Montek Singh Ahluwalia made the biggest contribution in planning and implementing the economic reforms. In an interaction, he looks back on those momentous days
Jasleen Kaur | July 23, 2016
If there is one person from the bureaucracy who has made the biggest contribution in planning and implementing the economic reforms, it has to be Montek Singh Ahluwalia. Commerce secretary at the time of the 1991 budget, he has served in a wide gamut of positions since: economic affairs secretary, finance secretary, planning commission member and then its deputy chairman apart from key positions in World Bank and IMF before and after. In an email interaction with Jasleen Kaur, he looks back on those momentous days.
What provided the push for the launch of economic reforms? Was it the BoP crisis, or was it a new thinking emerging in select circles (for example, your internal paper of 1990), or was it, in hindsight, a paradigm of the times that would have taken shape in India regardless?
I think both factors were at work. The crisis was really severe. No one younger than 45 can imagine what it was like. We had run out of foreign exchange, the rating agencies had downgraded us and imports had to be squeezed so severely that GDP growth dropped to 1.4 percent in 1991-92. Mr Narasimha Rao decided to have a technocrat as finance minister and Dr Manmohan Singh went into action remarkably quickly. But Dr Singh didn’t just act to control the crisis. He rightly chose to pursue structural reforms, without which the economy would never be able to grow rapidly. Most people have no idea what an absurd control system we were running, with the government interfering in all sorts of decisions which were better left to the private sector responding to the market. There had been quite a lot of internal rethinking on policy, but no real changes had been made. Dr Singh used the opportunity of the crisis to push structural reform. One cannot say there was consensus on reforms. The left was bitterly opposed and many in the political class had doubts. But the technocracy was convinced and the government persevered and the country benefited from that.
For younger readers, can you briefly encapsulate the key points of your 1990 paper that drafted a blueprint of reforms?
I had prepared a paper in June 1990 putting together ideas for change. VP Singh was the prime minister and he asked me to write a paper outlining the policy changes we needed, so I put together my views on issues we had been discussing internally and which I had hoped to put before Rajiv Gandhi had he been re-elected. The paper was discussed in the Committee of Secretaries. It was controversial and leaked and was published in the Financial Express and was often referred to as the ‘M Document’.
I have written about it in the July 16 issue of the Economic and Political Weekly and I summarise the thinking before the reforms and your readers could look at that. My 1990 paper itself is being made available by EPW online.
I should emphasise that the ideas were not original. They had all surfaced in internal discussions but had never been presented as a holistic policy for change. To summarise, the paper proposed bringing the fiscal deficit under control which is of course a standard mantra, but it also recommended a new approach to industrial policy, trade policy, MRTP relaxation, public sector reform and FDI policy. Taken together it was a fairly comprehensive agenda and it scared many people. But one year later, the reforms in 1991 actually did more.
I would urge your younger readers to reflect on the lesson that it is good to push for much more change than will command consensus at any point in time. People who want the status quo will always raise doubts and fears, and while such concerns need to be heeded, they should not be allowed to choke experimentation in policy.
Will you share any memories or anecdotes of that month of July when a slew of drastic and dramatic measures were announced – beginning with the rupee devaluation and culminating in the budget?
There are so many memories and I am putting them down in the book I am writing. But one thing that stands out is when we got Dr Manmohan Singh to agree with the trade policy changes liberalising imports via Exim scrips. The whole thing was agreed in one meeting between commerce minister Chidambaram and Manmohan Singh on July 3. We made our case (I was the commerce secretary at that time), the finance ministry officials were not in favour, but Dr Singh overruled them. Two hours later we had all the papers ready, and went with Dr Singh to see prime minister Narasimha Rao. Chidambaram explained what we wanted to do, the PM just asked Dr Singh whether he agreed, and when Dr Singh said he had signed the file, the PM just took the file and signed. The deed was done. No groups of officials, no GoMs, even the PMO was not actively involved. Trade policy was pretty fundamentally restructured in about 10 hours! I always felt it demonstrated that the Indian system could work if ministers understood what was involved and directly sorted out issues. Had the same proposal been moved “on file” I bet it would have got stuck somewhere. The lesson is we need much faster decision making with less shuffling of files and ministers taking responsibility.
In the initial years, the political management of the reform blueprint must have been very demanding. That is why, in popular impression, it is believed that Dr Manmohan Singh and his team worked in a pure policy domain, whereas the real credit for reforms go to PV Narasimha Rao and his political acumen. In your view, was the division of labour so neatly demarcated?
I was only an official so I have no personal knowledge [of] what was happening in the political space but of course Manmohan Singh could only have achieved what he did because Narasimha Rao gave him the space and said he would look after the politics. I think the severity of the crisis made politicians willing to hand it to a technocrat on the understanding that if it didn’t work he would get the blame. I think that is a fair deal.
After the exit of the Narasimha Rao regime in 1996, there was a degree of uncertainty over the continuity of reforms. Yet, history shows that there has been a broad consensus across political spectrum on the direction and pace of reforms. How did the reforms gain political acceptance?
That is indeed a remarkable feature of the system. The Rao government was succeeded by the UF government which had several left-leaning individuals, but fortunately Chidambaram was there representing the Tamil Maanila Congress. I think he made sure that reforms continued, although it was emphasised that it would be done gradually. The NDA under Atal Bihari Vajpayee did the same thing. I think gradualism made reforms acceptable to most. I said at one point that there is a strong consensus in India for weak reforms. I would stand by that statement.
You once referred to American author Daniel Yergin’s remark, about the Hindu rate of growth being replaced by Hindu rate of change. The pacing of reforms, except during the initial burst, has left most commentators impatient throughout the 25 years. Do you think the “democratic compulsions” may also have a positive role to play in economic policy-making?
I think that is what I meant about weak reforms. On the whole I am not for big bang reforms. We are a large and democratic country and there is no harm in trying to build as much of a consensus as possible. Deng Tsiao Peng said the best way of crossing a river is by feeling the stones. But one must be quite clear that one wants to cross, and people should know that is our intention. We should not waste time paddling around on the edges, trying to look as if one isn’t really crossing and just hope that if one gets a chance we will cross. That is what I have called “opportunistic reform” and it is sometimes also called reform by stealth. That is not good enough. I don’t think we should blame democratic institutions. We need leaders who will try to explain the logic of what they are doing to the people. A more informed debate will produce better results.
Looking back, is there anything that you would have liked to change in the history of these 25 years? Also, are there any lessons in pushing difficult economic policy decisions in the face of populist political compulsions?
I think we should have taken on the controversial issues more frontally. Public sector reform for example has been a non-starter. Do we really need BSNL or MTNL or Air India, or for that matter the numerous ITDC hotels in the metros to be in the public sector? These things need to be debated and the public made to understand. Of course it involves a political risk, but that is the essence of political entrepreneurship.
In the first five years, ‘trickling down’ and ‘the human face’ were among the oft-quoted terms. To what extent have the benefits of economic reforms trickled down to have-nots in real terms? Often, various forms of social unrest, for example, demands for job quota, are attributed to the ‘failures’ of the economic reforms. Would you agree?
No one should support a reform process that doesn’t trickle down. But the fact is that the growth in the period 2004-05 to 2011-12 did trickle down. Trickle down is an unattractive phrase. I would rather say the high growth in the period was also inclusive. The record on that is better than people think. Poverty went down faster than ever before and for the first time the absolute number of people below the poverty line declined by 140 million. Unfortunately, this phenomenon has been very little appreciated in India, because politically it is too tempting to say that the poor are suffering. They are, because poverty is still too large, but it is less than it was, and as Chidambaram has been saying publicly, if we keep growing in the manner we did, with high and inclusive growth poverty as we now define it will be over in twenty years. There is really no alternative. Of course we may want to raise the poverty line and we should. And that would increase the number below the poverty line but as we pointed out in the Twelfth Plan this would not alter the fact that poverty is falling. People lower down are benefiting. They are not getting essential services such as health and education and that needs to be remedied but we need to be clear about how that is to be achieved.
I agree that the record on employment is not good but we need to think how we can improve it. One of the issues that comes up is labour laws. Most economists think our labour laws discourage employment. Our trade unions however don’t. We need a more informed discussion on this issue. Personally I feel our labour laws do discourage employment. Of course there are many other factors that hold back small and medium labour intensive industries and we need to look at them also.
What are the items pending on the reforms agenda?
There are many issues, GST for one, financial sector reforms, fixing the problems of PPP [public-private partnership] in infrastructure. I have no idea how the government is prioritising among these. Labour reforms should be an issue, but we need to be clear what a good reform is. For example, if we want to weaken the present requirement that closing a unit or downsizing requires prior permission of government I don’t think the best way of doing this is to raise the limit for applying the laws from units employing 100 workers to 300. This exempts these units from all provisions of the law whereas many provisions, for example, on safety, are desirable. It is much better to build in flexibility where we want it and apply that to all units, including the larger ones. We should recognise that even units employing 5,000 workers need flexibility.
You are writing a book on your experiences in economic policy-making. Can you give a brief preview of it?
I hope to give my perceptions of how policies evolved in the period. I was in government which is roughly from 1979 to 2014, with a brief break between 2001 and 2004 when I was offered the post of the first director of the IMF’s Independent Evaluation Office. I resigned from that position in 2004 to take up the position of deputy chairman of the Planning Commission. It has been a very long stretch and I am trying to see how to put down what would be of interest for the general reader, and especially the younger reader. I hope they like reading the book as much as I am enjoying writing it.
(The interview appears in the July 16-31, 2016 issue)
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