Montek Singh Ahluwalia recounts the importance, and drama, of that historic summer.
If Manmohan Singh, given a full mandate by P.V. Narasimha Rao, became the prime architect of wide-ranging economic reforms, forced by a balance-of-payments crisis, that firmly put India on a new growth trajectory twenty-five years ago, he had men such asMontek Singh Ahluwalia to assist him in the momentous exercise. As Dr. Singh subsequently went on to helm the United Progressive Alliance government, Mr. Ahluwalia took reins of the erstwhile Planning Commission, of which he was Deputy Chairman through the UPA’s two terms in power. Mr. Ahluwalia walks down memory lane in an interview with Puja Mehra — looking back, and looking forward as India stares at the tailwinds of a sluggish world economy.
The rescue team of 1991, of which you were a key member, made a giant leap of faith. There hasn’t been a crisis of the same order, but would you say you have seen as much boldness and courage in economic policy formulation in the 25 years since then?
As you say, the crisis of 1991 was exceptionally severe and it did require a quick and bold response. We are fortunate that Dr. Manmohan Singh, backed by Prime Minister [P.V.] Narasimha Rao, acted quickly and boldly. He didn’t just act to control the crisis: he used the crisis as an opportunity to make far-reaching structural changes to transform a system that was designed in the mid fifties and sixties and had become quite unsuitable for the times. The problems with the system had been discussed earlier and there was general agreement in the technocracy about the need to reform industrial and trade policy, and the need for a greater role for the private sector and market forces. There was less agreement in the political class and especially not in the Left.
I agree we have not seen comparable boldness since then, but of course we have not had a comparable crisis. The good news is that the reforms have not been reversed by successive governments. On the contrary, they have been pushed forward. Each government gives its own names to the programmes but a discerning person can see that it is essentially the same broad direction. There is nothing wrong with that. However, it does mean that there hasn’t been comparable boldness in charting out new structural changes that are now needed.
How do you feel when you look around and see how much India today is different from the pre-1991 era?
Of course, India has changed, radically, but you would expect that over twenty-five years. The question to ask is has it changed faster than in the twenty-five years before the reforms, and seen more progress than other countries?
There is no question it has changed much faster than it did in the preceding 25 years. The rate of growth of GDP between 1955 and 1990 was only around 4 per cent. Per capita GDP grew at only 2 per cent per year. In the 25 years since the reforms GDP growth has averaged about 7 per cent and population growth has slowed down, which means per capita GDP growth has been close to 5.5 per cent. That’s a huge difference. A lot of the changes you see in the structure of the economy are a consequence of the fact that incomes are rising much faster and of course the economy is more open.
Poverty has declined much faster than in earlier years, though of course there are still too many people below the poverty line. More importantly, expectations have changed. The poor don’t just want to be pushed above the poverty line. They want better quality jobs, better access to essential services such as education and health and clean drinking water and sanitation. Our performance in these dimensions needs to be greatly improved.
Comparing India’s performance with that of other countries shows that India’s growth was lower than that of other developing countries in the pre-reform period but it exceeded that of all developing countries except China taken together. China’s performance is clearly outstanding and in a different league.
What is your most striking memory from the days of designing and implementing the 1991 reforms?
I am writing a book about my experiences which will have many memories. For now I would only say, as a poet put it, “Bliss it was in that dawn to be alive, but to be young was very heaven.”
At that time, did it seem like you were rewriting the future of the country?
In government it is very easy to persuade yourself that you are rewriting the future. However, after much reflection I would certainly say that what was done in trade policy exchange rate management, industrial policy, tax reforms and capital market reforms were game changers. Tax reforms are still ongoing, but that is normal.
Back then, Dr. Singh had said that his views on the pace of change had changed: “I used to be in favour of gradualism but look around and realise that time is not on our side. If there is to be structural reform it has to be done quickly.” And yet, he is said to have presided over, as Prime Minister, a state of “policy paralysis”. Tell us about that phase.
What you call policy paralysis refers I think to the problem of infrastructure projects being held up because of a piling up of environmental clearances, unresolved disputes in PPP [public-private partnership] cases, and financial constraints facing infrastructure investors because they did not anticipate the economic downturn and could not cope with cost escalations. This was definitely a problem and in the Twelfth Plan, which was approved towards the end of 2012, we had warned that the 8 per cent growth target depended on strong supportive policies and a “policy logjam” scenario would reduce growth to between 5 and 5.5 per cent. One of the reasons for the logjam was that Ministries acted as silos with very little willingness to cooperate to find a solution. Efforts were made to set up mechanisms to get effective cooperation across Ministries, but things were soon overtaken by the elections. Some of the problems relating to stalled infrastructure projects are still being addressed. I hope this will be done quickly.
Let me point out, however, that there are examples of effective policy handling also. We faced pressure on the rupee in 2013, after the current account deficit had widened to more than 4 per cent of GDP in the previous year (much higher than in 1990), and the “temper tantrum” led to a capital outflow, all of which put pressure on the rupee. We were able to handle that crisis without having to go to the IMF [International Monetary Fund] thanks to the flexible exchange rate, which allowed a substantial exchange rate adjustment to occur automatically, a clear policy decision by the Finance Minister that the fiscal deficit would be brought under control, and very high reserves which implied that we could buy time for the policy measures to take effect. I would call this very deft policy handling. Had we fumbled, the consequences would have been painful.
Former Finance Minister P. Chidambaram has said that the fiscal stimulus rolled out by the UPA government in the aftermath of the 2007-08 global financial meltdown ended up contributing to the economic pain. You were one of its architects…
I am sure [Mr.] Chidambaram did not describe me as the architect of the fiscal stimulus, since fiscal issues are handled by the Finance Ministry. However, let me say I was in favour of an initial stimulus to counter the impact of the crisis. That was the right thing to do then, and indeed it is what the G20 were recommending generally. However, having protected GDP growth in 2009-10, the stimulus should have been withdrawn by 2010. I was certainly not in favour of open-ended stimulus. Had we started withdrawing in 2010-11, we would have been in much better shape from a macroeconomic perspective in the next three years.
The Planning Commission, Prime Minister Manmohan Singh had said at its final meeting, was in need of reinventing itself. In what ways was the need for the Commission to contemporise itself felt?
All institutions should periodically rethink their purpose. Dr. Manmohan Singh wanted us to ponder on what an institution like the Planning Commission should do to support government policy in the new economic environment. I had submitted a detailed note to the Prime Minister in the last months of UPA-II but I said action could be left to the next government.
One of the suggestions I made was that the Commission should do more to provide an internal but independent critique of the sector policies and individual programmes implemented by the Ministries. Traditionally the planning process had focussed too much on funding plan and not enough on general sector policy, or even on scientific evaluation of the effectiveness of plan programmes. However, to do a good job the Commission has to be able to draw on professionals with domain knowledge and not just on generalist civil servants drawn from the same pool as the Ministries. In the pre-reform era, about 80 per cent of the knowledge on most things was within the government and only 20 per cent outside. Today, it is the reverse. This is especially so as the private sector now has an active presence in all critical areas. We had no way of tapping outside expertise in a systematic manner. We did set up committees and consultative groups, but that is not the same thing as having experts on the staff. I did move a proposal to allow each member a budget of Rs.2 crore, to hire outside consultants in any of their areas. They welcomed the initiative, but later complained that the administrative procedures for selecting the consultants were so complex that they could not cope! One of the newspapers even reported that the amount was too large.
It’s been over a year since the NITI Aayog replaced the Planning Commission. It’s early days still for the Aayog but is it, in your view, addressing those gaps and the need of the day?
As you say, it is early days, and I do not know what exactly they are doing. All I would like to say is that I wish NITI Aayog well. We are entering a very critical period, with considerable global uncertainty. Solid analysis and critical advice on policy can make a big difference. And that I understand is the terms of reference of the NITI Aayog.
Concerns have been expressed about the Central Statistical Organisation’s GDP and Gross Value Added estimates, including by Mr. Chidambaram. There are doubts if an industrial turnaround has indeed taken place. Commentators are saying that India’s growth doesn’t feel as good on the ground as the data suggest. Where do you stand in this debate? What disconnect could there be between the statistical estimates and the reality on the ground?
It is not just [Mr.] Chidambaram who has expressed doubts. The Economic Survey itself has expressed puzzlement, so clearly there are unresolved issues. These are mainly on the growth of manufacturing where the new data give a higher growth rate than the earlier indicators would suggest. I thought a committee under Pronab Sen had been appointed to go into these issues. They should release the report as soon as possible. The CSO should also come out as quickly as possible with a time series going back several years using the new method and comparing the result with the older series.
Now that China has slowed down, our growth rate is higher than China. Observers are already saying that even China’s reduced growth rate exaggerates the actual growth. If China’s growth data are being questioned, there will be similar scrutiny of our data, and we would be well advised to share whatever information we have as quickly as possible.
The Indian economy is said to be an island of relative calm in a gloomy global scenario. Mainly domestic engines propel it and it has remained relatively insulated from global shocks. Can it remain so? Is India a largely domestic story?
It is true that we are not dependent on an export-led growth process where expanding exports and a growing export surplus provide the demand that will support growth. But that does not mean we are somehow insulated from global shocks. We are much more open than we were and therefore what happens elsewhere matters to us. In fact, right now we are benefiting from a positive global shock in terms of low oil prices, though this shock has now bottomed out.
I do agree that India’s growth will depend upon domestic factors, notably a big push in infrastructure and a revival in private investment. However this will involve an increase in import and we will need better export performance to manage the balance of payments. FDI is also important for modernising technology in Indian industry and possibly also linking Indian production to global supply chains. That in turn has implications for trade negotiations. All this means there are many things we have to do to manage our interactions with the global economy well. We would ignore the global economy only at our peril.
Bharatiya Janata Party MP Subramanian Swamy ran a campaign against Dr. Raghuram Rajan, which, it is widely believed, is one of the reasons that led him to announce he will not be seeking a second term at the Reserve Bank of India. Many people say he was “hounded out” by the BJP. Would you like to say something about Dr. Rajan’s stint in India and the manner of his departure?
I do not know what led Dr. Rajan to announce that he would be rejoining academia at the end of his term. However, I have no doubt that this is a great loss for India’s economic management team. Dr. Rajan has been an outstanding Governor, and has commanded a great deal of respect internationally. This is actually an asset for the country since a Central bank governor who commands respect gives credibility to policy pronouncements. He managed the crisis of 2013 extremely well and also started many things in the area of financial and monetary reform which need to be completed as quickly as possible.
Is the worst yet to come from China?
There is a lot of nervousness internationally about China’s economic prospects in the near future. They were expected to slow down from the very high rates of growth they recorded in the past thirty years and initially, the slowdown to 6.5 per cent was regarded as commendable. The trouble is, people are now wondering whether China’s growth is lower than that, some say even as low as 4.5 per cent. If it is that low it will generate internal tensions in terms of insufficient growth of employment opportunities. China was able to maintain high growth after the crisis because of a credit-led boom feeding investment in real estate which has led to a number of what are now called ghost towns. This is clearly not sustainable and the traditional Chinese growth engine, which used to be exports, is unlikely to recover soon given the poor prospects in the advanced countries. One can never be sure, but it is reasonable to say there is no upside and quite a lot of downside. Poor performance in China will obviously have ripple effects on others.
What does Brexit tell us — will the European experiment succeed or fail? What are the economic implications?
Brexit was a surprise, although the polls were all pointing in that direction. Many of the underlying tensions that caused Brexit, especially a frustration with the soothing noises being made by the elite for several years which did not lead to visible improvements for the common man, are being felt in other European countries also. And immigration touches a raw nerve everywhere. I do not know whether the U.K.’s exit is now inevitable. The new Prime Minister will have to take a call and it is possible that they may push the decision to a general election. It is too early to judge whether the European experiment will be irreversibly damaged but in the short run, there will be more uncertainty. I don’t see any positive economic implications and one can imagine seriously negative ones.
Nationalism seems to be gaining popularity around the world. Is it linked to the economic hardships people faced after the 2007-08 global economic slowdown? By when will the global economy recover? Which economy will lead the recovery?
The rise of economic nationalism is almost certainly connected with persistent economic hardship and the perception that the establishments in these countries have been making standard reassuring noises that things will soon get better but they haven’t. I don’t think the current year will see an economic recovery for the simple reason that China is still mired in problems, Europe is overwhelmed and Brexit has added to uncertainty, and the U.S. is going through a general election. If developments in each of these regions go well, or at least better than people fear, we could at best expect a weak upturn next year. For us this implies that oil prices are unlikely to shoot up, which is good, but export markets will be challenged, which is bad. We should use this period to set our own house in order and make the kind of structural reforms which will make us look like an attractive destination for FDI when the world has regained its breath.