Montek Singh Ahluwalia, former deputy chairman of the Planning Commission, led the charge on several economic reforms unleashed in the Indian economy through the 1990s and during the UPA-I and II regimes. Both as finance secretary and in his role at Planning Commission, he had the ear of the Prime Minister, Dr Manmohan Singh. Ahluwalia spoke to Anjuli Bhargava on the areas he feels UPA did not meet up to the challenges, the progress made by the BJP and how social divisiveness can negate growth and development. Excerpts from a conversation:
How would you rate the performance of UPA-I and II on banking reforms?
The UPA failed to take on the full challenge of banking reform. While it managed to provide an environment in which new and old private banks were encouraged to expand, we did not do anything to loosen government control over the public sector banks. The Narasimhan committee had recommended reduction in the share of the government below 51 per cent but we did not act on that.
However, I must point out that this was not politically easy. Finance Minister Yashwant Sinha in the Vajpayee government announced that the government's share of equity in public sector banks would be brought below 51 per cent but he eventually had to back off due to opposition within his party.
The UPA was dependent on the support of the CPM and the CPM would have never have agreed to this. Its equation and relationship with the CPM was already fraught on account of the negotiations on the Indo-US nuclear deal.
Moreover, I should add that there wouldn’t have been much support in the Congress itself either, for diluting the government’s stake. So, this remained a good idea on paper, for which the political system across the board simply wasn’t ready.
Shouldn’t the UPA have done more on NPAs...this is something this government and regime feels it got saddled with…
There’s no denying that the lending done during the boom period led to what later became NPAs. All over the world, banks tend to get into a “risk-off” mood in the course of a boom and lend quite freely. It is the job of the banking regulator--not the government--to keep such lending in check. We saw in the global financial crisis of 2008 that regulators worldwide failed to do their job in restraining credit growth and I guess our regulators made the same mistake.
The full extent of NPAs only became known after former governor Raghuram Rajan ordered an asset quality review in 2014. However, once the extent of NPAs became known, we could have taken swift steps to bring them down. This had been done in India in the past between 2001 and 2008 when NPAs came down sharply. It didn’t happen after the asset quality review revealed the high NPAs. So we can’t just dismiss this as an inherited problem.
An important feature of the NPAs was that they were much higher in public sector banks than in private sector ones. Private sector bankers could say that it shows they are more careful, but part of the reason is that the RBI does not have the same power over public sector banks as it does over private sector banks. I have consistently been of the view that we need to amend the law to bring parity. This is the single most important reform needed now going forward for the banking system.
At present, when the RBI feels that the head of a private bank is running it in a manner that is not fit and proper, it can remove the managing director or the CEO. It needs to be able to do the same for public banks. Any top manager whose continuation depends on RBI approval will be strongly incentivised to work within the regulatory rules. The RBI too will be incentivised to ensure that it acts in a timely manner, including removing top management who fail to perform as they should. At the moment, they can’t do this, so RBI also feels it cannot be blamed.
If we can't privatise public sector banks, the single most important reform we could do to improve our banking system is to give the RBI the same power over public banks as they enjoy over private sector ones.
The government has picked up two banks to privatise and I welcome this step. However, privatising two banks will not affect the bulk of the public sector banking system. Further, we have to wait and see if this proposed privatisation can be successfully accomplished. Much will depend on the conditions imposed, what is done about excess staff and what eligibility conditions are imposed on buyers. If too many conditions are imposed, the sale will be difficult.
Can India or any society expect to develop in its present state of social divisiveness?
Social divisiveness can impede development. Some divisiveness is always there in any society and at low levels, it can be handled through normal social and political means. If a tipping point is crossed, it can disrupt the equilibrium of the society. This will spill over into economic performance.
Development takes place best in an environment where there is a social consensus behind the broad thrust of development policy. We have to create a situation where people believe that the government is working towards inclusive growth. There can be disputes and debates on whether a particular thing is the right thing to do, but the overall belief must be that it is doing its best and is open to discussion. The slogan “sabka saath, sabka vikas, sabkha vishwas” captures it all but it needs to be translated into reality.
The element of “vishwas” (trust) is very important. The controversy over the farm laws illustrates what happens when there is loss of trust. As I see it, modernising agricultural marketing, the stated objective of the proposed farm laws, is a sensible move. It was fully endorsed even by the UPA but at that time it was felt that under the Constitution, laws relating to agricultural marketing can be changed only by the state governments, and our efforts were all directed at getting state governments to make changes.
The present government has taken the view that there is no constitutional impediment to the central government making the necessary laws and has introduced legislation. I am not competent to pronounce on the issue of constitutionality. That can only be done by the Supreme Court.
But the lack of adequate consultation and discussion has created a perception that the laws are aimed at undermining some of the established mechanisms on which farmers depend, such as MSP or the APMC mandis. Those protesting actually believe that the government intends to abolish the MSP system, the mandis, leaving the farmers to the mercy of organised corporate entities. It’s a classic case of the failure to communicate and build the right consensus.
The government has subsequently denied the motives those opposing the move attribute to it, but now the farmers say they will only discuss if the laws are first repealed. I think franker discussions and consultations at an earlier stage would have helped dispel unwarranted fears and avoided divisiveness.
How do you see the last seven years doing as far as social harmony goes and how can a country develop if this aspect is not focussed on ? Won’t this negate whatever growth we achieve?
There have been many incidents which make the minorities and the Dalits feel excluded and vulnerable. We should not ignore this. Such incidents have happened before also but we should not assume that these problems can be overcome if we can regain rapid growth.
Rapid growth alone won’t solve the problem. Even if you succeed in pushing up GDP growth, people do not gain equally. In any growth process, there are winners and losers. But in general, citizens have to have faith that in the end their lives will improve in the future--if not for themselves, personally, then at least for their children.
We are going through a process of structural change in which many jobs or occupations will be adversely affected. Anyone negatively impacted may lose income, but if his son or daughter is being educated and has good prospects of a future job in sectors of the economy that see growth, he might be more willing to accept the structural changes as he can see that somebody in the family will benefit going forward.
When inner city transport was all by tongas, the tonga drivers could see that they would lose their jobs in future as taxis came in. But as long as his son could drive a taxi and earn more than he did as a tonga-walla, he didn’t mind. For social cohesion people have to believe that new opportunities are opening up and they have reasonable access to those. Ideally, the older people displaced should also get retrained, but even if that’s not possible or doesn’t happen, they are willing to accept some erosion if they can see the next generation benefiting.
In the 1990s, when Manmohan Singh was finance minister, computerisation of nationalised banks was opposed tooth and nail by all the unions because they feared job losses. We were convinced there was no option since failing to computerise the banks meant India would get left behind in this key area. I remember attending a meeting as finance secretary in the finance minister’s room where many of the bank union officials came for a full discussion. After the discussion one of them, as he left the room , said to Dr Singh “ Mr Finance Minister, I totally disagree with you but I must tell you my son agrees with you”.
Politicians should keep in mind that they are always selling a dream not just to a person but to him, his wider family and children, and the day people begin to feel there’s no hope for them, their families or their children, they don’t have a stake in the system anymore. Then, there are enough people who will ride on this discontent, giving rise to political instability.
I think the real test of leadership in a democratic and heterogeneous society is to be able to persuade the vast majority of people, each of whom has different dreams, desires and perceptions that you have their interests, safety and economic well-being at heart. If people don’t get jobs, and begin to feel it's because of their region, religion, caste, language or some such factor, then you never know what kind of tension is being generated. That’s where economists and others become irrelevant. Only an enlightened political leadership can deal with this problem and they must be sensitive to it.
In general, how in your view has the BJP fared on the reforms front? What do you credit them with?
The GST is a very important reform and the BJP deserves credit for pushing it through, even though they opposed it when they were in opposition. There were teething problems, but these have largely been overcome. The main thing to do now is to rationalise the rates. The government recognises this and I hope it acts before the next financial year.
I also credit them with putting genuine privatisation back on the agenda. However, we have to wait to see how successfully they implement this. Air India is a big feather in the government’s cap. We have to see how the effort to privatise the two public sector banks fares.
On infrastructure, the right noises are being made. There is acknowledgment that the principal job of the government is to build infrastructure and improve logistics, and the private sector can do the rest. The decision to monetise existing infrastructure projects and use the funds to build new projects is a welcome move too.
The IBC is an important reform I see--one critical for the financial sector to function efficiently. It seems to have lost momentum, perhaps partly due to the pandemic and the relaxations given in that context. A strong effort is needed to re-establish the credibility of this initiative.
There are a few things I think the government got wrong. The reversal of the trend of lowering customs duties in a number of areas is one such. Further, I regret the decision to stay out of RCEP. Some sections of Indian business were against RCEP and succeeded in lobbying against it. I hope some rethinking occurs in both these areas.
 "UPA fell back on loosening govt's grip on PSBs: Montek Singh Ahluwalia")
