Implosion (13 page)

It was her initiatives and Jha’s work, not the 1991 reforms, that marked the turning point in the history of India’s two phases of development since independence, as Arvind Virmani, a former chief economic adviser to the Indian government, has explained.
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The 30 years from 1950 to 1980 saw India’s version of socialism, which aimed to block imports and force the purchase of India-made goods (known as import substitution). The freedom of the private sector to compete was restricted in many industries, and government ownership and controls were extended into as many areas as possible. The second phase, which started in the early 1980s and was boosted in 1991, still continues. Virmani calls this the phase of ‘market experimentation’, in which the oppressive control regime set up during the first phase was gradually modified and removed. (Many controls however still remain, enabling companies involved with natural resources, land and infrastructure to impede development and encourage corruption.)

One of Indira Gandhi’s first initiatives, in February 1982, was to begin to remove controls on the cement industry (in response to a corruption scandal involving the exploitation of cement shortages by, among others, a leading Congress politician).
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I was on my first visit to India at the time, writing articles for a
Financial Times
country survey on India, and remember meeting my colleagues, Alain Cass and K.K. Sharma, on the terrace of the Taj Mahal Hotel in Mumbai. Cass, who was the Asia editor, asked Sharma, then our India correspondent, if this heralded real change and how we should reflect that in the overall approach of the survey. Little did we realize the significance of the question.

Gandhi had by this time lost some of her antipathy for the private sector and had also developed an unexpected enthusiasm for importing foreign technology. Alcatel of France had just started work on modernizing parts of India’s telephone system, which was so antiquated that Plessey of the UK donated two electronic exchanges in 1983 for use by a Commonwealth heads of government meeting in Goa.
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(Critics suggested that Gandhi had been influenced by Dhirubhai Ambani, founder of the rapidly growing Reliance Industries, who had a close political connection with her government, to swing in favour of the private sector. The acceptance of foreign technology controversially led to the award of fertiliser projects to Snamprogetti of Italy. Ottavio Quattrocchi, the company’s Delhi representative, and his wife had become friends of Italian-born Sonia Gandhi and Rajiv, and he was later embroiled in a notorious 1980s corruption scandal over a Bofors gun contract.)

More significant initiatives were taken by Rajiv Gandhi when he became prime minister after his mother was assassinated in October 1984. He opened India’s eyes to a modern world beyond the frugality, shortages and controls of the Nehru and Indira Gandhi years, and also beyond the khadi, home-spun traditions of Mahatma Gandhi. He started a debate between 1985 and 1988 about dismantling controls, forcing virtually every government department to examine how they could reduce restrictions on economic and business plans. In practical terms, his government rationalized and reduced taxation levels in various areas, produced a long-term fiscal policy, and pushed through tentative relaxations in the country’s tortuous industrial licensing system. He instigated significant activity in India’s electronics and associated industries, allowing imports and foreign joint ventures that helped to pave the way for India’s software successes in the information technology revolution of the 1990s and 2000s. The stock markets came to life for the first time in decades with a series of share issues that resulted in what was recognized abroad as well as in India as the launch of an ‘equity culture’.
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Unfortunately, India was not ready for such a vision of the twenty-first century, driven by ‘sunrise’ industries, modern cars, computers and electronics, and Rajiv Gandhi did not have enough time to learn how to politicize and implement his enthusiasm and drive.
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Consequently, he was not able to achieve as much as he had hoped, and what he did do remained under-recognized as his government floundered with corruption and other crises. Referring to vested interests and his political opponents, he told a bureaucrat in 1988 that he was not pushing reforms in foreign direct investment because ‘after Bofors they’d accuse me of selling out to foreigners’.
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Nevertheless, he did point to a more sensible way of managing the economy and he inspired reformers, who continue to have influence today, as well as a young generation of entrepreneurs and managers who still talk about how he made business a respectable occupation.

The ‘M’ Document

The 1991 reforms first appeared publicly on 11 July 1990 as an unsigned article headed ‘Towards a restructuring of industrial, trade & fiscal policies’ that was spread across a page and a half of the
Financial Express
newspaper. A note by the editor (A.M. Khusro) said that there had been ‘some controversy’ over a government policy paper that was being considered by a committee of secretaries, so the
Express
was publishing it ‘to generate a public debate on matters raised in the document’.

No one knew for sure who wrote the document, but Montek Singh Ahluwalia, one of India’s leading economic policy makers who now runs the Planning Commission as deputy chairman, has revealed to me that he was the author.
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Who leaked what was later dubbed the ‘M’ document – with the title page removed to hide its source – remains a mystery. Maybe it was Ahluwalia himself! I tracked down the article because I was convinced that Manmohan Singh was not the architect of the reforms and had heard that Ahluwalia was said to have written something called ‘What’s left to be done’ at the end of Rajiv Gandhi’s 1984–89 government. I followed the trail till Ahluwalia told me in June 2013 about the ‘M’ document and admitted authorship, though he did not have a copy.
The Indian Express
then searched its Chandigarh archives and later in the year found it and I passed a photostat to Ahluwalia, who said, ‘it takes me really down memory lane’.
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Ahluwalia confirmed that he initially wrote the ideas as an overview of ‘what needed to be done’ late in Gandhi’s government when he was an economic adviser in the prime minister’s office. He then turned the ideas into a presentation for V.P. Singh, formerly the finance minister, who became prime minister of a minority eleven-month National Front government in December 1989 (after breaking away from the Congress party). The ideas were discussed by a high-level committee of secretaries (the top level of the civil service) and that became the
Financial Express
leak. ‘The note he [Ahluwalia] wrote for the prime minister in 1990 contained most of the ideas which were subsequently implemented. He was, thus, a pioneer as far as economic reforms are concerned,’ says C. Rangarajan, who was deputy governor of the RBI at the time
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and later became the governor and top economic adviser to the prime minister from 2004.

Ahluwalia says that the paper was specially significant because it pulled together a comprehensive approach for tackling India’s economic problems and set out a five-year plan with firm objectives – though it acknowledged it was bound to create more controversy. ‘Even if you do things gradually, you must emphasize the end result – that is needed for any reforms,’ says Ahluwalia,
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citing initiatives in recent years on energy pricing as an example. He says it was also significant because it linked the reduction in import tariffs with reduction in the rupee exchange rate so that increased imports could be balanced by a growth in exports.

The paper began by setting the scene: ‘Our ability to compete is likely to be significantly impaired if our industry continues to operate in an environment which is much more restricted, and less amenable to various types of international linkages than our competitors.’ It covered five areas: ‘achievement of macro-economic balance with high investment levels; reform and redefi nition of the role of public sector; reducing and restructuring domestic controls over production and investment licensing; reducing the degree of protection to Indian industry; opening up to foreign investment’. There were detailed proposals for tackling the country’s mounting fiscal crisis, followed by plans for public sector reforms (but not privatisation), drastically reducing industrial licensing and trade protection, and opening the country up to foreign investment. The need for financial and labour reforms were mentioned without any details.

Another policy document had been prepared at the industries ministry during V.P. Singh’s time by Amar Nath Verma, the industry secretary (the ministry’s top civil servant), and Rakesh Mohan, then the ministry’s economic adviser and later the finance secretary and a deputy governor of the RBI. The industry minister at the time (later aviation minister from December 2011) was Ajit Singh, who was new to politics. He had returned to India in 1981 with plans to set up his own company after 17 years in the US working as a software systems trouble-shooter with IBM, Xerox and others. His father, Chaudhary Charan Singh, a prominent farmers’ leader in Uttar Pradesh and briefly prime minister in 1979–80, died in 1987 and this swept Ajit into politics to inherit a mass-base legacy. Accustomed to life in America, he was impatient for reforms and was appalled by the huge number of approvals and files that crossed his desk. ‘The industries minister was the most powerful in the government – I had seven secretaries handling licensing for everything,’ he told me.
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In January 1990, V.P. Singh (no relation) told him to go to the World Economic Forum in Davos, which was just beginning to grow into an annual Swiss alpine jamboree for world leaders and businessmen, and talk about how India could be changed by reforms. ‘We had to brief him on policy and that was the trigger for putting together a presentation on what had to be done,’ says Mohan,
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adding: ‘That gave me the opportunity to see the whole picture on control mechanisms that were in place including industrial licensing, phased manufacturing, monopolies regulations, controlling capital issues and export-import controls.’ But a day or two before Ajit Singh was due to fly to Davos, V.P. Singh decided to send someone else who did not have an industries’ brief.

The ideas continued to be developed and, in the middle of 1990, Ajit Singh placed a new industries policy in the Rajya Sabha. This included measures that appeared in the ‘M’ document and proposed, perhaps most controversially, raising the permissible level of heavily restricted foreign direct investment (FDI) to 51 per cent of a company’s equity, and opening some public sector industries to the private sector. It also proposed relaxing controls on monopolies and industrial production, and changing the way that import and export trade classifications were listed. There was widespread opposition, and the ideas had not progressed by the time the V.P. Singh government fell in November. Next came a coalition government led by Chandrashekhar (his second name was Singh but he was always known by this one name), a respected veteran socialist politician with a broad enough base to be chosen as leader of a fractured coalition. India was heading into a deep financial crisis and there was some interest in reforms, but there was strong resistance from politicians, bureaucrats and the private sector, who regarded the ideas as too controversial, so nothing was done. Eventually, the Chandrashekhar government collapsed in June 1991 after just seven months in office, triggering the election of Rao’s administration.

1991: Ten Hours to a New Policy

After Narasimha Rao had told Manmohan Singh to go and assemble reform policies, he prepared for a television address that he made to the nation at 9.45 the next evening, 22 June. He returned to his cobwebs theme and said there was ‘no time to lose’ because the government and the country could ‘not keep living beyond their means’. With ‘no soft options left... this government is committed to removing the cobwebs that come in the way of rapid industrialisation’.
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Major announcements were planned for Singh’s Budget speech on 21 July, but the schedule was suddenly upset on the morning of 3 July when it became clear that a second devaluation would be needed by the end of that day. Singh rang Ahluwalia, who was secretary for commerce, to say that he should brief Chidambaram, the commerce minister, on the need to announce, simultaneously with the devaluation, that expensive export incentives would be abolished. (Called the cash compensatory scheme, these incentives, which gave exporters arbitrarily, and potentially corruptly, authorized tax rebates, would no longer be necessary because the devaluation would give exporters sufficient incentive without compensation.)
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That phone call triggered one of the most rapid exercises ever seen in policy development and implementation, with major policy restructuring being written and approved by two ministries, as well as the prime minister, in just ten hours. Ahluwalia suggested to Chidambaram that grumbles from exporters about losing the rebates could be offset if a new liberalized trade policy, which the ministry was working on, was also announced at the same time.
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Chidambaram was new to economic policy making but, as a lawyer and one of the best brains in government, he quickly bought the idea.
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He and Ahluwalia said the policy could be ready in a few hours and suggested to Singh that it should be announced that evening. Singh agreed, overruling objections from top officials who were against the reforms.