We should have done what we have in half the time
An economist and former civil servant, Montek Singh Ahluwalia was a key member of the team that implemented the 1991 reforms, which dismantled government controls that stifled industry for four decades, unshackled the Indian economy and opened it up to the world. Ahluwalia, who went on to serve as deputy chairman of the Planning Commission, discusses the landmark reforms and their execution in an interview. Edited excerpts:
It is going to be 25 years since the watershed moment in 1991. When you look back, what thoughts immediately come to your mind?
Indeed, 1991 was a watershed moment. The basic idea that we needed to reform our industrial and trade policies was being discussed in the 1980s and several important steps were taken, especially in the second half of the decade. But they did not amount to a comprehensive blueprint for systemic reform. That is what 1991 achieved. Within two years, India’s industrial and trade control regime had been liberalized beyond recognition. Someone who is 45 years old today was only 20 when those changes were made and they cannot imagine the absurd level of controls that were in place.
A lot of preliminary work went into the policy changes that were eventually unveiled in July 1991. I believe the M-document authored by you during your stint in the Prime Minister’s Office (PMO) was critical in defining the contours of the new policy. Can you share the experience in drafting it and how you came to be entrusted with the task?
We had discussed with Prime Minister Rajiv Gandhi in the late 1980s the need for making much bolder changes in policy and I was hopeful that he would be able to push them if he came back into office after the general election of 1989. As it happened, the Congress did not get a majority and V.P. Singh became the prime minister. He retained me in the PMO and on one occasion, in a conversation with me, he enquired why other countries in Southeast Asia were doing so much better than us. I told him it was because they were seriously engaged in economic reforms, whereas we were hesitant to make changes. He asked me to prepare a paper spelling out what I thought needed to be done. The result was what came to be called the M-document. Prime minister V.P Singh directed that the paper be discussed in the committee of secretaries. The press got hold of it and it was published in The Financial Express in July 1990 and it sparked a huge controversy but it also received support.
I must emphasize that what I said in the paper pulled together ideas that had been discussed in government in different contexts, but they had never been presented as a coherent, internally consistent and mutually supportive reform package. The V.P. Singh government soon ran into other problems, but the internal discussion of the paper in the government helped to clarify the sort of problems people would raise if the package ever came to be implemented. There were different views among the secretaries at the meeting and many recognized the logic of what was being proposed. However, both the finance ministry and the Planning Commission were opposed to these ideas.
Fortunately, we got a chance a year later, when (P.V.) Narasimha Rao took over (as prime minister) and Manmohan Singh became the finance minister. We were able to put many of the ideas into practice. In fact, in some respects, we went further in 1991, and I think it helped that we had discussed these ideas before.
Can you relive, for our readers, the excitement of the first few months?
It was very exciting indeed. I am writing a book about my experiences and you will have to read my book to get the full flavour of the times, but let me just give you a brief preview. The new government took charge in the midst of a massive balance of payments crisis, with foreign exchange reserves down to two months of imports. There was much talk of the possibility of a default in payments by the government of India, which would have been a very serious development. To avoid it, the previous government had negotiated a sale of gold. Finance minister Yashwant Sinha was criticized for selling our “family gold”, but I believe it was the right thing to do, given the situation we had got into. To have defaulted would have been much worse.
It is fair to say that no other government in India has ever taken over in a situation as precarious. Quick action was clearly needed. Shortly after the government took over, the government devalued the rupee in two stages, on 1 July and 3 July. Devaluation in those days used to be regarded as a sign of mismanagement. It was very controversial, though professional economists understood that it was necessary. I was not in the finance ministry at the time. I was in the commerce ministry as commerce secretary, and this gave me the opportunity to push the trade policy reforms, especially the idea of getting rid of import licences and allowing all the earlier licensed imports, plus the OGL (open general licence) imports to be freely imported against an enhanced entitlement for REP (Replenishment) licences. This was an important part of the M-document.
We were lucky that P. Chidambaram was the minister of state in charge at the time. It was his first economic assignment, but he took very little time to understand the complex issues involved and backed the new approach fully. The import licensing system was a huge source of discretionary power for the commerce ministry, and Chidambaram’s willingness to give up this discretionary power was absolutely critical for the success of the reforms. I recall that officials in the finance ministry were not in favour of what they called “liberalization of imports” at a time of a balance of payments stress. We explained that since imports were being liberalized only against tradeable REP licences (to be called Exim scrip later) which would be issued to exporters, the total volume of imports through this window would be limited by the volume of licences issued. There would be no balance of payments stress since any excess demand for imports would lead to a larger premium on the licence which would accrue to exporters. Fortunately, Manmohan Singh saw the logic of what we were proposing, and backed it fully. Once the prime minister was assured that both ministers favoured the change, he approved it in a single short meeting. It was a remarkable example of quick decision-making at the political level.
There was an interesting coincidence proceeding the big-bang reforms moment in 1991: the coming together of a bunch of talented technocrats like you, almost all of whom were lateral inductions. More recently, this phenomenon has faded.
You are absolutely right about the usefulness of bringing in what you call technocrats into government. Our civil service system works in such a way that almost all top jobs are filled only by people from the services. Fortunately for me, when I joined government in 1979, economists at least had an avenue for lateral recruitment, because the various posts of economic adviser in different ministries were not “cadre posts” of the Indian Economic Service. They were filled by open competition in which internal candidates who were eligible could be considered, but they had to compete with outsiders. There were many economists such as Bimal Jalan, Vijay Joshi, Vijay Kelkar, Shankar Acharya, Rakesh Mohan, Jayanta Roy and Arvind Virmani who joined the government in this way. In fact, Manmohan Singh himself was first brought in as economic adviser, commerce!
This route was closed later because the economic adviser position was encadred so it could only be filled internally from the Indian Economic Service. The Indian Economic Service felt that just as IAS (Indian Administrative Service) officers had a presumptive claim to certain top jobs, they should have no less. The comparison was a valid one, but personally, I feel we need more flexibility in general for all posts so that technocrats of different types, not just economists, can be brought into government at senior levels.
Isn’t it a fact that while the big-bang moment happened in 1991, there was considerable heavy lifting in the previous decade beginning with the International Monetary Fund (IMF) loan of 1981? Don’t you think that this altered the intellectual discourse of the country, inspiring a shift away from socialism and allowing greater play to market forces?
I have said that many steps were taken in the 1980s but interestingly, the 1981 IMF programme was not particularly market-oriented. Of course it had a little bit of fiscal discipline, but we persuaded the IMF that we were going to manage the balance of payments by expanding capacity in a number of sectors, and much of that was through public investment! In fact, in retrospect, it is clear that the 1981 programme succeeded not because of any of the things we proposed in the programme but because we had a bonanza in offshore oil production from Bombay High, much beyond what was originally expected.
The 1980s did see some relaxations in industrial policy but they were essentially incremental. There was a more relaxed attitude towards import of foreign technology and also a willingness to grant larger capacities to the private sector. But that left the system of industrial and trade controls in place. The real systemic changes came in 1991.
What would have happened if the country had failed to generate the desired political consensus and India had defaulted?
A government default would have closed off all avenues of capital flow including NRI (non-resident Indian) remittances and also interrupted borrowing from the World Bank. It would have forced the government to impose even stricter controls on imports, which would have damaged the economy and worsened the domestic supply situation, leading to shortages and inflation. Countries that have defaulted have taken a very long time to get back to normalcy.
Looking back, do you believe that some sort of political consensus on economic reforms has evolved over the last few decades? Where the United Progressive Alliance (UPA) left off, the National Democratic Alliance (NDA) seems to have begun.
I have said earlier that we have developed a strong consensus for weak reforms. One of the strengths of our system is that it does manage to develop a political consensus. Political parties strongly oppose a policy when in opposition, but they do not roll it back when in power, and even manage to take it forward. The 1991 reforms were not rolled back by the United Front government and were actually carried forward. The NDA government under (Atal Bihari) Vajpayee also moved the reforms forward. Similarly, many of the reforms that were in various stages in the pipeline under the UPA are being pushed forward by the present government.
No government will say that it is doing the same thing as its predecessor. It would like to say it is doing something different which will yield better results. That is understandable, but investors recognize that there are no disruptive reversals and regard it as a strength of the Indian system. However, they naturally feel frustrated that if there is that much underlying continuity, why is it not possible to move faster? I think this is a fair point and we need to ponder why this is so.
What would you do differently if you had a chance?
I think the broad directions of reforms, and the coverage of sectors identified as needing reforms, were absolutely correct. However, I do feel we should have done what we have in half the time and been further ahead on the things that are still in the pipeline. I am not sure what I personally could have done differently to achieve this objective. Perhaps more effort should have been made to explain the benefits already emerging from the reforms, and use that as the reason for moving more quickly to the next stage.
The problem with gradualism is that it becomes confused with reform by stealth, or doing things when the political environment is conducive. There was a very active debate on policy issues in 1991. There has been much less of it in recent years. Public attention is easily focused on whatever is sensational. This means we always know what is wrong and that is a good thing. Hopefully, the deficiencies highlighted will be corrected. But there is less reasoned debate on what policy options the government has, and what it should do. As a result, the government is always under pressure to do better but never under pressure to take specific steps to achieve this result.
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