Former Planning Commission deputy chairman Montek Singh Ahluwalia defends UPA against charge of ‘welfarism’, says it failed to project its achievements, calls decision not to join RCEP ‘unfortunate’, and gives examples of scope for RBI to be independent .
UDIT MISRA: Did the Planning Commission overstay its welcome?
Many of my friends thought that it was a contradiction of sorts for someone associated with liberalisation to become deputy chairman of the Planning Commission. I used to make the point that they had no idea of what the Planning Commission does… It never engaged in detailed direct control. It was always an advisory body. But it did change quite a bit over time. The main task we had, which was effectively executive, was to divide the total development expenditure for the Centre and states…This resource allocation role was much emphasised but I felt that the real job of the Planning Commission should be to push for new policy initiatives….
UDIT MISRA: What is your opinion of the role played by the NITI Aayog?
I don’t have good knowledge of it, but I believe that they have no role to play in financial decisions, and that is unfortunate because part of the usefulness of the five-year planning process is that it introduces discipline. Even big corporations have budget processes that are multi-years. Currently, it is not being performed by the NITI Aayog. You could argue that it is being performed by the finance ministry. But I don’t think it is a good idea because the ministry has a core job, which is to keep fiscal deficit under control….
UDIT MISRA: Isn’t it true that many of the issues that the economy is facing at present are because of the UPA government not undertaking any significant economic reforms?
In a competitive political environment, political parties will put across facts in whatever manner suits them. Let’s look objectively at what accounted for high growth in the UPA period? There is no doubt that the tremendous reforms initiated in 1991, which were also continued by the United Front and Vajpayee governments, produced an image of continuity and broad consensus which helped generate a pro-investment climate.
The Vajpayee government contributed to this. His openness to FDI was a continuation but it was a new signal from the BJP which had many segments opposed to FDI.
Second, he signalled going beyond disinvestment to genuine privatisation… The United Front was the first to recognise that government equity could go below 51% but they didn’t do it… The Vajpayee government was the first to say that they were willing to reduce government equity to 26%. Arun Shourie led the charge with some genuine privatisation but it got embroiled in controversy.
Then came the UPA government. They took many initiatives that ignited private investment. Manmohan Singh’s presence was the best signal that could be sent out to the private sector that the government intended to stimulate private investment. The sharp reduction in the fiscal deficit in the first four years clearly helped create room for private investment to expand.
UDIT MISRA: Many argue that there was too much stress on welfare, and while the government created fiscal space, it also gave it up around 2008.
The notion that we created space and then gave it up for welfarism is just not true. Otherwise, the fiscal deficit would not have fallen. Besides I don’t believe that the MGNREGA was as negative as people think.The MGNREGA is a mechanism for building assets in rural areas… One of the big things that Mihir Shah (formerly a member of the Commission) and I were pushing for was that we should use the MGNREGA for programmes for water conservation. NGOs were opposed to it because they felt that the projects should be determined by panchayats. So we struck a balance.
The other major steps that were taken were reform-oriented. One was expanding the scope of FDI, both in airlines and telecom. Then there was FDI in insurance, which required legislation and the BJP opposed it. I am glad that when they came to power, they promptly did it.
The GST is another example. The idea was first announced in Parliament in 2005 by P Chidambaram. But then it was stopped again by the BJP, mainly by states such as Gujarat and Madhya Pradesh….
UDIT MISRA: There were also a lot of rights-based schemes such as Right to Education that were introduced. But what about larger structural points such as corporate tax cut, which has happened only now. Why wasn’t it done when there was fiscal space?
Can one object to Right to Education? The real problem is that we never recognised what institutional flexibility is needed to deliver Right to Education. And that is a fair criticism. But that is very difficult and we are not doing it now either. The only area where the government should have acted and didn’t is labour. And that is for the same reason why the central government is not doing it now. Historically, there has been large representation of organised labour in major parties. The opposition of organised labour to labour reforms was enormous.
SUNIL JAIN: Knowing about the twin balance sheet problem, if you were to do it again, would you push bank lending and boost infrastructure without carrying out reforms?
While we were certainly pushing growth, we were not directly pushing bank lending. When growth occurs, there is an enthusiasm; people borrow and banks lend… If you start trying to do everything, nothing will happen. The logic of change is to go ahead and push; watch out what the problem is and try and correct it… In 2014, when Raghuram Rajan was the RBI governor, he recognised the problem… He was criticised for unnecessarily creating difficulties. Frankly, this issue had emerged in 2014-15… The Economic Survey at that time talked about what we have to do — we should recognise the problem, that was done; we had to recapitalise banks, that was done but only partially; and we had to reform banks so that they don’t behave in the same way. That reform never happened and that was a pity.
UDIT MISRA: Since liberalisation, we have seen governments of all hues, but there seems to be continuity in terms of the broad economic strategy. Does India have only one economic ideology?
The strength of India depends upon a perception that there is a broad consensus on what is good policy. If the picture portrayed is one of competition between two opposed ideologies, with policy reversals after every change of government, you can assume that we will just be stuck. Right up to the Vajpayee government and then the UPA government, that is certainly the image. Now, some people might criticise the present government for continuing the UPA programmes while renaming them… Continuity, with renaming making it catchier is fine. On the other hand, I don’t think that continuity is being really maintained because there has been an increase in Customs duty in the last two-three years… It is possible that we are reacting to a perception that the old stuff about lowering duties is old-fashioned, and the new economics is that we should have higher protection. I personally think it is a mistake. I also think the decision not to join the RCEP (Regional Comprehensive Economic Partnership, a proposed free trade agreement in Asia-Pacific) was very unfortunate. The government initially said that we must go beyond ‘Look East’, and ‘Act East’. But refusing to join the RCEP is not Acting East, it is in fact sitting on the shore and saying no thank you very much.
UDIT MISRA: Do you think the Congress had the ability to push reforms?
The 1991 reform was carried out by a coalition government led by the Congress — Narasimha Rao provided the political leadership and Manmohan Singh was the economic architect. They undid an enormous amount of traditional Congress policies. If we could do it in 1991, why can’t we do it again?… Admittedly, it is easy to take tough steps in the face of a crisis if you can say that it was caused by somebody else. The experience of 1991 suggests that parties, in this case the Congress, can be persuaded to move in new directions. Not everybody in the top leadership of the party in 1991 was willing to go along, but the changes were made… If there are things that need to be done, they should be done.
PRABHA RAGHAVAN: With India having initiated a review of its existing free trade agreements (FTAs), what bearing do you think it will have on ongoing talks with other nations?
A lot of this desire to scrap FTAs is based on many lobbies arguing that our FTAs have not benefited us. The latest Economic Survey does an analysis of FTAs and says that’s not true. The first thing one has to ask is whether the Economic Survey is right or wrong? I believe that the Economic Survey is right. If the Economic Survey is right, then the whole argument against FTAs is false.
ISHAN BAKSHI: Is it time to review the macroeconomic framework that has governed India’s policies for the last two decades?
We should always review macroeconomics periodically. A key question is, are we on target in macroeconomic terms? We are not. We no longer have growth targets but the government has set the goal of becoming a $5 trillion economy by 2024-25. This requires a growth rate of almost 9%. We are going to end the financial year (2019-20) at 5% or a little less. And next year, may be a little above 5%. At this rate we are not going to get a 9% average unless the growth rate in the remaining four years is well above 10% or so, which is not going to happen.
There is also no chance of achieving the targeted doubling of farm income over a five-year period between 2015-16 and 2021-22. So we do need to revise our expectations and set realistic targets.
SUNNY VERMA: How fair is it for the current government to blame the UPA for the mess in the banking sector? Also, with the economy struggling, what would be your advice to finance minister Nirmala Sitharaman?
It should be accepted that periods of rapid growth are accompanied by excess bank lending. This is a common phenomenon. When growth occurs, private capitalists become excessively optimistic. There is no harm in banks supporting enthusiastic investors if they bring enough of their own equity, but this doesn’t happen. At the end of a boom, there is a downturn and the economy slows down. A lot of projects aren’t able to service their debt. So the banking sector gets stressed. But how long should that stress last? Six years?… I feel what has happened is that while the problem was clearly identified, corrective steps were not taken.
When it comes to reform of the banking system, it has still not been undertaken. Reform is not something which is done instantly. If you go back to 1991, a lot of reforms were carried out in the financial system… and these took four-five years. The next step was to open up the domestic capital market and the capital account in a cautious manner. And then opening up insurance. This was politically not easy but it was done. We now need to focus on reform of the banks. The PJ Nayak Committee recommendations should be implemented. The GST also needs to be fixed.
UDIT MISRA: Is current Indian politics economy proof?
I agree that the economy is under considerable stress… most felt in the lack of creation of job opportunities. Young graduates are looking for much better jobs than their parents had. And unless the economy performs differently, they’ll get frustrated soon. Populism, in the sense of saying that ‘You are not getting a job, but I’m giving you benefits’, is totally unsustainable because it is unaffordable. So it will reflect itself in the government borrowing excessively, directly or indirectly, which will only squeeze out the private sector and make the jobs crisis worse… The notion that you can ignore the economic side and rely on populism is just not viable.
UDIT MISRA: Did the public reaction to demonetisation surprise you?
It was very disruptive, but it is true that it was politically well sold and people did not seem to mind it. They minded the loss of jobs etc, but somehow the political management of demonetisation was such that it was accepted.
RAVISH TIWARI: Where do you think the UPA-II lost the plot?
There are two things that the UPA-II did not do. First, they did not adequately explain to people that the UPA-II had substantial achievements, particularly the reduction in percentages in absolute numbers of poverty as of 2011-12. So it was not just in the UPA-I. I have no answer why they were unable to project these achievements… The PM did mention them. Even Sonia Gandhi mentioned them in some of her speeches. Somehow, it was not part of the dominant political discourse… One of the biggest achievements of the UPA was in the area of health. Polio got eliminated. The director-general of the WHO came to India and made the announcement just before the (general) elections (of 2014)… Particularly because the Congress was so concerned about education and health, this should have been trumpeted from the rooftops…
The second was the public perception that corruption had reached impossible levels. There were many factors — the Anna Hazare movement, mobilisation by NGOs.
Corruption is a problem everywhere. It is not as if India is the only corrupt country in the world. But the way the whole thing was managed, the UPA never got around to making its case that it is being tarred unfairly by a particular brush.
My suspicion is that they did not actually appreciate the fact that social media or new methods of communication — Twitter, Instagram, Facebook — have shifted the arena where these issues are discussed. And they paid the price for that.
UDIT MISRA: Can you think of examples in the past when the Reserve Bank was able to display independence?
The RBI is not legally independent since the law allows the government to intervene if it wishes. However, it has been able to preserve a high degree of independence in the past. This is exemplified by the case of the Bank of Credit and Commerce International (BCCI) in the early 1980s. The BCCI was lobbying hard to get a banking licence but the RBI had reservations. The Finance Ministry felt the presence of the BCCI would send a positive signal to investors and it sought to overcome the RBI’s unwillingness by getting the Cabinet to approve a proposal that the power to allow a foreign bank to operate should lie with the Finance Ministry, although the RBI could continue to supervise the functioning of the bank once it started operation.This proposal was approved by the Cabinet, but Manmohan Singh, who was the governor of the RBI at the time, took up the matter with prime minister Indira Gandhi. He explained that it would seriously damage the credibility of the RBI as an institution, and if the government insisted on implementing it, he would have to resign. After hearing him, the PM actually reversed the Cabinet decision and the withdrawal of powers was never implemented. This is an example of preserving effective independence of the institution. Singh has written about this in a little-known article.
The RBI’s reservations were amply justified by subsequent revelations of money-laundering and illegal activities unearthed by US authorities which led to the collapse of the bank. It exemplified the potential conflict between a proactive developmental approach and a regulator’s risk mitigation approach.