New Delhi: It has been exactly three decades since the P.V. Narasimha Rao government ushered in the historic 1991 economic reforms that freed up the private sector and removed many trade barriers unleashing India’s growth potential.
ThePrint speaks to Montek Singh Ahluwalia, former deputy chairperson of the erstwhile planning commission and well-known economist who was closely associated with the 1991 reforms, on what these reforms achieved and what more needs to be done by the Narendra Modi government to ensure India remains on the high growth trajectory.
Edited excerpts from the interview:
Q: It has been nearly three decades since the historic 1991 reforms. How do you think these reforms have made an impact on the Indian economy?
The reforms were indeed historic and they had a very important impact. The results took time to show up, because the reforms were consciously introduced in a gradualist manner. This was a concession to the fact that this is a democratic country and in a democracy, you have to act at a pace which carries enough people.
Looking back, there can be no doubt that the reforms succeeded in unleashing India’s long suppressed private sector. From 2003 till around 2016, a period spanning more than one government, we had a growth rate which was for well over 7 per cent per year on an average.
Right now, we are in the middle of a pandemic, and it is not clear how quickly the economy will recover, but there’s no doubt that the reforms led to India being regarded as one of the fastest growing emerging market countries.
There was a lot of criticism at that time that the reforms would not actually help the poor. The evidence we have suggests the opposite.
Between 2004 and 2011, the only period for which we have data on poverty levels, there was a big reduction in the absolute number of people below the poverty line. I attribute that to the fact that the reforms not only unleashed a faster growth process but also ensured that the growth was inclusive.
I think we should have done more to build the kind of infrastructure that Indian industry needs in order to become globally competitive.
This is not to say there were no shortcomings. There were two areas of disappointment. First, we didn’t do as well as we should have in human development, by which I mean, health and education. It was recognised during the UPA period that more needs to be done. We did increase funding for primary education and that increased access to schooling. But we have not yet succeeded in delivering quality education.
In the case of health, we recognised the need to increase public spending on health but were not able to do it. One of the reasons is that health is dominantly a state subject. Whatever the reasons, I would have hoped that 30 years after the reforms began, we would have seen better results.
The second area of disappointment is managing the environment. In recent years, there is growing awareness that we need to do more to protect the environment and also to combat the threat of climate change. How to evolve a development policy, which reconciles development objectives with protecting the environment remains an open challenge.
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Q: What are some of the other areas that you think should have been addressed before?
I think we should have done more to build the kind of infrastructure that Indian industry needs in order to become globally competitive.
The importance of infrastructure development was recognised during the UPA period. It was also recognised that since the public sector doesn’t have the money, we needed to do more by way of public-private partnerships (PPPs). There have been lots of success stories in PPPs but the initiative also ran into unanticipated obstacles of different kinds.
It was clear that we needed to work harder to create an environment in which PPP can work. One of the big issues was dispute resolution.
The present government had set up a committee under Vijay Kelkar to suggest ways of overcoming the problems bedevilling PPPs. The committee made a number of recommendations. I hope these will be speedily implemented.
I think we are also too willing to raise protective walls against imports to protect Indian industry. That’s not a strategy for gaining export competitiveness.
The new industrial policy of 1991 was aimed at doing away with the numerous permits that industries need and help them flourish. However, Indian manufacturing still remains far from competitive…
Manufacturing has done well in many areas because of the reforms. We have shown ourselves to be competitive in auto components, two-wheelers, pharmaceuticals, and vaccine manufacturing. But I agree manufacturing has not grown at the kind of double-digit level we wanted it to.
I think the only way it could have grown that rapidly was if we had had an equally rapid growth in exports of manufactured goods.
In all the success stories of East Asia, manufacturing grew rapidly but this growth was not led by the growth of domestic demand. It happened because economic policy consciously encouraged exports to take advantage of booming global trade. We didn’t do enough to achieve a comparable success in Indian industries engaged in simpler manufacturing exploiting global markets. There are many reasons for this failure.
A general constraint is that Indian industry does not have infrastructure of the quality needed to be competitive. The cost and quality of power is a major problem. Another reason commonly advanced is that our labour markets are too rigid and do not provide the flexibility needed for investors to invest on a large enough scale in labour intensive areas.
Yet another reason is that in the early years of reforms many of the sectors that had export potential were reserved for small scale manufacture. These restrictions were removed only very gradually and were finally eliminated more than twenty years after the reforms began. The procedures related to trade logistics are also much poorer than elsewhere.
These are self-imposed limitations on the country’s competitiveness, which are unfortunate. We can actually improve in all these areas over time.
The problem with protectionism is it completely removes that pressure on Indian industry to become competitive.
I think what has happened is that our system has encouraged our manufacturers to go into high-skill and capital-intensive areas. They have been positively discouraged from going into the labour intensive low skill areas, which is where a lot of growth could have taken place, but that growth would have required them to be export competitive.
I think we are also too willing to raise protective walls against imports to protect Indian industry. That’s not a strategy for gaining export competitiveness.
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Q: The Modi government has been raising custom duties…
In the last three or four years, we have indeed raised our customs duties. When the reforms began our duties were ridiculously high and a conscious part of the economic reforms adopted by the Narasimha Rao government was to bring customs duties down to East Asian duty levels. This policy was endorsed by subsequent governments including the Vajpayee government.
Even within the current government’s time, the Niti Aayog, under the vice-chairmanship of Arvind Panagariya, a distinguished trade economist, had said in one of its first reports that India should keep lowering customs duties. But we have not done that. Instead we have reversed the trend and raised customs duties. This is not consistent with the objective of making Indian industry competitive and integrating with global supply chains.
I also think we missed an opportunity when we decided not to join RCEP (Regional Comprehensive Economic Partnership). East Asia is the fastest-growing region in the world and we ought to plan to integrate with it more closely. It is as much a geopolitical as an economic decision.
Since China is a member of RCEP, there is a fear that we will be giving a lot of concessions to China. But let’s face it, in an integrated global economy, you will be competing with China directly or indirectly. RCEP gave us a lot of time to lower our duty levels.
The problem with protectionism is it completely removes that pressure on Indian industry to become competitive.
If we raise duties for every Indian industry to make it competitive, we will end up somewhere close to where we were in 1991.
Q: So this is a step backwards in terms of what the 1991 reforms achieved?
It was the American philosopher George Santayana who said, ‘Those who forget history are doomed to repeat it’. I hope your series on the 1991 reforms will help remind your viewers and readers how bad things were before 1990 so we don’t see a regression.
The pandemic has hit most countries very badly and it has hit us also. However, we seem to be hit worse than others.
Incidentally, I don’t say we should never change direction. I have no problem with criticising the past and correcting mistakes but you must think carefully whether what you are doing now will achieve better results.
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Q: The government has brought in labour reforms through the introduction of the four labour codes. What are the big reforms that still need to be done?
The consolidation of multiple codes is a good thing and should be done. They have not yet been notified but I assume that will be done soon.
But the labour codes don’t give the flexibility to tackle the permanent labour force for large units. They only raise the limit from 100 employees to 300 employees for units that need permission to retrench labour. That is actually only going back to where it was in 1983, before it was lowered by Mrs (Indira) Gandhi’s government in an effort to appear to be pro-worker.
If you want competitiveness in a labour intensive industry, the flexibility should be available not just for firms employing up to 300 workers but even for those employing 5,000 workers.
There was a lot of criticism at that time that the reforms would not actually help the poor. The evidence we have suggests the opposite.
However, I must acknowledge that there is no political party that’s willing to do that. I mean, somehow, all our political parties have got fixated on the idea that introducing flexibility in hiring amounts to a hire and fire policy and is anti-labour. That is not true. One can have flexibility which provides adequate protection to labour but also allows shedding of labour in a downturn.
Q: What do you think about this fresh move by the Modi government to privatise two state-owned banks?
I hope we are not planning to select some banks and sell them to other public sector enterprises or LIC as was done for IDBI. That is not privatisation. But if we end up with genuinely privatising some public sector banks, I think that’s a good move.
However, between announcing a privatisation and getting it done there are many gaps. For example, all public sector banks are massively overstaffed. If you impose a condition that you cannot downsize, you are not going to get much interest.
More generally, we need to bring in a wider set of reforms for public sector banks. The excessive control that the central government has over public sector banks is very damaging.
The Reserve Bank of India (RBI) does not have the same regulatory power over public sector banks that it has over private sector banks. The RBI can remove a chief executive of a private bank if they feel that he or she is not doing a good job but not in public sector banks. The PJ Nayak Committee had recommended many reforms and we should consider implementing them.
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Q: What do you think of the current government’s handling of the economic fallout of the pandemic?
The pandemic has hit most countries very badly and it has hit us also. However, we seem to be hit worse than others.
There was a period when we went around saying that we’ve done exceptionally well, but that has totally been reversed because of the second surge.
The latest official estimate of a 7.3 per cent decline in GDP in 2020-21 is among the worst in developing countries. Many statisticians have pointed out that the actual outcome may be worse than what the official data shows because the pandemic hit the informal sector especially badly and we don’t have reliable data on the performance of the informal sector.
Our national accounts assume that the informal sector grows at the same rate as the formal sector and this would exaggerate the overall growth performance.
On the government’s handling of the economic fallout, I think we should have done more by way of fiscal measures. We did a lot on the monetary side and that was good but I personally think that we were too conservative on fiscal expansion.
We were a little too preoccupied with protecting the fiscal deficit. Part of the problem is that we were not willing to accept that growth is going to be negative until much later in the year. Had we publicly recognised the extent of the decline in the first half of 2020-21 much earlier, we might have followed a more expansionary policy on the fiscal side.
The real question to ask is what are we going to do from now onwards? It is clear that we will see a revival in 2021-22 which will bring the economy back to where it was in 2019-20, but will growth in 2022-23 just go back to the pre-pandemic level of say 4-plus per cent?
We need to aim for faster growth than that and for that much depends on what happens to private investment. How do we revive the private sector spirit and its ability to invest?
I think that a much healthier banking system is absolutely crucial. Getting the IBC back into operation is a very important element of financial sector reform and we should ensure that it doesn’t fall by the wayside.
Q: How does the government’s decision to appeal the adverse arbitration ruling in the Vodafone and Cairn Energy cases impact India’s image as an investor-friendly country, especially given that the government has said it does not favour retrospective taxation?
You cannot complain about a government pursuing a case by filing an appeal if they have that legal option. Fortunately, decisions are quick in international arbitration cases and if an appeal is filed, it will be quickly disposed of.
The real question is, at the end of it all, if the case goes against the government, what should the government do?
To my mind, when we enter into these arbitrations, we enter into them on the clear understanding that we will go through the full due process, but in the end we will abide by the decision.
If the case finally goes against us we should accept the end result. If we don’t, the word will quickly go around that if you ever have a dispute with the Government of India, there is no fair way of resolving the dispute because the government will never accept anything that goes against it. That would be very damaging for India.
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