Transcript: From Crisis To Reform: Montek Singh Ahluwalia On India’s 1991 Redux

Growth in the US also doesn’t seem to be that much affected. But most people say that the full effects of the tariff have not yet come in. So it is going to take about three or four months before the US decides whether what Trump is doing is good for them. I personally think it’s not, but I think we have to look at it in the following way.

There’s no doubt that what the US is doing is acting like a bully. Now they’re a big boy, the biggest one in the block, so they can afford it. But what should we do? The normal argument would be that when somebody acts like a bully, everybody else says, “Look, we’re not going to accept that.” Unfortunately, everybody is not doing this. All the big boys – EU, UK, Japan, you name it – they have all effectively kowtowed to the US position.

This leaves us in a situation where how do we react? I don’t think that we should be necessarily provoking conflicts. We should be doing exactly what we are doing, which is trying to negotiate with the US. How good a deal can we get? And when you say how good a deal, it’s quite absurd to be having high tariffs, even 25% when the US wants much lower tariffs and faces much lower tariffs for themselves. Our problem is at the moment 25 could become 50. So hopefully our negotiators are trying to get as good a deal as possible with the US. That’s the only thing to do and wish them luck.

A New Trade Strategy: Looking Beyond the US

But I think we need to do more than that. I think our trade strategy, we need to address the question. A lot of people are saying that the old idea of being open is wrong, that you should raise protectionist barriers. The Chinese have always done it, the Americans are doing it, et cetera. I think that’s wrong.

I think we should be linking up with a non-US part of the world and saying, “Look, let’s integrate and open up with each other.” So in that sense, I think the UK FTA is a very good example. I think we should conclude an FTA with EU as quickly as possible and I think we should also look eastward.

Now I can understand that there’s a political difficulty in doing RCEP because our industry opposed, I’m told. I don’t know, but I’m told that industry was very opposed to any free trade agreement which had China in it because they feel China is difficult to compete with. But we could join the Comprehensive Progressive Trade Partnership, the CPTPP, which includes Japan, which includes Korea, which includes Australia, which includes other countries. Now this would be a very major signal to those who say that India is wedded to closed markets. If you want to give a signal that we are not, in my view we should apply to join the CPTPP.

RAJDEEP SARDESAI: So we diversify our…

MONTEK SINGH AHLUWALIA: Hang on. CPTPP is not just about tariffs. Far too much of our intellectual thinking in the country is based on the assumption that open trade means lowering tariffs, but it also means harmonizing behind-the-border standards, which traditionally we have been very reluctant to do.

Frankly, in the way the world is evolving, I think we should face the fact if other people are agreeing, if other people are doing an alignment of behind-the-border standards, then India should be willing to do it. Of course you negotiate, you determine the time period, but that would give a clear signal that look, the rest of the world wants an open system, the US doesn’t. We would welcome the US joining when it’s ready, but we don’t just sit around building little walls around ourselves. And that is a big challenge for us to accept.

Moving Away from Protectionism

RAJDEEP SARDESAI: But in that sense there is a parallel between 1991 because some of our traditional policies which were based around protectionism of the so-called Bombay Club, which was resisting any kind of opening up of the economy. This provides us an opportunity maybe for example, to reduce some of the non-tariff barriers. It gives us an opportunity to look at trade well beyond the United States, which actually accounts for only 18% of our export basket.

I’m just asking in that sense, is it time for the government of India – they’ve shown signs of it – to move away from the protectionism that marked the kind of Swadeshi approach in the first 7, 8, 10 years of the Modi government to a far more opening up of the Indian economy now?

MONTEK SINGH AHLUWALIA: Yes, I completely agree with that. Look, when you say we did reverse our reduction of tariffs earlier, but I think the Modi government also said that we want to become part of global value chains. To that extent the geopolitical tension between the US and China creates this famous “China plus one” alternative. If we want to benefit from that, we need to integrate with global value chains, not just sit there and produce everything ourselves.

Now, in order to integrate with global value chains, we have to have a policy towards technology and investment capital movements, a whole range of things. I think I would put it this way. What President Trump has done is by unwinding or dismantling practically the established rules of international trade, he’s given us an opportunity to think, what is the rules of international trade that we want?

Are we just happy with multipolarity and everybody builds protectionist walls around themselves, or do we want to create an integrated world with everybody other than the US and then let the US join? There’s no question that the US should be invited to join. Right now they don’t seem to be in a mood. What I worry is that the protectionism in the US will encourage many people in India to say that’s the way we should go. And I think that would be a great mistake.

The China Question: Competitor or Partner?

RAJDEEP SARDESAI: You mentioned briefly China, you spoke about “China plus one” and India almost becoming a competitor in a way to China as part of global supply chain. At the same time, there’s a concern in this country of our trade deficit that we have with the Chinese. Would you believe China is to be seen as a competitor? Or could China be a potential trading partner as part of a larger regional block that you just spoke about, like RCEP?

MONTEK SINGH AHLUWALIA: Well, look, longer term, China is the second largest economy in the world and it would be in China’s interest also to integrate with the world. So from that point of view, China… everybody’s a competitor. So the idea that we’ll only have trade deals with people who are not competitors is just wrong. Really successful trade deals are between people who are competing, but you’re competing at different levels of value chain, et cetera.

The problem with China is with any country, all countries have security concerns and they have to take precedence. Now, it’s no secret that we are not on the best terms with China in this respect. How things will evolve in future, one can’t judge. Therefore having security concerns that in this area we don’t want imports from China because it compromises national security, not economic security. That’s understandable.

But otherwise, quite frankly, the fact that we have a deficit with China, we should not fall into the Trumpian mistake of trying to have balanced trade with every country as long as our overall trade deficit or balance of payments deficit is not a problem. I don’t think we should look at individual deficit. Trump’s biggest fundamental error is the belief that “look at every country and devise a trade policy for each country which responds to whether you have a deficit with that country.” This will get you zero marks in economics 101 or as Paul Krugman has said, and we should really avoid that.

Overcoming Bureaucratic Resistance to Reform

RAJDEEP SARDESAI: You know, the reason I’m pushing you, Dr. Ahluwalia, on how we should respond to what Donald Trump is doing is because protectionism for a long time was supported by the bureaucratic political elite in this country. I have your book with me backstage, which is your memoir. And you mention in that at numerous times, even in 1991, the roadblocks that you faced to actually push through reform, some of which came even from the planning commission of which you later became deputy chairperson.

There was a general sense that “Jo Chalrai vo Chalne do” – that’s been part of the attitude to bring in the kind of major reform as opposed to incremental reform. A lot of our problem seems to be over the last decade and more we’ve resorted to incremental reform rather than path breaking reform that will entirely disrupt the system. How do you overcome that? How do you overcome the bureaucratic hurdles that remain when for example, you want to remove non-tariff barriers and there are companies which over the years have benefited from keeping retaining those barriers?

MONTEK SINGH AHLUWALIA: Well, thank you for mentioning my memoir because it brings out these things very clearly. Let me remind you that in 1991 the Planning Commission was not in favor of the reforms. I had written a paper in the PMO which got discussed in the committee of secretaries. And the one group that said this should not have been done was the Planning Commission. They didn’t oppose it in substance. They said we are about to prepare an approach to the something plan. And why is the PMO writing papers like this?

I think the real lesson is at that time, I wrote this paper for V.P. Singh. It was originally meant to be done for Rajiv Gandhi, but of course he didn’t come back. So that was a pity. We had sort of watching for the election and what V.P. Singh said was, “Look, let’s send this to the committee of secretaries for discussion.” Then the paper leaked, huge discussion in the press. I believe that open discussion of alternative views helped people in 1991 to take a position.

I think we need that always, particularly in a world in which the problem is becoming more complex and multidimensional. As I said, technology this, that and the other. And I think that the idea that the bureaucracy is obstructive, I don’t buy. If the political leadership is clear about wanting a frank discussion and can organize and see the consensus evolve, I don’t think the bureaucracy would be opposing it.

The Deregulation Commission Delay

RAJDEEP SARDESAI: Let me give you an example, Dr. Ahluwalia. The last budget spoke of a deregulation commission. Now, we are now eight months from or seven months after the budget. We still haven’t – the deregulatory commission has not been formed. Now, that leads me to ask the question, is reform by its very nature in this country going to be incremental, whether Donald Trump forces us to disrupt the existing order or not?

MONTEK SINGH AHLUWALIA: I greatly welcomed the announcement of a commission because it was different from “we are going to deregulate.” If you go back to 1991, one of the very interesting things that Dr. Manmohan Singh announced in his budget speech – he didn’t announce the details of either the financial sector reforms or the tax reforms, but what he said is, “I’m setting up a committee under Raja Chelliah to do the tax reforms, under M. Narasimham to do the financial sector reforms and to report back by December.” Those committees were notified within two weeks.

Now, yes, they’ve delayed it, but I really hope that they actually appoint a commission. I think I’ve seen some conflicting information. Sometimes one hears in the newspapers that it’s being done by a group of secretaries. That would be a mistake, because a group of secretaries who’ve presided over a system which they haven’t changed is extremely unlikely just because they sit together to come up with radical change.

What you need is somebody outside, including some retired secretaries, can be put in. Let them produce the thing in public and let it be discussed so people judge, is this the real reform you need or not? And that’s very important in my view.

RAJDEEP SARDESAI: But it again comes back to it that when we want to reform, even in a crisis moment, we do it by stealth. Reform in this country has taken by in ’91.

MONTEK SINGH AHLUWALIA: It wasn’t by stealth. These committees submitted a report. The report was made public. It could be discussed. We could do the same thing now. I don’t know whether the government intends to appoint a commission or just rely on internal processing. But if they intend to appoint a commission, the first thing that will happen, depending on who’s appointed on the commission, they will carry credibility, they will be able to invite industrialists to come and talk to them.

Industrialists will be freer in discussing with the commission what they want than they would be within the government. And then they come up with a report. Then we look at what the report says.

Agriculture and Trade Negotiations

RAJDEEP SARDESAI: Dr. Ahluwalia, the Prime Minister in particular has drawn a red line. He said that “I will do whatever it takes to protect the interests of Indian farmers.” Now, one of the big sticking points for a full blown trade deal with the United States could well be in areas of agriculture and dairying. Do you agree that given the state of our economy, given the fact that the farmers constitute a major constituency in this country, we will always need an element of protectionism for our agriculture and dairying sector?

MONTEK SINGH AHLUWALIA: I think, look, in every country, agriculture and farmers are politically very special. So I think the idea, if you’re going to do reforms, I think there are a lot of reforms needed in agriculture. But I think you should not be doing reforms in agriculture, seeing to be pushed by others. If there are reforms, develop a consensus within.

It would not surprise me at all if I hope our negotiators are telling our other side that, “Look, agriculture is a sensitive subject. Nothing is ever written in stone. But this is not something that should be done as a result of trade negotiation.” Now, there are little things you can do because we do allow some agricultural imports. But the basic agricultural issues, including I think, things like, let’s say, allowing GM food. At the moment we’re not allowing Indian farmers to benefit from GM technology because we haven’t made up our mind. So how do you concede allowing import of GM foods from outside if you’re not allowing it to be done inside?

RAJDEEP SARDESAI: But I’ve heard many economic commentators say that agricultural reform is necessary. And yet when the Prime Minister pushed ahead a few years ago with farm laws, he met with a backlash that eventually forced him to push back on those same reforms. So is part of the challenge even now to build that political consensus first and then go ahead with the reform? Even in 1991, you didn’t have a political consensus when you went ahead with the reforms. So what comes first – reforms and then political consensus? Or do you build a political consensus and then go ahead with your reform?

MONTEK SINGH AHLUWALIA: No, no, it’s quite clear that nothing ever gets done simply in abstraction. So where there are political problems, you need to work in advance towards solving those problems. I think we’ve left too many things in agriculture somehow outside discussion. And I think we need to have an internal discussion on that. I don’t somehow think that these are areas which are best pushed through trade negotiations. In the trade area, there are other things we can negotiate and that’s where we should concentrate on.

The Path from 6% to 8.5% Growth

RAJDEEP SARDESAI: We started off or you started off by saying you believe that the real crisis, if I may call it that, and perhaps this links to our Viksit Bharat theme is to see how can we grow from 6% to 8.5%. Where would you start if you were advising Prime Minister Modi or the government of India today? Where would you start if you wanted to ensure that over the next few years we push from 6 to 8.5%?

MONTEK SINGH AHLUWALIA: Well, I would certainly say that what we are doing already in infrastructure needs to be done much faster and better and it’s the right thing to do. It’s closing a lot of gaps. That’s good. I think there’s a lot of procedural things which affect logistics. Our procedures are sometimes quite absurd and I don’t know how – somebody needs to see whether in addition to infrastructure improvements the procedures can be simplified. That’s an easy one to do.

What I’ve said on trade, that is imagining the world we are going to face in the next four or five years and positioning ourselves in a way in which we can actually contribute to creating a more open, non-US centered – with the US welcomed when it wants to – that should have very high priority.

I also feel that there are certain sectors where the ease of doing business, for example, which is being talked about – Manish Sabarwal I think had done a very good report where he pointed out that there were 16,000 compliances required, half by the center and half by the states which require, which involved criminal offense penalties rather than just financial penalty.

Now frankly I would say that if the center wanted to give a lead it could say, “Well look out of this report, these are the thousand compliances that are criminal. We’ve looked at it and we cut them down by 90%.” That doesn’t mean, by the way, that you don’t have a penalty. It’s a financial penalty, not a criminal penalty and invite the states to do the same thing. If the center were to show that it is serious, there would be a momentum built up in the state. Not just in the BJP states, but clearly in the BJP states but in the non-BJP states.

Half the things that are needed for ease of doing business can be done by the states and we should do that. I think the reform of the – we’ve been talking about it for the last three or four years – that the GST rate structure. The GST was a great innovation, good that it came in, but the rate structure is simply not conducive to maximum efficiency. And what is more, everybody seems to have agreed. Why isn’t it getting done? Maybe we need to take, maybe set up another committee or commission or something to put something down which can then be publicly discussed.

Minority vs Majority Governments and Reform

RAJDEEP SARDESAI: You know what you are saying? Manish Sabarwal uses the word “regulatory cholesterol.” You’ve got to get that regulatory cholesterol out of the system. It was interesting. In 1991 you had a minority government which actually brought in some of these landmark reforms. Since then you’ve had a government certainly in the last 10 years, which has been, except for the last few years, a majority government. Is it easier to sometimes do some of the more dramatic reforms in a minority government or a coalition government because you almost need those reforms to brand or pitch yourself distinctively to previous governments? And a stable political government, ironically, can take its own sweet time because it’s politically so strong.

MONTEK SINGH AHLUWALIA: There’s some truth that if you – I’m not suggesting that we shouldn’t have majority governments, but it’s certainly true that if you have a minority government and if the top people in the government are convinced that they have to do reforms, they are much more moved to build a consensus. And there are ways of doing it.

Look, when the reforms were done, the left was totally opposed to the reforms, so were parts of the right. And what Dr. Manmohan Singh did was he got about four or five people to write a piece defending the proposed reforms and why they’re a good thing. So I think we need a more active debate. The idea that reforms are going to come because in a budget speech, the finance minister is going to announce reforms is not, I think, the way it should be done. I think we need to create a reasonable debate so people are more aware. And of course that means that those who oppose them will oppose them.

The other point I want to mention here, which is very important – there is competition now among the states and I think in many areas, including by the way, farm laws, states might well want to do things which others don’t want to do. If you make this into a national affair, then you make it into a national crisis. If you make it an individual state affair, you may find that some states are able to get things done which others are not able to do. Now if those things work well then there will be a natural tendency to emulate whoever’s succeeding.

Decentralization and State Autonomy

RAJDEEP SARDESAI: In a sense you are saying move away from over centralization where Delhi knows best and start giving far more autonomy to state governments to take some of the key decisions they need to.

MONTEK SINGH AHLUWALIA: Absolutely. Our states are at very different levels of development. The ratio of per capita GDP between the say the southern states, the higher and Gujarat and so on and say the eastern states, 5 to 1. So in any country if you had a 5 to 1 difference in per capita GDP, the priorities would be quite different in one compared to the other. And the only way this will be allowed to surface is if the states have a much bigger say in defining their own strategy.

Modi Government’s Achievements and Challenges

RAJDEEP SARDESAI: As we enter the last part, you’ve had this vantage look at the Indian economy over the last three and a half decades and more. Three things that the Narendra Modi government has done that you would applaud and three things where you think they’ve either got wrong or they need to do now.

MONTEK SINGH AHLUWALIA: Well, applause.

RAJDEEP SARDESAI: Spirit of bipartisanship.

MONTEK SINGH AHLUWALIA: Yeah, I’m giving a bipartisan view. Look, by continuing the Aadhaar initiative which actually began in the previous government which the BJP had opposed and at one time it wasn’t clear, but the present prime minister quite early on said “no Aadhaar must continue” and then this whole financial build up, DBT, etc. I think it was a very good thing and over this period it is an area where we are recognized to have done well.

RAJDEEP SARDESAI: That’s point number one.

GST Implementation and Simplification Needs

MONTEK SINGH AHLUWALIA: Point number two is getting the GST through, which by the way he himself opposed as state Chief Minister when the previous government was trying. But to his credit he got it done when he was Prime Minister.

I think the problem with that is that the most important thing about the GST is simplification and that has not been done. Let me give a very simple example – not just the number of rates, why on earth is it necessary if I’m operating in four different states to be registered in four different states as a taxpayer? I mean surely in a world where we are talking about it, that should not be happening at all. So we need to get that done, simplified, cleared up.

I think that introducing the IBC, the bankruptcy code was a very good idea and it’s still a work in progress because it gets involved in courts, but it’s sending a signal that look, you can’t just keep borrowing from the banks and never repaying. It hasn’t yet become smooth enough. But it’s a good thing.

Areas of Concern

Things that I don’t think were right. Raising Customs duties in 2017 was a mistake. We can correct it now by taking a totally different approach to trade policy. But this will require persuading people in industry that it’s in our interest to open up because there are people saying that no, we should go the protectionist route. So that I think is a very big problem.

I think finally the issue of how much flexibility does the center give to the states. This will become more and more of a problem. And my guess is that the more central government assistance to states is tailored to conditions designed by the states but subject to some government approval would be better than detailed designing by the center, which the states then have to implement.

Railway Privatization and Labor Reforms

RAJDEEP SARDESAI: That’s an interesting note on which to end this conversation because our next precise discussion is on center state relation. By the way, before we started the conversation, Dr. Ahluwalia had an interesting point which you didn’t mention. Why aren’t our railway platforms in the private sector? Am I correct that you would like – you don’t want to see if airports can be privatized. Why wouldn’t railway platforms? But you’d get a lot of backlash then from railway unions as you get when it comes to labor reform.

MONTEK SINGH AHLUWALIA: You know, we had a lot of backlash from the public sector bank unions when we got computerization done in 1993. So fact is unions will do what unions have to do. But you have to persuade them, build a consensus and in due course there’s a deal that can be done.

Closing Remarks

RAJDEEP SARDESAI: On that positive note, ladies and gentlemen, I think we’ve listened to someone who’s had the wisdom of being in government for many years and being an intrinsic part of the reform process. Dr. Ahluwalia, always a pleasure talking to you. Thank you very much.

MONTEK SINGH AHLUWALIA: Thank you very much, and thank you so much, Rajdeep.

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