Delaying reforms will hurt future of our youth: Montek Singh Ahluwalia

Montek Singh Ahluwalia says India needs a fresh reform roadmap, faster private investment and broader policy consensus to achieve the Viksit Bharat goal

Montek Singh Ahluwalia, one of the principal architects of India’s 1991 reforms, played a pivotal role in shaping the country’s economic policy over the course of his long career. In an email interview with Asit Ranjan Mishra, Ahluwalia reflects on India’s reform trajectory and discusses the challenges that lie ahead. Edited excerpts:

 

How do you view India’s reforms journey from 1991 to the present? Has progress been swift enough or could we have done more than we have managed to do so far? 

The reforms were clearly historic. The earlier strategy of industrialising behind high protective walls with the private sector operating under strict government control had curbed India’s growth potential. The control system was broken and needed to be removed. 

The 1991 crisis gave Prime Minister P V Narasimha Rao and Finance Minister Manmohan Singh the opportunity they needed. But the important point is that they didn’t just use the opportunity to manage the crisis. That job was finished within two years. They went beyond that to implement a larger reform agenda that would put the economy on a higher growth path. 

There is no doubt that India’s growth rate after 1991 has been much higher than before. However, we did not achieve the miracle growth rate that many East Asian countries did. This is because the reforms, though very substantial, were not strong enough. One reason is that India’s democratic polity made it necessary to adopt a gradualist path. Gradualism has the advantage that it allows time for the change to gain wider acceptance. But it also means that the full range of reforms gets delayed. 

The 1991 reforms did suffer from that problem. Some reforms were unnecessarily delayed, such as opening up the insurance industry and getting rid of reservation for the small scale sector. Some just never took off, like privatising the non-strategic public sector. In fact, privatisation remains a problem even today. 

We could not have avoided gradualism, but I think we could have done more. What was achieved in the past 35 years should have been achieved in half that time. I hope that the lesson is learned for implementing reforms in the future. Delaying reforms will only jeopardise the future of today’s youth. 

It is often said that India only makes significant policy changes during a crisis. Do you agree? 

A crisis certainly forces governments to act. But the real question is whether you do the right thing. I am reminded of a plaque that my old friend and senior colleague Gopi Arora used to have on his desk. It said: “This is a crisis. We must do something. This is something. Therefore, let us do it!” Any bureaucracy asked to come up with a solution will brush up what they have been doing and come up with what they call a solution. But it may be the wrong solution. 

In 1991, for example, the Left was of the view that trade liberalisation and  devaluation were not necessary because the balance-of-payments crisis could be solved by controlling imports more tightly (i.e. more import substitution). They felt that there was no need to bring in FDI (foreign direct investment) for technology development, which could be done by funding more government research. They were also not in favour of private sector expansion, claiming that it would only generate income inequality — much better to do all the investment you need through the public sector. 

The important thing about 1991 is that we got the design of policy right. 

 

Given India’s current situation, what is the unfinished reform agenda you would prioritise to achieve meaningful change in the coming years? Do you think we need a second M Document of the type you authored in 1990? 

I think there is a need for a paper that presents a reforms agenda relevant to the current situation. The Viksit Bharat objective has raised the expectations of younger people and I think we need a clear statement of the specific policy initiatives we need to get there. 

However, we must recognise that the challenge we face today is very different from 1991. Francis Fukuyama’s essay, The End of History, was published in 1989. It was a triumphal assertion of the final victory of liberal democracy and free markets. East Europe abandoned Communism and the Soviet Union collapsed in 1991. “Globalisation” was the only game in town. We were the last  to board that train. 

What I mean to say is that the policy choices we had to make then were “no-brainers”. The situation today is completely different for four reasons. 

First, the earlier vision of a globalised world working according to multilaterally agreed rules has evaporated. The United States, which built that system, has now formally abandoned it. The US now claims that it was “played” by its partners, and it wants to operate much more transactionally to push its own interests. No one knows quite which rules will now guide trade, or finance, or IT and e-commerce, or even the law of the sea! 

Second, geopolitics has created a more fragmented world. The Europeans worry that the US is no longer committed to NATO and they must deal with Russia much more on their own. In Asia, the US is no longer seeking to contain China, but only to “balance” it. This has implications for South Korea, Japan and Taiwan. We have problems with Pakistan and its nexus with China makes it a bigger threat than it would otherwise be. We will have to spend much more on defence and these demands have to be factored into our medium-term financing plans for other sectors where resource demands are also expanding. 

Third, all this is happening at a time when technology is changing faster than ever. And the interaction of technology with the rest of the economy will increase. Artificial intelligence is developing exceptionally rapidly and will have negative effects on certain types of jobs. Exactly how we should respond poses a special challenge. 

Fourth, climate change is gaining ground and that calls for a restructuring of our policy in many areas. Dealing with it also means additional resources adding to the other demands. 

We have to define a set of policies that is consistent with the changed world we face. There is a recognition that business as usual — i.e. the current 6.5 per cent growth rate — will not be enough to get us to Viksit Bharat. In fact, the 6.5 per cent business-as-usual growth may itself not be achievable with such policies, in view of the changes I have listed. Everyone rightly talks of the need for more reforms, and that is correct, but there is no agreement on what these reforms should be. 

There are different views. For example, everyone agrees that the rate of investment has to rise by 3–4 per cent of GDP to get to Viksit Bharat. In my view, much of this should be private investment, and if that is not rising we should examine why. It would be a mistake to think that if private investment is not responding, we can do the same through the public sector. 

Similarly, we are rightly signing a number of free trade agreements (FTAs). We should go further and sign the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Not everyone agrees with this. There are many who feel that Indian industry will not be able to compete. I don’t agree with that view.  We should instead identify what is needed to get them to compete and do it. 

In other words, we need an informed debate on all these issues in which sector experts, industry and civil society are all actively involved. It’s a task for the NITI Aayog to perform in an open and inclusive way.