted into any other country’s currency without any regulatory hurdles. When we say a particular currency is partially convertible, it means that the currency can still be converted into other currencies but might need regulatory approvals beyond a certain threshold. Currency convertibility accelerates global trade in that currency because it can be used by anyone across the world. Prior to 1991, any transaction in foreign currency through the Indian rupee had to be approved by the RBI, and this imposed restrictions on the magnitude of exports from India. Nani Palkhivala explained this using the example of Pakistani rupee. At the beginning of 1992, 100 Pakistani rupees equaled 86 Indian rupees. But after Pakistani rupee was made fully convertible, 100 Pakistani rupees equaled 111 by the time of this budget. Nani Palkhivala also appreciated the reduction of statutory liquidity ratio from 38.5% to 30% since it would allow banks to lend more to businesses and reduce the bank interest rate. SLR refers to a minimum reserve that the commercial banks have to maintain with them according to the RBI’s monetary policy. The idea behind this policy is to reduce the risks taken by the banks and thereby protect the deposits of the public. However, a high SLR means that the bank has less capital to lend, thus negatively impacting the credit options for the entrepreneurs. Hence, a moderate SLR helps to maintain this balance between reducing the risk rate of the banks and enabling the growth of businesses. Currently, SLR is at a rate of 18%. If you want to know more about Nani Palkhivala’s take on the Union Budget nineteen ninety two ninety three, read his entire article on the link provided below.