BR Shenoy Memorial Lecture 2021 | Montek Singh Ahluwalia

BR Shenoy Memorial Lecture 2021 | Montek Singh Ahluwalia

Source: https://www.youtube.com/watch?v=YxTw_OgJwZc Duration: 5994.1s

Speaker 1 (00:00): we are now going to go live okay you can or uh Okay. So Mr. Luol, if you’re ready, then we can start. Yeah, as ready as one can be in these things, but go ahead. Yeah.

Speaker 2 (00:30): Yeah. Great. Thank you. So we’ll get started. Hello, welcome to the Biya Chennai Memorial Lecture 2021, co-sponsored by the Economic Research

Speaker 1 (00:41): Mangalore and the Center for Civil Society Delhi. My name is Kumar Anand and I will be your host this evening. After the talk there will be some time for questions and we have shared a Slido link on Zoom and on YouTube which takes you to a portal. Please type in your question there. You can also upvote and downvote a certain question. This lecture series memorializes the Indian economist Professor B.R. Shinoy who for almost 30 years till his passing in the late 1970s waged a lonely fight in the decades of soviet style centralized plans for liberalized economic policies that would generate both employment and genuine economic growth for the indian common man

Speaker 2 (01:19): this was the era of permit license raj a phrase he coined as a description of a distorted economy where delhi had to give permission for a company to spend its own funds to expand production of what people need to buy and growth was a nominal few percent annually at the time foreign exchange was perennially scarce the country was a global arms seeker and rbi reserves

Speaker 1 (01:43): were too so depleted that india had to pledge her gold for an imf loan in 1991 driven by desperate

Speaker 2 (01:50): circumstances and economic revolution took place and the then finance minister dr manmohan singh noted the fervor for a change in a budget speech quoting the well-known couplet our speaker for the b.r.

Speaker 1 (02:04): shunai memorial lecture 2021 was a central player in the vital backstage policy work that made possible the success of the 1991 economic reforms on behalf of the chairman

Speaker 2 (02:15): of the economic research center shri gredhar prabhu and the founder president of the center for civil society dr parjeshah it gives me great pleasure to invite montexing aluvalia

Speaker 1 (02:24): to deliver the b.r shunai memorial lecture 2021 our speaker is of course very well known After BA honours in economics from Delhi University, he obtained an MA and MPhil in economics as a Rhodes Scholar at Oxford University. He has worked at the International Monetary Fund and at the highest administrative levels of the government of India as Secretary of Economic Affairs and as Finance Secretary, Ministry of Finance, and as Deputy Chairman Planning Commission 2004-14. He was awarded the Padma Bibhushan in 2011. He is presently a distinguished fellow at the Center for Social and Economic Progress Delhi. We now request our speaker Montek Singh Aluwalia to

Speaker 2 (03:03): deliver B.R. Chenoy Memorial Lecture on Lessons from 1991 for 2021, New Economic Reforms for

Speaker 1 (03:10): Renewing India. Please go ahead sir. Thank you very much. Let me first of all begin by thanking the center for civil society and the economic research center for inviting me to give this lecture and i’m particularly pleased uh to be able to give this lecture because i think the work of br shanoy is very relevant to the whole economic restructuring that took place in 1991. you know You know, the conventional approach when you’re delivering a memorial lecture is that you say a few nice things about the person for whom the lecture is named, and then you just go on and deliver your lecture. I don’t think I can do that in this case, because there’s a lot to say about B.R. Shrenoy.

Speaker 3 (04:04): And let me just say that at the beginning.

Speaker 1 (04:06): He was clearly one of the most distinguished economists that we had in the 50s and the 60s. But, you know, he also had a very stellar academic career. It’s not widely known, but he was the first Indian economist to be published in an international journal.

Speaker 3 (04:30): That’s the Quarterly Journal of Economics way back in 1931.

Speaker 1 (04:38): And what he published was not just an article on India. He published what was actually a critique on Keynes’ Treatise on Money. So very much out there at the forefront of top quality academic writing. he later on is most well known in India because he was one of the 20 or so economists whom the government of India had invited to prepare recommendations for the second five-year plan and he prepared a famous minute of descent. Now, the plan, of course, went on and got approved in spite of Chenoy’s minute of descent. That doesn’t surprise me too much because, you know, there’s a fashion in things. And in 56 and 57, the fashion really was in favor of centralized planning. The politics drove in that direction. I mean, that was evident in 1955 when the AICC meeting at Abadi led to the resolution calling for a socialistic pattern of society. So if the politics had moved in that direction, it’s not surprising that the economists and the planners would sort of replicate what the Goss Plan was doing.

Speaker 4 (06:14): And let me say that at that time, this was not all that surprising either.

Speaker 1 (06:21): Many developing countries, seeing the Soviet Union having broken free of its feudal background and converted itself during the war years into an industrial power, saw this as a way of accelerating growth. I mentioned in my book Backstage that, you know, even Samuelson, the guru of market economics, in the 1960 edition of his book Economics, sort of said that the rate the Soviet Union is growing, it will overtake the GDP of the United States by 1984. And this perception that the Soviet strategy, whatever its other faults, and they had many that they would worry about liberty, et cetera, and so on, but it would generate high growth. This survived right up to 1980, because in 1980, Samuelson’s book said the same thing, except now he said that it’ll overtake the U.S. in 2012. Well, after 1980, these predictions were just dropped. So my point is that at the time that Shrenoy wrote, I’m not surprised that his minute was minuted and we went off in the direction that we went off. But what I think is interesting, and that’s very relevant in terms of lessons, you know, we didn’t do so badly in the 1950s or even really in the first half of the 1960s. compared to other developing countries. It is in the period after 1964. I mean, Panditji died in 1964. It’s in the subsequent period and in the next decade that India’s growth performance really deteriorated, whereas the growth performance of others in East Asia and Southeast Asia actually improved significantly. So this is the period when there should have been a reconsideration of why is it that we are not doing as well as our targets want us to do. And frankly, at that time, I would have thought that it would have been logical, even if Chenoy was actually ignored when he wrote the minutes, it would have been logical for someone to go back to what Chenoy wrote and say, well, look, maybe he was right. And, you know, it struck me that other than noting that he wrote this famous minute of descent, there was hardly any focus on the issues that Shinoah had raised. In fact, again, in my book backstage, I mentioned that we were aware that Shinoah had written this minute of this descent, but there was very little teaching that went on in Delhi University at the time that said these were the issues.

Speaker 4 (09:21): This is what Shinoah said. Was he right? Wasn’t he right? It was just taken for granted that whatever the government is doing is right. And we have this tendency. And I believe that one of the important lessons we should get out of the 91 year report.

Speaker 1 (09:35): 2100 reforms is that we should constantly examine what is actually going on. And are we anywhere near achieving the targets we’ve set? And if we’re not, what is the reason? I think one important lesson which is relevant for the future is to subject our actual performance to very close scrutiny. Now, having said that, let me say that in the in the broad thrust of of reviewing of economic history, I feel that the 1991 reforms very often described as if they were simply, I mean, they were triggered by a crisis, there was a crisis, the IMF would not have given us money if we had not reformed. So naturally the reforms happened. I think this is actually a superficial assessment of the situation because it’s absolutely true the IMF would not give money if we were not willing to do reforms. But the fact is that the reforms we did were actually much deeper than the IMF would have insisted upon. So actually, we carried out much more far-reaching reforms in 1991. And one reason we were able to do that is that during the 1980s, people were beginning to think that, look, why are things not working? I mean, after all, in the mid-1980s, Rajiv Gandhi became Prime Minister. And being a new entrant into that office and a young man and a fresh approach, I mean, he actually said things like, you know, we must get India ready for the 21st century. He also said in Parliament that how can we be competitive when our systems are 20 years old and now out of date?

Speaker 3 (11:31): So the idea that we need to review our systems as a whole was there in the public debate, but we somehow failed to translate that into actual action. And, you know, my thing, I was in the government at the time. I was in the prime minister’s office at various stages.

Speaker 1 (11:49): I mean, after Mr. Gandhi left, Mr. V.P. Singh became prime minister. Internally, we had discussions that, you know, why is our performance not very good? And I sat down and I wrote what later on came to be called the M document. And the dominant thing that emerged from that was that, you know, our approach to reform is very much each ministry pronounces what reforms are necessary. This is not does not give you a holistic assessment of what needs to be done. Because, you know, each ministry is usually responsible for some particular objective and it controls some policies. But it tends to think that in order to achieve those objectives, it must concentrate on the policies that it controls.

Speaker 3 (12:44): Whereas, in fact, the objectives are not being met because of other policies which the ministry itself does not control.

Speaker 4 (12:52): I mean, let me give you a very simple example.

Speaker 1 (12:55): The Ministry of Commerce, I was Commerce Secretary, the Ministry of Commerce is supposed to be responsible for pushing exports. And in those days, the way to push exports was either by having some export subsidy, it used to be called cash compensatory support, or by giving some assistance in marketing. So the Ministry of Commerce would always be told by exporters that, look, we can do much better if you give us more of a subsidy. Whereas actually what they should have been saying is, look, why are we not competitive? We’re not competitive because of a large number of things which are outside the control of the commerce ministry.

Speaker 3 (13:37): I mean, one of those things is very high import tariffs, which raise the cost structure of Indian industry, which force the exporters to look for a subsidy.

Speaker 1 (13:47): Now, if you got rid of those tariffs, then you wouldn’t have a highly uncompetitive industry and you’d become a little more competitive. Of course, if you got rid of the tariffs, people would say, well, then you’d have a lot of imports. And how would you finance them? Well, the short answer to that is that if you had an exchange rate that was flexible, then if there were too many imports, the exchange rate would depreciate. And the exchange rate would make exports more competitive and also make it easier to compete against imports. But the exchange rate was not in the control of the commerce ministry. The exchange rate was somewhere between the finance ministry and the Reserve Bank of India. You can multiply these types of examples. And the only point I want to make is that if you tell each ministry what is necessary to achieve its objectives, it tends to take a silo-like view. I said, what is it doing? How can it help export it? It doesn’t take a system wide view, which says, look, the system itself is wrong. I mean, to change the system. And I think we weren’t doing enough of that. During the 1980s, we had a lot of opportunity to think about these things.

Speaker 3 (14:57): I mean, I mentioned that I prepared a document came to be called the M document, which was leaked. And therefore, in fact, one of the journalists decided to call it the M document because it was widely believed correctly that I had written it,

Speaker 1 (15:10): although it didn’t acknowledge authorship. And when that document was discussed, I discovered that, you know, there’s quite a lot of agreement. It wasn’t that I was inventing something new. There was quite a lot of agreement when people sat collectively and said, look, these are the changes necessary. But somehow we were not running a system that enabled that to happen. So I think the 1991 reforms came out of the a good holistic understanding of what was wrong.

Speaker 4 (15:45): Now, honestly, if we had had more self-criticism

Speaker 1 (15:48): and if we had listened a little bit more to Shanoi-type dissents, which were produced many, many years earlier, this might have happened earlier. But what did happen was that the crisis was used as an opportunity

Speaker 3 (16:05): and a multi-pronged reform effort was set in motion. You know, many of the areas that we did, we pushed were areas that Chenoy himself had talked about. I mean, for example, he was not in favor of nationalization and expanding the public sector.

Speaker 1 (16:25): You know, incidentally, the minute of dissent, when people talk about it, they keep saying he was critical of the large size of the plan and the fiscal deficit.

Speaker 3 (16:34): That’s true. But the most important part, in my view, of his criticism was the institutional structure for implementation, which included a lot of controls.

Speaker 1 (16:46): I mean, Shinoi’s view was that, look, we’ve gained, we’ve built up a lot of controls during wartime, and the time has now come to decontrol, not increase control. This is what actually happened in Europe. They had these controls imposed during the war. And when the war, the Second World War was over, they just got rid of them in a few years’ time. We’re the ones that didn’t. And I think part of the problem is that there was a tendency in India to think of development must be pursued on a war footing. And all these controls that even market economists say that when you’re facing a war, you can’t rely on the market. Because then you have a single minded objective that this is what we must achieve and never mind the costs. You follow a control oriented approach. But that’s not what you do when you’re trying to promote development. And I think that a lot of what was done, the intellectual framework that, you know, you should give the private sector more freedom. You should not be pushing for a large public sector. you should recognize that Shinoi is quite categorical, that controls are not only inefficient, but they promote corruption.

Speaker 3 (18:01): I mean, these are two different things

Speaker 4 (18:03): because inefficiency can be there without corruption. But he also said that they actually promote corruption,

Speaker 1 (18:09): which of course they did. Now, 91 went way beyond what Shinoi was talking about simply because the world had changed. I mean, Chenoy didn’t think very, didn’t say very much about foreign trade, although his opposition to controls would imply

Speaker 3 (18:27): that he would not be in favor of excessive controls on foreign trade. He didn’t talk very much about protection. That’s something that became part of economists consciousness in the 60s and the 70s. And he didn’t talk about foreign capital

Speaker 4 (18:43): and liberalization of capital influence.

Speaker 1 (18:45): In 99, and he didn’t talk very much either about liberalizing the financial sector or moving to a more efficient financial sector. But remember that the nationalization of the banks and all the rest of it happened much later in 1969 or so. So I think that had we paid more attention to the sort of critique that was there in Chennai’s minute of dissent, we would have had a better understanding of the weakness of foreign policy.

Speaker 3 (19:19): And one of the lessons for today is we should be constantly critiquing foreign policy.

Speaker 4 (19:25): We should actually be encouraging critics to put forward criticism because, you know, with the best intention in the world, the government cannot always get it right. And actually with economics, very often there are multiple points of view and only time will tell whether X is right or Y is right.

Speaker 1 (19:45): So we need a culture of criticism. And I think anything we do to promote that would, to my mind, be a good thing. Now, having said that, and this makes Shanoi’s work especially relevant, it’s relevant to ask the question, you know, what are the lessons from 91 reforms for the current year, that is for the year 2021? But it seems to me that one of the first things we need to do is to make up our mind whether the 91 reforms worked or didn’t work. I mean, obviously, if you come to the conclusion that they were a complete failure, then you come to one sort of conclusion. If you think there was substantial success, then you come to a different conclusion. Now, my feeling is that, and most people would agree with this, the 1991 reform was substantial. They were systemic, and they pushed India into a higher growth path. I mean, we saw growth rates above 8% for several years during the 2000s, which we had never seen before. And during that period, internationally also, we came to be recognized as possibly the second rapidly growing emerging market country after China.

Speaker 4 (21:09): And many people even thought that China had done exceptionally well, but it had reached a much higher level and it would face new constraints in order to continue growing.

Speaker 1 (21:22): India was still at a lower level, had a lot of, if you like, low hanging fruit, which it could harvest.

Speaker 3 (21:30): And it would most likely continue to grow. And people thought that India’s growth will then be faster than China’s growth. Although, of course, China was at a much higher level of per capita income than India. So we would catch up on growth, but not necessarily catch up on per capita income. Those were very positive years.

Speaker 1 (21:49): years and I think they created a changed image of India including in the capital markets.

Speaker 3 (21:57): Investors beginning to look at India and so on. That has continued over the last several years.

Speaker 1 (22:02): You can see that because those policies have continued. But let me come back. In terms of success, I would say that I would learn from the 20 to 1991 reforms that you know the basic argument that the private sector is going to be the leading sector to generate growth this is actually valid in other words the old idea that the public sector should occupy the commanding heights of the economy which was the belief before 1991 and the private sector should actually be constrained so that the public sector can do its bit this is just wrong i don’t know if there is a complete consensus on it but i find that today uh nobody nobody is yearning for the public sector and they’re quite willing to see the private sector play a much larger role so that’s a good anchor of policy that you know what are we doing and so we should look at we

Speaker 4 (23:08): should look at private sector experience look at feedback from the private sector what do these

Speaker 1 (23:13): guys need in order to become more efficient i mean this is a positive lesson the second lesson really is that a question that arises does this mean that government has no role to play i mean that

Speaker 4 (23:26): you know policy discussions are very often shuffled between extremes so people like to pose

Speaker 1 (23:33): things in extreme fashion so you’re either described as a pro-market fellow or a pro-public sector. Now I think it’s quite clear to me that you know it’s wrong to say that the government has no role to play. What we should be doing and learning from our experience is the private sector has

Speaker 4 (23:55): tremendous capacities, it has a degree of flexibility that public sector cannot match,

Speaker 1 (24:02): the government has a big role to play and what is that role well i would say that role is clearly in two very critical areas as we move to higher levels of development those areas really are a much better health system to be set up in the country and also a much better education system which isn’t just better in terms of quality but also ensures equal access i mean we need to have a health system and an education system where those who cannot actually afford to buy better quality are still quite well given access to good quality facilities and that’s a very big role for the government to play and it’s not a role that at the moment is playing adequately so i think that’s one of the areas where government has to expand its role and that’s also in due course you can say whether this can be done through public private partnership but dominantly it has to be an expansion of the government system especially in rural areas so that’s one second the building of infrastructure now here from 91 onwards and in recent times even more so we have moved to the idea that uh infrastructure investment of certain types can be promoted through public private uh participation in other areas it can only be done by the public sector i mean if you’re going to have rural connectivity that’s going to have to come from the public sector if you’re going to have connectivity to remote areas that’s going to have to come from the public sector but there are many parts of road connectivity where you can levy a toll and even if the toll doesn’t cover the full cost of investment you can have a public-private partnership where you can bid for a capital subsidy in return for which for 30 years you get the right to operate that facility and make money on the tolls that you earn provided the tolls are reasonable and appropriately regulated and the same thing holds for ports same thing holds for airports so this is a very big role for the government to play and let’s be very clear about it india’s infrastructure is nowhere near where it needs to be if India has to increase, move from what it is now, which is the bottom of the middle-income countries,

Speaker 3 (26:50): to something nearer the top of the middle-income countries. I mean, the great contribution of the 91 reforms

Speaker 1 (26:58): is that we got pushed out from the low-income country category to the bottom of the middle-income country category. Now we have a whole new set of constraints that we have to deal with. We have to be competitive.

Speaker 4 (27:10): we have to improve our infrastructure and we have to improve logistics. Now, you know, logistics is another area where,

Speaker 1 (27:19): which is not a matter of capital investment, but it’s a matter of systems. And that’s something that only the government can take care of. And the government means in this case,

Speaker 3 (27:28): both the central government and the state governments working together so that things move smoothly and products are delivered on time.

Speaker 1 (27:36): I mean, there’s a lot of work that’s been done on industrial competitiveness, which says that Indian industry is actually quite competitive when it comes to what the factory does. But where it’s not competitive is getting the inputs into the factory and getting the outputs from the factory into the ports.

Speaker 4 (27:56): So these are elements of competitiveness which are critical if you have to be internationally competitive and it’s a role for the government to play.

Speaker 1 (28:04): So let’s not be fooled by assuming that we’re in favor of liberalization, market will do it, not at all. Second, third issue that we have to ask ourselves is that if you’re going to give the private sector a lot of freedom, does it mean that you don’t have anything to worry about? The short answer here is that, and many people do worry, that large private sector companies may exploit their market position. This is where we need a sophisticated structure, a sophisticated regulatory structure, which subjects the private sector to competition. You know, my personal view, and I mean, this can be debated and it should be debated. My personal view is that we do need to discipline the private sector. But the best discipline for the private sector is competition, not having a bunch of bureaucrats circulating around the private sectors, telling them why are you doing this and why are you doing that? I mean, I’ve discussed these things at great length in backstage my book. And my main hope was that enough people are made aware of the fact that government intervention creates an environment in which economic efficiency is almost impossible to achieve.

Speaker 4 (29:26): And I think this is another reason why I feel that I feel honored delivering the B.R. Chenoy Memorial Lecture, because people should remember what he said, but even more should remember why was it that he wasn’t given not enough attention was devoted to it.

Speaker 1 (29:46): And I mean, as I think the American philosopher George Santayana famously said, I mean, those who cannot remember history are doomed to repeat it. So I think we should understand what the pre liberalization world was like, because otherwise we’ll just repeat it. Having said that, the way the critical message here is that big private sector companies do need discipline, but the best discipline for them is competition. And this leads to another question that, you know, one can imagine a number of products that are produced by a large number of private sector entities will compete with each other. each other but when you get to uh private sector entities which are very large and there are very few of them how do you ensure competition well in certain areas like for example telecom where you know there are kind of uh network effects that prevent uh the presence of very large number of competitors but you can have enough competition with two or three dominance providers as long as you have a regulatory system that ensures that competition is fair and is not tilted towards one or the other when it comes to production the only competition is really from imports no matter how big a producer as long as the consumer has the choice between buying what he produces and buying from abroad he is automatically under a competitive pressure Now, I’m not saying that you should not have any protective tariff to protect your industry. A modest amount of tariff is perfectly okay. But if you’ve got big companies and they have a reasonable tariff protection, 10%, 12%, something like that, you can be sure that they are not going to be misusing their position because basically the consumer has an option.

Speaker 3 (31:53): So I think as we move forward, this becomes very critical in devising the kind of policies that we want.

Speaker 1 (32:04): And this answers the question, should we remain open? Now, currently, I mean, you know, all policies made in an existing context, And the current international context is one in which many countries seem to have deserted the earlier kind of commitment to open trading system, including some of the most important. In their case, by the way, it’s not as if they’re deserting it for everything. They’re deserting it for critical areas, technologies that they regard are critical to maintain their hegemonic dominance. And then they’re going in for protection and control. So what should India do? Should we assume that the world of the open economy, which was more or less unquestioned five or six years ago, is gone forever and that everybody is going to retreat into protectionism? Or should we assume that it’s going to be a more interesting and complicated world where some of the major economies, primarily the United States and China, will be engaged in economic conflict with each other and maybe engaged in that context in slightly closing of their markets. But for the kinds of things that we are competing in, we will not face closed markets. So we should remain open and remain as competitive as possible. Does this mean that in certain areas we can’t just rely on openness for our own products to develop? We do need to do something special to develop Indian capability. The answer is yes. I mean, for example, we are a very, very important player globally in, say, pharmaceutical formulations. It makes sense for us to develop a substantial, you know, the basic ingredients, the active pharmaceutical ingredients that go into formulations. And for some reason, we’ve been weak on that.

Speaker 3 (34:18): So we need to ask the question, why is that so? How can we develop? I mean, after all, if we have a leading pharmaceutical formulations industry that provides a base for a very healthy industry for active ingredients, that’s not happening. How can we do that?

Speaker 1 (34:37): We are going to be one of the leading markets in, for example, renewable energy, solar energy, for example. So we ought to think about how much of the solar energy stuff that we need can we produce ourselves. That doesn’t mean we have to produce everything. But we do need to think of how we can develop a domestic capacity. And what are the strategic kind of interventions that will help to do that? So that’s an area where I think we need to do something. But, you know, this cannot be multiplied many times. I mean, we cannot have, we cannot be doing it for 20, 30 sectors.

Speaker 4 (35:24): I would have said if we were to identify five or six sectors that we want to do it, let’s do it and get somewhere.

Speaker 1 (35:30): And as in when we’re ready to do it in other sectors, maybe we can approach those sectors in a similar kind of way. We need to look forward and ask ourselves, what’s happening in the world of technology and what is capitalism doing? Now, here, globally, there’s a very big change in attitudes right now. In the 91 reforms, those were undertaken at the height of the enthusiasm about globalization. I mean, everybody was open. The Chinese were desperately trying to get into WTO, and the communist countries declaring themselves to be market economies. So that was one kind of work. And the West was also very confident about itself. So we adjusted policies based on that kind of work. Today, the attitude seemed to have changed quite a bit in the sense that there is a perception that coming largely out of the West, that market oriented capitalism combined with globalization has led to a sharp increase in inequality. Now, they are beginning to question whether this is the right thing to have done. But you know, I want to warn here that some of what they are questioning is simply the erosion of the real income of that middle segment of US industry, which was caught in a set of industries where they’re no longer competitive. and we’re actually we are the ones who should be stepping in.

Speaker 3 (37:13): So I don’t think we should be we should fall victim to the trap of saying, yes, that’s terrible.

Speaker 1 (37:19): The fact that some of these things are going abroad is a good thing. It’s helpful for us. And of course, it’s true that China has been the one that took the biggest advantage. But frankly, that’s partly our fault because we did not position ourselves so that we could take an equivalent advantage. I think that what we need to do is to recognize that as far as the Americans are concerned, they have to adjust to this by altering the structure of their own production, moving out of this middle range area, moving into higher level things which require higher skills, etc. and letting developing countries provide these products. My guess, by the way, is that that is what they’ll do. I don’t think they’re going to be erecting huge protective walls behind items that are not, according to them, of strategic value. Now, cybersecurity, artificial intelligence, those kinds of things, they certainly will become very protective and very distrustful.

Speaker 3 (38:29): I mean, that’s certainly true of telecommunications and the Internet.

Speaker 1 (38:33): And, you know, these are things we also have to be concerned about. I mean, after all, if in the world of the Internet of Things, when the Internet connects all kinds of machines, you have to be concerned whether an external agency could get control of all sorts of equipments in your country because they’re able to hack the Internet in one way or the other. So this is a new thing that we have to do, but it applies to very specific areas where cybersecurity is important. It does not apply to the general range of manufactured products where it seems to me we just have to show that we are actually competitive and get on with it. I think there are a couple of other points that I’d like to make, and that is that, you know, before opening it up to questions. You know, one of the one of the important things that is necessary in as you move into a middle income category, we’re already at the bottom of the middle income country, but as we move higher. When it comes to inequality, I mean, we we should look at what’s happening on inequality in India. And I think we should separate out what has gone on because of the pandemic. I think there’s a great mistake to sort of treat many of these problems that are specifically there because of the pandemic and treat them as problems of capitalism. They do reflect the fact that we are not able to respond to the pandemic in as flexible a way as would be ideal. But, you know, there’s been lots of loss of jobs, lots of loss of income, et cetera, et cetera, because of the pandemic. And that will come back as the economy recovers. So the question really is, if we separate out effects that are temporary and then look at effects that are longer term, what are the things that should be of concern in the future? And my guess is that the biggest problem there, quite honestly, is that we are not seeing a sufficiently rapid expansion in what I would call the non-agricultural sector that would enable us to pull people out of agriculture. I mean, the fact is that in a normal development process, the percentage of the population depending on agriculture should go down. Unfortunately, when people talk about agricultural employment, a lot of the talk is that we must increase agricultural employment. That’s not true. We should be reducing agricultural employment by taking people off the land. But taking people off the land doesn’t mean pushing them off the land. We ought to be creating full of factors so that they themselves want to move off the land. And the fewer people that are dependent depending on agriculture, because they found other jobs, the easier it will be to raise per capita incomes and wages in in the agricultural sector. What are these areas? Well, I mean, services and construction, these things, they’re obviously important. But you know, manufacturing is also important. And we have not done as good a job in that area as we should have. So we really need to look at what is it that’s holding back manufacturing. Again, it’s easy to get into the mistake that manufacturing is suffering because it’s not protective. The fact is manufacturing is suffering because we haven’t created the ecosystem that would enable manufacturing to be competitive. And so we get more imports of things that we could easily produce competitively. Our focus should be on that rather than on raising protective tariffs. There will always be pressure on the part of industry to raise protective tariffs because that’s the easiest thing to do. I mean, it’s in the public debate. It’s a mistaken impression that raising tariffs hurts foreign manufacturers. Actually, it primarily hurts domestic consumers. They also hurt foreign manufacturers. But it hurts domestic consumers and it hurts domestic exporters because the raising of tariffs raises the cost of production domestically, which feeds itself through into exports. So this class of issues, what do we need to do to improve our ability to expand employment in manufacturing is important. And frankly, linked to that is the whole issue of improving the quality of the labor endowment. It is any employer will tell you that, you know, we have a serious problem that although we have a lot of people and we have a young population, the availability of people who are adequately skilled is not very good. And that’s a huge lacuna in the system, which can only be solved by the government intervening, again, through a combination of both public sector and private sector activity.

Speaker 3 (44:09): So that basically we can we can generate a labor quality that is actually better.

Speaker 1 (44:15): And I think if you use most of the metrics that people use, number of years of schooling, etc., etc., we don’t come out looking good compared to, let us say, Vietnam, which is also a low-income country, but I think they’ve managed to do a better job in training their labor. So I think that’s one big area. I think we need to also look at the issue of our kind of tax system, because, you know, if the role of government is not going to contract, and I have said earlier that it’s not going to contract. Let’s ask ourselves, how is it going to expand? Well, a very simple answer would be that we need to add at least 1% of GDP to education and skill development in India. We almost certainly need to add maybe 1% to 1.5% of GDP on provision of health through the government, centre and state put together. So that’s 2.5% of GDP additional expenditure. We certainly need to add about 1% of GDP in research support, including agricultural research. I mean, I say this in the context where we are currently facing all sorts of threats of climate change, which will have a very adverse effect on agricultural productivity.

Speaker 3 (45:46): So we do need to do more research in these areas than we are doing. how we do it is another matter, how to get the biggest bang for the buck.

Speaker 1 (45:57): But if you take 1% there, so 1 and 1.5, 2.5, and another one, which is this 1%, and then look at what infrastructure needs. Without any question, we probably need to spend an extra 2% points of GDP on infrastructure, of which, again, 1% will have to come from the government, center and states to put together. So that alone would take this to about 4.5% of GDP. And I think we also have to recognize that we’re not spending enough on defense. Given the geopolitical situation that we face, our defense expenditure as a percent of GDP has been shrinking steadily. You don’t want to be caught in a vulnerable position. So you need to jack up defense expenditure somewhere between half a percent to one percent of GDP. That means really, I’m not saying that this has to be done immediately. This would have to be done over the next five or six years. You can easily think of five percentage points of GDP increase in expenditure. Now, in addition to that, we already have a fiscal deficit that’s far too high. I mean, India’s fiscal deficit, center and states put together, is amongst the highest of all developing countries. So by any standard, we need to reduce that. And people will have different views on how much it needs to be reduced. But very few people would disagree that over a five-year period, we should reduce the fiscal deficit somewhere between 4% and 5% center and states put together. Now, if you add these two together, more expenditure and reduced deficit, the fiscal turnaround that India needs is over a five-year period, could be 9 to 10% of GDP. Now, this, to my mind, whatever energies we have in policy reform, should be concentrated on trying to make sure that this gets done. Now, two things here are very important. One is tax revenues. Is India mobilizing as much by way of tax revenues as it should? The answer is no. Any number of studies have shown that India’s tax as a ratio to GDP is lower than it should be given up a capita income. So different people have different ideas of what the gap would be. But most people would say that, look, if you if you were to optimize that particular ratio, you really need to you need to you need to reduce the tax ratio by something of the order of just one second. Let me something of the order of I mean, you need to increase the tax ratio by something of the order of 5% of GDP.

Speaker 3 (49:00): GDP. How do you do that? That requires a major tax reform. You know, I think we tend to think

Speaker 1 (49:09): of tax reform as being done from budget to budget. But actually, most systemic reform is done with a lot of thinking in advance. I think one of the very important advances that we have made is the implementation of the GST, which took several years. It began under the upa finished in the nda period the current government um and it’s still a a work in progress because the design of the gst is widely regarded as not ideal so it’ll take a

Speaker 3 (49:43): little more time but i think the gst uh has been done but there’s a whole issue of what should be the structure of direct taxes what’s the structure that’s most consistent with what is global best

Speaker 4 (49:57): practice and also there’s the issue of property tax you know by any standard the property tax

Speaker 1 (50:07): rates in India are ridiculously low at the same time we’re becoming an increasingly urban society and they’re going to be huge demands to increase urban services now property tax is the rate is determined by the state government the tax accrues to the municipality so the state governments have great incentive to follow a populist approach and actually lower the property tax rate the end

Speaker 3 (50:37): result is that the municipalities end up with no revenue at all and if you make a comparison between rates of property tax in India compared to rates of property tax in the rest of the world you can

Speaker 1 (50:50): see that we are hugely under taxing under utilizing this source of money. But you know, in all in all the tax reform approaches, you shouldn’t take a silo type of type of approach, we need to take a comprehensive look and say that look, we need to increase tax revenues by this much, because we

Speaker 3 (51:15): need to increase expenditure by this month. Now, of course, if you don’t need to increase

Speaker 1 (51:19): expenditure then you don’t need to increase taxes but if you don’t need to increase expenditure you’re not going to get all the other good things that you want so you need to build a political awareness that since it is the society as a whole that benefits from what we do on the expenditure side the society as a whole must pay and that payment must be made in a progressive manner to those who can most afford to pay actually do pay and those that cannot afford to pay pay much less. So I think how to move towards a tax system that enables people to say that India is now mobilizing the kind of taxes that for our level of development, we should be able to mobilize. That’s a very high priority. It’s an important lesson from the 91 reforms, because Dr. Manmohan knew that he had to make all these changes.

Speaker 3 (52:16): Now, instead of simply announcing changes in the budget,

Speaker 1 (52:20): he set up a committee under Dr. Rajah Chalaya, then one of our most distinguished fiscal economists, included a lot of distinguished economists and tax accountants and people familiar with business, etc. They produced a very comprehensive report on what to do

Speaker 3 (52:40): on the direct taxes, indirect taxes, domestic indirect taxes, customs duties, etc.

Speaker 1 (52:49): I think we need another similar kind of committee which would bring the best expertise in the country and I would say even go beyond the best expertise in the country and bring in international experts. There’s no reason why we shouldn’t put on it people with acknowledged expertise internationally Because, you know, as we integrate with the world, as more and more foreign companies have tax base, taxable entities located in India, we need to be able to make sure that people who do business in India say that, you know, the Indian tax system and the Indian tax administration is among the best in the developing world. I mean, that should be our objective. So we are benchmarking not against what our view is, but we are benchmarking against what would be an expectation internationally of what a developing country on the move should be delivering and offering. So these are some of the ways in which we should define the agenda for the future. It is a very important agenda. is not something that can be done straight away. But we should not view this as we need to do this because the 91 reforms failed, which very often you hear people say, oh, well, the 91 reforms haven’t worked, therefore let’s do something. And that’s quite wrong. I think the correct thing is that the 91 reforms worked very well, but some areas didn’t work as well as we had hoped. Gave us a good 20 years of much more rapid growth.

Speaker 4 (54:28): And we’ve now run that they’ve run out of steam. We have new challenges before us. The world has changed. The level of sophistication in the country has changed. The expectations have changed. So we need to redefine the policy agenda.

Speaker 1 (54:43): And I think that is really the big lesson of the 91 reforms is that we will do that only if we have a good appreciation of what is wrong in the existing system, because the purpose of reform is to change the existing system. And for that, it’s very difficult to do that if every ministry’s change is being dictated by itself, because very few ministries will say that they’ve been doing anything wrong. the tendency will be to say, give us more power so that we can correct other people’s mistakes. And that’s not actually what we want to do. You want to have a good holistic analysis of what is needed for India to move into the next 20 year period of rapid growth. So those are those are some of the thoughts I have. I probably haven’t. I’m running out of time. so I know that I have to end at this point. Maybe other issues that you have can be can surface during the question and answers. So with those words, let me once again thank you for listening to me so patiently and I look forward to questions that may arise from the audience.

Speaker 2 (55:58): Thank you. Thank you very much Mr. Huluwalia for painting a very broad picture of list of both macro and micro things that we should look into lessons from 1991. 30 years have passed since then.

Speaker 1 (56:18): I’ll just use my privilege as a panelist and ask the first question.

Speaker 2 (56:23): But before that, two things that I particularly liked, you highlighted about Mr. Chenoy’s work, Professor Chenoy’s work. One is as part of his dissent on central planning, the note, the memorandum that he wrote, The third thing that he mentioned, the third part of it was that how pursuing the goals of or pursuing socialism, the institutions become weak, the democratic institutions become weak. So that does not get highlighted as much as his point about the size of the plan or the deficit financing, which will cause inflation. And second thing about my favorite chapter of Shinoah that he wrote is economics of corruption. And there’s a line which says, corruption is an inevitable byproduct of interventionism. So those two, I’m glad that you highlighted those. Recently, I was speaking to a friend of mine and he mentioned, and I mentioned to him that we are hosting this lecture and you will be the speaker. And then he said that he recalled an encounter that he had with you when you were the deputy chairman at the planning commission. And he said, you know, in one of those after the conference side conversations said, you know, once policy proposals comes to people who are part of the government, you know, those proposals are already known by whether it is deputy chairman of the planning commission

Speaker 1 (57:44): or ministers or so your remark and I’m paraphrasing my friend that may or may not be right is

Speaker 2 (57:52): we know what to do but how to make politically feasible and the recent farm will case are whatever happened in the you know farm with fiasco so to say is is something so I wonder if you have some thoughts on it you know so what is so end is known and end is generally agreed upon by everyone but how to you know go about doing those and going about implementing those reforms is the key and I think we have not found a way around it yet.

Speaker 1 (58:26): You want me to comment on, I mean that deserves a whole lecture in itself because you know, I mean the way I look at it, I think the need for reform in agricultural marketing was agreed to by most people, certainly including me.

Speaker 3 (58:44): And, you know, during the previous government, the understanding was that these reforms have to be done by state governments. So we made many recommendations which are not that different from what has been done.

Speaker 1 (59:00): But our whole approach was to try and persuade the state governments. We did persuade some. We didn’t persuade others.

Speaker 4 (59:07): But it didn’t lead to conflict because we were only saying, look, why don’t you do this?

Speaker 1 (59:11): And send to the left to them. And I mean, if they didn’t want to do it, they just didn’t do it. We, of course, felt that this is a pity because they’re losing out all kinds of possibilities. The present government interpretation of the Constitution, and I can’t pronounce on the validity of that.

Speaker 3 (59:29): That’s something only the Supreme Court can do.

Speaker 1 (59:32): They came to the conclusion that, no, you don’t have to leave it to the states. If you think it’s a good idea, you do it. But then you run the risk that I mean, certainly you run the risk that the opposition is bound to criticize. That’s their job. My guess is that when you do it that way, you need a lot of you need to allow room for consultation. And I think the perhaps the way it was done, the perception was that there was no room for consultation. consultation more importantly what happened subsequently is that the farmers have interpreted

Speaker 3 (01:00:08): the government’s intention into all kinds of directions the government says that it doesn’t have for example many people said this whole thing is just a ploy to abolish mondays

Speaker 1 (01:00:23): government has said that’s not the case they don’t intend to abolish monday but you know this is where issues of trust are very difficult to pronounce on i mean you just have to build the trust and if you build it people won’t have this perception if you don’t build it they will

Speaker 3 (01:00:39): by the way you mentioned it’s interesting that this has now gone off into a completely different

Speaker 1 (01:00:44): direction which is legal guarantee of msp and you know shanoi had specifically commented on this and he was actually against minimum support price. I mean, so in a way, he takes an extreme view. So nothing new under the sun, but that’s why I feel that, you know, you should constantly encourage dissent and you should give an opportunity for these opposing points of view to be discussed and understood so that nobody is suddenly taken by surprise. I mean, I don’t agree with Shrenoy that there should be no minimum support price. But the real question is, what is the right minimum support price? And secondly, are you going to have it for every crop?

Speaker 3 (01:01:34): Currently, the pressure is that you should have it for every crop, including the ones for which you don’t have an MSP.

Speaker 1 (01:01:42): That is going to be, I mean, the implementation ability to do that is going to be huge.

Speaker 4 (01:01:50): I have no idea how that will play out or what the government intends to do.

Speaker 1 (01:01:56): Certainly one of the members of Niti Aayog, Mr. Ramesh Chand, who’s a very distinguished agricultural economist, he has raised all these issues that look, having a legal guarantee doesn’t make sense unless the government stands ready to buy. So is that at all credible that, you know, if some farmer somewhere says, listen,

Speaker 4 (01:02:18): I have this thing and there’s nobody willing to buy, what are you going to do? Are you going to

Speaker 1 (01:02:22): create an institution where it’s very simple if you were to say that he has to travel 20 miles into some depot in order to sell is quite another if he feels that he should be able to sell it at his farm gate. So I think this is going to, this is going to require a lot of discussion and I don’t know how it’s going to play out. But I’m told that they’re setting up a committee, which is a good thing, and ask the farmers to recommend some people. So I think that’s a good way of, you know, if problems are raised, they can be, problems are posed, they can be raised, discussed, and then we can take a view. In a similar light, the first question which has got the maximum number of upvotes and

Speaker 2 (01:03:08): a lot of people wanted to ask this question to be answered by you is asked by Akash and he asked, economic reforms usually hurt some vested interests. How do we steer through that to build consensus and implement reforms? So how to build consensus and implement?

Speaker 1 (01:03:22): Yeah. Can you add my upvote also to that, all those upvotes?

Speaker 4 (01:03:27): In my view, that is the most important issue.

Speaker 1 (01:03:33): So first, you know, I want to say that economists have always been aware of the fact that any economic change, I mean, it’s only marketeers and management types who invent phrases like, you know, a win-win situation and so on. I mean, we know that there are win-win situations in economics also, but the vast majority of the situations involve a trade-off. Somebody is better off, somebody else is worse off. But, you know, societies are usually able to make that judgment, providing we create a sufficient debate and understanding. I mean, let’s take a very simple example, which I’m usually fond of. that a particular job may be destined to become obsolete. And the this is going to be much more likely in the next 10 years than in the previous 10 years because the way technology is changed.

Speaker 4 (01:04:39): But other jobs will be created. So the simplistic view would be that look, you just retrain everybody.

Speaker 3 (01:04:47): But, you know, that’s not I mean, a guy who’s 60 years old or 58 years old, not going to be retrained and he may lose his job.

Speaker 1 (01:04:54): So you can compensate him. But if he’s if he finds that his son or daughter are in line for these new jobs and they’re benefiting, they will get a sense that thing is working reasonably well. The question really is. Is your family income getting hurt or not getting hurt? And quite honestly, if it is getting hurt, and if that’s a large number of people, it’s going to be very difficult to do the reforms. On the other hand, you can persuade people that, look, this is the way to go. And after all, before cars arrived in buses, in cities, there were a lot of Tongawalas who did all the transportation. They could easily take the view that we don’t want any taxis because it will take away business from us. But that’s not what happened. I mean, maybe here and there, there was a feeling. But on the whole, the system was able to adjust because a lot of the Tonga guys themselves became taxi drivers or some of their some of their sons became taxi drivers, whatever it is. I think this is really the task of political leadership.

Speaker 3 (01:06:03): How do you persuade people that the society is changing? Lots of new opportunities are opening up.

Speaker 1 (01:06:11): Certainly the younger people will be able to benefit from those opportunities. Possibly the older people may not be able to benefit, but then maybe you can compensate them in some way. That balance is not easy to meet, but it’s possible. You know, I mentioned a story in my book backstage of how we were trying to push computerization in the banking system in the early nineties.

Speaker 3 (01:06:40): It is amazing. The bank union were totally opposed to computerization because they felt that look, it’ll affect employment. So we had said that, look, it won’t affect employment. We promise you nobody will be fired.

Speaker 1 (01:06:55): But the union leaders said that only means they won’t expand employment, which is true. Anyway, we tried to convince them that, look, the way the banking system is moving, if you want India to look like a modern, efficient economy, you needed to have a banking system that could handle modern transactions.

Speaker 3 (01:07:13): And without computers, that’s just not going to be possible. the finance minister manmohan Singh met with a whole bunch of bank union leaders trade union

Speaker 4 (01:07:22): leaders in his room and he tried to persuade them they expressed their views etc and they were not

Speaker 1 (01:07:29): actually persuaded but you know as they were leaving they were saying goodbye to each one of them and shaking their hands and being very polite i happened to be standing by since i was a finance secretary, one of the leaders said to him, Mr. Finance Minister, I don’t agree with you at all. But then he suffered and said, but you know, I don’t mind telling you that my son agrees with you. You know, I always viewed that as an example of how you have to persuade people that there will be benefits, more benefits than you think. But otherwise, you know, it’s not fair to describe everyone who’s hurt as a vested interest. I mean, somehow I think of a vested interest as someone who’s sitting on a privileged position and desperate to hang on to it, where the privilege isn’t justified. There are lots of those, but even if that’s not the case, there are innocent, there are innocent observers who will get a little bit hit and we need to observe that. This is also one of the reasons why in favor of making change gradually. I mean, the more rapidly you make it, the larger the fallout, the collateral damage. If you make it more slowly, then the collateral damage is smaller, but equally the benefits are delayed. So that’s a political balance the different societies have to make. You know, what pace of change do they want?

Speaker 2 (01:08:59): So your story from the backstage, which you just narrated, is a good segue into the next question, which comes from Parth Shah. He asks, younger generation almost across the world is skeptical at best and outright opposed to markets. How did this happen despite millions of people have been lifted out of poverty in the last generation?

Speaker 1 (01:09:19): And what should we do to address this challenge? Well, as usual, Pat is right. Mind you, he’s one of the leading exponents of the good that markets do. So I’m hoping that he will be the one finding the answer. I don’t have a short quick answer to this, but you know, what is very important is to maximize familiarity with the good stories.

Speaker 4 (01:09:46): I mean, look, when you do something, hundreds of people benefit.

Speaker 1 (01:09:52): Rightly, they believe the benefits are due to their own achievements. Maybe to some extent they think, yes, you know, thank God you aren’t mucking things up and you allowed me to succeed. But subsequently, they’re not grateful to you.

Speaker 3 (01:10:07): But whoever hurt is upset specifically at you and for a long time. So how how the political process can make people aware of all the good things that are happening.

Speaker 1 (01:10:21): And I feel that in India, I mean, this is something I feel very strongly that, you know, if you were to if you were to ask questions about good things happening.

Speaker 3 (01:10:30): There’s an enormous number of good things that are happening. But unfortunately, modern social media and others, there is no

Speaker 1 (01:10:43): there’s no kind of emphasis or payoff from spreading good news. All the payoff in spreading the bad news. I mean, you saw that in the pandemic. the fact that 98 of the people who got infected recovered never hit the news

Speaker 3 (01:11:05): but whoever didn’t recover and that is a tragic uh occasion hit the news all the time now sometimes these things are good because they they draw your attention to what is a real problem

Speaker 1 (01:11:19): and force you to do something more but i think the lack of knowledge about micro good stories is I think a problem because markets markets work by creating a huge number of opportunities for a large number of people. And by and large, when they succeed, they don’t attribute it to good policy. So they’re not actually none of them is a is an advocate of the policy.

Speaker 3 (01:11:51): Those who are not positively affected are made permanent

Speaker 1 (01:11:57): opponents or whatever the policy is. So it’s a very unbalanced outcome. I haven’t answered parts question, because it is

Speaker 4 (01:12:05): actually one of the most difficult questions to answer. The solution really lies in political messaging. But it is it does also lie in many, many more people putting across the

Speaker 1 (01:12:18): facts so that people understand them thank you next question comes from Mohit Sapienan and he asked what do you think of the popular narrative that the Indian economy is getting formalized formalized recent course well you know I make a I make a distinction between getting formalized and being kicked into being formalized I’m not in favor of kicking the economy into being

Speaker 4 (01:12:45): formalized because you know but I think in due course I mean look nobody can think nobody can

Speaker 1 (01:12:55): paint a picture of India 20 years from now and say that 85 percent of the labor will be informal sector with no social security that would be just be absurd the somehow the the the role of the the formal sector and formal sector doesn’t by the way mean with rigid labor laws formal sector means you have some some protection a whole range of things but not necessarily rigid labor laws yes we should be more formalized our problem quite honestly is that I mean this is one view and I know this is highly controversial and that is that our labor laws are so rigid that they have created a strong disincentive for any of the entrepreneurs who are capable of operating efficient sector formal sectors units entering into the labor intensive sector leaving this sector to basically those who are able to arbitrage away from whatever regulations there are and as a result we are doing much worse in terms of employment generation because we’ve created a capital capital intensive bias in industry um i think that’s a problem

Speaker 2 (01:14:16): thank you very much next question and uh here i’m clubbing a few questions and a few people have asked the question in a very similar vein uh such as uh uh srikar sirvastava and rajesh jain the question uh broadly speaking is does india have the chance of to become a five trillion economy and how can we get to a per capita income like China’s of $10,000 in a short amount of time,

Speaker 1 (01:14:40): in a quick time? Well, the crux of that is in a short, you know, let’s put it this way. I’ll rephrase that question. This $5 trillion, I mean, one of these days we are bound to hit $5 trillion. The reason the $5 trillion was an attractive thought was that it was said we’re going to get there by 2024. There’s no chance of that. And that’s clear. Fair enough. I mean, hit by a pandemic, you couldn’t possibly. You know, I don’t find it any more attractive to define a target in terms of $5 trillion than to define the terms of rate of growth. I mean, in the bad old days of planning, the targets were all growth rate oriented. And one of the big advantages of that is every year you could check are you hitting that target or not so the question to ask is what do you think is a reasonable growth rate for india if you go by the miracle economy achievements of the past you can even aim at nine to ten percent i don’t think that india can aim at nine to ten percent we did get a little better than eight percent for about four or five years during the 2000s in the early part of upa1 but you can argue that those were also days when the growth global economy was growing very rapidly but you know i would say that today there’s no reason why india once we’ve got over the pandemic problem okay there’s no reason why india cannot shoot for an average growth rate of say seven and a half percent providing it does all the things that are necessary to get there i mean the prediction is therefore highly conditional prediction Now, all the things that are necessary include making all the corrections that I talked about in the bulk of the lecture. When that will hit five trillion, you can work out yourself. I mean, frankly, if we grow at something like 7%, we will double our income in 10 years time per capita. Sorry, if you go at 7% per capita, you will double in 10 years time. If you grow at 7% GDP and you’re growing at a little above one for population, then you’re growing at six, then you’ll probably double something around 12 years, every 12 years. Now, doubling around every 12 years means it’s going to take us a very long time before we hit China’s level. But I don’t think we should worry about that. The important thing is let’s double it.

Speaker 3 (01:17:09): And that the important operational consequence of that is let’s target a growth rate of seven plus percent.

Speaker 1 (01:17:16): And then let’s work out what what is needed to achieve. And then let’s do it. I mean, get a consensus. I think our problem really is that, you know, I like to think of this in terms of partitioning everything. The policy making consists of slogans and then slogans have to be translated into targets. And then targets have to be translated into programs and policies. Okay. Now, slogans, we are the world’s biggest experts. And, you know, all slogans are good, whatever you want to call them. Okay. The question is, when you translate from slogans to targets for the economy, you can make some, I mean, we have a lot of targets right now. We, finance minister has said that from next year onwards, she expects the growth rate to be about 7.5%. That’s good. That’s a GDP.

Speaker 3 (01:18:09): I think it’s a good target in the sense that if she actually achieves that, I think she deserves a lot of commendation.

Speaker 1 (01:18:18): Equally, if she doesn’t achieve that, then she should tell us why they haven’t achieved it. And we should do a shenoy type analysis of why is it not happening? We should avoid what happened before the 1991 reforms, where we kept having these targets and the economy didn’t perform and nobody questioned the strategy. Okay, having got the target, then the question is programs versus policies. In my view, while the programs are important, the policies are much more important. And we we do not have in we do not spend enough energy on fixing the policy, we spend too much time on just the program programs are just announcements of government expenditure. You know, and policies are what makes the economy and people behave in a particular way. And I think we should spell those out.

Speaker 2 (01:19:13): Thank you. Next question comes from Barimitra and he makes the case that whenever we have a, you know, more a government, which is not single party, but rather, you know, more a coalition, generally the growth rate is high. The question is, is a competitive politics a precondition for creating a conducive environment

Speaker 1 (01:19:33): for economic free reforms that ensure an open and competitive market? That’s a tough, I mean, I’m not a political scientist, so I can’t answer that. But it’s certainly true that, you know, contrary to what economists and even ordinary people very often think that a coalition government will be a complete mess. The truth is that the biggest reform that we could conceive was done by a coalition government under Narasimur Awad, Finance Minister Manmohan Singh. Subsequent governments were all coalitions. Each of them continued the reforms, including the Vajpayee government.

Speaker 4 (01:20:16): So I would I would certainly say that the fact that you have a coalition government should not be a reason for not being able to do reforms.

Speaker 1 (01:20:28): Clearly, if you don’t have a coalition, you have more political flexibility and therefore in some ways, assuming that you do as much work to build a consensus reform should also be possible.

Speaker 2 (01:20:43): Thank you. Next question is from Soria and he asked, is there a risk of COVID throwing the world back into a protectionist regime?

Speaker 1 (01:20:53): Well, I don’t know if COVID is doing that, but it’s certainly true that COVID has created a lot of misery around the world and has created a great sense of lack of confidence in governments knowing people don’t believe that governments know what they’re doing. I mean, you can see that in Europe, you can see that in America. Now, whether that has directly led to protectionism, you know, when you get a loss of trust in government, it can lead to any sort of irresponsible policies. And I’m sure that this is one of the factors. I mean, once people feel that their economy is now on a sustainable recovery path, governments are also in a much better position to argue with people that look this is the way to go

Speaker 3 (01:21:45): forward but hopefully the covid thing is a temporary phenomenon many people tell me that

Speaker 1 (01:21:53): by the year 2022 when you know enough people have got vaccinated although there will be new strains and you know this is not a it’s going to take some time but it’s quite possible that it won’t be a panic situation. The real problem in the global economy

Speaker 3 (01:22:10): is that right now, whatever their economic well-being has been fueled by a huge expansion in liquidity with low interest rates

Speaker 1 (01:22:20): and money sloshing around. As they start withdrawing that, which undoubtedly they will and Jerome Powell and the Fed has already signaled that, the well-being will depend on whether the economy then does well. the economy doesn’t do well and you withdraw liquidity then you could end up with a real mess akshay murari asks what are the bureaucratic changes that need to occur to accelerate free market reforms you know i don’t think you need i mean bureaucracy unfortunately is too often blamed

Speaker 4 (01:22:56): let’s put it this way when the 1991 reforms were brought about uh most people thought

Speaker 1 (01:23:04): particularly foreign observers thought that the bureaucracy is anti-reforms but dr manmohan singh and mr narasim rao were able to push through quite a lot of reforms without bureaucratic opposition i’ve mentioned again in backstage that dr singh when he was finance minister called a whole bunch of secretaries to his room and said look we’re going to be making big changes and we need your support because without your support we will not be able to make these changes efficient but i realize that some of you may have intellectual reservations about the line that we are following and if you do just let me know and we will give you an alternative just as good a job you will not be made to do things that you don’t believe in and you know i frankly felt the bureaucracy was very they were very flattered that he thought their support was necessary and also quite pleased that they were being consulted in this way so frankly if you give the the bureaucracy is meant to do what it is told to do and if you do it very clearly they will in fact do the job i think they should also be warning you when when you’re telling them to do something if they think this is going to have negative effects you should encourage them to say well look if you think i’m wrong you can tell me why but i’m the decision maker and at that point the bureaucrats should either just take another job or do what they’re told

Speaker 2 (01:24:47): you know next question also which is now the second highest upvotes is what lesson lessons should we learn from the success of Bangladesh that’s a very by the Bangladesh

Speaker 3 (01:25:04): success is very important there’s no question in my mind and as a matter of fact in 91 I remember

Speaker 1 (01:25:12): that the finance minister of Bangladesh was visiting India. And Dr. Manmohan Singh said, you know, you have been much faster than we thought in liberalizing your economy. And I’m looking at this with great interest.

Speaker 4 (01:25:29): So I think I don’t follow the Bangladesh economy sufficiently closely.

Speaker 1 (01:25:36): But there’s no, and to be able to judge, you know, what they’re doing currently, which we should learn from. But certainly, they’re a very, very far cry from what Mr. Kissinger described as an international basket case. I mean, that was one of the most catastrophically wrong predictions that Henry Kissinger made. At that time, time of liberation of Bangladesh, Bangladesh was poorer than West Pakistan. Today, they’re much higher income, and their growth performance is very good. Export performance is very good. actually the export form is better than India so you know when our per capita income I think they have just caught up and went ahead hmm they are ahead of off in terms of per capita income as well now yeah that is a one year I mean that I think they’ve narrowed the gap quite a bit yes that thing is one year phenomenon because we had a huge rock probably that will but but I don’t mean this to denigrate by any standard if you look at a five to six year performance bangladesh has closed its average gap with india you know i’ve done comparisons of bangladesh with the different states because we are a very diverse country so if you compare bangladesh

Speaker 4 (01:26:53): with what the southern states are doing they don’t necessarily look that good what i think

Speaker 1 (01:27:00): looks very good is compared to what the heartland in india is doing on these social indicators So I think that’s an important achievement, no doubt. So Mr. Aluwali, our 90 minutes are up, but there are a lot of questions which are still out there. So I wonder if you have some time to spare, else we will just close up.

Speaker 2 (01:27:18): Yeah, we can talk a little bit longer. Okay, super, thanks. Next question is from Dipankar Call, and he asks, How can we ensure that our regulatory bodies are not captured by vested interests,

Speaker 1 (01:27:30): the capture being either through explicit corruption or situational factors? You know, it’s a very good question and all over the world, people are looking at the danger of regulatory capture. There’s no single bullet solution. But certainly one of the most important things is that regulatory agencies must function in a totally transparent manner. And they should have access to expertise, which makes them behave in a manner which is also transparent and predictable. It’s not easy to do. But to my mind, you know, in some of the agencies that we have, I think we’ve done a pretty good job. You know, I think SEBI, for example, has been a very good regulatory agency. Can’t say that for all agencies, but I don’t follow them adequately. Let me say that the danger of regulatory capture is not a unique problem for India. It’s a constant problem. And the only thing that will reduce that probability is a very high quality of debate and discussion. combined with staffing these agencies with real experts.

Speaker 4 (01:28:51): Now, I think in the early stages, there weren’t too many real experts because there wasn’t a marketplace.

Speaker 1 (01:28:57): So every agency was staffed with retired bureaucrats. I don’t think that’s a good idea at all. I don’t mind bureaucrats moving into regulatory bodies, but if they want to do that, they should not be a post-retirement job. I mean, for example, if somebody says, if somebody says, I want to be in SEBI and I want to move out of government, as long as his retirement age remains the same, he’s sacrificing an important job in government for going into SEBI, I would not object. But what should not be done is that these things become post-retirement jobs because then everybody wants to be in whatever regulatory agency they can be. And that’s not really a sensible thing at all. Thank you. Next question is from Giridhar Prabhu and he asks, with foreign investment in lower level production in China beginning to slow, what can we do to capture these flows? Well, I think as it were, this is not so much a pivot against China. It’s just a natural process that China is becoming competitive at higher end of a manufacturing sector. We are just entering into that area. I think as long as we have an environment which remains positive, both for entrepreneurship and for FDI, we will be able to attract such investment. You know, my feeling is that right now, I think one of the signals that the government has given, which are actually quite clear, is that they’re pro-foreign investment. So the old idea that somehow the BJP is anti-foreign investment, maybe some sections of it may be, but the government is certainly giving a very clear signal that foreign FDI is welcome. The question is, is the working environment, the business environment in India attractive? and that’s not just attractive for FDIs, also for business. So I think we need to focus on that. On the other hand, you know, lots of money is coming in. For example, in venture capital and all these new startups, etc., they’re attracting a lot of money. So I don’t think that India is reasonably well positioned to get this sort of investment

Speaker 4 (01:31:16): if Indian entrepreneurs are keen to have it.

Speaker 1 (01:31:21): The key point about China is that foreign investment in China is not directed at serving the Chinese market.

Speaker 3 (01:31:28): It’s directed at serving the international market.

Speaker 1 (01:31:32): Whereas too much of the foreign investors, we are still viewed as a closed economy. We have higher tariff barriers than anybody else. We’ve been raising these tariff barriers. So the approach in India seems to be it’s a big market. They like foreign direct investment. Let’s get in. We haven’t yet created an environment in which people say, look, India is a great place with lots of very great people, lots of smart capital, human capital. Let’s put a base there to service the rest of the world. That’s what we really need to attract. So coming to the last couple of questions. So Jedidaya Ezreal asked this question that how do we follow self-reliance, that is Atan Nirvah Bharat, while also maintaining open trade? Well, I mentioned this right at the beginning that there is room for picking a few strategic areas and recognizing that we have to do something special here. But in general, we ought to be having low tariff barriers and running an open system.

Speaker 4 (01:32:38): Okay. Clearly in areas like cybersecurity, artificial intelligence, I would even say in things like batteries, for example, because we are going to be very important market for batteries. We should be able to attract people. So when you say Atman and Par, does it mean Indians setting up only or does it mean Indian units with FDI?

Speaker 1 (01:33:05): The government has not ruled out FDI as part of Atman and Bar as long as you’re producing in India. So I think with a I think the real problem is that some of what we have done in raising tariffs in the last few years has sent a signal that we are reversing the open economy direction.

Speaker 4 (01:33:31): And I think the first thing they should do is send a very clear macro signal that that is not the case. That took TK, we’ve raised some. Ideally, I personally think we should have a strategy for reducing tariffs to a certain target level,

Speaker 1 (01:33:48): maybe with some elements which get some special support, preferably subsidy support, in order to make them more competitive. I think if you set up a committee to do your tax reform, that committee should give some advice on what the average level of tariff should be. And I think a clear signal should be given to business that, look, don’t start lobbying for higher tariffs because you’ve got a problem. I mean, any business interest, if they believe they can lobby for a higher tariffs, they’ll do so. not just in India, anywhere in the world.

Speaker 2 (01:34:30): So a few people have asked this question about lateral entry. So I’ll just ask this and we kind of club them is should the Indian economic service, instead of being restricted to only bureaucrats,

Speaker 1 (01:34:41): also actively involve, consult and hire from outside the government? Well, by the way, the Indian economic service is not open. It’s a service. So it’s a regular service which you join at a young age and it keeps you

Speaker 4 (01:34:54): going, et cetera.

Speaker 1 (01:34:56): If the question you’re asking really is should the government bring in expertise from outside? I think it should. And I think it’s doing some. The real problem is at the moment, these are sort of fixed term assignments. We are not we’re not saying, look, you can come in at this level. And you’re then permanently in the government until you’re willing to leave. And you have an opportunity to get promoted. It’s a sort of three year assignment as a joint secretary. at the end of which you leave so i personally think that mind you in the united states i mean that’s pretty much what happens because at the end of the presidency all these guys will come in go out so you know you can take lateral entry in whatever form is a good idea if you can create an environment where you attract more people you will improve the quality of decision making within the

Speaker 2 (01:35:52): government. Thank you. So we’ll take this last question and I don’t have a name here. The question is as government is opening higher education sector for private players, what do you think is a way ahead for students from low socioeconomic backgrounds and institutions? Well look when I say

Speaker 1 (01:36:13): I mean I’ve said even earlier that the role of the government in providing educational access is not meant to be reduced. But I have no objection to private universities coming in and providing perhaps a slightly better quality education if they think it’s better quality. I don’t, I mean, the only solution as far as, if it’s a private university, the only way of giving access to less privileged students is through a system of scholarships which can meet the gap between what they can afford to pay and what the fees are. And I think that private universities should work towards such funding. You know, elsewhere in the world, that’s what happens. I mean, places like Harvard and so on, they tend to follow a policy where if a student is good enough, then he is not denied a seat because he can’t afford it. But for that, you need well-funded private universities. And it will take a long time before we can get there. I certainly wouldn’t prevent private universities from coming in because it gives some people, because otherwise, actually what’s happening is these privileged people otherwise go abroad. So what we’ve got is something in between. They go into Indian universities and actually hopefully the Indian universities themselves through some cross subsidization can create a scholarship fund where at least 10% of the students are actually from economic classes which can’t afford the university, but they’re themselves meritorious.

Speaker 2 (01:37:57): My apologies. I will just make this one the last question. It comes from Anviti and she asked, or he, I’m not sure. Some ministries enjoy the unequal distribution of power among them,

Speaker 1 (01:38:09): thus creating more ministries, widening this cleavage and leading to more silo decisions. Well, I mean, look, there’s a huge, you know, the incentive structure under which bureaucrats work is a huge area of political science. And it’s a well-established principle that all bureaucracies ultimately are driven by the self-interest of the bureaucrats, unless you have very vigilant both public opinion and politicians who keep them in check. I mean, I’m sure you’ve all seen the British serial Yes Minister, which gives you a sense of how bureaucrats manage to create shields around themselves. And I’m sure that it happens in India, too. But that’s a universal feature. It’s not special to India in my view.

Speaker 2 (01:39:05): Thank you very much. So with this, this brings to a close the Biya-Shanoy Memorial Lecture 2021. And I would like to thank our speaker Montek Singh Aluwalia on behalf of Economic Research Centre, Centre for Civil Society, once again for sparing his time and delivering a very stimulating lecture as well as engaging with questions from the audience at length. Thanks also to Shorya, samrudha mansa and others from industry of the ccs team who have helped organize an efficient

Speaker 1 (01:39:31): and wrinkle-free lecture so with this uh goodbye and good luck uh thank you once again uh mr alwar here thank you very much many thanks thank you okay goodbye okay thanks