TIME FOR A GUJARAT MODEL OF CONSENSUS ON REFORMS
India risks falling into the middle-income trap if it fails to generate political consensus for the next generation of reforms. EPISODE #34
Dear Reader,
A very Happy Monday to you.
In the last week or so most newspapers have been flagging the 30th anniversary of the 1991 reforms moment. In the process they make the claim that this was the starting point of economic reforms in modern India. It has always been my case that this claim is misplaced. At the very basic level it disregards the fact that history is a continuous process and not the tagging together randomly picked discrete time points. Undoubtedly 1991 saw an unprecedented acceleration and is hence an important milestone. My limited point is that it was not the starting point. And there is a reason.
Seen this way the big turning point came in 1980 under the regime of Prime Minister Indira Gandhi. At the end of four decades the big takeaway is that governments—of varying ideological hue—have incrementally nudged the process forward. As a result, there is today a strong consensus on economic reforms. This is critical at a time when India has initiated the next round of change involving tough trade-offs. It is my argument that this consensus should be institutionalised to ensure smooth navigation.
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THE LAST MILE CHALLENGE
“A basic problem we have to recognise is that although our policy initiatives are widely appreciated, there are understandable doubts about whether we will deliver on what we have promised. There are several reasons for this. One reason for this skepticism is the view that India has, in the past, announced economic reforms but the initial initiatives have been allowed to peter out. In the present situation, there are questions whether, in the absence of a clear parliamentary majority, we will be able to deliver on potentially controversial proposals which could always run into motivated opportunistic criticism. There is also tremendous suspicion that the bureaucracy will simply not let liberalisation and de-regularisation proceed. These doubts at present are only doubts, and do not diminish the genuine applause for what the government has already done and announced to do in the future. But they will surface quickly we do not persevere in what we have said we will do.”
—Telegram received by Prime Minister P V Narasimha Rao in October 1991 from Montek Singh Ahluwalia.
Thirty years ago Montek Singh Ahluwalia despatched an urgent telegram to the then Prime Minister P V Narasimha Rao after the conclusion of the meeting of the boards of the World Bank and the International Monetary Fund on 15-17 October 1991. The highlighted parts capture the global scepticism about India’s ability to stay the course. Worryingly, three decades later, political instability continues to be the big risk to economic policy.
Yes, India has fundamentally transformed since the economic crisis of 1991. It is now a $2.7 trillion economy and has traded-up to the envious status of a middle-income economy—albeit at the bottom rung.
Yet, when it looks to break into the big league—avoiding the dreaded middle-income trap—and is rapidly rolling out the second generation reforms it faces the very same challenge that Ahluwalia flagged three decades ago: the last mile problem.
The two-pronged assault, from opportunistic politicians and lack of buy-in from the bureaucracy is threatening to undermine if not delay the rollout of the reform agenda. The downside risk is that India will fall into the so-called ‘middle-income trap’. History is replete with such instances. According to a research report from the World Bank “out of 101 middle-income countries in 1960, approximately 13 became high-income by 2008”.
The writing is on the wall: Reform or perish.
However to reform we need a modicum of political consensus. At present the binary approach—‘With us or against us’—adopted by political parties precludes such consensus. Is all lost then? If we look back at recent economic history then we have cause to be optimistic. More of this later.
The Origins
Tomes have been written, documentaries have been put together and recently the pink-papers have been inundated with features arguing that this is the 30th anniversary of economic reforms.
This is a bizarre claim. Indeed if the argument is that 1991 was the moment for initiating a big acceleration in economic reforms, then the claim is correct. Alternatively it is patently false.
For one, it denies history: change is continuous and benchmarks like 1991 are the result of cumulative efforts preceding it—in this case a stealthy debate among the top economists in the country throughout the 1970s provided the basis for articulating the reform agenda in the 1980s; this was fine-tuned by a regime led by Prime Minister Chandra Shekhar which however fell before it could implement the reforms. So the combination of Rao-Singh inherited a ready-made crisis and a blueprint.
Second, this distorted view of history blinds us to a very important nugget: The consensus that has been painstakingly developed around economic reforms over the last 40 years. It is this glue which needs to be leveraged to launch the next generation of reforms.
I wrote about this in my monthly column in Economic Times where I argued that the ideological reset for 1991 reforms was drafted into India’s growth strategy in 1980. Sharing a screen shot and some quotes.
“It all began in 1980 — and unbelievably — under the prime ministership of Indira Gandhi, who has often been given the moniker of being an incorrigible populist and someone steeped in socialism.”
“The big shift in economic thought began with the Sixth Five-Year Plan.”
“The second oil shock in 1979 and the resulting balance of payments crisis expedited matters. India knew that eventually they would have had to lean on the International Monetary Fund (IMF) for a bailout with conditionalities. When Indira Gandhi returned as the PM in 1980, a team of domestic policymakers drew up the scenarios — including a potential bankruptcy. They convinced her that India would be better off implementing change ordained domestically rather than follow the diktat of the IMF.”
“There is continuity between the 1980 moment and 1991. The member-secretary of the Planning Commission that formulated the Sixth Five-Year Plan was Manmohan Singh, the same technocrat who as FM in 1991 became the lightning rod for economic reforms.”
If you wish to read further please click here.
To cut a long story short, there already exists a consensus around economic reforms. Successive regimes have invested their social capital to generate it. Yes today some of these votaries may be suffering from selective amnesia, but the facts can’t be denied.
The Gujarat Model
The time has come therefore for institutionalising this consensus—which has been achieved after lengthy debates, some of which were extremely acrimonious. This will save crucial time and social capital and also preclude this constant reinvention of the wheel as it were when the opposition and the ruling party switch roles after an election. A good example is the stance of the Bharatiya Janata Party (BJP) and Congress on the Goods and Services Tax when in power and in opposition.
It is time to give short shrift to mindless political opportunism. Hopefully our politicians who are elected to serve India will realise that the opportunity cost of such grandstanding is a denial of economic opportunity.
The good news is that there is a model the political parties can adopt. And interestingly it was cobbled together by the two principal rivals: BJP and Congress. Both of them, like most political parties, have a history of speaking with a forked tongue. Yet, there was this one moment when both buried their differences for a common cause: welfare of the state of Gujarat.
It is an important milestone in the modern economic history of India. Yet it has never got the play it deserved. At that time I was working with the Business Standard and travelled to Gujarat to map this development. The time in question was in 1996—much before Narendra Modi took charge of Gujarat.
The western state became the first to ink a direct deal—$250 million Public Sector Resource Management Loan—with a multilateral institution, the Asian Development Bank. Prior to this it was the union government which negotiated and received multilateral aid on behalf of a state.
The basis of this deal was a bi-partisan document drafted under the chairmanship of the former state finance minister Sanat Mehta. It set out the blueprint for economic reforms which among other things gave the green light to fiscal reforms and privatisation. Most importantly it had the consent of both the BJP and the Congress which guaranteed continuity of reforms regardless of who was in power.
Without this the ADB as officials told me soto voce would never have sanctioned the loan, especially since in the 1990s the state’s politics was in a flux.
Fast forward three decades and we find that political risk continues to be the biggest threat to the roll-out of economic reforms. It is all the more challenging as the task today involves undertaking second generation reforms—in which states need to be equal stakeholders.
At the moment the political parties are split down the middle. As a result every policy move, like the amendments to the farms laws, is being opposed. In the case of the farm laws there is no economic argument; instead it is just about playing cynical politics—the Congress as I showed in my piece in the Economic Times even wanted to initiate taxation of agriculture in 1980. Worse many policy moves are also being legally challenged—inserting the judiciary as an additional layer of governance. The delay will ensure the reform initiatives are still born.
To be sure, one cannot deny the right of political parties to oppose—it is their dharma and hence should be respected. But, opposition for the sake of it or mere grandstanding is undermining efforts to effect a reset to deliver the economic potential of India. Especially since this change can only be achieved if the states champion their cause. Needless to say the clock is running out.
Exactly why it is time for the political parties to ink a common minimum programme for economic reforms. History shows us that it was achieved in equally acrimonious circumstances in Gujarat. No reason to believe that we can’t have an encore nearly three decades later.
Today the downside risks of not doing so are even greater and the economic costs devastating. Status quo is not an option.
It is a moment of reckoning.
Recommended Viewing
Like most people I too have always been fascinated by China. Unfortunately we have had access to the works of very few objective academicians/observers; most are overwhelmed by the staggering and impressive surge that our Eastern neighbour has displayed. So they often failed to go beyond the headlines.
I was therefore delighted to stumble upon the work of Yuen Yuen Ang, Associate Professor of Political Science, University of Michigan. Her latest book, China's Gilded Age: The Paradox of Economic Boom and Vast Corruption. It holds the promise of being exceptional.
The book offers a fascinating insight into the meteoric rise of China and the method in the madness as it were. It also reveals how China is beset with fundamental contradictions and hence dangerously poised on a precipice. Given its size—as the second largest economy in the world—this should be a cause of worry to all of us.
You can get a sneak preview in this fantastic conversation hosted recently by Stanford University. The analysis of “access corruption” in China and comparison to the gilded age of the United States is compelling. India, according to Ang, is more of a case of “speed corruption” (bribes paid to overcome bureaucratic hurdles). Though the conversation is long I would say it is totally worth it. Do give it a listen.
Till we meet again next week. Stay safe.
Dear Anil,
very comprehensive article .I agree with you reforms are a continuous process.This process started in India when in 1969 MRTP Act was abolished.18 PSUs were gradully liberalised. The changes in trade and FDI POLICY which allowed import of capital and intermediate goods and switch to flexible exchange rate system regime in 1993, INDIA joining the WTO were major changes in our economy.current account convertability was also introduced along with 100% foreign ownership in many industries.
Many new institutions like SEBI , IRDA , PFRDA etc have been set up for better monitoring of financial sector. MGNREGA to provide100 days of wage employment in rural areas, targeted PDS to provide foodgrains at subsidised rates are also reforms.
AADHAAR system which is a single source offline /online identity verification, has boosted the inclusion of programs like Ayushman Bharat, Ujjwala , PMUDY etc . GST has changed are tax regime. Monetary policy committee has been set up to maintain price stabity and accelerate economic growth rate to reach 5 trillion target someday .
Comparision between India and China is important as both started their journey of growth at similar time.In China policies are made and implemented easily due to the State Control. Most enterprises are state controlled, especially the capital intensive industries like coal and cement. India is the worlds largest demoracy , the reforms , initiatives of the govt. will take time to show the desired result. but we all agree they are a step in the right direction.
An overdue wakeup call Anil.