Siddhartha Ahluwalia

Hi, this is Siddhartha Ahluwalia, welcome to The Neon Show. I’m your host. And today I have with me a person who I have idolized since my childhood.

I have with me Mr. Montek Singh Ahluwalia, ex-Deputy Chairman of Planning Commission. Sir, welcome to the podcast. So glad to have you today.

Montek Singh Ahluwalia

Thank you. Thank you for having me. Nice to be interviewed by another Ahluwalia.

Siddhartha Ahluwalia

Yes, Ahluwalia versus Ahluwalia on the show today.

Montek Singh Ahluwalia

I hope it won’t be versus, but you are free to do that.

Siddhartha Ahluwalia

No, no, my intent is not to do that. But just saying, for Ahluwalia, total handshakes with an Ahluwalia.

Montek Singh Ahluwalia

Okay, good.

Siddhartha Ahluwalia

So you got a Padma Vibhushan in your second highest civilian honour for contribution to Indian economy. I’m so glad to be discussing, you know, about Indian economy today with you, your contributions and what has happened since 1991 in the last 34 years to Indian economy.

But just I want to start today with your childhood, growing up in Rawalpindi, moving to Delhi, then St. Stephen’s College. And then the events that led up, you know, to you joining government and becoming, you know, the Deputy Chairman for the Planning Commission of India.

Montek Singh Ahluwalia

I mentioned in the book that, you know, I was born three or four years too early to be called Midnight’s Child, 1943, and we became independent in 1947. But, you know, I’m a good example of someone whose entire upbringing and thinking life was in the immediate post-independence period and onwards. Now, I had no family disruption because of partition.

My father was a low to middle level government employee in the Indian Defence Accounts Service, and he was already posted in this side of the border. So as a family, we didn’t have to move. Although, you know, my mother’s brothers did move from Rawalpindi to India.

But fortunately, they came in a military convoy. So we had no personal experience of what was otherwise an incredibly traumatic partition. And, you know, we were in Secunderabad for a long time.

Originally, when I was very young, we were posted in Saharanpur and Ambala. But after Hyderabad got incorporated into the Union, the army was posted, went into Hyderabad and along with the army, the accountants went in. So the Defence Accounts Service moved in there.

I moved to Secunderabad with my parents. And for the next seven years until 1957 or so, we stayed in Secunderabad. So I was brought up there.

I have a sense of the flavor of the South, much more than any other North Indian kid would have had. And in 1957, moved back to Delhi. You know, my father was a pretty good official.

And his parents, his bosses said, look, we’d like to promote you into the Indian Defence Accounts Service from the clerical system. That was a big deal in those days because the Defence Accounts Service was what they called a grade-one service. But they said to him that, you know, you’ll be the junior most person in the Defence Accounts Service.

And normally for junior people, it’s for people just joining and they are made in charge of very small offices. So you’ll move from the Secunderabad office, which was quite large, to be a head of a very small office. And that may not be very nice.

And so what we’re giving you is a choice. You can either get promoted, then you can write IDAS on your visiting card, or we post you to Delhi, which is the center of the whole thing. And it might be good for your kid’s education because they have to finish it.

And, you know, my father thought about it. And he decided to go to Delhi primarily because of the kid’s education. So I think he made a very, very crucial contribution to my future.

Because quite honestly, I mean, I was doing quite well in the school in Secunderabad, but even the school did not think that I had as much potential as subsequently I was able to display. So that was a big contribution that my parents made, or my father made. I then came to Delhi.

I had a very regular kind of experience in the Delhi Public School. I did well, got into St. Stephen’s College. Thought I would sit for the Indian Administrative Service examination, which is what everybody of my age in those days wanted to do, at least in St. Stephen’s College. We used to have 15, 16 people every year joining the administrative service and the foreign service taken together. But then, you know, I applied for the Rhodes Scholarship, which I got. I didn’t think I would get it, but I got it.

And that also changed my life because all of a sudden I was getting into the stream of getting a foreign degree, went to Oxford, wonderful time. You know, people often ask me, how much did you like Oxford? Of course, I liked Oxford a lot.

But, you know, most people like university wherever they are because that’s the age, you know, between 18, 21, et cetera, which is a great age, whatever you’re doing. Well, I had a good time because Delhi University was very nice. Oxford University was very nice. And I thought initially that I’ll come back.

Siddhartha Ahluwalia

And you met your wife there in Oxford?

Montek Singh Ahluwalia

No, no, no. My wife I met later. She had a very similar background. She sort of did well in education and got a scholarship to go to MIT.

And I, instead of coming back after Oxford, I was recruited into the World Bank, which had just started expanding because, you know, in the early 60s, I mean, development and how to help developing countries became a big issue. And the World Bank was a major instrument for flow of development funds. So they were expanding the office and they recruited a lot of young people.

I thought I’d do that for three years, gain some experience, come back. But it was a lot of fun. Then I met my wife there. She was working for the IMF. We got married. Then we had decided to have children.

So my eldest son was about to be born. And she also wanted to finish her PhD because she left her PhD before completing it to join the IMF, thinking she would go back. So that delayed our return.

But, you know, by the time my eldest son was actually born and was one year old, we decided that it’s time to come back. There was a vacancy in the Ministry of Finance. Dr. Manmohan Singh, who used to come to Washington quite often, you know, in connection with the World Bank annual meetings, I got to know him and we would always ask him, what are the possibilities of coming back?

And he said, look, we are advertising this position for an economic advisor. In those days, these positions were meant for anyone internal in the Indian Economic Service or anyone laterally qualified wanting to get in. So he said, why don’t you apply?

And I did. And the UPSC appointed me. And so in 1979, I went back and started working in the finance ministry. I was in the government then practically continuously. In 2001, the IMF created the Independent Evaluation Office. And they had a system of identifying people.

So I was asked that, look, your name is recommended. Would you like to apply? And I said, no, I don’t want to apply because I’m quite happy. I had then done all kinds of secretary positions. I was in…This is during the BJP government. I was in the planning commission then as a member, with Jaswant Singh as deputy chairman.

And I said, look, I’m quite happy. I don’t particularly want to apply. Then after a little while, they called me up.

And they said, look, the headhunting firm that we have hired is getting a lot of feedback that you should go for this guy. And you didn’t want to apply, but we now have narrowed down the selection to five people whom we are going to actually interview. And you’re being invited to be one of those by making it six.

And they were very senior people, including some finance ministers from small countries. So naturally, I was a bit flattered. But I said, look, I mean, I’m working in the government.

So I have to ask the government. So I asked Brajesh Mishra, who was then the principal secretary to Prime Minister Vajpayee. I said, listen, these guys have contacted me. What is your advice? And he said, look, I think it would be good if the first person to head this new office is an Indian. Because it was not an office under the management of the IMF.

It was an office created by the board to report on the management to the board. So our reports didn’t go through the management. We interviewed the management and gave our assessment to the board. And he said, look, I’ll talk to the prime minister and we’ll give you leave to go. So I said, OK. I had my interview.

They chose me. So in 2001, I left to go to Washington, DC. And then, you know, actually, my retirement age happened around at that time, 2003.

So technically, in the year 2003, while on leave, I ceased to be a government employee. In 2004, when the UPA government came in and Dr. Manmohan Singh was made the prime minister, he said to me, I called on him when I was visiting Delhi and knew him very well. He said, look, why don’t you come back and help me?

So I said, what would you like me to do? So he says, well, what about the deputy chairmanship for the planning commission? And I said, that sounds very attractive. So you let me know. And if you want, I’ll come. I had to go off to China for some other meeting, not a government-to-government.

It was a private meeting. And while I was in China, I got a phone call from the PM’s office saying, the prime minister has consulted his senior colleagues and they want you to be deputy chairman. So I said, when do they want me to join?

So they said in a week. So I interrupted my visit to China, went back to the US, resigned from the IMF and came back. And I’ve been in India since then, since 2004.

For 10 years, I was deputy chairman of the planning commission under the UPA government. And of course, when that government changed, I, like everybody else, handed in my papers and I’ve been a private citizen since then.

Siddhartha Ahluwalia

It’s been, I would say, such an interesting journey from a person who is seeing it from outside. You are one of the key people, key person who opened up the economy in 1991 via the M paper, which is known widely.

And then you played an active role in Indian economy till 2014. So you have literally seen the Indian economy opening up in 1991. In the next 25 years, what has happened?

What are the impacts? One of the key things that has been in discussion always is, and which we have shared through our podcast with C. Rangarajan sir or D. Subbarao, the ex-RBI governor, is the changes that happened in 1991, right?. We still carry the benefits of them today. But none of the governments since then has implemented changes with that rigor ever again.

Montek Singh Ahluwalia

Well, I think that’s a very good point you make because there are two things about 1991. One is, there was a crisis. And you know, it was a crisis that happened under a previous government.

So when Mr. Narasimha Rao came in, it wasn’t that he had to say, listen, we’ve got it all wrong. We have a crisis now. He said, look, this crisis has happened. The previous government wasn’t able to handle it. I now have to do something different. But I don’t think the reforms were due only to the crisis.

I think during the 1980s, there was a gradual buildup of realization that our economic policy was not delivering. You know, if you take the long sweep of India’s economic record, I mean, in the immediate post-independence period, Pandit Nehru was prime minister. There was a period of political consensus.

I mean, everybody, voters kind of kept voting the Congress back. So there’s no political differences, really. And the Congress had a sort of left of center ideology, which again, globally, was not out of line.

I mean, after all, in Europe and all these guys, the Labour Party, public sector, the Soviet Union had just done quite well after the Second World War and so on. So I think there was a feeling that, one, that the government has to do a lot, not much faith in the private sector, and not much realization about how the world was going to move. And frankly, up to, I would say, up to about 1955, the country did reasonably well.

You know, we had a growth target of about 5%, and we actually achieved around 4.5%. So if you were looking at that period, you would have to compare it with the pre-colonial period. Now, in the pre-colonial period, the GDP grew at about 1%, and population grew at a little less than 1%. So basically, per capita income for 50 years didn’t change at all.

In the first six, seven years after independence, the growth rate was 4.5%, and population growth was a little over 2%, but per capita income was still rising. So there was a sense that, you know, things are getting better. We didn’t have long-term visions and so on, but, you know, there was a process of planning and things were not seen to be going terribly wrong.

I think things began to go wrong around during the 60s, and mainly, I think, in the 70s. I mean, the Congress Party’s first industrial resolution in 1956 or something, it went very strongly towards the notion that the state must occupy the commanding heights of the economy. That gave the dominant position to the state, and over time, a system of licensing, et cetera, was introduced, which, when we look back on it, did a lot of damage, okay?

Also, after the balance of payments crisis in 1957, we adopted an approach of tightening imports, rather than managing the balance of payments in a more liberal environment. You know, in a liberal environment, you don’t impose restrictions. I mean, if people want too many imports, you let the exchange rate take the…take the hit, so you depreciate the currency.

Of course, politically, this is always very difficult, but that’s what other countries also did, and they managed, okay? We didn’t. So we kept an exchange rate that was completely out of line with the extent of reduction of imports that we wanted.

And by… during the 1970s, this became very obvious, because somewhere in the mid-’60s, the East Asian countries began to do very well. So then you had Korea, then you had Taiwan.

Siddhartha Ahluwalia

Japan started to do very well.

Montek Singh Ahluwalia

Well, Japan, but Japan was a developed country that had collapsed and then rose very sharply. But the real message is not Japan. It’s really East Asia.

 

Japan, of course, had this notion of the flying geese model. That is, we are the successors. Japan took off first, Korea, then Taiwan, and then you had, they also used to include Hong Kong, which was not part of China and Singapore.

We tended to disregard this, because we viewed the success of both Korea and Taiwan as due to their closeness to the Western powers. Now, those were days of non-alignment. And we ourselves, politically, were not in favor of what the Americans were doing in Vietnam.

So there was tension between our government and the Vietnamese and the Americans on the American presence in Vietnam. So, you know, the politics, and those were days of non-alignment and what have you. So we regarded these countries as appendages of the West.

But the fact is, they did incredibly well. And, you know, sometime around the 70s, their experience was emulated, if you like, by countries like Thailand, Indonesia, Malaysia, and they also seemed to be doing quite well. Now, you couldn’t call these countries stooges of the West in quite the same way.

And also, our own attitudes had begun to change. And I think that when I came back in 1979, it was very clear to me that India is falling behind. And what is worse, the Indian regime and people in power don’t realize it. I mean, the official lot just carried on more planning, more this, more the other.

Siddhartha Ahluwalia

More committees

Montek Singh Ahluwalia

Nothing wrong with committees. When committees are just designed to repeat the official view, then they’re very bad. But in 1991, Dr. Manmohan Singh set up two very important committees outside the government setup. I mean, one was the Chelliah Committee, where he brought in Raja Chelliah.

He said, look at our tax system. Now, that had former government officials and experts, including economists and accountants. Similarly, he set up the Narasimham Committee.

Now, Narasimham was a former governor of the Reserve Bank, not the current governor or deputy governor. So, you know, that was committees which brought in expertise from outside. Committees which are set up within the government almost never recommend radical change because they’re set up, they’re run by the same people who are running the system.

So, understandably, their mental image is, we can improve the system a little bit. Let’s make a list or a little bit of improvement. They don’t have the mindset of saying, look, this whole system is wrong.

And, you know, I realized that in the course of the 1980s. I was part of a few of these even internally run committees. The first external committee that I was part of was really run by Prakash Tandon in 1980. And he was making, it was meant to look at exports. But most of the staff were all internal government people. And exporters also didn’t have an understanding of the total economy.

I mean, for example, most exporters would say, we are not competitive. There is an export subsidy. It isn’t enough. You should raise the subsidy. Since the subsidy was administered by the Ministry of Commerce, Ministry of Commerce was very happy to say, yes, we will have more subsidy. I made the point in that committee, which was completely ignored.

I don’t even think it was understood by almost anyone except by Vijay Kelkar, who was the secretary of the committee. And I said, look, the reason exports are not competitive is because you’re running the wrong kind of import protection system. If you protect imports through whatever means, that’s equivalent to taxing exports.

Because if you wanted to generate the same reduction in imports, which your protection is doing, and you did it through an exchange rate change, exporters would have a boom. Instead, you want to keep the exchange rate what it is. So those people to whom you give the permission to import can import at a lower… at a depreciated… appreciated exchange rate, but exporters get a much lower return.

So you’re biasing the system. I mean, fortunately, they allowed me to write a chapter saying so, and then it was completely ignored. I mean, nobody took the slightest interest.

So I think this is one of those problems in India, that you know that every problem can be traced to a ministry, because everything is assigned to different ministries. Ministries invariably want to do reforms, which enable them to improve the way they handle the instruments under their control. I mean, the commerce ministry used to handle the export subsidy.

They used to handle subsidies for whatever marketing. And their whole approach was this is what you should change. They would not be willing to say the real problem is that your import controls and import tariffs are too high.

You should actually change the exchange rate, which was the job of the Economic Affairs and Reserve Bank of India. And also your transport logistics are terrible, which is the job of other ministries. So they would just say exports are not productive, exports are competitive.

We need a higher subsidy. And the Ministry of Finance would shoot that down, saying, look here, we don’t have that much money. So, you know, I was trying very hard to make these changes.

And the way it happened, you mentioned the M document. That in a way was the first, I think it was the first time that an analytically comprehensive account was taken, looking at the effect of different types of interventions. Okay. How did it happen? Very interesting. VP Singh, who was then the Prime Minister, visited Malaysia, some Commonwealth heads of government meeting or something. And he said that, I mean, I was in his staff.

You know, I was on the staff of Rajiv Gandhi’s PMO. And during that period, we did initiate a few reforms. I think Rajiv Gandhi was very clear that we need reforms, system reforms.

In fact, in his very first speech, more or less, in Parliament, I joined him in 1985, in January. Shortly thereafter, he made a speech. And in that speech, he said, how can we compete with other countries if we are running systems which are 20 years out of date?

So that gave us a realization that here is a Prime Minister who’s not just saying, I must improve the system. He’s actually saying these systems are out of date. We had been…I’d been briefing him, others also, that you need a system change.

But of course, he wasn’t able to do it. I mean, in the sense that he was overtaken by the Bofors scandal within two years. I mean, he was just bowed down under these problems, which also illustrates the fact that you’ve got to initiate system reform early in your prime ministership when you have goodwill. If you lose that momentum, sooner or later, you’ll get stuck.

Siddhartha Ahluwalia

You call that period honeymoon period that every government has.

Montek Singh Ahluwalia

Yes, and that can vary between six months and certainly two years. But if you don’t lay out an agenda and take the flack, we’re going to do this, then you’re not going to do it. okay. And we did manage to do a few things subsequently.

I mean, some of the introduction of, let’s say, CENVAT, which was a system of giving credit for earlier excise duties, was introduced in the second year of the Rajiv Gandhi government. But it was a little bit of change in liberalization of control, but not really a wholesale change. So, you know, B.G. Deshmukh, who was the principal secretary to the prime minister, I was secretary to the prime minister, he was principal secretary.

When the election was taking place and Rajiv Gandhi was busy campaigning, he said to me, you know, Montek, we have not been able to do. He was a remarkable person. He was probably the first cabinet secretary of India who came from Bombay, where he had a very close and non-antagonistic view of the business sector, because he knew businessmen from Bombay.

And he was, therefore, in that sense, unbiased between the public. He wasn’t necessarily pro-private sector, but he knew that there are many things the private sector could do very well, which government couldn’t. And he was, therefore, in favor and he helped.

I mean, he gave me support in pushing a couple of things, like, you know, deregulation of aluminium done at one stroke in 1987 would never have happened if Deshmukh hadn’t backed. And it worked very well. But, you know, he said to me, you know, there are many other things we need to do and we haven’t been able to do it.

And I said, the reason we are not doing it is you are counting on each ministry to make proposals, whereas every sensible change requires changes in other ministries. And, therefore, we should have a comprehensive view. Now, ideally, the Planning Commission should have been doing it.

But the Planning Commission was not in a reform mode at all. He said to me, why don’t you write a paper? And we will, if Rajiv Gandhi comes back, we’ll persuade him.

Well, of course, I started writing the paper and Rajiv Gandhi lost the election. And at that time, I mean, he had 194 seats, but he decided that the people’s mandate is not for me. I’m going to sit in the opposition.

Very good. And in came a coalition government headed by V.P. Singh. I knew V.P. Singh. I’d worked with him when he was finance minister under Mr. Gandhi. And I always felt that the break between Rajiv Gandhi and V.P. Singh was very unfortunate because they worked very well together. And he retained both B.G. Deshmukh and me.

And, you know, at one point, we were all expecting, after he came in, that we would be thanked and sent off somewhere and generally given a good job, but not stay in the same PMO when you have a change of government. To my surprise, V.P. Singh said, no, no, you guys continue. So I said this and I mentioned this in Backstage.

I said this to B.G. Deshmukh, sitting outside the PM’s office just after we learnt. I said, isn’t this unusual? He said, Montek, look, Delhi is such a city where cups change, but spoons don’t change.

I thought it was a wonderful way of hearing from the senior most civil servant a fairly self-critical description of the permanent civil service, right? Anyway, V.P. Singh went to Malaysia and V.P. Singh said to me, I mean, one of those, I was part of the team, so we had informal moments. He said, Malaysia, I’ve been here in early 70s as Deputy Minister for Commerce, Minister of State for Commerce, and they’ve made remarkable progress.

I said, yes, I used to visit here in the early 70s from the World Bank. And you’re right, they’ve made remarkable progress. So he said, why is that?

I said, sir, the reason is that they have done reforms and we have not. So he said, you write me a paper. So I immediately dragged out whatever I was working on before we had more or less come back, finished it and sent him 34-page paper on structural changes we need.

And you know, V.P. Singh could have ignored it. Because it was too difficult. After all, he didn’t have much of a majority and he was a very shaky kind of situation.

But, you know, he consciously decided to send this paper to the Cabinet Secretary, Vinod Pandey, and have it discussed. Now, you know, in the system, once something comes and they know it has come from the PMO, I mean, my name wasn’t on the paper, but they knew it came from the PMO. And since I was the main economist there, everybody assumed I wrote it, which was correct.

And secretaries all turned up and took it very seriously. And I was very pleasantly surprised that many secretaries were supportive. I mean, I should mention in particular Amar Nath Verma, who was then industry secretary. He was supportive.

He said, we should do these things. A couple of others also. Finance ministry was not at all supportive because it would mean handling the balance of payments crisis without relying on import controls and they didn’t like it because I had recommended we move to some EXIM scrips, you know, we create a tradable item which can be given to exporters to import whatever they want and no import licenses for these capital goods and intermediates.

Finance ministry was not supportive. Interestingly, the planning commission was not supportive either because the planning commission said, what is this prime minister’s office is circulating? These are the things we should look at in the approach to the plan which we are working on.

They didn’t tell us what they would recommend but they made a procedural objection. That paper leaked. I mean, I didn’t leak it but it leaked.

Siddhartha Ahluwalia

And it got published in newspapers?

Montek Singh Ahluwalia

It was published in newspapers and you know, it was fascinating. It produced a terrific discussion but some people criticizing, some people saying, no, this is very good and you know, Ashok Desai, who was then a journalist, he wrote a very nice piece.

He said, this paper has been leaked. He said, it’s quite a good paper. I didn’t know that the government writes good papers.

Maybe they should leak them more often. He said, it doesn’t have a name but everybody knows it was written by Montek. So, I’m going to call it the M document and then he wrote a piece saying what he agreed, etc.

I think the discussion showed that we need a comprehensive account of policy which then can go to the public and you can have a bit of a discussion on it, etc. Now, you know, VP Singh never actually said that he agreed with it and of course, his government fell within a few months. So, there was no question of acting on it.

Siddhartha Ahluwalia

And I have a submission to make. In my previous interviews, economists of that time have said that it was very difficult to get anything through the government. So, starting with your document, government started leaking those papers to get a public view.

Montek Singh Ahluwalia

Well, no, I don’t think that’s entirely fair. Let’s be clear. The paper would have been killed if VP Singh had not circulated, not instructed that it be circulated. Now, when you circulate, what it means is the cabinet secretariat makes 60 copies and of course, they put secret on the copies.

But, you know, if it’s interesting, unless it’s a defense type top secret, I mean, defense matters go to only four ministries and they have a big red cross on it and they hand carry them. Secret, I mean, is a lower level of classification. And if it’s interesting and newsy, somebody will leak it.

You know, it’s interesting that the paper was leaked by tearing off the first page because the first page carries the cabinet secretary’s serial number. So, you can trace to whom number 35 went. And so, what was published, it begins very abruptly because the introductory paragraph is not there.

So, I don’t think it was consciously leaked by anyone in order to make changes. In any case, that government was so politically weak that it would not have been in a position to make those changes. I think this was a case of what Julian Assange nowadays calls journalism in the sense that somebody said, hey, this is interesting.

Let’s talk about it. And they all talked about it. And VP Singh never minded that they’re talking about it or any of those things.

But the interesting thing is that because it was circulated, talked about, etc. Those ideas, and by the way, I should say it’s not as if I invented these things. I mean, I was only summarizing what you would call an objective view of what the rest of the world thinks of our politics.

The paper said, look, everybody else is liberalized. Even the East Europeans are liberalizing. China is liberalizing. What the hell are we doing?

Siddhartha Ahluwalia

And what did liberalization mean during that time?

Montek Singh Ahluwalia

Yes. Now, here, I think there were a few broad things that I talked about. I thought the highest probability was that the import control regime, where every single application is looked at by the DGTD was ridiculous. You know, again, I mentioned this in backstage. I keep going back to backstage, and I hope you don’t mind.

Siddhartha Ahluwalia

Absolutely Sir.

Montek Singh Ahluwalia

I want people to be aware of how stupid the system was. I used to be a member of a committee chaired in the commerce ministry by the chief controller of imports and exports. We should look at each import application.

And you know, half the time, the guys around it were deciding whether to allow the import of A or B. And they didn’t know whether A was a solid, a liquid, or a gas. Because these are all very technical things.

But one very simple example I can give you. Actually, I’ll give you two. One was a guy in some northern India who was producing electric irons. And he said that, look, our electric irons are far too heavy around the world. I mean, irons are used now by housewives, even young girls, and hopefully young boys. And they need something light.

And we are making irons out of heavy steel sheets. This is ridiculous. So I want to import…I want to make an electric iron, which is light. And I want to import this gauge of sheet, which is not made at home. And therefore, allow me to import. And you know, when this was discussed, people said that, look, if this was for 100% export, this would be justifiable.

He’s going to sell it only domestically. Domestically, sales says that they make these sheets. They’re about three times thicker, but how does that matter? And therefore, it was rejected. What this guy said is, look, how can I get export orders if my current line of production is so out of date? Because if people come to me for an export order, they will say, what are the irons you’re producing?

And if I’m producing things that look ridiculous, they’re not going to give me any orders. It’s no good my telling them that if you give me an export order, I will get lighter material and I will make a lighter iron, which I’m not able to show you. You don’t get no order at all.

That was one example. Another example, which was very interesting, was Maruti. You know, in the 1980s, the emergence of Maruti was a big achievement.

Krishnamurti, who led that thing, I mean, produced a car that most Indians thought and was. It was a completely contemporary car, but it was heavily based on imported material. And there was an understanding that he would indigenize progressively.

You know, phase manufacturing program. Now, when the time came to do a phase manufacturing, he said, fine, I’ll do a phase manufacturing program, but I can’t produce domestically the engine block of the Maruti. And therefore, I’m going to indigenize X, Y and Z, but engine block I’ll have to import.

Application went to the DGTD, to the Commerce Ministry, and the DGTD said, we have consulted the domestic producers. And HMT, Hindustan Machine Tools, they said, we can produce this engine block because we are producing engine blocks for Bajaj scooters. So, if you deny him the import, we’ll produce it.

Now, what these guys said was that, look, they have never produced an engine block for a car. I want to roll it out maintaining quality. I don’t think they can produce it. And they’re not able to produce one for export anyway. If you force me to get something from them, there’ll be endless delays. I can’t guarantee quality, etc, etc.

Because the Maruti engine block is very different from the engine block of a two-wheeler. You know, this matter went all the way up to Narayan Datt Tiwari. And let me say, the only reason it went up there was that Krishnamurthy was a very powerfully connected fellow. And he had only agreed to become the Managing Director of Suzuki Maruti Limited. He had retired. He’d been offered a job by the World Bank in Washington, DC.

Mrs. Gandhi spoke to him and said, look, I want this people’s car to really work and be a model. And you take this over and forget your World Bank job. So, he agreed to give up his World Bank job, took a job that paid him much less money.

And he had said, ma’am, the real problem is, you know, you may make me Managing Director, but there’ll be so much government interference, I won’t be able to do this. So, she said to him, look, you keep in touch with Rajiv Gandhi. And if there’s ever a problem, just go to him and he’ll fix it for you.

In other words, he had superior access. Even then, in spite of everybody knowing this, it was very difficult to overrule DGTD, which said that, no, you don’t have to import, place an order on HMT, which was a public sector company. Had they said place an order on private sector company, it would have been easy, public sector company.

So, Maruti public sector, HMT public sector went all the way up to the Minister. You know, Bhargav, who had then taken over MD, he told me, and I’ve repeated this, that there was a meeting in ND Tiwari’s office, where Bhargava brought an engine block of the Maruti 800 and was put on the conference table.

And next to it, he put the engine block of the Bajaj scooter and that was put on the table and said, look, sir, I know they produce this very well. They have no proof of producing this. I don’t want to take the risk. ND Tiwari looked at it and said, okay. I don’t know, by the way, whether ND Tiwari did this because he knew that Mr. Gandhi was interested in not interrupting the work of Maruti. But it tells you the level of interference that this licensing system, it gives power to bureaucrats who don’t have a stake in the system. I mean, if the bureaucrats view had been taken, the bureaucrat would have said, but HMT said they would do it.

So the fault lies with them or me. And you can’t run a business if you do that. So these are two examples, I could give you a hundred. I thought this was just terrible. We must allow free import of capital goods and intermediates and leave the decision in the hand of the producer. Now, the ideal way of doing this is to free the exchange rate.

So what we did was said, no, what we’ll do is instead of this system of export licensing, where we used to calculate what are the imports that an exporter really needs and then give him an import license for those imports, which only he can use. Okay.

We said, look, let’s just give them, give all exporters 30% effective import permission. That means even if you’re exporting basmati rice, you would get a fungible, tradable import license for 30% of the value, which you could sell.

And over time you could increase this value. And that was a radical change, which really meant that the power of the commerce ministry to give licensing was abolished. And I mean, I was commerce secretary when we managed to get it done.

So I mean, it was a little bit easier, but I would give a lot of credit also to Chidambaram, who was the commerce minister, because, you know, it was his ministry’s power that was being got rid of. I may have thought it was a good idea economically, but ministers enjoy power because people come to them. And he was quite willing to do that.

And it got done. And it’s interesting, it got done again, because decision making was restricted to a small number of people. Normally an import license change would have required sending the file to the finance ministry and then to the PMO on file.

And I told Chidambaram that, look, on file, they’ll write a 10-page note. It’ll be very difficult for anybody to read it. The PS to the finance minister would have to explain it and the point would get lost and they would also dilute it.

So I suggest that you seek a meeting with Dr. Manmohan Singh and explain the thing yourself. He said, fine, you come along. So Chidambaram and I went, Manmohan gave us time. His officials, Shukla and Deepak Nair were also there. And Chidambaram explained this to Manmohan Singh, who clearly saw the point. The officials, they didn’t actually oppose it as such.

What they said was, this is a change in import policy, send it on file. And I said, no, sir, we don’t have time, because the big problem was the second devaluation had happened. And part of the second devaluation package was to get rid of export subsidies.

I had persuaded Chidambaram that if you’re devaluing the rupee, you don’t need a subsidy, but use this opportunity to get a clearance on the abolition of import licensing. Exporters would be delighted. He agreed.

Manmohan saw the point. He overruled his officials. And he said, now, the next step is to get Narsimha Rao’s approval.

Again, that had to be done on file. If I’d sent the file to PMO saying Manmohan Singh has agreed, somebody in PMO would have examined it. They would have consulted Finance Ministry. Finance Ministry would have said, yes, Finance Minister has agreed, but actually we have a lot of reservations. Then they would have put up a note to the PM. Avoid all that. Let’s go directly.

So, what we did was, we said to the PMO, Finance Minister and Commerce Minister want to see you. And they took me along. And Chidambaram, as the minister concerned, explained to Narsimha Rao that, look, we’re making a big change. You’re announcing a devaluation. This is part of the structure. Explain why we’re doing it. Narsimha Rao didn’t ask, let it be examined in PMO. He just turned to Manmohan and said, Manmohan, have you seen all this?

He said, yes, sir. It’s completely right. I’ve signed the file. So, Narsimha Rao said, give me the file, took it and signed, gave it to us back. And then called in Jairam Ramesh, who was in his office. And he said, put out a press note so this is properly understood.

So, you know, I was really struck that a system that had been built up over several decades effectively got abolished within eight hours, starting with when Chidambaram first called on Manmohan Singh to when Narsimha Rao signed off on the file. And it indicates that, you know, when you want to do things, don’t send the file floating all over. But in order to do that, you have to have trust.

You have to believe that you’re getting the best advice. And, you know, Narsimha Rao’s view was that, look, Chidambaram and Manmohan both agreed. What has any other cabinet minister got to add to this?

They have consulted their staff and I don’t need to worry about this any further. And I thought it was a fantastic achievement. So, one issue was the trade policy.

Equally important, in my view, was the industrial policy in which I was not directly involved myself. But, you know, that had been in the M document, I’d also said we must liberalize etc. But I had not recommended as bold liberalization as they actually did.

And the reason is that when I sent my M document paper, they had just announced a little bit of liberalization. So, I didn’t want to, as it were, knock the ministry at that time. They’ve done something you must do more over time and so on.

The industrial policy resolution got rid of a lot of these. Didn’t get rid of everything, by the way. I mean, for example, on FDI, it said automatic up to 51% for certain industries.

Now, that’s not what I would call a big liberalization. But by Indian standards, it was big. However, many of our chaps were not actually, did not realize that just because you say 51% is automatic doesn’t mean investment will come. Many people don’t want 51%, particularly if they control technology. They maybe want…

Siddhartha Ahluwalia

75%

Montek Singh Ahluwalia

100 or at least 75. Because, you know, if you have 24%, you can call for special resolutions and things like that.

So, those changes got made a little bit over time, but that was very important. I did say, by the way, that public sector reform is very important. And, you know, I had been trying to persuade Mr. Gandhi, Rajiv Gandhi, that we need to reform the public sector. We are stuck in an old mode. And this whole kind of hangover from British socialism giving importance to the public sector doesn’t actually work. He was not persuaded, so we weren’t able to do that.

We had also suggested on the financial side that, you know, we need a financial system which is capable of supporting a liberalized industrial environment. That automatically points to modernizing the capital market. And the first step was taken in 1987, when Rajiv Gandhi announced, we’re going to get rid of finance ministry controlling capital issues and shift that to an independent regulator, SEBI, which was first set up as a non-statutory body.

You know, I moved from commerce ministry to the finance ministry in October of 1991, and I was able to persuade the finance minister that before the next budget, we should implement this change, which was done by ordinance. So, SEBI was made a statutory body in 1992 before the budget. So, he was able to announce.

So, you know, we built up a kind of a momentum of reforms. But over time, we were able to do a lot up to about 1993. And in 1993, we ended the IMF program.

You know, at that time, it was thought that we may need a second program. Okay. We were able to say, no, we don’t need the second program. The thing is working fine. We’ve reduced the fiscal deficit. We made these changes. And you know, one of the biggest fallacies is that these changes were made because of the IMF. This is totally false.

It is true that the IMF would have said reduce the fiscal deficit, but everybody was saying reduce the fiscal deficit. The IMF would have insisted on devaluation. We were also in favor of it anyway. But the IMF did not prescribe the extent of comprehensive change in either trade policy or industrial policy. Of course, in the earlier reports, the World Bank and the IMF kept on saying we should be more liberal.

And I mean, a lot of this push towards liberalism came from the Indian academics themselves. I mean, you know, in the mid 60s, Jagdish Bhagwati and Padma Desai wrote this classic piece saying that Indian industrialization is being mucked up by all these controls. But unfortunately, the atmosphere was such that they were not listened to.

So regrettably, they all both emigrated and went off to Harvard or MIT. So it’s not as if we were pushing ideas that didn’t have, that were not rooted in our own economic discussions at home. They were very much rooted in those.

And I think it just took too long. I mean, we should have done all, by 1980, we should have done all this. Had we done so, I think our performance would have been much better. But even so, I think the 1991 reforms kind of unleashed the potential. And economic growth since then has been much better. Of course, there are ups and downs depending on odd events here and there.

But the interesting thing is that the reforms were initiated by a coalition government headed by Narasimha Rao with Manmohan Singh as prime minister. They were continued by a United Front government for three years, which included the Communist Party of India, not the Communist Party Marxist, the Communist Party of India. It included Chidambaram, but representing the Tamil Maanila Congress, a breakaway faction. They were continued by the Vajpayee government, the BJP, NDA government with Prime Minister.

Siddhartha Ahluwalia

And which you feared which could have been an RSS government.

Montek Singh Ahluwalia

Yes, there was a lot of, I think when the Vajpayee government came in, there was a perception that while they would be in favor of privatization of the public sector, they would not be in favor of liberalizing licensing. Because if you liberalize licensing, then the larger and better quality Indian producer, which would very often be the large private sector, may be able to squeeze out the small. But the Vajpayee government did continue the liberalization, which was very good.

Then you got the UPA, which was another coalition. They also continued in the same broad direction, bringing in a few other things, education, rural employment guarantee, those kinds of things. So, I think we’ve had a continuity.

Now, of course, when there was a change of government in 2014, the present government, rather Modi 1.0 came in. And you know, the initial, initial outline also sort of talked about you know minimum government, maximum governance, etc.

So, there’s a sense that if you get away from the political confrontations, which by the way are essential in any democracy, it would be fair to say that the government…that economic policies since 1991, or I would say in a hesitant way in the 80s, in a much firmer way in the 1991, have seen gradualist reform.

I think too gradualist. In my view, and I’ve said this in Backstage, there is a case for gradualism because you cannot subject a system to extreme shocks. But I feel what we did in 30 years, we should have been able to do in 15.

And that is where democracy comes in. Either you persuade people and take them on board, in which case, you must have a very articulate political discussion, not just articulating a slogan, but recognizing that when you convert a slogan to reality, some people are going to get hurt and some people are going to benefit. But net-net, the benefits will be worth making the change.

You know, I’m talking too much, so forgive me, but you wanted to get a background of the flame. I think it’s very interesting, one of the big things that we wanted to do in the 1990s, and you’ve already interviewed Rangarajan, who was very much involved in the whole business of computerizing the banks.

You know, there was phenomenal opposition from the banks. And he had to make a promise to the banks at one time that we’re going to computerize the banks, but don’t worry, we’ll fix it so that the computer can only handle so many transactions per day, so that it won’t be the case that you won’t need tellers. Okay.

We told, we would keep telling people that nobody will be fired. But the unions were not convinced because the union said, you know, banking is going to expand. So not being fired is not good enough.

What it means is you won’t increase employment at the rate that you have been doing. And this became a big problem. And in the early 90s, when Manmohan Singh was the finance minister, not prime minister, finance minister, we needed to get the banks on board and not go on a strike and so on.

So he is a very consultative sort of person. And so he called all the top unions. When I say top unions, the BJP unions, Congress unions, communist union, all the parties have the unions which have the same view.

Call him to his office, long discussion. And of course, none of these fellows was in favor of computerizing the banks. Manmohan told them that, look, what you’re doing is since the private sector and the foreign banks are going to computerize and they’re doing it, business will just go to them.

So how is your policy consistent with helping public sector banks? Actually, it will destroy them. And, you know, they kind of knew that, but they wouldn’t agree.

They said, no computerization and so on. At the end of the whole thing, Manmohan Singh sort of, they were all leaving. So instead of just saying thank you all very much and going back to his room in that desk at the end of that big room, he went to the door and shook hands with each one of them.

So they kind of liked that. By the time it came to the last third or fourth person, he felt, you know, they have been very negative with the Prime minister… the finance minister. But they should give him some slightly positive feedback.

So this guy, forgetting his name now, he shook his hand and he said, finance minister, thank you for calling us for the meeting. I must tell you, I completely disagree with you, but I will also admit that my son agrees with you. I think a realization on the part of many people that very often, even if the work that you are doing is going to be affected adversely, your son will have better opportunities and your family will have better.

And that’s really what you’re interested in. You know, if the Tongawalas in Delhi had launched a protest saying no taxis, think of what would have happened. Basically, economic growth would not have taken place.

And I think these guys did not think that when more and more taxis and scooters come, their kids, instead of driving a Tonga, would be driving a taxi, which is a lot better. And I think that sense that you have to judge economic reforms by the effect that will have over time, by the totality of the effect, that’s very important.

Siddhartha Ahluwalia

Folks, whatever we discussed today, that’s just a trailer of what Montek Singh Ahluwalia has captured in his book Backstage. I loved his book that I read. I would urge you to grab your physical copies from your nearest bookstore or Amazon or any other place.

But, you know, this is such an elaborate movie of what happened in 1991 that you will enjoy it as much as I enjoy reading it and recording it with Sir today. Sir one thing which I want to, you know, dive into this part of the podcast is why was the exchange rate so sacrosanct to the previous government that their policies were based on that?

Montek Singh Ahluwalia

Well, that’s actually a very good question in the sense that all around the world, there’s some politicians like to think that the exchange rate is a signal of strength, and therefore the exchange rate should be strong.

But if you look at traditional trade economics, the exchange rate is just another price. Now, when you’re looking at exports and imports, and you feel that there’s too much being imported, and we should produce some of these imports domestically, and that means shifting resources to producing imports. But you know, resources are also limited. If you shift resources to producing imports, it means you will produce less of exports.

So changing the balance between imports and exports is not something that leaves, you can act on one and leave the other unaffected. This is the first point. Second point is that, you know, a lot of people think that if we can only reduce imports, why don’t we just impose an import duty or impose a…introduce a license?

In other words, you can’t import unless we give you a license to import. Now, anyone who’s done trade theory knows that import licensing is just an implicit tax on imports, except that you don’t actually, the government gains nothing. You just prevent the import from happening.

But for every import license, there’s an equivalent import tax, which would restrict the volume of imports. The only difference is that you may restrict the volume of imports, but you won’t be ensuring that it’s the people you want who will get the import. Whereas if you impose a license, basically what you’ve got is a low price for the import at which the equilibrium would involve a larger import volume.

You don’t want that import volume. So you give the license to those whom you want to favor. That’s the difference.

If you, you’d always…If you impose a license that reduces the import of item A from X to Y, you could achieve the same thing by having an equivalent import tax, which reduces the volume of imports from X to Y. But in the case of the import tax, you won’t be deciding who actually gets the imports. In the case of a license, you will.

That’s why bureaucrats love licensing, because it gets everybody to come to their office and so on. I’m not saying they do this for corruption. People very often feel good that they’re helping someone.

Siddhartha Ahluwalia

Sense of power.

Montek Singh Ahluwalia

Yes, you can call it a sense of power, a sense of discretion, all of that. Now, our problem was that we had acquired an incredible collection of import controls, which was initially introduced all over the world during the war.

The rest of the world, within a few years after the war ended, gave up all this nonsense. We continued it.

Siddhartha Ahluwalia

And why did we continue it?

Montek Singh Ahluwalia

Well, you know, a lot of the thinking in those days was that economic development must be undertaken on a war footing. So, you know, if the name of the game in economic development is that it will be done by the private sector and you must give the private sector the freedom to act, you wouldn’t do it. If, on the other hand, you think the development will be done by the government, the government must occupy the strategic heights of the economy.

That means public sector. That means you must favor the public sector. That means that if Tata Steel wants to import something to expand their capacity, you don’t agree with that, but you give it to SAIL because you want more public sector steel parts.

Now, if you just did all this through import duties, that wouldn’t necessarily happen. But I think what most people didn’t realize is that whatever you do on imports, if you try to control just imports, it’s equivalent to a tax on exports because resources are moving from both the non-traded sector to the import substitution sector, but also from the export sector because you’re making imports more profitable. This can be…The same result can be achieved by an exchange rate change. Okay.

But again, with an exchange rate change, if you depreciate the exchange rate, resources… import substitution will become more profitable because imports will be more expensive. Resources will flow to whichever companies are able to do a better job.

But on the other hand, if the exchange rate is kept low, exporters will get hurt. Whereas if you did it through the exchange rate, you would depreciate the exchange rate. There’d be more import substitution, but exports would also benefit. So the resources would go from what is called the non-traded sector to both import substitution and exports.

This simple point, I don’t think is understood by 95% of politicians and I regret to say also by 85% of businessmen. If you ask any in those days, as far as the politicians were concerned, they regarded a devaluation as a national insult. Now, you know, they didn’t realize at the same time that the Americans were criticizing China for making the…for keeping the exchange rate unduly low and thus giving an advantage to their own exports.

So on the one hand, China is seen as using the exchange rate to increase their exports, increase their world position, etc. But if India did the same thing, people say, oh they did devaluation. You know, I remember some of the politicians at one time saying, that our money should be strong like the Himalayas. I think I have tried to explain this and completely failed. It’s one of my biggest failures in my view.

I’ve tried to explain to many politicians and even journalists, by the way, that it is true that a strong exchange rate is a sign of a strong economy in the sense that if the economy is strong, it’s able to produce imported items competitively and also to produce exportable items competitively, then basically what will happen is it will generate a balance of payment surplus that will get reflected in a stronger rupee.

So when the rupee reflects the strength of the economy, you can judge that yes, the fact that the rupee, a market-determined exchange rate is strengthening. It means the economy is getting stronger.

But when a weak economy tries to pretend that it is strong by keeping the exchange rate strong, in other words, overvalued, it actually weakens the economy. So while people may think that if you want a strong exchange rate, don’t muck up the exchange rate, work on the economy to make it strong and then see if that’s reflected in the exchange rate. It’s my great regret that I’ve not been able to convince anybody of this.

Maybe the odd economists will understand. Even they, I think, don’t translate this into a belief in what should be done in practical terms. You know, I remember I was in Britain when Harold Wilson did the devaluation of the pound, 1967, I think.

You know, even Wilson, who after all did PPE in economics at Oxford, so he would have understood the basic stuff. Even Wilson had to tell the public in a broadcast, a pound in your pocket is not worth less. Okay.

That was a bit dishonest because a devaluation changes the relative price of tradables versus non-tradable. It raises the relative price of tradables. To that extent, the pound in your pocket earns you, buys you less tradable goods.

But even Wilson had to convince the British public that this was actually a good thing. And look at it the other way around. When the Americans were in a conflict, economic conflict with Japan, I think this was around the 80s or so, okay.

The feeling was that the Japanese are exporting too much. And the Americans were using, this was the Plaza Accord, I forget the exact date. It was a convoluted way of getting the Japanese, getting all the central banks to ensure that the Japanese exchange rate appreciates.

And that means, you know, since the dollar was the currency for everybody, it was difficult to actually depreciate the dollar. But the thing to do, they picked the one economy that was strong and made sure that they all collaborated in the G7 to raise the exchange rate of the Yen. And this is exactly what they tried to do vis-a-vis China during the 90s.

When Chinese exports were booming, the Americans would say, well, you know, the Chinese are not running a market exchange rate. They’re having all this success because the Yen is unduly low and they should appreciate the Yen. Now that tells you that keeping an undervalued exchange rate is very often good for the economy. This is a very important East Asian lesson. But again, as I said, it’s a pity that it’s not well understood.

Siddhartha Ahluwalia

And it’s so sad that now, you know, if you see the GDP per capita of Japan, it’s much, much higher than that of India. But their currency is valued like 2x lower as compared to dollar from Indian currency.

Montek Singh Ahluwalia

Yes, yes. But that’s a sign of the…The Yen is reflecting the strength of the Japanese economy, which is steadily going down. Yeah.

Siddhartha Ahluwalia

And it’s surprising to know that nobody in 80s or 90s focused on, rather than putting more import taxes or tariffs, how can we increase the quality of our exports and how can we encourage our businessmen to do more exports?

Montek Singh Ahluwalia

I think now looking back, it’s not just the exchange rate. I think our exports, I mean, India logically would have had a comparative advantage in labor intensive manufactured exports. The following things in our policy were completely wrong, in my view.

Number one, competitive advantage is not just a matter of the productivity at the factory level. It’s also a question of productivity in transport and logistics. So Indian industry suffered from the fact that we had very, very high transport costs.

And those high transport costs were also a function of the fact that we were not open to trade. I mean, the tragedy in the Indian case is that if you go back to pre-BC, to the years BC, before Christ, Roman era, Pliny was one of the famous Romans, made many speeches in the Roman Senate saying that our country is being ruined because goods are coming from India, by which he meant cotton and silk, and of course pepper and all these things, and they’re coming from India and we have to pay back in gold. And Roman gold is going to India. And this is by the way true.

I mean, even today, if you go to a place like Kudumulu in Kerala, which is the old Cranganore, which is the old Muziris, which was the original port where all the kind of ships that went out to Arabia and Europe, etc, used to dock, they’re still finding Roman gold coins in excavations.

Same thing is true on the other side, the ports on the east coast, which were part of the trade. So we were a trading country. And we were not just a trading country. We were a trading country that had an export surplus. Stuff came in. We also believe that we were in those days a relatively strong economy. That’s true. But you know, the reason why these things were happening, in those days, of course, it was all the gold standard.

So there’s no question of your currency going up or down. People were trading based on gold. And we were getting a lot of gold coming in. But Indian trade was free and open, at least in the south. And you know, it looked outward and we happily exported what we could. Many, many, many years later, I think, really during the European colonial period.

Siddhartha Ahluwalia

Starting 1600s.

Montek Singh Ahluwalia

I would, no, I think the restrictions really came once the Europeans became politically powerful. Because basically they were able, once they started producing cloth through mills, they were able, they had a potential advantage on Indian productivity.

And they basically used trade policy to essentially make sure that their cloth got exported here and our cloth didn’t get exported there. So the discriminatory trade policy that was followed.

And I think for some reason, because we bought into the idea that colonial structures exploited trade, we somehow got the wrong idea that trade is bad. I mean, colonial structures created an unfair trading arrangement. We should have said now that we’re independent, we’re ending all that. But we wrongly concluded that if people are trading with you on a level playing field, that’s not bad. But we didn’t come to that conclusion.

Siddhartha Ahluwalia

And it was because of biases against the East India Trading Company that for 50 years.

Montek Singh Ahluwalia

Yeah, I think, but you know, there’s also, there’s also a political angle. And the political angle was the sort of burn foreign cloth protests during independence. And it kind of created a feeling that foreign clothes and foreign items are bad.

Yeah. Well, the correct thing is that they were bad because the British didn’t allow us to modernize our mills until much more recently. Had we competed with them on equal terms, we would not have been importing British cloth.

We would have been exporting cloth much more than China is doing. And I think that that was a tragic mistake on trade policy. Which to some extent is the result of a control oriented regime, and a regime that inherited wartime British controls, and was a little bit too much influenced by the kind of burn your foreign clothes, which was part of our political independence movement.

You know, I don’t think you should blame this to the on the politicians alone. I mean, primary blame has to be on the economists and bureaucrats who manage the system. After all, the many things that Gandhiji did during independence that we are not doing, and we didn’t do later on.

I mean, he would have been against the railways, while we were happily expanding the railways. I think that’s one. Second, we underestimated the extent to which import licensing, rather than tariffs, is especially damaging.

Because, you know, when you have a tariff, it’s very simple. I mean, whatever the tariff is, you pay the tariff and you get out. When you have, if you have a common tariff, if you start having a tariff that, you know, if this is the item you pay this, and if this is, then you have to have a bureaucratic chap has to check what is the import in order to determine the right tariff.

When you have import licensing, exactly the same thing happens. You know, in my book Backstage, I tell a lovely story about what the damage that import licensing does in a world of rapidly changing technology. I tell the story of which Narayana Murthy told me about Infosys in the days when they were still a young company. Okay.

And they wanted to bring in a computer. I forget now whether it was Hewlett-Packard or something. And they needed that computer.

And in the Indian system, we had a system where you weren’t allowed to import computers duty-free. But if you were doing it as an exporter, we realized that no export market can be serviced if the computers are subject to high import tariffs. So you are allowed to bring a duty fee provided you exported three times the value of the import within a certain period.

So these guys applied to the Commerce Ministry that we want to import this item. And we promised to export three times the value. It took a bit of time. And I think he had to go several times to get the license. He got the license.

And in the meantime, this is four five months elapsed. In the meantime, the same company produced a better version of the same computer, which had a different model number. It had more, more memory, more capacity, more everything. So they said, well, okay, let’s get this model rather than the older model and got it.

When the thing arrived in Bangalore, they went there to collect they had the exemption duty-free for this kind of model. And the customs official said, no, I’m afraid this doesn’t work because your duty-free exemption is for this model. And this is a different model. So these chaps said, look here, in computers, every model gets updated every six months. And you know, this is exactly the same computer. It has more power, more memory, more everything.

He said, no, I’m saying he then he subtly kind of hinted that he could let it go if they paid him a bribe. But otherwise, he wasn’t going to let it go. So Narayana Murthy, of course, being a very kind of disciplined, honest, morally correct kind of guy, he said, look, I’m not going to pay any bribe. What do I do? He said, it’s very simple. You go back and get another license, which will actually have the correct license number. But that would also take another three or four months. And meanwhile, his computer would be sitting unused. Okay.

And Narayana Murthy, I think he was told by his people that, listen, the bribe this fellow is asking is very low. But what you’re going to do is you’re going to lose three months more in this process. But he was absolutely insistent. He went through it, took more time, finally got the computer cleared. But he wasted six to seven months.

And he said, you know, in a world of exports, I mean, even every day counts. And it’s not a system that is geared to taking quick decisions and responding to the way the market changes. If somebody else can do it and you can’t, you’re not going to get the business. I think these are examples.

It’s not just the exchange rate. The exchange rate is a substitute for much cleaner methods of managing the balance of payments. Sorry, it is a clean method of managing the balance of payments. The alternatives are all kinds of import restrictions. Unfortunately, historically, we have always favored the latter. I think the bureaucracy loves it because you have to go to them.

If they are not corrupt, they still enjoy the fact that you have to come to them. And there’s always this application of mind. And in the old days, somebody had to decide, is this really necessary? That was called the essentiality condition. And the other one was, is it domestically available? That becomes a kind of qualitative judgment.

I mean, the guy concerned decides whether it’s necessary. He also decides whether what is available domestically is the right quality. And this can be absolutely disastrous.

Because let me give you a simple example. If you’re trying to get an instrument which measures, I don’t know, the accuracy of something or the other, there are all kinds of alternatives which are either more accurate or more convenient or, in practice, more easy. You cannot…You have to leave this choice to the guy who’s going to make the decision.

And in three different companies, in requiring the same instrument, one instrument may be judged more suited by one person, another may be judged more suited by another person, and a third may be judged more suited by a third person. The difference is they become responsible for delivering because they chose. If, on the other hand, you make this a government choice, he has a perfect excuse. Sir, what can I do? I said this, they allowed this, and you imported this, and this doesn’t work. And it’s an awful arrangement.

Siddhartha Ahluwalia

One thing that I want to ask you, which I always wanted to ask, what are the things that we could have done in the past? Like, 91 was one incident, right? And possibly my dream is to make a movie one day on what happened during the 91.

Montek Singh Ahluwalia

Yeah, you should make a movie. I mean, I’ve written a book, so make a movie out of that.

Siddhartha Ahluwalia

But the thing is, what could we have done in the past, and which we can do also in the future, to have made India $10 trillion economy faster, right? We are sitting at $3.7 trillion.

Montek Singh Ahluwalia

I mean, first, this is all hypothetical. But I think there are two or three things that we could have done. Number one, more politicians must come clean, that something is a good policy, and persuade people that their opposition to it is misconceived.

Take a simple thing like public sector. I’m of the view that with the exception of very, very small areas, we should actually privatize the public sector, okay? And I say this whenever I get a chance. But politicians resist saying that. For a while, they did. I mean, Yashwant Sinha, who was the finance minister of the BJP, he actually said that, you know, except for a very few enterprises in certain sectors, we really don’t need public sector, okay?

But within the BJP, although the BJP traditionally viewed the public sector as a Nehruvian fixation, within the BJP, once they realized that if they’re in government, the public sector will report to them, they lost that conviction. I think it’s still relevant today. You will find all kinds of people telling you from all parties, why you need the public sector.

For example, many people think that we need the public sector in order to produce either medicines or vaccines. It’s completely untrue. Because on vaccines, the best job has been done by the Serum Institute of India. It’s not a public sector company. Public sector pharmaceutical companies have been a disaster. Now, people are trying to resuscitate them. I don’t know why. So you..My favorite example on this is hotels. There is absolutely no reason on earth why you should have hotels in the public sector.

I mean, if you really press people, they’ll tell you that the reason hotels in the public sector very often survive, and they have survived through several governments, is that those in power, if they have their wedding receptions in these hotels, will basically be charged for fewer guests than they actually invite. Now, you know, that seems to me no kind of reason for having hotels in the public sector.

And it’s irrelevant to say that a particular hotel has done a good job. Because today, I mean, we’ve had, when I was in government, there was a kind of tendency to say that if we have a state guest, we put them up in the Ashok Hotel, which was a public sector hotel. But you know, in due course, we found that many people didn’t want to stay in the Ashok Hotel. They preferred to stay in the private sector hotel. So why do we have? Why do we have…?

And you know, Arun Shourie, who was with me in college, and also later on in the World Bank, he had the gumption to say, we must privatize these hotels. And he’s the one who did it. But then there were cases against him, bogus cases in my view, which none of them have come to anything. But as a result, the privatization of hotels is more or less stopped.

Siddhartha Ahluwalia

And what are the other things, you know, privatization of public sector entities is one.

Montek Singh Ahluwalia

Well, one was privatized. I mean, I think more generally, you know, we need to have a broader way of discussing what is needed and not rely on just internal committees. I mean, take for example, the dream of Viksit Bharat, which is a good, in my view, it is giving us a 25 year horizon. Okay. And you should have these horizons. And I think it’s not unreasonable to say, okay, by 25 years from now, we should be what is now called a developed country.

Now, what I would do is not just to have one committee, not a bad idea to have three or four committees of different types of people making alternative recommendations. The idea that this you will get good ideas by just getting it done internally is I think mistaken. Because you know, the staff that you have internally is has been doing a certain kind of work.

No government official is trained to do to anticipate what will be needed 25 years from now. I don’t think it’s good enough to do it internally, and also get consultant firms to advise. Because those firms, their advice when it comes hired by a particular ministry will be filtered by the prejudices of the ministry.

Siddhartha Ahluwalia

Because they get paid by that.

Montek Singh Ahluwalia

Yeah, I don’t blame them. Look, consultants are trained to tell the management what it wants to hear. Very rarely does a consultant make a recommendation to a top management, which actually would make the top management realize that you know what its prejudices were wrong. So they’re trained, they’ll put the best face on it. Sometimes you get a consultant who actually is just brought in from the outside and does it spontaneously.

I remember when Vajpayee Ji was Prime Minister, McKinsey produced some plan for, they said by India must grow at 14% per year or something. This seven, eight which you’re talking about is neither here or there. So my friend N.K. Singh was then Special Secretary to the Prime Minister and I was Member Planning Commission.

So there was a presentation made by McKinsey. And the usual McKinsey kind of stuff, okay, if you do this, this, this, this, this, then you’ll get 14%. And you know, the Prime Minister didn’t say very much, but I distinctly, I was sitting kind of a little bit behind him on one side, so I could hear what he said.

Vajpayee Ji looked at me, he said, he said the right thing. He said, but ye sab kaise hoga? Now, I think what you need is, first of all commission, maybe two or three different groups, some which focus on the R&D side, some which focus on infrastructure, some which focus on manufacturing, modern manufacturing, traditional manufacturing, with experts who worked in these areas and people in the industry who are working on those areas, most of all in finance, for example.

I mean, look, we have, our financial market has evolved, which is good. But you know, it is by no means today regarded as the, if you like, a model financial market for a middle-income country. We’re only just putting in all the instruments that are needed.

I think on the whole financial markets, in order to write a good report for the 27, for 2047, you need to know what the world financial system is going to be like in 2047. I am not aware of anybody in the country who’s an expert on that. So, and yet we have Indians dominating the financial system in the US, in the UK, in Europe.

Let’s set up a committee with some of these top people. So, I personally think that we need, rather than set a target and believe that the moment you set a target you know how to get it, it’s much better to set a target and trigger off a lot of independent thinking and then get your ministries to criticize that.

See, remember people are very impressed by Kennedy when he set the target, we must have a… After Sputnik went up, the Americans suddenly felt that they are being left behind and Kennedy said we must have a man on the moon in 10 years and to their credit they did it.

But you know they did it, it was an area where there was no wide experience and he just told NASA that look you got to do it. But I think if he had said we want to have the best financial system in the world and then told the Federal Reserve it would have been a disaster. So you know in certain areas you are in charge of the most forward-looking, most competent organization so you have to trust them.

But I mean look at the way the atom bomb was produced, it was not produced by one guy. I mean they collected a team and they were not all government people from different universities put them together. I think we need to do much more of that as we move into the modern age.

By the way with artificial intelligence, this whole issue of how do you regulate artificial intelligence, how do you regulate the digital economy. I think we need much more lateral input and certainly the government must take the final view and government chaps should be advising the Prime Minister or the other ministers that this is what the experts say and this is what we think, now you decide. But the view that we know and we will do it internally, I think we need to do less of that.

There are a lot of good people in the government, let me be clear. After all a lot of this but you know while we say a lot of this was done internally we drew from a huge amount of research from outside. I said many occasions that what I said in backstage what I said in the M document draws upon research on trade policy in which other Indians have contributed hugely.

Jagdish Bhagwati, Padma Desai, TN Srinivasan and of course distinguished outsiders like IMD Little, Morris Scott, Anne Krueger who worked in India also. So we were constantly watching what’s going on in the world on these areas and trying to do the best we can to put it across.

Siddhartha Ahluwalia

So my last part that I want to touch upon is where do you think practically India will be in the next 10 years?

Montek Singh Ahluwalia

You know, I…Let me put it this way, I think we are in a soft spot at the moment because I think over the 30-year period the country has got used to the idea that things must change, there must be reforms, there must be progress etc. I personally think that it won’t be very difficult for India to grow at about six or six plus percent but you know if you like the the explosion of expectations is such that six plus percent will not satisfy the expectations that have been raised. Remember we have widely expanded education.

Now it’s all very well to say that a lot of the people who have BA degrees are not employable and you blame the universities but people also say that all these chaps are very easily given the last mile training, you know and therefore, you know, you have to do something.

There’s no question that on the human capital side we are much better placed than we were 20 years ago but it’s not as if we are bursting at the seams with people who can be brought in straight away into global capability centers. So I think we need to aim over the next 10 years at something like seven and a half percent which I don’t think is currently the underlying trend growth rate.

So we need to decide how are we going to handle this problem. One of the things we absolutely have to do is be clear about is that do we believe that this will require a dynamic private sector or do we believe that we can do all this through public investment. I sometimes hear people nowadays saying that if the private sector is not investing then what’s the harm if the public sector does it. This would be an unbelievable mistake.

But you know if you want a dynamic private sector you need to encourage things like startups, you need to do a huge amount on ease of doing business, you need to do a huge amount on minimum governance, sorry minimum government, maximum governance which I think is a good slogan but it hasn’t actually been implemented.

You know what’s his name Manish Sabharwal was telling me because he’d done some work and he said that you know even in the central government there are I don’t know 15,000 provisions in various laws which attract a criminal penalty and they had recommended that we should drastically cut them down.

But finally they did recommend to the central government that at least 5,000 need not be a criminal penalty and so a lot of work was done but in the end only 100 were removed. So you know this is typically what happens that you give a signal at the top but the bureaucracy doesn’t necessarily care. I’d give the same recommendation to Amarinder Singh in Punjab that you have…your state government has far too many penalties that are criminal and these just become a source of harassment for the private sector.

I mean he said to me that look I know some of the recommendations you’re going to make you know like free power for farmers and all politically I can’t do it. I said okay I recognize that you handle that problem separately but there’s no political problem in this and he… I said if you manage to do 80 percent of what we are recommending in this area I think you will make a big difference.

Well of course he was moved out so he didn’t stay for that long but subsequent governments haven’t implemented that and I personally feel that too much focus today is on what the central government should do.

The truth of the matter is that on all these things ease of doing business, harassment, dealing with people they’re all in the realm of state governments and I think we I would hope that 10 years from now we are able to show conclusively that out of 30 states or whatever it is that we have now at least 15 have made a dramatic change in these areas.

If you do that you will also find that these are the states that have grown because these are the states that will attract investment and the solution should not be to give money to the states that have not grown. The solution should be to benchmark their policies against the policies of the successful states and tell them why don’t you do this.

I think we need that but it can only happen if it becomes part of state-level politics local understanding on part of the voters. And the big tension will be between that and trying to get local support through freebies which is actually very popular.

Now if you go down that route I don’t think we should not expect even six and a half percent growth. But if we don’t go down that route and a lot of that depends on what happens in state government not just the center then I think you know we should be able to do seven whatever it is. That may not get us to developed country status by 2047.

I mean you know that requires about eight and a half percent real growth but you know whether we do it in 2047 or 2053 the important thing is are we making the structural changes needed between now and then so that people will say you know it’s working and we can then speed it up.

Siddhartha Ahluwalia

Because India has advantage which is in narrative right now it’s not happening in real that you know. China is almost shunned by the global investment fraternity right now because of various reasons. I’ll not go into in this podcast. But the next alternative that people are thinking about is India. And India is a promising land and has been a promising land for the last 20 years but people people have to see it in action.

Montek Singh Ahluwalia

No I’m you know I don’t think we should. I have no idea how the global geopolitical tension will evolve. It’s not difficult to imagine that if there’s a certain if there are certain changes in Chinese policy they may be they may lead to certain changes in Western policy that would create a little bit of a closure on this point. You’re right in my right now the Chinese do not seem to be indicating any change and therefore we have an opportunity maybe for the next five maybe ten years.

If we respond in the right direction people will respond towards India very positively. But sometimes I hear that people will come to India because there’s nowhere else to go. This is wrong because you know after all of East Asia is a highly integrated economy with zero tariffs.

And that’s a very large potentially quite a large market so actually we are competing with Southeast Asia. They have their own problems but all told people judge that they’re doing a better job than we are. Although people also realize that if we can get our act together then there are things that we can offer which they can’t. But will we get our act together that’s what you have to advise all your colleagues because this is what younger people have to do.

Siddhartha Ahluwalia

Yeah. Like India could, can at least aim towards becoming free market like Singapore. With you know the ease of going or coming in of money and going out of money. And Singapore has been able to do it.

Montek Singh Ahluwalia

Let me…I want to slightly differ with you on that. Singapore has done a fantastic job for the circumstances they had. If you were that small and you were you were living in a continent where everybody was closed it’s a no-brainer that you should be open and simply being an anthropo would give you a fantastic advantage.

And I mean in order to continue that you also need to invest hugely in human capital, which Lee Kuan Yew did. You also have to invest hugely in improving the quality of cities, which Lee Kuan Yew did. You know the notion that Singapore is an example of free market, this is actually a mistake.

The Singaporean government is far more intrusive than other governments. They can do it because there’s a small… It’s a city-state. And they can actually they know more about what every individual is doing or saying than any other government can. They’re not an example of a free market. They are an example of a free financial system.

That’s absolutely true. I’m not sure that we need to emulate them. In that respect, I think the approach of having a gift city maybe we can have a couple more because it shouldn’t just be concentrated in one area. Having a couple more gift cities so that that part of the economy that needs to interact more freely is able to do so.

Then remember India is still, I mean half of India is at a level of development which is not very different from what the country was let’s say on average in 1991. The other half has moved forward. When I say half, you might say 40 percent whatever, that’s the one. So I think that the Indian state has to define the role for itself. And it’s not a zero role. In certain areas we need to expand the state.

And for example we don’t have enough judges. We don’t have enough policemen. We don’t have enough nurses. We don’t have enough doctors in rural areas. And we don’t have enough sanitary workers etc etc. We have too many clerks. So really government has to manage its resources so that it creates the right kind of jobs and either restricts or closes some of the not so necessary jobs.

It also needs to create a system where the incentive to work is there. If a teacher is hired, I mean in many parts of the country today when a teacher is hired the teacher is being paid five times the market rate. So all that the teacher does it hires somebody else to do his work and sit at home. Because basically the local community doesn’t have control over the teacher to the extent that it should.

Massive decentralization is needed. This is not a central government issue this is a state government. All our states complain that they’re not getting enough decentralization between the center and the states, which is true. But none of them pay any attention to the fact that as far as the rest of the thing is concerned they have to decentralize locally. I mean within the state.

So these are the things, now you know, and of course underneath all this there’s climate change which raises all these problems where the resource is going to come from who’s going to manage them blah blah blah.

I personally think that long-term problems are best condensed into workable 10-year problems. So yes we’ll aim somewhere. Many things are not disputable. Yes, so we endorse all that. In the next 10 years what are we going to do?

And I think if the government were to make up its mind that look it has been doing all these things and in the next 10 years is going to shrink its focus to half of these things that would be a huge problem. These half while shrunk in numbers will involve a widening of the role of the state and that’s correct. We should do that. So I think we need…the debate needs to shift on the to this. This cannot in my view be done purely within the government. This needs to bring in business, think tanks, NGOs, civil society, political party.

Siddhartha Ahluwalia

Yeah. So what I understand from you is what government did in 1991 to open up the central economy, each state needs to build up their own committees or their own bodies to literally liberalize the state.

Montek Singh Ahluwalia

Absolutely. I think there’s no question in my mind that we need to do that. In fact by focusing too much on the center, we… and and this happened during the UPA. All the NGO types, on the one hand they were very much in favor of decentralizing. But on the other hand they wanted the central government to give directions.

None of them were willing to say leave it to the states. They said this is what the states should do and you should have guidelines which tell the states to do it. And the states would say look this is not right. We are responsible people. We are going back to our own population to get voted. So you let us decide all this and you have a much more limited role.

I think if we can get a better understanding, a political understanding, that one the state has to do more but the state must shrink the area in which it intervenes, that it was make life a lot easier for the private sector. And that very often requires getting rid of innumerable useless regulations. I think we make a lot of progress.

Siddhartha Ahluwalia

Well, thank you so much sir I think this debate that we have sparked and draws inspiration from what you did and what you know the entire team did in 1991 is very valuable to make the path for the next 10 years of what India could be.

Montek Singh Ahluwalia

Well, thank you I think it’s important and thank you for inviting me to speak on your forum.

Siddhartha Ahluwalia

Thank you so much sir. I’m so glad that we could make it happen. And thank you so much you know that this debate could happen.

Montek Singh Ahluwalia

Thanks.