History shows weak govts managed to push more reforms: Naushad Forbes

Naushad Forbes says India needs deeper economic reforms, lower trade barriers and greater deregulation to revive manufacturing, exports, private investment and growth

Naushad Forbes, co-chairman of steam engineering and control instrumentation company Forbes Marshall, had just taken charge of the business with his brother around the time of the 1991 reforms. In a virtual interview with Gireesh Chandra Prasad and Rajesh Kumar, Forbes reflects on how the reform wave helped them expand their business in ways it wasn’t possible earlier. Over the years, Forbes has been one of the few industrialists who has persistently pitched for a pivot away from protectionism to a freer economy. Edited excerpts:

 

What was your view of India’s business environment before 1991? 

If I compare what my father had to do to run the business in the 1970s and ’80s, I just feel fortunate that my brother and I were able to develop the business in an era that was completely different. 

It was different in several ways. It meant that economic factors mattered more in a firm’s success. Whether we did a good job or not determined our success to a much greater extent from the ’90s onwards than what happened with policy, or particular favours that individual firms received, or licences they acquired. 

I will give you one example: In the early ’80s, we wanted to form a joint venture (JV) with a Swiss firm to manufacture pH electrodes in India. This device, which we used to import from them, is at the heart of all pharmaceutical production and various chemical processes. Our JV application was rejected because an instrumentation laboratory in Chandigarh, part of the Council of Scientific & Industrial Research, had the necessary technology, and we were told to approach them. We believed our existing electrodes were considerably more sophisticated than those from Chandigarh. We never could get that JV approved (though we did get two other JVs through). 

The net result is that today, the country essentially imports all its pH electrodes. I believe if the government’s decision had been different back then, we and many others would have been making a product in which India could have had a comparative advantage. But that opportunity passed. This shows how policy came in the way of business initiatives and sensible economic decisions those days, particularly in high technology. 

 

How did your firm respond to liberalisation? 

The 1991 Budget speech of (then finance minister) Manmohan Singh was a real landmark. Within two weeks of that speech, we asked ourselves, “What would we do differently?” We noted that the speech indicated the world would be coming to India, and we were clear that the world’s best firms would, over time, be progressively free to operate here. 

Forbes with CII Director General Chandrajit Banerjee and then Prime Minister Manmohan Singh (Photo: Courtesy Forbes Marshall)

 

That led us to two further questions: First, what would we still make if imports were available at zero tariff? And second, how could we best prepare for this? The answer to the first question was that about half the products we made in 1990 could still be competitive in the long run. But the other half, we believed, would eventually go away because we were simply not at a scale where we could compete with the best in the world. So we took a call to let those products die out naturally as the market shifted. 

For the second question, we decided we needed to do two things: First, invest in building proprietary technology capability where we could sell products in India and abroad. These products had to be differentiated from what everyone else did globally. Otherwise, we would constantly be playing catch-up. Second, we decided we would initially invest in foreign markets, not because they were intrinsically attractive, but because competing with foreign firms in third countries would enable us to compete with them easily at home. It was primarily a learning objective. 

The international aspect of this strategy changed over time because after entering markets in Southeast Asia, West Asia, and East Africa, we discovered they were attractive in their own right. 

It is not easy to develop the capability to do what others cannot, since the first instinct is often to identify what is already the best product in the market and to make something similar. Moving beyond that mindset takes time, as does building the necessary skills and technological depth in research and development (R&D). It took time, but those two strategic shifts still underpin our success 35 years later.

 

Did growth pick up after the reforms? 

Business growth was significantly higher from the 1990s than before. Some of this was internal: My brother and I were in our 30s, more ambitious, and I believe we brought new energy. We also had a younger leadership team. But the policy environment was undeniably the foundation for faster growth. 

The first year or two after 1991 were difficult, with weak macroeconomic indicators —industrial growth took time to stabilise. By 1994-95, however, the economy was doing very well, with attractive growth rates that continued until around 1999. After a two- or three-year slowdown, growth picked up again in the early 2000s and remained strong until about 2012.

As industrialists, we tend to attribute success to our own brilliance and problems to policy. But a rapidly growing economy lifts all boats and one needs to be sensible and good enough to rise with it, perhaps a little faster. If things are not going so well, then it is a good test of whether one is any good. 

On then chief consultant to the finance ministry Ashok Desai’s invitation, I used to be part of a group that met Manmohan Singh before each Budget from 1992 to 1996. 

I was by far the youngest member and consistently argued for faster economic opening. Several prominent “Bombay Club” members sought protection for their sectors. At the end of each meeting, Singh would tell me, “Keep saying the things you’re saying, and say them loudly!” I argued that after 30 years of protection, industries should be able to stand on their own. The only economic justification for protection is infant-industry protection — and 30 years is long enough for an infant to grow up.

 

Have we built on that reform momentum adequately since then? 

Until 2016-17, tariffs continuously decreased, and the Indian economy, despite fits and starts, was more open than it had been earlier. However, in 2016-17, we started seeing things turn around, with tariff increases. Then, in the past six or seven years, there’s been the systematic use of non-tariff barriers, like quality control orders, which are deliberate protectionist measures by another name. I am clearly against all of that. I think that is the reason we haven’t seen the sustained growth in foreign trade that we saw till 2012. 

The only way we can raise our share in global merchandise trade is by being more open. Import tariffs and trade policy are important areas where we have regressed and we need to turn things around again. 

There is some indication that we are moving in the right direction through the free trade agreements (FTAs) we have been signing. But the big exclusion in our trade policy is Asia. We still need to find a way to engage more directly with the region, whether through the Regional Comprehensive Economic Partnership (RCEP), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or by deepening existing agreements. We should also deepen existing FTAs by increasing the number of products covered. We need serious engagement with Asia and Africa, including the African Continental Free Trade Area. African markets will be increasingly attractive for India. 

Many things changed in 1991, but some did not. The permissions required from Delhi were removed in areas such as technology imports, foreign JVs, overseas investment and remittances. But the day-to-day operation of a business remained burdened by regulation. 

The ‘ease of doing business’ initiative introduced in 2014 was, therefore, very welcome, although I wish it had gone further. It created useful competition among states, but focused too heavily on metrics for starting a business and on the World Bank’s indicators. Power connection times fell, for example, and the Insolvency and Bankruptcy Code helped improve our ranking, but contract enforcement barely improved. However, the challenges of running an existing business were not captured. I repeatedly urged policymakers to seek feedback from firms on their day-to-day regulatory problems. 

The various deregulation groups in the government do good work, but they are fighting a losing battle. While they try to remove regulations, thousands of bureaucrats across the central and state governments continue to create new ones. 

The real question should be: Why is certain regulation needed in the first place? If regulation hasn’t worked and delivered the desired result, for heaven’s sake, why not get rid of it instead of making it more stringent? 

Higher education is a good example. For four decades, we have tried to regulate quality without success. Instead of adding more prescriptive rules, we should publish outcomes and make assessments of educational quality public. Parents and students can then decide whether an institution is worth attending. Institutions should otherwise have the freedom to decide what degrees to offer, who their leadership should be, faculty qualifications, courses, student numbers and fees. All of this should be transparent.

 

The share of manufacturing in India’s gross domestic product (GDP) remains low as do R&D spends… 

The share of manufacturing in GDP and Indian industry’s investment in R&D, are directly connected. The role of government and policy is secondary when it comes to technology. The primary responsibility is with industry. Indian industry is more skill-and capital-intensive than other countries at our level of per capita GDP. Our industrial structure is dominated by sectors such as chemicals, pharmaceuticals, auto components, and engineering, and much less, for example, by textiles, garments, and footwear. Food processing is one large sector for us, which is also present in other lower-income economies. 

With this industrial structure, you have to invest much more in technology to achieve a vibrant, rapidly growing industrial sector where the share of manufacturing rises. It is the responsibility of the industry. 

Our numbers are very low: We invest 0.3 per cent of GDP in in-house R&D by firms, while the world average is 1.5 per cent. So, there’s a gap there. Whatever we may say about policy needing to be supportive, I think that single factor is squarely industry’s responsibility. 

I would argue that increasing R&D investments will directly show in the manufacturing sector’s vibrancy. If we protect firms, we give them the ability to hide behind protectionist barriers where they do not need to compete with the world’s best. If they don’t compete, they certainly can’t capture world markets. They will restrict themselves, perhaps happily, to the Indian market, which is protected.

 

But why does industry still resist further opening up? 

People in government say, “We are just listening to industry.” The government should indeed hear industry, but that doesn’t mean they should do what industry asks. You can be accommodating, provide time to adjust, but the direction has to be set by the government, keeping the national interest in mind. 

If you heard industry voices in pre-Budget meetings in the 1990s as well, with the exception of me, Ratan Tata and Keshub Mahindra, who consistently asked for a more open economy with whoever the Confederation of Indian Industry (CII) president at that particular time — the rest of the room overwhelmingly used to say the same thing. 

Forbes was the president of the industry lobby CII in 2016-17 (Photo: Courtesy Forbes Marshall)

 

“Mr Finance Minister, you’re doing an amazing job taking the country in a new direction. But my sector needs special protection, and here’s why.” And the government ignored it then, and it was right to do that.

 

Is Indian industry prepared to navigate the multiple challenges facing the world now? 

I think everyone expected the West Asia war to end quickly, or at least they hoped it would. The government responded very effectively in the early days and domestic consumers were largely shielded from the global oil price increase. Raw material costs went up for industry. Industry has adjusted to these cost increases, and so has the broader economy. 

Having said all that, I think as an economy, we are in an okay shape. I wouldn’t say things are great, but I wouldn’t say they are terrible either. But I wish we were using the current situation more effectively. 

In March-April, there was a real sense of crisis, and I think we wasted an opportunity to take some difficult decisions that would have been easier to justify then. A crisis can provide the political space to act on issues beyond the crisis itself — whether advancing privatisation or deregulating sectors like education. 

If we are serious about a Viksit Bharat (developed India), we need to deregulate how we develop talent. It is not enough to have a large working-age population for a few years. We need a better-educated and more skilled workforce, and policies that support that. 

We may still be able to do it, but I wish this received more attention because we will not achieve them at current growth rates and trends.

 

Are reforms dependent on having a strong government? 

I would argue that weak governments have been more reform-minded than strong ones. Indira Gandhi had a really strong government, but she took reform in the negative direction, right? She brought in all the controls that had to later be reformed and removed. So, a strong government with the right reform mindset can perhaps move faster, but remember — the PV Narasimha Rao government was a minority government, not even a coalition government. And those were the most wide-ranging reforms that we ever saw in the country. 

So, I would make an argument in favour of weak government, because that’s what our history says. I think such a government is able to deliver reforms not necessarily because they intend them — some are highly intentional — but because they let institutions operate more independently, which may add up to better performance in the economy. 

We saw some useful reforms in the first term of this NDA (National Democratic Alliance) government. Obviously, the GST (goods and services tax) was a huge and welcome reform. You could say it was the previous government’s idea, but it couldn’t get it passed; this government did. The same goes for the IBC. These were useful steps forward. The FTAs we’ve been signing are useful steps forward. I don’t think there was any serious reform of note in the second term of this government. And in the third term, reforms have been really limited. We’ve seen some useful steps, but there hasn’t been anything significant in sectors that need to be opened up, like the social sectors.

 

The initial decade after liberalisation saw a lot of churn in the Sensex constituents as new industry champions emerged. Do you sense that pace of churn has declined? 

Constant churn in our top firms is a sign of economic vibrancy and health. The ’90s saw the rise of whole new sectors. The information technology (IT) services and the pharmaceutical sectors came to prominence then. Then in the 2000s, the financial sector came to real prominence. If you look at the numbers, you also see that when IT, pharma, and financial service firms came to greater prominence, they replaced traditional commodity producers. In the past 10-15 years, we have seen the reversal of that trend, with traditional commodity producers coming back to prominence, which is very strange.

I think it would be a sign of vibrancy and economic health if we saw the churn continuing. The IBC should support that, but the process is still too slow. My best example, unfortunately, is when you fly around the country and you see these rusting hulks of Jet Airways and Go Air aircraft still dotting airports. At a time when there is a shortage of planes, these are good aircraft sitting there, rusting away simply because we do not have an effective asset restructuring process.

 

What is holding back private sector investments? 

The private sector invests when it needs to. It invests when capacity is fully utilised and it sees opportunities for expansion. Now, where will that demand growth come from? It will come from vibrant domestic consumption, and consumption growth that is sustained year after year. It can also come from exports, or from new sectors and the entry of businesses into those sectors.

Private domestic consumption growth has been somewhat subdued for many years. Look at where employment is being created. Over the past 10 years, the single sector that has increased employment is agriculture, which makes no sense. That is an economic failure, because we need far fewer people, many millions fewer, in agriculture. If more people are employed in agriculture, it is because they have no other alternative or they find it a more secure livelihood than alternative occupations.

We should provide a safety net to gig workers as the new labour laws tried to do. If we want domestic consumption to recover, we have to shift domestic employment to occupations that have higher productivity than agriculture. We have to see that growth in the more modern sectors of the economy. 

Second, if we want exports to shine, we have to reduce import restrictions. 

Third, in terms of new sectors, I think we are seeing some action on the ground — for instance, the growth of electronic assemblies is good, as is renewable energy. Nuclear power is the most recent illustration of attracting some investment. Defence production is attracting more investment. These are all healthy indicators. 

I worry that it is not a lack of political will to reform, but I don’t know if there are fresh ideas and the resolve to pursue them, even at the cost of upsetting some stakeholders.