When economics defeated ideology in India and the three men behind it - Rvpg media

When economics defeated ideology in India and the three men behind it

To understand the on-ground realities of how difficult it was to do business in pre-1991 India, here is an excerpt from a book by Rakesh Mohan, one of the technocrat-drafters of the 1991 policy. The macroeconomic problems that faced the nation in their compounded form were aggregated from the microeconomic difficulties entrepreneurs faced:

Prior to the sweeping industrial policy reforms of 1991, the establishment and operation of an industrial enterprise in India required approval from the central government at almost every step. Before making an investment, an entrepreneur had to obtain an ‘in principle’ approval from the Ministry of Industry. The granting of this approval resulted in the issuance of a ‘Letter of Intent’ (LoI), which usually included a requirement for a phased manufacturing programme (PMP) aimed at progressive indigenization of the manufacturing process. Armed with this LoI, the entrepreneur could then tie up other requirements for
setting up the project. If he needed to import capital goods, he had to obtain a capital goods import licence from the Chief Controller of Imports and Exports (CCI&E), in the Ministry of Commerce. The approval for the import, however, was given by a committee set up in the Ministry of Industry. If there was also a need for a foreign collaboration agreement, as there usually was, the entrepreneur had to obtain a specific approval for this, an ‘FC’ approval, from a committee chaired by the finance secretary, but serviced by the Ministry of Industry, which then enabled the allocation of foreign exchange from the RBI. In order to raise funds for the project, if an entrepreneur wanted to go to the capital market, he needed separate approval from the Controller of Capital Issues (CCI) in the Ministry of Finance. For import of raw material and components, separate licences had to be obtained on an annual basis from the CCI&E, with the list each year having been determined by the requirements of the PMP. In each case, an essentiality and indigenous non-availability clearance had to be given by the technical wing of the Ministry of Industry, the Directorate General of Technical Development (DGTD). Once everything was tied up and the unit was about to go into production, the entrepreneur had to go back to the Ministry of Industry for an Industrial Licence, and then approach the government-owned development finance institutions for funding. In this whole approval process, the DGTD was the linchpin as it alone was supposed to possess the technical knowledge needed to process the approvals at this stage.

Parts of these distortions worked their way through what was being alleged as economic reforms. That is, use the expression ‘economic reforms’ as a branding exercise to legitimize and ‘satisfy the “aid-givers”, whether from the World Bank, or from the richer countries like the US, West Germany and Japan, from whom the Indian government and big business are seeking assistance’, wrote H.K. Paranjape in a sharp paper seeking liberalization from the ‘vice-like grip of parasitic “rent” seeking politicians and bureaucrats’:

This manner of liberalization in doses, sometimes small, sometimes large, also serves the purpose of keeping the discretionary powers of the government largely intact. Every time a basic structural change which would lay down clear-cut guidelines and rely on macro-instruments has been suggested, those in power have defeated it. Whether it was the Dutt
Committee in 1969–70, or the Narasimhan Committee in 1983–84, the bureaucracy makes sure that its power and authority do not suffer; and those in political authority agree, for they benefit probably even more as a result.

Keeping this as background and the macroeconomic crisis as trigger, there are three men (the 1991 economic reforms story has no women characters) who prepared the intellectual groundwork for the Industrial Policy 1991. One end saw veteran politician Pranab Mukherjee deliver resounding rhetoric but refrain from moving away from the past. In the middle was young politician Jairam Ramesh who tried to bridge the past and the present to guide the future. And on the other end, technocrat Montek Singh Ahluwalia, with a clearer mind, advocated for shedding the past to drive a new future.


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First, Jairam Ramesh, who prepared ‘A discussion paper on new industrial policy initiatives’ in September 1986. His ideas were lucid, his arguments strong. But he devised the recommendations in that present, keeping one foot in the regressive ideas of the past and one in the potentially bright but invisible-yet future. Some of his pointers and recommendations:

  • The swing from one extreme of controls and regulations to the other extreme of permitting a ‘free for all’ in many technology-intensive industries has resulted in fragmentation of capacities that would result in high costs. An appreciation of market structure would involve acceptance of an oligopoly in many technology-intensive industries. This simply means that a few (between five and eight) procedures would control the market and would aggressively fight it out for establishing market share.

• We should be actively allowing a large company to grow. For this major modifications will have to be introduced in the MRTP Act to permit large companies to become truly
international giants.

• On market development, Ramesh offered specific proposals—legal changes for cement, easier credit for commercial vehicles, procurement policy for capital goods.

• To remove infrastructural bottlenecks, his advice was to make states the stakeholders: each State must have an industrial location policy of its own—a policy that is clear in terms of the types of industries it wants to attract and how these should be dispersed within the State.

• He was in favour of sector-specific liberalization versus an across-the-board approach.

• On capital markets, his approach was in the right direction (expanding investors, for instance) but he could not let go of state control (‘with proper pricing at least 50 per cent more capital can be raised from the public’). Read together, it seems Ramesh knew what needed to be done but keeping the political proclivities of his party in mind, was exercising self-restraint. Despite calls to open the economy he continued with an underlying layer of controls. Of course, a full-blown crisis was yet to emerge. Another way to look at his recommendations is that while they attempt to fix the economy, his approach is that of a pragmatic gradualist rather than a big banger. If he had drafted this paper three or four years later it would have looked different.

Second, Montek Singh Ahluwalia, whose 34-page note to Prime Minister Vishwanath Pratap Singh titled ‘Restructuring India’s Industrial, Trade and Fiscal Policies’ put together key changes needed for the economy. Informally called the ‘M Document’, the June 1990 note sought the following (paraphrased):

• Reduce fiscal deficit.
• Contain defence expenditure, and food and fertilizer subsidies.
• Restructure ministries to reduce staff by 10 per cent.
• Do not push expenditure commitments such as the Right to
Work until resources situation improved.
• Public sector reforms: partial privatization, exclude PSUs from the definition of ‘state’ under Article 12, shut down unviable PSUs, reserve strategic and mineral resources for PSUs, end preferences to PSUs in purchases, and make wage negotiations on the basis of the ability to pay rather than uniformity.
• Expand the coverage of liberalization.
• Ease FDI norms.
• End import licensing for a wide range of products.

‘It was clear to me that the central economic challenge for India was how to break out of the low-growth trajectory and ensure that higher growth would benefit lower-income groups in sufficient measure. In India, there was a tendency in public debate to denigrate growth on the grounds that it did not help the poor,’ writes Ahluwalia, capturing the povertarian ideas of the nation, whose echoes continue to linger aimlessly in policy corridors even today. ‘But our problem was not that growth did not trickle down to the poor, rather that the rate of growth itself was too low.’

And third, Pranab Mukherjee whose February 1991 note on the economic situation for a meeting of the Congress Working Committee was general in its approach and poetic in its push: ‘Congress Working Committee firmly believes that before the end of this century this last decade of the nineties can be the decade of transformation for [the] Indian economy—transformation from sluggishness to dynamism, transformation from stagnation to growth and transformation from “closed economy” to “open economy.”’ Perhaps the word ‘transformation’ of the Indian economy that has been incessantly used by all governments
post 1991 has its rhetorical roots here.


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Mukherjee, the epitome of Indian politics, remained guarded and restrained about critiquing the past and the party. He made some interesting observations, but refrained from embracing change:
• He began with courage and hope: The immediate task before the government is to remove the sense of panic and frustration and to restore confidence in the system.

• But without batting an eye, he pulled out the dark spirit of the 1970s: The psychology of scarcity should be removed and stringent measures taken against hoarders, black marketeers, smugglers and profiteers who want to exploit the situation.

• Then, he got political, as all leaders are inclined to be: There is no doubt that the panic reaction of the erstwhile Janata Dal Government and its failure to locate alternative sources of crude oil supply since the beginning of the Gulf crisis created the dislocation in availability of diesel, kerosene and petrol.

• A loyalty statement followed: Although in growth rate terms, the performance in the eighties has been very dynamic it did create some major weaknesses and structural imbalance. Mainly because of the failure of public sector enterprises [not policies, ideologies or politics, but PSEs under the control of the same government, which could not even defend themselves]. Our public sector has failed to exhibit the quality needed to cope with the fast pace of change. Mukherjee remained rooted in the policies and approaches of the past and stayed a loyal articulator of the Gandhi family. Above all, despite being one of the most knowledgeable leaders of the Indian National Congress, with access to all information and experiential knowledge about the nuances of the economy, he remained the quintessential Congressman—a devoted statist.

Other than Jairam Ramesh, Montek Singh Ahluwalia and Pranab Mukherjee, there were others who added their weight to this discussion at various points in time. In a 1 July 1991 statement titled ‘Agenda for Economic Reform’, P.N. Dhar, I.G. Patel, M. Narasimham and R.N. Malhotra bemoaned the fact that the nation had ‘got used to living beyond our means, our persistently high fiscal deficits and current account deficits are testimony to the firmly-grounded belief that social and economic responsibility carries no penalty’.

Apart from holding forth on bringing efficiencies in the public sector, freer induction of foreign investment and fiscal adjustment, they were clear about the underlying requirement of economic reforms—courage. ‘Vigorous growth will not come from doing more of what we have done before. A bold programme of setting free initiatives and capabilities will have to be put in place. For this, resolution and courage are needed. But, more importantly, shedding of dogma is indispensable.’ In addition, they not only supported going to the International Monetary Fund and accepting its conditions, they pushed for the expected conditionalities irrespective: ‘We need indeed, self-imposed conditionality in the three major areas where the IMF also is likely to ask for reform, viz in correcting the fiscal deficit, in having an appropriate and competitive exchange rate and in moving towards an
open economy.’

This excerpt from Reform Nation by Gautam Chikermane been published with permission from HarperCollins India.

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