Transcript: How Will Modi Govt Fix India’s Problems? – ft. Sanjeev Sanyal on IBP #EP13

So sir, what exactly have we done so differently in the past 10 years than that we’ve taken this big leap to become the fifth largest economy?

SANJEEV SANYAL: So first of all we need to understand these numbers and let me put them in context. So when we began liberalizing our economy, I began become serious about economic policymaking. In 1991 we were only a 270 billion dollar economy. So we were that small.

It then took us 16, 17 years till 2007-08 to become a 1 trillion dollar economy. Okay, that long how it took from there it took us seven years, okay to 2014-15 to become a two trillion dollar economy.

Now from there it should have been faster. But then, we took about another seven years, odd, partly because of COVID to become a three trillion dollar economy which happened in 2021-22. Then we added another trillion dollars in just three years. So we were three trillion dollar economy in 2021-22. This year, in the year 2024-25 will be close to four trillion dollars. So another trillion dollars being added in three years. A little over three years.

The Power of Compounding

So the reason I’m making this point to you is this. People forget the power of compounding. Okay? China, everybody says, oh my God, this is now a 19 trillion dollar economy, impossibly big. Do remember that they got here through compounding and people learned compound interest rates in schools, but they forget how powerful it is. In the first few years it doesn’t seem to matter, and then a few years later it just blows up. So this is the important thing.

So this power of compounding, what we are benefiting from, this number of course is a nominal number, not a real number. But our economy last year grew by 8.2%. It is growing at double digits in nominal dollar terms. And this year again it will go by 7% in real terms in again probably over 10% in nominal dollar terms.

The point I’m making is this 10 percentage point compounding is massively powerful. So we are now at 4 trillion dollars. It takes us a little over two years. Somewhere in 2007 or so we will become a 5 trillion dollar economy. Along the way we will go past Japan, which we should do this year or early next year, and then another two years from there to go past Germany to become the world’s third largest economy.

So what I’m trying to say is this is basically that compounding process.

Understanding Per Capita Income

Now of course people will say that even when we are the world’s third largest economy, 5 trillion dollar economy, etcetera, we will be per capita terms poor. No doubt about it, we’ll be the fifth largest economy now then third largest economy. But we already are by some margin the world’s largest population. So one divided by the other. Not surprisingly, the number is small and it’s barely 3, little around about 3,000 dollars per capita.

Remember, US is at 80,000 dollars per capita. Even if you adjust for purchasing power, we will still be at little over 10,000 dollars per capita. Okay, so we are a poor economy. Not as poor as we used to be. Admittedly we used to have barely, 300 and something, 330 dollars or something per capita in 1991. So from there we have grown a little less than 10, 10 times.

So no doubt that we are much less poor than we used to be. That extreme kind of poverty I remember from my childhood is now restricted to much smaller areas and a much smaller segment of society. But yes, we are still very, very poor. And the solution to this is to keep this compounding process going.

Everybody got here through compounding. We are not going to be an exception. China got through it. The west went through this compounding process. They just started in the 19th century through the 20th century over a long period of time. We probably don’t want to spend that much time getting here. But even if we go for an East Asian model, it was still compounding.

So the first point I want to make to you is no matter how you think about this, this is about compounding and we have now reached a critical mass where that compounding is really beginning to count. And so that point I was making is that we are adding that extra trillion dollars faster and faster. And that’s how basically, that’s basically the point we have reached.

Why Sensible Policies Matter

Now some people will say, and the point you were making is that this is only happening because we have a large population, we are very poor and so on. Well, utter rubbish. We had a large population and were even poorer in the 1960s and 70s. We didn’t grow, we only began to get going serious about growth in the 90s. Why? Because we began to have sensible policies. Right.

So the point I’m making is that sensible policies matter. Simply having population doesn’t get you there. Simply being poor and therefore having a catch up doesn’t get you there. Not only forget India’s own history of being very poor. Well there are many, many countries in the world which are much poorer than us. Much of Africa, there’s Pakistan, Afghanistan. Why aren’t they growing faster than us?

So to make this case that we are growing faster because we are poor is utter rubbish. We have been even poorer in the past and we didn’t grow.

GANESHPRASAD SRIDHARAN: Sir, what exactly have we done differently in the past 20 years because of which this compounding is happening?

The 1991 Reforms: India’s Economic Freedom

SANJEEV SANYAL: Little more than 20 years. It really began in the 90s. The first step obviously was to bid the 1991 reforms. I would count it as just like 1947 was political freedom. 1991 begins the journey to economic freedom.

So we first of all broke out of this extremely corrosive socialist framework. And of course it happened not because we suddenly changed our worldview, it happened because we had a crisis and the Soviet bloc collapsed and things changed. But anyway, nonetheless we’ve, since we began to introduce sensible policies, first thing that happened is that we began to withdraw the Indian state from things it should not do.

So that entire licensing Raj, that entire thinking process and allowing the private sector innovation and all these kinds of things, that is a very important reason why we began to grow. And that process has taken us 30 years. And let me say that we even today are reluctant reformers but that process has gathered pace and we have become more and more bold in what we have done.

So for example, if you go back to the 90s, we did do in 91, 92, maybe up to 93, we did a whole bunch of bold reforms. Once the economy recovered from the crisis, we actually stopped doing reforms.

GANESHPRASAD SRIDHARAN: Really?

The Pattern of Reform and Stagnation

SANJEEV SANYAL: Yes. So it’s quite striking that in the second half of the 90s we did some reforms, the odd one here, there, but we actually didn’t do reforms. We got growth by about 98, 99, that growth momentum that we had got from that first round of it, that began to falter. So it’s only again under the Vajpayee regime that another round of reforms happened and that generated the growth that you got in from around 2002 to 2007, 26 or therefore then unfortunately after the Vajpayee regime, again reforms were few, reforms were done.

So one of the problems is that we do a bunch of reforms, we get growth because of it, and then we say, okay, now things are fine, so we don’t have to do any more reforms. So again, by 2007, 8, we got the global financial crisis. But here in India, the benefits of the Vajpayee reforms also then ran out. And we hadn’t done reforms then for the period from 2007-13 or so, we instead of doing reforms, we tried to keep growth going by essentially pumping up the banking sector and encouraging it to go out and give random loans.

So what happens as a result of that? We do get some growth. We do recover from the global, the shock of the global financial crisis. But because it is based essentially on expansion of the monetary and fiscal and financial expansion and it is not based on actual supply side reforms, what happens is that by about 2013, 14, our banking system begins to be questioned, our macro fundamentals begin to wobble. There is, you will remember, you know, we began to be counted as the fragile five and so on. So again, growth begins to kind of be under pressure.

The Banking Crisis and Cleanup

Anyway, that decade of the 2010s, the teens saw global growth slowing generally because everybody had problems with their financial sector. So we were first of all in a slower global growth environment. Our own banking system then had to be cleaned. And so in the year 17, 18, 19, we went through a fair amount of pain because we had to clean up our banking system. Something I was also one of the participants in it.

Many others also contributed to this cause. Several RBI governors, Deputy Governor Acharya, Deputy Governor Vishwanathan, Deputy Governor Jain. There were banking secretaries here who did a lot of great work. There was Anjali Dugal after her banking secretary, Rajiv Kumar, and so on. And so I’m mentioning them because you see very often people forget the contributions of people who are one layer below the top layer. So of course there was contributions from Governor Patel, Governor Das and so on, and the Finance Minister, Jaitley, Prime Minister, all at the very top level. But I’m mentioning the layer below that also, who put in a lot of effort.

And then the banking system got cleaned up at simultaneously, we did one major reform, the GST. And you can complain about the GST all you want, but the fact is it is a dramatic improvement on whatever was there before. I’m not saying that the current system cannot be improved. I think it can be. It needs a lot of simplification. But whatever it is, with all its flaws, it’s a dramatic improvement on what was there before we introduced the insolvency in bankruptcy court.

So, you know, this whole business of carrying around defunct companies of the past and putting them in BIFR, which is basically a warehouse for dead companies, you know, finally we began to shut down these companies and large companies were shut down, you know, whether it’s Jet Airways or these whole bunch of steel companies and so on. So then one, of course for the banks, that was good because you created, you know, imposed creditor rights. But generally speaking for the economy, it’s good because you are giving economic assets from, you know, and these are productive economic assets from a inefficient user to an efficient user and so on.

The Importance of Process Reforms

So there is this change and big bunch of reforms that happened, which of course there was a period, of course, then had the two years of COVID that we had to go through. Then what happens is that on the other side of it, we, because we had done all these reforms, clean the banks, we begin to benefit from all of those. And so the important part of the thing is that we need to keep doing these reforms, okay? We have to be unapologetic about ease of doing business, ease of living, simplifying the thing.

And I am a big advocate of something called process reforms. You see, everybody loves big structural reforms, but it’s actually a lot of the gain in efficiency comes from small process reform nuts and bolts. You know, this process here, this rule here. And if you go and look at the articles I write on the speeches I give, I talk a lot about these nuts and bolts that you small changes, you have to keep changing. And so those are the things that suddenly get your system to grow and none of them will hit headlines. But somebody has to pay attention to them and keep changing them.

And you know, while I am a big advocate of certain kind of structural reforms, I have written extensively about and I have participated in formulating a lot of these smaller changes which people in that little sector will know about, but widely people may not know.

GANESHPRASAD SRIDHARAN: Okay, so if I were to summarize your answer, it is we went from being a state run economy to a market run economy because of liberalization. We got rid of our socialistic frameworks and then we introduced several policies like IBC and in the process of that we also stagnated with our policy reforms because of which we entered into a banking crisis. And then once we got in IBC and reforms like that of GST, today we are in a much, today we are much better off as compared to the past.

Sir, I want to go a little deeper into this market on economy and state owned economy. And you mentioned the socialistic framework. You know, because we were born in the 1990s, we are not able to appreciate the market that we exist in today. So could you please throw some light on what was it like to do business in India and the 1980s and how is it far different today in 2024?

The Ambassador Car Analogy

SANJEEV SANYAL: So the best way to understand this is get up one morning, see if you can find somebody who owns an old Ambassador car, preferably one before they introduce the Isuzu engine in the 90s. So a really old Ambassador car, just try and drive it, okay? You will realize what the problem is. I mean, you know, the gear shift is not smooth. It doesn’t, you need to five times to get it to get into the right gear. It rattles when it goes. Its speed is up and down. It’ll break down on you all the time.

And as I said, the ones that are still around are mostly the ones from the 90s on Isuzu engines. Try and find if there’s anyone one of them left from the priest Isuzu Ambassador car. They were awful. And when we finally, when I as a teenager finally encountered a Maruti 800, it was an absolute revelation. Maruti 800, Maruti 800. Okay. That was the, that was the major sociological event of my childhood, okay. Was the Maruti 800, because suddenly you had a car that actually functioned. Okay, okay.

People don’t understand this. And since very often they have not, they don’t remember the pre, you know, improved Ambassador, which even after the improvement wasn’t a great car. But you should really go back to the pre Isuzu engine ambassador to understand what a dramatic shift it was. Now this doesn’t mean that after the 1991 reforms we became a great place, there’s a lot to be done about our ease of doing business, etc. But what has happened is at least there is a mindset that came that doing business was a good thing and that at least some of the state, chief ministers, etc. began to think, yes, maybe attracting business is a good thing. I mean these are radical ideas at one point in time.

GANESHPRASAD SRIDHARAN: Radical.

SANJEEV SANYAL: They were radical ideas. You know, just like you hear some of that rhetoric is still around.

GANESHPRASAD SRIDHARAN: Okay, that business is a bad thing.

The Anti-Business Narrative

SANJEEV SANYAL: Yes, absolutely. You hear it in a diffuse way as Adani Ambani, etc. But when I was growing up, it wasn’t Adani Ambani, it was Tata Birla. So you would hear, oh my God, you know, this is bad because Tata Birla will take advantage of it or something. And remember I grew up in 1980s Kolkata. 70s and 80s Kolkata, where they actually threw out business. Threw out, threw them out.

So people don’t realize that before Bangalore became the tech hub of India, most of these international tech companies and people with technology oriented sort of businesses or inclinations, they used to be based out of Kolkata. Okay, okay. I remember in the 80s there being actual large scale strikes against the computerization. And they remember first generation of computerization, I mean proper computerization is being attempted. That it is computers are going from some esoteric thing in a few industries or in university or scientific labs or something to something that is being more widely used. In the 80s there was a huge pushback as a result of which the industry actually moved to Bangalore.

GANESHPRASAD SRIDHARAN: Why, sir?

SANJEEV SANYAL: Because, you know, as I told you, and this is why you have to understand the framework in which you think about an issue. The narrative framework of how you think about something is absolutely critical. In the narrative framework of socialist India, but specifically concentrated in of communist ruled West Bengal, the narrative framework was that you cannot grow the cake, it can only be divided.

So it was only about whether you divide the cake between the computer and the incumbent clerk or whoever was going to get replaced by the computer. The idea that you could upskill the person and use the computer to do more things simply wasn’t a part of the conversation.

The Era of Punitive Taxation

GANESHPRASAD SRIDHARAN: So you’re saying that in the 1980s business was a bad thing. And I also read somewhere, sir, that back then the tax rates were so high that the highest tax lab was somewhere around 93.5%.

SANJEEV SANYAL: No no, it was 97 plus 97% in the 1970s, and it was brought down significantly after that. But, you know, that was kind of part of that entire thinking process. Yes.

GANESHPRASAD SRIDHARAN: So the government was thinking, we’ll just tax the rich and then pass on the welfare to the poor.

The Political Economy of Control

SANJEEV SANYAL: No, it helped them, basically. You have to understand the political economy. That was the rhetoric, “garibi hatao” and so on. But this is really about political power. Okay, and so what were, what were they trying to do? Essentially, the political establishment and the bureaucratic establishment of that time essentially ganged up and they said, look, let us introduce power on the whole system. How do we do it? We nationalize whoever we can. So, you know, we’ll nationalize the airlines, we’ll nationalize the banks. What are you basically doing? You are introducing control over the whole system.

And it was well understood even at that time that all of this was a bad idea. That is one of the funny things about this is this, that this idea called License Raj that we use even to this day is not a term that we came up with after we had done it and it turned out to be a bad idea. Okay, License Raj is a term used in the 1950s, where Rajaji, when he’s trying to warn the political establishment, more generally the public, that this is a bad idea. So there are economists like Chenoy who are warning people that this is going to lead to bad outcomes. And it does lead to bad outcomes.

So in the 1960s, our economy basically falls apart. We have to, you know, go begging to the Americans for food aid. In the 70s, our economy again collapses. We have very high inflation. Yeah, that’s why the emergency. One of the reason. One of the big reasons the emergency was introduced was because there was huge amount of turmoil. Okay. And it continued into the 80s, you know, this kind of thinking. Although by the mid-80s, finally we began to relent and, you know, Rajiv Gandhi began to ease things up a little bit.

But point of the matter is this was the thinking process. So you have to understand that this had a lot to do with the politics of the time and the imposition of control and by the, you know, the political leadership of that time that did not want alternative sources of power. And so the nationalization of banks has even at that time, was thought to be a bad idea.

The Mundra Scandal

In fact, people do not understand that that even earlier in the 1950s, the LIC that you see today is the result of a large number of nationalization of insurance companies, which were then amalgamated into LIC. And within few months of that happening, there was a massive scandal called the Mundra scandal. Okay. In which it was discovered that this, that this LIC, now big entity is its monies were being used to, for all kinds of political purposes to fund, you know, politically linked business. And so there was a big scandal.

Interestingly, the then Prime Minister’s son in law is the one, Firoz Gandhi, who is the one who in the parliament brought it up. Okay. And the then finance minister TTK who had to actually resign. And it was a big embarrassment for the Prime Minister especially since his, it was his son in law who had brought it up. And so he never spoke to his son in law ever again. Damn.

GANESHPRASAD SRIDHARAN: So concentration.

Trade-Oriented Infrastructure and Process Reforms

SANJEEV SANYAL: So this is one of the reasons by the way, interestingly, Firoz Gandhi’s name never comes up in any conversation because Firoz Gandhi was the person who actually opposed some of this clear grab of resources that his own in-laws were doing.

GANESHPRASAD SRIDHARAN: Interesting. So sir, it was concentration of power by the government and then spreading this narrative that business was bad, which eventually stunted our growth. Is that it?

SANJEEV SANYAL: Absolutely. And then when it all went bad, they said it was the Hindu rate of growth. So what exactly is going on here? This is again a part of narratives.

Okay, so 50s, 60s, 70s happen. You have now run this system based on the socialist thing. It has now failed for a significant period of time. And by this point in time you already have Korea, Taiwan, Singapore, etc. who have changed their policies and are succeeding. So it is quite obvious by the late 70s that this socialist system is a disaster. So now who do you blame? So you blame it on Hindu rate of growth. It must be because those Hindus and their social customs are all outdated. And it is because of them.

GANESHPRASAD SRIDHARAN: Sir, what is this Hindu rate of growth?

SANJEEV SANYAL: So the Hindu rate of growth is we were growing at three, three and a half percent. And that time the population growth was 2%. So basically there was no per capita growth that was happening.

So instead of blaming bad policy and calling it the Nehru rate of growth, let’s blame it on India’s cultural roots. So the entire thing was then blamed as the Hindu rate of growth. You’ll see this term still used. But why was it used? It’s a lot of how you create narratives about whose failure it is. It is not the failure of socialist policies.

So the narrative that is being sold, it’s not that Nehru and Nehruvian policies failed India. It is India and its cultural roots that failed Nehru. So that is how, of course, that’s all politics. Basically, when you have failed, you blame the victim.

GANESHPRASAD SRIDHARAN: And how did people believe it? I mean, what is that?

SANJEEV SANYAL: You should ask the intellectuals of that time. Why they were… And in fact, one of the things that I keep pointing out to you, that even though it had clearly failed and by the 80s, it was more than visible and even in many of Rajiv Gandhi’s statements, you can see that he is acknowledging that this system had broken down.

I mean, he makes a statement that for every rupee that the government spends on welfare schemes, 85% disappear. So he’s acknowledging that this is happening. But still the intellectual class continues to support these bad ideas because in many ways they are the beneficiaries of that system because the elite of that system is largely bureaucracy and so on, and they are the beneficiaries of the system.

Similarly, the business class of that time, they may complain about various things. The fact of the matter is they are protected from all kinds of competition. So never confuse capitalism with the personal interests of capitalists.

So when in 1991 our economy finally collapses and we are forced to do these reforms, be very clear that the intellectual class of that time, and I was at university at that time, they were not in favor of the reforms. There were very, very few economists of that time who thought it was a good idea. They all argued against it.

But importantly to remember, even the business community, not everybody, but largely, they also argued against it, even though you would think they were beneficiaries from it. Business community as a whole benefits because it will grow, etc. But individual businesses do not because they now will face competition. If you are producing inefficient, poor quality products and are able to get away with it, you are now afraid that new competitors will come, foreign competitors will come and you will not be able to compete. So in fact, ironically, Indian business also argued against it.

Rethinking India’s Economic Benchmarks

GANESHPRASAD SRIDHARAN: Interesting. So now I want to come back to 2024 and now that we are in the capitalist era, in the Indian economic story, while we’ve become the fifth largest economy in the world, I think, sir, we have to rethink our benchmarks and we have to get rid of all the Pakistan narrative and the socialist era narrative and we have to stop comparing ourselves with those entities.

And what I believe is the right comparison to make would be developed countries like Japan and Germany. And I was just doing a case study in Germany and I found something absolutely stunning. Germany just has a population of 83.8 million and yet their exports stand on the upwards of $1.6 trillion. And here we have a population of 1.4 billion and yet our exports barely touch $800 billion. Sir, why is there such a big gap and what are we doing to fix it?

SANJEEV SANYAL: So first of all, we have to remember that for a very long time, as I said, this is also a part of that legacy. We were not integrated to the world. So we had this import substitution mindset. And of course it protected all kinds of internal interests. So we kept ourselves closed. It’s only in the 90s we began to open it up.

And fair enough, we did it carefully. I think we were correct in doing that because if you open things up too fast, you’ll get chaos. So we took our time to do it, which was fine. But I think we then reached a point where we are now… Even that number that you gave is of recent origin. You have to add to it the fact that we also became competitive in services, which is partly an artifact of the fact that we liberalized the economy in the post-digital age. So that is a market that would not have been available to other countries. So we have taken advantage of that.

But in manufacturing, I would argue we can do a lot better. And that requires us now to be much more aggressive. And you will see that we talk a lot about manufacturing. And even though there are people who argue that India should somehow just use the services pathway, this government has been strongly stating over and over again that why should we give up manufacturing? There are many benefits to this.

One is that we happen to be unique in that we have a domestic market that allows leveraging up. We have, we are one of the few countries which actually have the skills to absorb this. We already have many of these big companies here and there is this general China-plus-one environment. However, that is the good side.

However, the bad side is the world economy is not growing. So it’s always easier to grab market share in an environment that is expanding rather than one that is stagnant. So the Chinese had the advantage that they did this in the 90s and 2000s when the world was globalizing very rapidly. And therefore, in an expanding environment you can grow fast anyway.

Now we are in a stagnant global environment, relatively speaking, and we have to grow in that. Now I’m not saying it’ll remain like this forever. I’m sure the world goes through cycles. We’ll also get a good phase at some point in time. But while we are waiting for the cycle to turn, we have to keep investing on the supply side of the economy. That requires that we invest into being competitive. There’s many things we need to do. First of all, we need to get our trade-oriented infrastructure up and running.

GANESHPRASAD SRIDHARAN: Trade-oriented infrastructure?

SANJEEV SANYAL: Yeah. So that means that our highways, our airports, our business processes in the customs, our ports are up to speed. And you can see that we are building, for example, our ports have become a lot more efficient than they used to be a decade ago. Radically.

Similarly, we are building this massive new port in Vadhavan, just north of Mumbai. Our airports are not only a lot better than what they used to be, but also we are building these brand new airports in many places, but two really big ones. One in Navi Mumbai, one east of Delhi in Greater Noida, and so on and so forth. So that is one part of it, just getting the physical infrastructure up and running.

The second thing is that we need to get our business processes up to speed. Some progress has been made in this and I will give you some examples of how things have improved. For example, patents. Just six, seven years ago, we used to do just 10,000 patents a year. That’s the number of patents we used to grant. And more than half of it used to go to multinational companies which were just regularizing their patents in India. So they are not real innovations in India’s context.

In the last financial year, 2023-24, we did 100,000 patents a year. So in seven years, we have increased the number of patents granted by the system 10 times.

GANESHPRASAD SRIDHARAN: Okay, how, sir?

SANJEEV SANYAL: By improving processes and doing a whole bunch of things. And I’ve written extensively about it. You can read about it. So that’s one kind of… I’ll give you another kind of process reforms. You know, everybody talks about ease of entry, but actually for an economy based on creative destruction, you need ease of exit as well.

GANESHPRASAD SRIDHARAN: Ease of exit?

Ease of Exit: Simplifying Company Closures

SANJEEV SANYAL: Yes. You know, how easily can you shut down a company? And I’m not talking about companies that are shut down because they go bankrupt. Those are forcibly bankrupt. I’m talking about voluntary shutdowns. In fact, 70, 80% of companies that shut down, in fact, maybe even more, maybe 90% of companies that shut down in any one year are not shutting down because they went bankrupt. They’re shutting down for a variety of reasons.

You know, the guy who’s running the company has got fed up of running it because whatever, he’s grown old, his children don’t want it. Or they can be a large company that is shutting down a subsidiary. Any number of reasons why, for entirely voluntary reasons, companies get shut down every year.

Now, earlier, this was a real headache to shut down a company even when nobody was objecting to it. It was not like there was a case that was outstanding or there were some outstanding amounts, or there was some dispute. No, there were large numbers of companies which everybody agrees should be shut down, but it would take years to shut them down.

GANESHPRASAD SRIDHARAN: Why?

SANJEEV SANYAL: Well, the processes were ridiculous. For example, you had to get NOCs from various people. You needed your company’s name to be published in the newspaper that for some reason would be delayed. And there’s a whole list. And I’ve also written about this extensively.

Now about a year ago we created something called CPACE, which the Ministry of Corporate Affairs created. They simplified all the processes and they’ve automated it. Guess how long it takes now? So what used to take years, three, four years now takes 90 days.

GANESHPRASAD SRIDHARAN: 90 days.

SANJEEV SANYAL: 90 days. We are the fastest place in the world to shut down a company voluntarily if there’s no dispute.

GANESHPRASAD SRIDHARAN: Interesting.

SANJEEV SANYAL: So why I’m bringing this up to you is that you can dramatically change something if you pay attention to the processes. So we are now paying enough attention to these processes. There are thousands of them. You know our metrology, legal metrology laws, these are the laws relating to labels and weights and measures and things. We need to simplify them. We need to… there’s a lot of unnecessary criminalization of things which lead to harassment, rent-seeking and all kinds of things by officials. All kinds of things happen. So we need to simplify them and create…

Similarly, you take our income tax system. The rules are still very complicated, but the process, thanks to being put online has become radically easier. The refunds come through much more quickly. Things are all connected. We have anonymized it. So hopefully the amount of random harassment, etc. has gone down.

So the point I’m making to you is that at every step we are trying to improve. It is not that this is perfect and with every change some other wrinkle appears also. So, you know, we have introduced the GST. Certainly a dramatic improvement on the plethora of rules, state level octroi, all kinds of garbage we used to have is gone. But there are all kinds of kinks in the system. Even today people keep complaining about the GST system. They have kinks in the website, it doesn’t work for some reason.

Similarly, in the IPR regime we have solved significantly for patents, but there are problems with the trademark system. So we are continuously trying to improve. But there has to be a single-minded attention to these process reforms because I think everybody loves grand structural reforms but in fact much of the friction in the system is in the process.

GANESHPRASAD SRIDHARAN: Interesting. So you’re saying that we first need trade-oriented infrastructure and we need process reforms.

SANJEEV SANYAL: Large numbers of them and as a matter of course that every day we get up and make things better.

GANESHPRASAD SRIDHARAN: Which will help us improve ease of doing business even.

The Importance of System Integrity

SANJEEV SANYAL: Absolutely. That is ease of living also, not just ease. Many of these things relate to just day to day living. I mean the ease with which, for example, and the integrity of the process by which I get myself a passport, a driving license, all of these things have hopefully become significantly better in recent years. Not just making it easier. The integrity of the system has to be still there. I mean you still want to make sure the guy who gets a driving license actually knows how to drive. So the integrity of the system is also important.

GANESHPRASAD SRIDHARAN: Sir, here’s where the narrative of red tape comes into play, right? Could you please explain what exactly is red tape and how is it hindering our economic growth?

SANJEEV SANYAL: So this is the point I was making all this while. Reform is about getting rid of red tape.

India’s Manufacturing Challenge: Quality vs. Price

GANESHPRASAD SRIDHARAN: Okay, sir. I think one of the major reasons why India also lacks in achieving exponential manufacturing growth is also because we are competing with China in terms of prices, whereas Germany is competing with quality. Because I was reading about the Mittelstand companies in Germany and I saw this map of Germany where Mittelstand companies were spread all across the country and 80% of these companies were located in those towns which had a population of less than 1 lakh.

And Germany as of 2022 had 1,400 world market leaders. So these companies were not market leaders in Germany, they were market leaders across the world. And when I looked deeper into what was the fundamental reason why they were market leaders, I understood that they have hyper specialized in doing one thing. For example, there’s a company that just manufactures fridges.

SANJEEV SANYAL: That’s all.

GANESHPRASAD SRIDHARAN: There’s a company that just makes wires and there’s also a company which has been making beer for a century. But they do it so well that they do not have to compete on the basis of price.

The Historical Context of Germany’s Industrial Model

SANJEEV SANYAL: Well, I think that’s a simplistic view. But let’s go back to a little bit of the history of how Germany got here. Do remember that Germany was united into a country only in 1870. So earlier it was actually a network of small kingdoms. And each one of these small kingdoms had a capital and some sort of a hub. When it then got united into a country in 1870 by Bismarck, these hubs…

GANESHPRASAD SRIDHARAN: Were all over the place.

SANJEEV SANYAL: So the way they worked rather than the way it worked in other countries. So there are other developed countries where the logic worked differently.

GANESHPRASAD SRIDHARAN: Okay.

SANJEEV SANYAL: So, for example, in the UK there were very large clusters. So there were three very large clusters. One was around London, there was one in the Midlands around Birmingham, and there was another further north in the north of England. So three big hubs. And that’s basically where it happened. And then there’s now a lot of deindustrialization that has happened. So London has remained as the main hub now.

Same thing has happened with France, with Paris. Paris is overwhelmingly the largest economic hub. So this has not happened in Germany, partly because of history and this dispersed nature of it. Even in India, history very often plays a role. So if you look at Gujarat, for example, Gujarat, because it was dispersed into a number of small kingdoms, interestingly, even today it has large numbers of economic hubs. It has got Rajkot, Ahmedabad, Surat, Baroda and so on. They’re all, by the way, many of these are capitals of small kingdoms and so on.

I’ll give the contrast with that with say, West Bengal, which had one major hub, Kolkata and so on. So history does play a role in some of it, how it develops. And sometimes the highly concentrated model can also be extremely successful. I mean, Japan has an extremely concentrated model with one really big city in Tokyo, and then one or two other hubs, Osaka or whatever. But Osaka is much, much smaller than Tokyo.

So let’s not confuse success with the peculiarities of a decentralized model of Germany. Nevertheless, Germany does it in this particular way. Now, Germany’s model, which I think the more interesting part is, I mean, there is the issue of decentralization, which is an urban design and geographical. And that’s a different conversation.

The Mittelstand Model and China’s Rise

Let me focus on this business of small specialized companies, Mittelstand, basically, which does an amazing job. And I think here also we tend to overstate the case. Many of these Mittelstand companies feed into larger companies. So do remember that they are not entirely independent bodies from the bigger companies that they feed into. Nevertheless, it is true that Germany has this culture of many of these companies and they have done an amazing job.

So there are many things why it succeeds in doing this. One of them of course is this amazing system of apprenticeships that they have where people are there, and there are many other reasons for that. But the point that you made about Germany competing on quality and China competing on price is actually no longer true. China now is rapidly competing in quality as well. There are many areas where they are genuinely at the cutting edge and much of that technology is learned from, stolen, whatever you prefer, from the Germans.

So I think one of the real big problems that Germany will now have is being able to compete with this rapid growth of China and moving up the value chain and doing so. I personally don’t think there is a choice that India has of competing going the German way or the Chinese way. The Chinese way competes on both fronts and in many ways, while we cannot exactly replicate their model because our political system is different, etc., but there are a few very key things to learn here.

Starting at the Bottom: Lessons from China

First of all, go into an industry and in the beginning do not get emotional about where in the value chain you are. Even if there is a big industry and all you’re doing there is turning the screws, go into it. That’s how China got into electronics, right? The first thing they were doing is just pure assembly. So do not, many people in India said, “Oh, why are we only going into the lower end? We should go into the higher end.” Hello. Before you can run, you have to walk.

The same, very often you’ll hear these sort of derogatory terms about Indians are only doing cyber coolie work. Well actually you have to start by being a cyber coolie. In fact, India’s entire software industry is based on a non-event, it’s called Y2K. So don’t have any emotions about dirtying your hands at the bottom of the pyramid. But then you have to have ambition.

And we have now shown ambition. Indians are showing ambition in the sense that you see when you say artificial intelligence is being developed by these companies, Google and the others. Do remember that a lot of this is developed in India by Indians in the captives of these companies in India, number one. Number two, the ambition that we have of moving up the value chain of Indian companies doing it, that I think is something we need to encourage.

Indian Capability vs. Corporate Ambition

So it’s not the lack of ability of Indians. After all, Apple is increasingly making its phones in India. Foreign companies are able to compete in various markets around the world based on Indian research, Indian development, R&D and all kinds of things. Even Google Maps that is used worldwide is an Indian invention. It was invented in the Indian offices of Google.

So Indians are able to do it. The question is why is India’s corporate sector… And I have now for the last half an hour, 40 minutes criticized Indian bureaucracy, government, etc., and the need to reform them. I think this is a criticism I can fairly make about India’s corporate sector. Again, the lack of ambition.

It is extraordinary that Indian companies which are now global size companies, they are not small companies anymore. They are hugely profitable for the last several years. And the amount of R&D Indian companies do is ludicrous for their size. And Indian generics manufacturers, they’re not small companies. Why aren’t they the guys who are now creating cutting edge molecules? Maybe there are some rules and regulations, etc., that we need to change on the India side. Yeah, fair, that’s what the government needs to do. But I think a large part of it is simply lack of ambition on our corporate sector. And the poverty of aspiration, which I often blame on other parts of the system, needs to also be, is also true of our corporate sector.

GANESHPRASAD SRIDHARAN: Poverty of aspiration.

The Need for Innovation Culture

SANJEEV SANYAL: Absolutely. Why are Indian companies not aspiring to be world leaders in certain things? And that will require you to invest in R&D. You go into the R&D departments of Indian companies, large Indian companies. And there are some notable exceptions. So I’m painting them with a broad brush. But generally speaking, you go into those German Mittelstand companies and see them, small companies doing enormous amount of research.

Is it because our education system is not generating great scientists? I’m sorry, you go and meet these Mittelstand, they come from very mid-level, it’s not the top engineering colleges in Germany. It’s the middle ones. Even some of them have just been apprenticeships. So they’re not highly educated in that sense. But there is a culture of continuous innovation that happens here.

There is an unwillingness to dirty your hands. And that is very important. It’s the engineers who need to run Indian companies. And it really bothers me that even where engineers did create Indian companies, the next generation of those family owned companies then become basically MBAs and become managers. They are not the guys going back there and doing masters in chemical engineering. Their dad who set up the company was a chemical engineer. This guy is a pretty boy who has got an MBA from fancy school in America, good at PowerPoint but cannot actually fix the machine.

And this is an issue. So I think we need to begin to get serious about a culture that does this. And as I keep saying, we Indians are not being ambitious enough at multiple levels.

The MSME Capital Challenge

GANESHPRASAD SRIDHARAN: So two things that you mentioned that I found very interesting are the poverty of aspiration, and number two is education. I want to dig deeper into poverty of aspiration. I actually spoke to a lot of these MSME owners and manufacturers and what they often complain about is the Chinese dumping the products in the market. So if they’re producing something at 5 rupees, the Chinese dump it in the market at 4 rupees. So there is no way they could make a profit.

And when I spoke to them about why don’t they invest into R&D, one primary reason that they pointed out is the lack of capital. And that is when I started reading about ONDC, which India is recently getting into. And that is what made me think that the MSME sector of India employs 100 million people. It contributes close to 50% to our exports and yet it is one of those sectors which is just struggling for capital. Why is that sir? Why is there…

# GST and Economic Reforms

Lowering the Cost of Capital

SANJEEV SANYAL: So there are many reasons for it and I could give a long lecture on how we can improve this. First of all, we need to lower the cost of capital in this country. I think that is something that will happen naturally as we become more developed country. The cleaning up of the banks was an important part, the bringing back a credit culture. Because remember, if there’s poor credit culture, then the good debtors are paying for the bad debtors. True, right.

So I think we need to lower the cost of capital in this country significantly. Some of it has happened. If you look at the equity markets today, good companies are getting massive premiums, no problem getting capital. So maybe historically true, but at least on the margin this problem is becoming much, much lesser of a binding.

Similarly, if you have a really good startup and you have a great idea, you will get money. So I think at the margin this idea, this problem is dissolving itself.

Regulatory Friction and Cultural Challenges

There is however two problems. One is again going back to my earlier discussion we had about the red tapism that is still embedded in our system. It’s not big things. Very often the big things have in fact been resolved. It is a continuous friction of regulation over regulation, harassment and rent seeking. That at the ground level is a major restraining factor on middle level companies growing.

But I will say that we need to, there is a general national problem of poverty of aspiration that we have. A lot of our talent, for example in this country would rather spend years doing the UPSC exam which with a 99.9% failure rate than take a risk in pursuing a business or some other profession. Didn’t you have to become a writer or an athlete or something else? Something, some form of risk taking even though your success rates are higher there? True.

So therefore there is a culture problem here which cannot be solved by the government. It is something we as a people have to begin to think about. After all, the same people go abroad. I mean, I cannot believe that people go abroad to the US and make a fortune or go to Dubai or UK and make a fortune. Right? How do they do this? Why are we able to do this more successfully outside of our own country than in India?

The same person’s cousin who is equally talented is unable to do it. Why? Because I think one part of it is this whole, the whole thing. But some part of it we will have to accept as a society is a poverty of aspiration which restrains you when you live here, but you get liberated from when you are forced to do something in some other society.

GANESHPRASAD SRIDHARAN: So I think the only difference between India and the US and you just mentioned that the same person goes on to do extraordinary things in the US. I think that is primarily because of the education system, sir. Our education system, and I’m so sorry to say this, it is just beyond pathetic, sir. And I am the perfect by-product of the education system.

My college had a rule of 75% attendance. I did my civil engineering and we were building something called sewage treatment plant. And my professor actually wrote a stat on the board which said that if the population increases by 30% year on year, this is the amount of waste that is going to increase. So calculate the amount of waste and then build an STP.

And the first argument that I put forth was that if the population grows at 30% we are going to collapse. So aren’t we supposed to think about how are we going to reduce the amount of waste that each person puts out rather than building an STP? And he had no answer to that. And that is a clear indication of, I would say that’s a clear anecdotal evidence of how our education system functions.

Rethinking Education and Growth

SANJEEV SANYAL: There’s a lot of problem with the education system. So there are two problems here: a lack of performance due to education system alone and two, should we improve the education system? I think the two should be separated. The reason is, you see, what happens is this debate otherwise goes into the following: let’s fix the education system and then we will get growth.

Actually, this is not how the world has functioned. China grew with bad education system. Most of the guys who created these great companies are not very well educated. Please go and meet the average Chinese billionaires. He’s not very well educated. Dhirubhai Ambani was not as educated as his descendants are, but he created.

So first of all, this whole idea that we know, first we have to improve our education system, then at some point, I’m sorry, if you go back and look at all the great companies of today in America with that great education system, let me tell you: Bill Gates, college dropout; Zuckerberg, college dropout. Many of the guys today may have an undergraduate degree.

So the point I’m making is that first of all, this is part of that poverty of aspiration that we have, is that we will do, only after finishing a PhD can you do some great thing. No, that is the wrong way of thinking about it. In fact, that is some part of our colonization of being clerks that you can only do great things if you remain within the nice British education system and work your way up grade one to grade two clerk and so on. So this is part of that problem.

So please, I’m all for improving the education system, but let us please separate this from the need to get on with more innovative economy, more risk taking, more. All of this is a cultural issue. It is not an education issue. So I want to make this clear, but otherwise we go into this circular thing.

However, we do need to improve our education system because there are benefits from that too. Here I would say we could spend the next 30, 40 years trying to fix each college. I think it’s too difficult to do this. My own view is that the way we deliver education worldwide, not just in India, is already too outdated. It’s a 19th century idea of giving lectures.

Why do we need to give the same lecture in every college worldwide when we have YouTube? You just need to give a good lecture once and everybody on the planet can watch it. And then answering questions can be done by artificial intelligence. I mean, how often will there be some one person in thousands who will ask a unique question which AI cannot answer? For that you can have one supervisory professor.

Automating Tertiary Education

So the reason I’m making this line of thought out to you is this: while you may need still for primary education, the old classroom kind of thing, just to get people on the rails, a lot of tertiary education can be automated on a mass scale. I am a firm believer that tertiary education can be made almost free.

Colleges should not be wasting their time on giving lectures. They should become places for research. They should become certification and testing systems. But giving particularly undergraduate level lectures is a complete waste of time. Now in some subjects you may need, like medical etc., you need to have hands on. So fine, this will not apply to them.

But I can’t see why my subject economics cannot be completely automated except for special project. So you go to college, you do some special project, maybe a few testing and what happens then is you can dramatically expand the amount of people who study these subjects, infinitely in fact. So I believe that we are trying to solve the problem in the wrong way.

GANESHPRASAD SRIDHARAN: Sir, I think, sir, I actually disagree with that lecture thing and I’ll tell you why. The example that I gave you about my professor, my own best friend, when he went to the US he was given a very similar problem statement. But the difference in approach was that the professor conducted the lecture to provoke a particular discussion and debate about the entire topic.

SANJEEV SANYAL: No, no. So fine, so therefore you need to have face to face interaction for doing a limited number of projects. True? Fine, do it. But just imagine if I then completely automate this lecturing business. And then the same professor can take 500 classes instead of taking five. True. Because he’s only taking, doing the things where face to face interaction…

GANESHPRASAD SRIDHARAN: That you do project.

SANJEEV SANYAL: There are places where you need human interaction. I agree with you. But just imagine the same IIT campus today you’re sending their people for four years, they’re sitting the IIT campus now, a few times a year you call in people to do these things that are needed. Otherwise it’s all automated and you have tests. And it’s not like people can’t use their time to do other things.

And then we create a much more apprentice based system. Let people, let young people go and work, let them go into the factory floor. And we are all talking about German system, where the German system is based on apprenticeship. I mean throughout history, 18 year olds used to work. What’s the big deal? Even today some of our most skilled people are doing this.

Think of getting a chartered accountancy degree. Chartered accountancy is not based on your B.Com. Most of those guys are working. They are taking most of their classes online. And you are creating chartered accountancy, highly skilled job. Now you are able to create them. Now you cannot tell me that you cannot create lower skilled activities like economists.

I’m sorry, it is not a very high skilled job. They are good economists and bad economists. That’s a different issue. But it actually requires less face to face interaction. A lot of economics can be generally taught. And then take these guys, the skill of economics is in the doing. Put them into think tanks, put them into policy making, put them in financial markets.

No amount of lecturing will teach you economics better than having your fingers burnt in a market crash. Let me tell you this.

GANESHPRASAD SRIDHARAN: So you’re saying that sir, we have to strike a perfect balance between automation, thought provoking lectures and apprenticeship which will give the student…

SANJEEV SANYAL: Yes, so and so now the point I’m making is the model I’m saying is actually cheaper. The guy is working, he’s spending less time doing useless lectures which he can anyway do online. In fact, why does he even have to listen to his college lecturer? He can listen to the best in the world.

GANESHPRASAD SRIDHARAN: Sir, why haven’t we done this in the past 10 years?

SANJEEV SANYAL: No, no, there are two reasons for it. One is it was not possible till relatively recently. It takes some time for systems to catch up. The second is as with any innovation, the incumbents of the system will resist it. So today’s academia is not going to be deeply happy about this anymore than lawyers are going to be happy with AI driven legal systems or in the past I mentioned, the clerks in Kolkata being deeply unhappy about introduction of computerization.

The same thing will happen here. The difference is that obviously academia has much greater control over narrative building. So they are going to resist this. But I am telling you this is the future.

GST: Consumption vs Production Tax

GANESHPRASAD SRIDHARAN: So the last question that I have is about GST and this is something that I asked Nirmala ma’am also. So I just thought I would get a much better answer from you more elaboratively. And this is about GST being a consumption tax and not a production based tax.

So just to put it in context for the audience, if 100 rupees worth of T-shirt is sold, 18 rupees GST is collected. Out of that nine goes to the center, nine goes to the state. And this nine rupees that goes to the state, it goes to the consumer state which is let’s say UP and not the producer state which is Tamil Nadu.

And here’s where governments like Tamil Nadu often argue that when we are the ones who have spent so much into building factories and incentivizing these businesses, why are the consumer states government gaining benefit out of it and not us? So how do you explain that, sir?

GST: Multiple Points of Taxation

SANJEEV SANYAL: So there are two parts of it. First of all, let me talk—people need to understand why there are multiple points of taxation. Many people love to say, you know, we should have one tax and everybody pays it. No, you see, the moment you create one tax, the entire economy will change itself to not have to pay that one tax.

So you need multiple points, hopefully light taxation, so that people can be captured in the tax web in multiple ways. So you do need direct taxes which are more towards the producers, if you can call it. And then there are the consumption taxes there. Now that is the indirect taxes and direct taxes.

So first of all, you need both of them. If you have only one and too much of one, everything, the entire economy will fit itself, it will change itself to try and avoid that one tax.

Producer States vs Consumer States

Two, about this distribution. Well, first of all, the producer state is benefiting massively from many of these things as well. It’s not the case. After all, jobs are being created in that state. There are more workers. Consequently, they are also consuming. They are also consumers. So the producer state benefits massively from having production in their state. To say that they do not benefit from it is utterly wrong.

Now of course, the consumer is an important part of the equation, and by the way, there are many offsets along the way. So it’s not like because the consumption is happening in the last point, they’re getting all the taxes. There is a whole bunch of people along—at each point the tax is being paid.

So if further up somebody produced thread, they got an offset. So it’s not like the last guy is getting—in fact, that is one of the points about GST. It’s value-added based. It is not based on sales and therefore the final point. So I’m not certain that your example is even accurate.

A Fair System

Okay, now, well, the fact of the matter is that we do have a system where I personally think it’s a reasonably fair system. You can change it around. But let me tell you, I’m not going to solve it. If there are large consumer states, it is fair. They’re probably also large population states and they need more taxes.

If for whatever reason your higher growth in your state, including these production capacities, you are presumably also generating higher GST from—you have after all, T-shirts is not the only place GST is there. You have cement, you’re getting higher from construction material, from the fact that workers, many of them may be from UP who have now moved to Tirupur.

So I am not so sympathetic to these kinds of arguments as maybe you may think. But occasionally you may require to do some balancing. But generally speaking, a simple system that applies to the whole is probably the better thing. I am much more sympathetic to simplifying those slabs, simplifying categorizations, getting rid of bugs in the website, and so on and so forth.

GANESHPRASAD SRIDHARAN: Okay, sir, if it was so straightforward, then why did we introduce the GST compensation?

SANJEEV SANYAL: Because there was an earlier system.

GANESHPRASAD SRIDHARAN: Okay?

The Transition from the Old System

SANJEEV SANYAL: There was an earlier system. You cannot suddenly change to one system and say that, you know, overnight all my expenditures are based on a certain framework. But you have been given a long time to transition, so that it was a transition thing.

We all agreed as a country that this is a better system. And I don’t think anybody seriously wants to go back to the old system. And if you want to, please go and talk to people how things worked before. You see, people love criticizing the current system, which is perfectly fine for improving it, but never try to go back to—that shouldn’t be, under no circumstances an argument for going back to the earlier system, which was a disaster.

I mean, there were multiple taxes, there were state boundaries. It was an absolute mess. So there has now been a transition. State governments should have adjusted to that transition. They provided compensation for it. In fact, for Covid also, extra compensation time was given. So this thing has been extended longer than it would have been the case. Now, you know, states do need to play by the current system.

GANESHPRASAD SRIDHARAN: Understood, sir. Thank you so much for your time, sir. It really means a lot. I was able to understand everything and I just hope everybody else also understood. Thank you so much, sir.

SANJEEV SANYAL: Thank you very much.

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