Ideas of India is a podcast in which Mercatus Senior Research Fellow Shruti Rajagopalan examines the academic ideas that can propel India forward. You can subscribe to the podcast on Apple, Spotify, Google, Overcast, Stitcher or the podcast app of your choice.
In this episode, Shruti speaks with Montek Singh Ahluwalia about how policy reforms happen, civil servants vs. technocratic experts, the importance of expert committees, good and bad lobbying, economic growth and much more. Ahluwalia is an Indian economist and civil servant who was the deputy chairman of the Planning Commission of India, a position which carried the rank of cabinet minister. He previously held various other government positions, including member of the Economic Advisory Council to the prime minister; finance secretary; commerce secretary; special secretary to the prime minister; and economic adviser to the ministry of finance. He has also served in several positions at the World Bank and International Monetary Fund.
SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University.
Today my guest is Montek Singh Ahluwalia, who is an Indian economist and civil servant. Over three decades, Montek has held various positions in government, including deputy chairman of the Planning Commission of India; member of the Economic Advisory Council to the prime minister; finance secretary; commerce secretary; special secretary to the prime minister; and economic adviser to the ministry of finance. He has also served in several positions at the World Bank and IMF. He is the author of “Backstage: The Story Behind India’s High-Growth Years.”
We spoke about the journey of an economic reform and how an idea turns into implementable policy, the Indian administrative service, the importance of technocratic expertise, economic growth and much more.
For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit Discourse Magazine DOT COM.
Hi, Montek. It’s wonderful to have you here and to do this in person. Thank you for being here.
MONTEK SINGH AHLUWALIA: Well, thank you for having me.
Journey of a Policy Reform
RAJAGOPALAN: I want to start with a big theme in your book “Backstage.” I think of the book very much as the journey or a travelogue of a policymaker going to different places within the policy world, different departments, working with different groups of people. I wanted to ask you more specifically about the journey of a policy reform. When we think about some of the big reforms which are, even now, being discussed, how does one go from the big idea, like free trade or liberalizing the entire economy more generally, or particular sectors like telecom or insurance, to the actual policy that is then implemented? What does that journey look like?
AHLUWALIA: That’s a good question because in the Indian system, and maybe it’s true in all systems, every area is assigned to a ministry, and changes of policy that belong (in a narrow sense) to that area are the responsibility of the ministry. There are two problems here. One is, the functioning of a system as a whole requires you to do more than just add up what needs to be done in each area, because you want to look at what the economist would call a general equilibrium approach. If you want to reach a particular result, you’ve got to do A over here, B over there, C over there. All that is in different ministries.
Now, in the old days, the Planning Commission every five years would provide some kind of an overall perspective. Now, that overall perspective would be approved by the cabinet, but the dominant approval then was the allocation of resources, the total and sectoral. The policy stuff was more or less treated as a general essay, and it was really left to the ministries to implement. Very often, the essays are themselves somewhat meaningless—for example, things like, “We must have a much stronger export promotion combined with efficient import substitution.”
Now, these are vacuous statements. They can lead to all kinds of wrong policies or right policies. Even the plan never specifically spelt that out. On this system, only a ministry that is responsible for an area can take the matter to the cabinet for a change in policy. Now, some policies are so flexible that a lot of discretion is left to the ministry anyway. A lot of what it wants to do, it thinks it can do within the framework of the existing policy. It doesn’t really need to go to the cabinet; it just does what it has to do.
When the policy is more specifically laid down—for example, if you’re in the ministry of industry, and you have a policy that says that “no foreign investment allowed in these key sectors,” and you want to allow foreign investment, then you have to go to the cabinet and modify that list. Many ministries used to rely on expert committees to guide them on what changes were needed in their policies. If you go back and look at the history, there have been several expert committees, sometimes appointed because the prime minister’s office thought it was a good idea, very often because the ministry itself thought it was a good idea.
The composition of these things was largely left to the ministries with some interministerial coordination. Let’s say, when the exports strategy document under P.L. Tandon was set up, I had just arrived in the finance ministry. They set up the committee with my good friend Vijay Kelkar as the member secretary. I spoke to Manmohan Singh and said, “You know, I’m interested in this area. They seem to have only people from the commerce, from the revenue department on it. They don’t have anyone from economic affairs, so why don’t you suggest my name?”
He wrote a letter to the commerce secretary saying, “I suggest you include so-and-so,” and the guy said, “Fine.” There was an element of consultation, and committees were set up. Ministries wanted to get their inputs. This is still happening, as far as I know. A lot of think tanks get asked to prepare reports, et cetera. I think what we need is more critical assessment that certain policies followed by certain ministries are actually hampering the growth of something else. For that, you need a cross-ministerial look. The system allows it. The present NITI Aayog, for example—it’s meant to be a policy think tank—it could set up such committees.
Now, I don’t know what is actually being done. I must say, by the way, merely because you do it doesn’t mean it yields results. When I was a deputy chairman, I made the point that, “Look, energy policy is not in the realm of any one ministry.” We have the ministry of power, which deals with electricity. In those days, we had a separate ministry for renewable energy, solar, wind, that kind of stuff; another ministry altogether for petroleum; yet another ministry for coal. How do you get energy policy which is sensible?
There wasn’t even a mechanism to ensure the principles that were being adopted, let’s say for petroleum pricing, were similar to the principles being adopted for gas pricing or coal pricing. I suggested that we in the Planning Commission take a paper to the cabinet on energy policy, which would actually be the responsibility of several ministries. We set up an expert committee. It had representations from different ministries, outsiders, et cetera. We came up with something called the Integrated Energy Policy, took it to the cabinet. Well, cabinet approved it.
It had lots of very specific recommendations. To process those recommendations, they set up a group of ministers. You can’t have the cabinet discussing a hundred proposals, so you set up a group of ministers. I think it was under Pranab Mukherjee. You know what actually happened is that, when these things went to the group of ministers, the group of ministers said something like, “This is acceptable in principle, and we refer it to the relevant ministry to take appropriate action,” because the administrative action had to be taken by the concerned ministry.
The ministries didn’t want to change, just didn’t. Unless something is put on a very high profile, is recognized to have the top attention of the very top, you can do all this, but you may not get the change.
Top-Down vs. Bottom-Up Policy Changes
RAJAGOPALAN: In your experience with reforms for almost 25 years after 1991, did most of the provocation come from the top, that there were people in cabinet or the prime minister’s office, or the relevant ministry—you worked in the commerce ministry, you worked in the finance ministry—asking the deputies to prepare a note or to prepare an amendment to a particular statute? Or did it bubble up bottom-up? That is, people like yourself in the technocratic business, who understood the change that was required, wrote these notes or had meetings and then persuaded people further up and across different ministries?
AHLUWALIA: Well, I think clearly it was a bubbling up, as you call it. But clearly, the bubbling up took place more effectively when the broad direction to which it was responding is something that the top approved of. You can’t have the top laying out details. One of the very important inputs into policy throughout the ’80s, and also I think the ’90s, were the relevant industry stakeholders, and most ministries had very close relationships with them, consultative groups.
When Manmohan Singh was prime minister, he even had an Industrial Advisory Council, which had about 20 industrialists who would come, and they would make their points. It is important that you set up a mechanism of consultation. The essence of such a mechanism of consultation is a recognition that what you’ve got as policy, however well intentioned, may not actually be all that good.
You’ve got to persuade industry to, as it were, speak truth to power, and that requires a lot of persuasion. Because if the ministries feel that what they say may be resented as unfair criticism, they’ll just shut up. There were many, many occasions that I can remember when we had very productive consultations with industry. And quite frankly, in the liberalization, the CII then headed by Tarun Das, they were a very important source of confidence that we should get rid of the controls on our private sector.
They were not that good in getting rid of import controls, because they had an asymmetric approach. They were in favor of getting rid of all the import controls on the things that industry wanted to be imported, but the producers had a very strong vested interest in not being subject to import competition, and the government, as I mentioned in my lecture yesterday, went halfway.
We didn’t do everything, but we did some, and in many cases, these things got debated in public. For example, the opening up to foreign direct investment, a whole bunch of Indian industrialists actually lobbied strongly, called the Bombay Club. It got named the Bombay Club. Some people, later on, claimed that they were never part of the Bombay Club. They thought it was just a one-off consultation. They did come forward and very often put forth views that were, in some respects, supportive of liberalization but in other respects critical. The government had to sit back and decide how it’s going to react.
RAJAGOPALAN: Is it easier to do this when it requires some kind of statutory change, and amendment must be passed in parliament? Or is it easier to do this just through the various ministry approvals?
AHLUWALIA: Well, that’s a good question. For example, in the old system the powers were under the law, but they were subject to a lot of executive discretion. For example, we had a list of industries reserved for the public sector, 28. It was an executive decision to cut that down to eight. You didn’t have to amend the law, but under the law, you had that executive power.
Similarly, import controls—we abolished import controls over a wide range of things overnight because the law was sufficiently flexible. Now, in a way, that was great for abolishing. If the same law allows you to reintroduce it bit by bit, that’s not so good. I think that’s a real issue. The bottom line is, I don’t know how to respond to whether it’s better to have everything, as it were, guided by law, or leave a lot to government discretion, which would enable the government to make changes as it goes along.
New and Existing Policy Frameworks
RAJAGOPALAN: Is it easier to come up with a new policy framework, versus tinkering a little bit? Like you said, there’s an existing framework, and we want to make the list longer or make the list shorter. For instance, something like the inflation targeting, which is basically a monetary policy area. The RBI Act needed to be amended for it. I mean, it came from an expert committee report before that. So that is a brand-new framework, in a sense, within the Indian polity, which takes away discretion from the executive, both members of the RBI and the finance ministry. Is something like that just easier to start with a clean slate?
AHLUWALIA: Well, on some of these things, yes, because you are giving a broad signal that, this is how I want policy to be formulated. You can always twist the arm of the Reserve Bank, because how independent the Reserve Bank is is always a matter of judgment. My good friend Venu [Y.V.] Reddy once made a lot of friends by saying, in answer to a question, is the reserve bank truly autonomous? Venu said, “The Reserve Bank is truly autonomous, and I have the permission of the finance ministry to say so.”
The truth of the matter is, I’m not a great advocate of strict separation and autonomy, for the simple reason that monetary policy has to be coordinated with fiscal policy. The idea that you will determine the optimal monetary policy given the fiscal policy, because that’s what strict autonomy means, doesn’t make sense. I think it’s much better for the Reserve Bank to say to the finance ministry that, “Look, you’re running such a huge fiscal deficit that’s putting a lot of pressure on inflation.”
If I have to live by my dharma, I will now have to tighten money supply. That’s going to raise interest rates, and that is going to hurt some parts of the economy that you are concerned about. For God’s sake, let’s get a better mix. Now, you can’t do that if you’re not coordinating. Technically, if the Reserve Bank governor is not concerned with these other things, he’s just concerned with we’re hitting the inflation target, you wouldn’t have coordination.
I think you need much more coordination between the Reserve Bank and the finance ministry. Now, the difference there is that, first of all, these are generally the most well-equipped, technically strongest arm of the government. The RBI does its own recruiting and has pretty good staff, very technically competent people. Finance ministry is generally also, and today has lots of technically competent people.
You can leave this to the two of them, but there are other ministries which don’t have the same history. Therefore, I think for them, it’s a little more difficult. You do need, within the government, a periodic overview of the performance of the system as a whole, not a review of individual ministries. For example, if it’s your judgment that exports are not doing well because you are pushed into an overvalued exchange rate, whatever these poor fellows do, the commerce ministry, they’re not going to succeed.
If you take an overview of the commerce ministry, typically, no commerce minister likes to say to the prime minister that “We are doing everything right; the trouble is the finance ministry is mucking up the exchange rate.” Generally, it becomes, what are you doing? What are your programs? How can you do better on exports? And they look at their own things. This is where it’s very important for the government to take a look at the system as a whole, and look what are the big five things that drive the system, and which one is going right and which one is not.
HR and Personnel Problems in the Civil Service
RAJAGOPALAN: Let’s say that the government does take a view of the system as a whole. As you mentioned, the RBI has an excellent technocratic staff. It has a long history of developing that pipeline of talent, which can then get to the top. The finance ministry has demonstrated the same within each of its departments. How do you think about the overall HR problem, if one were to dub it that, across the different ministries? For the moment, let’s say just at the union government level. What kind of HR problems are there?
One is, of course, is there just a dearth of talent? Or is there excellent talent, but they are placed at the wrong place at the wrong time, and we don’t have a good fit of the relevant civil servant or technocrat to ministry? Also, do we have sufficient talent and capacity to tackle these questions of coordination and technocratic expertise?
AHLUWALIA: Very tough questions. I can tell you how the system works from the government’s perspective. If you’re running a department—I was, at the department of economic affairs—vacancies come up. Now, I don’t have the right to say, “I know this person in the government, and he or she’s ideal for this job.” I have to tell the personnel department to prepare a panel. Now, the reason for that is, the government is so huge. There are lots of people in different states. There would be a clientelism bias if you just leave it to the secretary, because there’s some people I would know, but of the pool of eligible candidates I really wouldn’t know.
You can specify your requirements. They will give you a panel, and you have the choice. They give you a panel of three from which you can choose one, or you can reject the whole panel, and then they’ll give you another panel of three. If you reject a panel, God knows when they’ll give you the second panel. You’re trying to fill a vacancy.
I think it’s very unsatisfactory, let’s put it that way, but I can understand that it’s not easy to make it nonrulebound, because within the civil service, there would be very strong pressure that you shouldn’t leave it to the biases of the secretary concerned, who would have personal biases, maybe regional biases, caste bias, whatever it is. We are forced, therefore, to operate through a department of personnel. Now, there’s a separate question: Is the department of personnel organized the way an HR department should be?
The truth of the matter is that it is just full of a lot of other IAS [Indian Administrative Service] officers, most of whom hate their job, because you don’t join the IAS to be in the personnel department. I think there is a problem. Now, that’s one side of it. The second is leavening what you’ve got by bringing in people from outside. I think we had ways of doing that, and the present government also has found ways of doing that. But what is actually working, I think quite well, is people come in from outside for three years, and the system accepts that, but equally, that’s because the system tends to ignore them.
We are not open to people coming in and then making the system, that civil service system, their career—because you come in, then you leave, go back to the private sector. Still, it is good because it gives you a feel on what the private sector is doing, kind of an inside look, enables them to contribute from a very different perspective. I think we need to do a lot more to both build expertise and bring in expertise. Part of our problem in India is that people circulate between the central government and the state government.
Civil servants, the IAS are organized as state cadres. They actually don’t have any claim on any job in the center. It’s just a convention that the center fills its positions through IAS officers brought in from different states. Now, one of the things the personnel department does quite efficiently is to make sure that state cadres are represented. Within the state cadre, half the people are from the state and the other half from outside the state. So that all-India aspect, that is by and large taken care of. But what I don’t think is necessarily taken care of is putting people in the right jobs.
There’s big bias within the government against people wanting to specialize. The IAS’ view of itself is, it’s a generalist service. This I think is a bit of a colonial hangover. You come from England to rule the country; expertise is looked down upon. But in this day and age, we ought to be encouraging the people who are really into IT—there’s no point putting someone who’s really made up his mind that he wants to be in IT to have a stint in education and health and road transport and that sort of stuff.
Civil Service vs. Technocratic Expertise
RAJAGOPALAN: It’s also disservice to the civil service, right? In the sense that these are people who wanted to do this in the first place, and now they’re told that, “Oh, you never developed a technocratic expertise to be in IT or to be in economic affairs. Now we have to helicopter in people.”
AHLUWALIA: Well, the problem is, that’s not a disservice to them; that is what they’ve been told right from the beginning. I know a lot of senior IAS officers who look down on expertise, rather look down on their own colleagues who sought to define themselves as experts, because they felt that’s not what an IAS officer does. It’s like we are capable of doing anything. They know that they’re getting into this, but I think the world has changed. Look, I was originally going to join the IAS. In the normal way, I got a Rhodes Scholarship, which took me to Oxford. That was not a problem, because a lot of people went to Oxford and sat for the IAS exam there.
That’s what I thought I would do, but having worked there as an economist, I suddenly got interested that, “Look, I don’t want to be just an administrator. I want to be an economist.” The World Bank was recruiting for economists, so I thought, “That’s maintaining professional integrity. Let me go there, see what’s happening around the world, and then go back.”
I think that, in those days, the position of economic adviser in a ministry was open for recruitment either to people in the economic service or to outsiders. But 95% of the time, these positions were taken by outsiders, because these are people who had gone out and acquired—I’m not talking about myself. I can give you a list of names, ranging from Bimal Jalan, Nitin Desai, Rakesh Mohan, Shankar Acharya, Arvind Virmani, you name it.
They would all come from outside, having worked abroad and elsewhere. The Indian Economic Service felt that this is very unfair, because they felt that the IAS just carries on all the way to the top. They’re also a first-rate service, but they had got relegated to just being research assistants, with these other slightly more glamorous people recruited as economic adviser onward, so then they changed that.
RAJAGOPALAN: You tried to change that.
AHLUWALIA: I was secretary then, and their argument on itself had merit because they said, “Look, we are a class-one service just like the IAS.” Now, if we don’t have career promotion prospects up to the joint secretary level, whereas the IAS gets to joint secretary within X years, then why would a bright economist who is sitting with the civil service opt for the Indian Economic Service? Indeed, some of the best economists that I worked with were in IAS. Venu Reddy is one example. Gajendra Haldea is another example, I can give others too.
These guys joined the IAS because they knew that, that’s where the career opportunities are maximal. They said, “If you want to make the Indian Economic Service a true first-class service, you must reserve the jobs of economic adviser for us.” From an incentive point of view, that’s actually correct.
Part of the problem is that you’re inheriting 20 years, let’s say, of a system where the best guys didn’t go into the IAS; then you suddenly open up. So for a certain number of years, you’re going to have, let’s say, not the best. That doesn’t sound like a nice way of putting it, but I’m old enough not to mince words, but you would think that in due course, it would change.
Now, I don’t know whether it’s has changed or not, because the IAS has other benefits. The Indian Economic Service doesn’t give you any guarantee of going beyond economic adviser; that’s the joint secretary level job, whereas the IAS goes all the way above. So even today, the best candidate, the best-qualified economist, if given a choice between the Indian Administrative Service and the Indian Economic Service, would choose the former. We haven’t succeeded in breaking that barrier completely.
Helicoptering into the Administration
RAJAGOPALAN: They face competition from two places. One is, of course, the civil service, but also from foreign-trained economists, who are now brought in, sort of helicoptered in for the absolute top jobs, which are anyway not available to them. So, now there are two—
AHLUWALIA: Well, they’re available to them, but it’s a competitive world.
RAJAGOPALAN: It’s competitive.
AHLUWALIA: Let me say, I mean the term “foreign” in this context is being used pejoratively.
RAJAGOPALAN: Oh, no.
AHLUWALIA: Let’s put it this way: Unless you are banning Indian economists from going abroad, it’s the best Indian economists who will, A, get admission and, B, get scholarships. And not just economics, every discipline. I think on the one hand, one should be assuming that Indian institutions of excellence should be able to provide good candidates. Now, the present chief economic adviser, Mr. Anantha Nageswaran, he’s very good. He may have had a foreign degree, but he came in from IIM, so it’s not that we’re helicoptered in always.
I think that the real issue is not so much the lack of quality, because you can recruit people. I think government needs to be aware, A, that what it is doing is much more difficult than it thinks. I should add, by the way, it’s a lot more difficult than it was when we were in government. Frankly, we were undoing a ridiculous system. We carried on with the wartime controls introduced by the British, which they had themselves during the war, but they got rid of them two years after the war. For some idiotic reason, we didn’t.
My suspicion has always been that we frequently used to say that “the development must be taken on a wartime basis.” So I think that led to the confusion, “That is such an urgent battle that we must retain all these absurd controls.” When you get out of that, and for example, the functioning of capital markets, the role of speculation, how do you handle the problem of a dominance, weakening competition, the problem of networking characteristics, creating a sort of prior presumption of a monopoly situation being created?
Now, these are complex issues. Even in the United States, people are wondering how to do it. Ms. Lina Khan of your Federal [Trade Commission], she’s going in hammer and tongs against a lot of companies, which to a lot of the people in the private sector here looks a bit socialistic. We’re moving from a system where we were trying to give the market play, and I think that was the right thing to do, and probably we need to do a lot more of it. At the same time, it’s characteristic of a well-functioning economy that you control monopolistic tendencies through appropriate regulation.
When those monopolistic tendencies involve complex use of AI to actually alter your freedom of choice, manipulate you in ways that you don’t even know, it’s not easy. The danger of a ham-handed approach is very large. It’s also a global world. The kind of rules we have cannot be made very different from the rules that exist in Europe and the rules that exist in the United States. We need to get away from this notion that we don’t have to follow others. True, the day our economy is as large as all of the European economies put together, they should follow us as much as we should follow them.
In a way, that’s what the Chinese are doing because they have reached a certain scale. We haven’t, so we have to join like-minded countries, and that requires a different approach from simply doing your own thing.
RAJAGOPALAN: There are two kinds of expertise required in the leadership positions of the various departments within the civil service and the technocratic service. One is the technical knowledge: If you’re in the commerce ministry, how do we conduct that business, or if you’re in the department of economic affairs, and so on.
The other is knowledge of how the system works and the networks and the relationships. There’s a protocol within the civil service of who picks up the phone to call someone else, versus you actually go to the building to meet them, or do you call someone to your building to meet you. These are important things, and they can’t be fiddled with or messed around.
I grew up in New Delhi, and I remember every time we would dine at the India International Center, I knew by age 10 who was joint secretary, additional secretary, secretary, depending on who stood to greet whom, and there’s a system.
One of the aspects of bringing in technocrats—either foreign trained who have worked abroad coming in for a few years, or just foreign trained but in the Indian system because they’ve returned and they’ve stayed in the system for a long time—is this problem of the cultural gelling. Because they tend to think systems are flatter, they don’t think about these rules and protocols, they may not know everyone. Do you think of that as a problem?
AHLUWALIA: No. I was aware that the system is less flat, if you like, but I don’t think that’s a problem. These are superficial things. I was shocked when I first joined the World Bank. In the first few months, I walked into the elevator, and there was McNamara, who was then president of the bank. I didn’t know what to say. He said, “Good morning, sir. How are you?” I was puzzled that here’s this guy calling me “sir,” and he’s the boss of the whole organization.
The Americans and my friends told me that in America you call a person “sir” when you don’t know his name. It’s not a sign of respect. You worked that out quite soon. I didn’t find it difficult, and let me say that others that I’ve mentioned who joined the government, this list of people from Bimal Jalan downward, none of them found that difficult. I think one thing is very clear, that they were not there for two and three years.
RAJAGOPALAN: Yes. They were there for a long time.
AHLUWALIA: Of course, nothing is forever, but we came back thinking, “We’re going to work in the government of India.” Otherwise, if you’re there for three years, it takes one year just to get to know people. If you’re leaving in three years, then in the last year, you are beginning to disengage. I think all these people who go back ought to be thinking in principle of going back for a longer period.
What doesn’t work so well is that they have a two-year leave of absence. They say, “Why don’t I go?” That’s actually wonderful for certain kinds of things. You go and do a particular job in a research institution and produce a paper, et cetera. But for a regular job in the government, it ought to be a longer tenure, in my view.
A Commitment to Working with and Within the Government
RAJAGOPALAN: You managed to move up to the top positions in many of these government departments. Is there a secret sauce that you had to figure this out to go all the way as finance secretary, deputy chairman, Planning Commission and so on?
AHLUWALIA: Dr. Singh, of course, became finance minister and prime minister.
RAJAGOPALAN: Yes. I don’t mean the political positions, but he held all the top technocratic positions before 91.
AHLUWALIA: Many of the others did too. For example, Bimal Jalan held these technical—Rangarajan who came in—
RAJAGOPALAN: Rangarajan, of course.
AHLUWALIA: —not helicoptered from abroad, but helicoptered from the IIM, pretty much held. He didn’t become secretary to the government of India, but he became governor of the Reserve Bank. Shankar Acharya left by himself. He’s the only person who left government and then went into academic life, became a famous columnist on his own. Because he felt, been there, done that, wanted to do something different. Rakesh Mohan became secretary of economic affairs and then deputy governor. I think they got pretty much to what I would call the nonpolitical technocratic top.
RAJAGOPALAN: Yes. Is there a secret sauce to this for you and these colleagues? It doesn’t happen anymore.
AHLUWALIA: Look, they’re all intelligent guys, nice guys, but the main thing is they knew that they wanted to work in government. You take on the color and complexion of the government. After all, when people come from abroad to work in India, they take on the color and complexion of the country in order to fit in.
I think the worst thing is if you come in thinking, “I have superior technical knowledge; these guys should bow to my knowledge.” That’s just nonsensical. First of all, economics knowledge is highly contestable. For every point of view that you may have, I can provide a Nobel Prize-winning economist who has the opposite view. A mere ranking by standing doesn’t make a difference.
I think you need people who want to be part of a team and who want to persuade people. You’ve got to have the skill to persuade a knowledgeable person, to persuade the public, who is generally not knowledgeable but may be willing to learn, to persuade people in decision-making authority, who may or may not be willing to learn. If they are well meaning and want to do a better job, maybe they can be made to understand. All of this means you got to be one of the boys. In my day, there weren’t any girls, but whatever—one of the persons, I should say. I think most people have those skills. That’s not a problem.
How To Seek Expertise
RAJAGOPALAN: The other aspect that you mentioned when it comes to expertise is the expert committee reports. In the various positions that you’ve held—I have a list here—you suggested to the finance minister to set up the Rangarajan Committee on balance of payments in 1992, which was very important, and the recommendations became the playbook for the external sector after that. The Malhotra Committee on insurance in ’93, you suggested to Rangarajan, who was at the Reserve Bank at the time, to set up the Tarapore Committee on Capital Account Convertibility.
You suggested to P. Chidambaram to set up the second Narasimham Committee report in ’97—they came out with an excellent set of reports in ’98, which has still not been implemented—and to the prime minister to set up the Raghuram Rajan Committee in 2008. When you were the deputy chairman in the Planning Commission, the question of measuring poverty, again the Rangarajan Committee on poverty measurement.
This is just the list of expert committees that you have suggested to others that they should be set up. What were the gaps in the system that you were hoping to fill with the committee? Was it a knowledge gap, or was it a question of we know, but we need this in a very official government form in one place as a playbook that can then be handed to other people? What was the point of view?
AHLUWALIA: That’s a very perceptive question. I must confess, I’ve not realized how many committees I’ve recommended to be set up. And that’s an impressive list that you’ve made.
RAJAGOPALAN: This is a list from your book.
AHLUWALIA: Yes, absolutely. No, I’ve recorded every one of them.
RAJAGOPALAN: I may have missed some.
AHLUWALIA: I was very impressed with the way the committee system worked. Because in the Malhotra Committee on Exports, I was made a member. I think it’s the first time in any committee in India—I made the point that “Look, if you want to promote exports, you must get rid of the import substitution.” Even Indian universities used to believe that you can pursue both export promotion and import substitution with duties and all the rest of it, although we all know that the tax on imports is actually a tax on exports. This elementary point had not been made in any government document before.
A, I’m very pleased that Vijay Kelkar, of course, understood that perfectly. I’m very pleased that Prakash Tandon, who was a businessman, bright guy, and the other economic fellows were quite willing—not economic, the administrators—were quite willing to leave it in. They left it in primarily because they didn’t think it would lead to any operational consequences. Because the power to get rid of import substitution didn’t rest with the Malhotra Committee or with the commerce ministry, but at least we put that thing in.
I was then very impressed when Dr. Singh became finance minister, that in making the changes both on the monetary side and on the tax policy side—issues that he was very well aware of, obviously, and he could well have got these chaps together and said, “Look, let’s do it.” But he set up the idea of setting up committees. First thing is that, when you set up a committee under, let’s say, Raja Chelliah, to recommend a set of tax [reforms], you broadly know what it’s going to be like, but you put 10 people around him. He persuades them all, and they get persuaded.
There’s a process of what in Hindi would be called sunvayi [a hearing]. I mean, you’re heard by the committee, and that sanctifies the committee’s report. Much the same thing with the Narasimham Committee. Both Mr. Narasimham and Dr. Singh knew what we needed to do on the bank. Setting up a committee, bringing more people on board, put their report forward. Then you’re able to say that you’re doing what the Narasimham Committee recommended, rather than just doing it on your own.
I was quite impressed—in fact, it’s interesting that in his very first speech, budget speech in ’91, what Dr. Singh said was that “we need tax reforms, and I’m setting up the Raja Chelliah Committee,” but the actual tax changes he made on that day was to raise the corporate tax rate. Quite the contrary, because that was a time when a lot of poor people were going to be hurt by the fiscal tightening, and he felt that, “Look, you cannot have something which the rich pay,” and this was reversed a year later.
I think the committee system, I felt, was a good way of putting before the government the consensus view, from which the government could then lead. If you’re somewhere outside the system and you set up a committee, and the government isn’t actually intending to do anything, it doesn’t help. What I’m saying is, when the government has decided that this is broadly the direction we want to go, setting up a committee helps to structure the movement, determine the sequencing, persuade people. At the very least, it enables you to say to the world that, “Look, either you think these guys know nothing, or you can’t say that I’m not acting on good technical advice.”
RAJAGOPALAN: Yes. In that sense, it also puts an end to endless conversation and opposition to something, right?
AHLUWALIA: No, it doesn’t put an end to it.
RAJAGOPALAN: Oh, it doesn’t?
AHLUWALIA: It defines the boundary. Everybody knows that, as I said, you can find another economist who will take a different view. If you set up a committee, and in principle, those people are broadly regarded as being competent, and then you say, “Well, look, I’m going to go by their advice,” that doesn’t mean you do 100%, but you do most of what they say. You are reassured that you can argue that, “Listen, I’ve done the best I can. Now let’s give it a chance.”
RAJAGOPALAN: It’s another way of getting technical expertise in, outside of the everyday business of government. Some of these people were, of course, quite senior civil servants, and they were also in a government functioning role while doing the committee work. But oftentimes, they were brought in as experts. They were working on taxes somewhere else, not within government, and they were brought in.
AHLUWALIA: Well, they’re brought in only into the committee—
RAJAGOPALAN: Into the committee, yes.
AHLUWALIA: —not into the decision.
The Future of Expert Committees
RAJAGOPALAN: No, but their ideas then can percolate into government. I have now observed that these expert committees are becoming less frequent. In fact, all committee and consultative processes are becoming less frequent. One, the PRS legislative has talked about how parliamentary committees are formed less frequently, fewer statutes are actually sent to committees and so on.
On the technical side of things, now we can count them up. There are fewer committees set up each year. How do you see this trend? Is this a problem because we are not going to have excellent reports, where one day, when the policy window opens or the political climate changes, you can actually pass the next set of important structural reforms? Or do you see this as, that was the need then, and now the world has changed, and there’s all this information available everywhere all the time; we don’t need these expert committees necessarily to do business now?
AHLUWALIA: No. My feeling is we do need them. Although there’s a lot of truth in what you say, that earlier we were making an about-turn because a lot of people believed that the heavy state control was a way of ensuring that the government did the right thing. Then, what we were really saying is, “Look, most of these things should be left to the market.”
I’m not sure that committees are not being formed. For example, the new education policy—that was the result of some kind of a committee. It’s not an area that I feel knowledgeable about. When the new education policy was set up, the chairmanship was given to Dr. Katsurirangan, who used to be a member of the Planning Commission when I was there. He brought in a lot of younger people who were part of his committee. They submitted this report, and that’s the basis on which the new education policy has been set up.
I think that they have had other committees on things like water management. Once again, the committee that was set up had Mihir Shah, who was a member of the Planning Commission when I was there. They did a wonderful job, and they’ve prepared a report. We’ve not had that so much on the tax side, and we’ve not had it on the trade side. I think, given the way the global trading system has changed, we probably should have it. I’ve always said that on the tax side, it’s now time, because we’ve gone through that first round of reforms. We need to have another committee that would lay out what should we be doing now.
For example, on tax policy, I think we’ve lowered corporate tax rates to what are globally regarded as sensible levels. Probably on the personal tax, we do need to think again because we don’t have a large enough coverage. For years, finance ministers have been happy raising the minimum level at which income tax applies. In India, it’s really very, very small.
On the other hand, we are rising from being a low-income country to the bottom of a middle-income country. We’ve set targets that we are going to raise our per capita income over the next, whatever it is, 10 or 20 years. I think this suggests that if you’re going to achieve those targets, the coverage of income tax has to become much broader. We’ve got to bring people into it rather than throwing people out of it.
More than that, I think tax administration has not been given the attention it deserves. Several committees have said this, and I think Partha Shome, who was fiscal adviser to the finance minister during the Vajpayee government, he had produced a huge report on tax reform on the tax administration side. Frankly, I don’t think enough action has been taken on that. They’re not highly controversial things. They’re technically very complicated things, and they should be done.
RAJAGOPALAN: Also, figuring out the correct tax rate or the range in which it needs to be is also a technically complicated problem. It’s not like picking a number out of the hat or “this sounds politically sensible” or something like that.
AHLUWALIA: I think that’s absolutely correct.
Dissent in Committees
RAJAGOPALAN: In terms of dissent—this is a long time ago, but we have someone like B.R. Shenoy, who famously gave his dissent to the second plan—how does dissent work, both in these expert committee reports and outside of the reports within government and civil service? Is there a proper channel through which dissent is recorded, or it’s done largely through interpersonal connections, or “You know my view on this. I don’t agree, but I might be willing to go, or I’ll move to another department.” How does that exactly work?
AHLUWALIA: That’s a very good question because within the government at lower levels, the file records the views of different people. It doesn’t matter up to the level of joint secretary, because as far as the finance minister is concerned, the joint secretary is the level at which he’s meant to take all the inputs and put forward a recommendation, and people above him are meant to evaluate that and so on. Within the ministry’s functioning, there would be normally a lot of opportunities for dissent to be recorded. What a ministry does, of course, depends on the individual’s concern.
On policy, for example in committees, dissent can be recorded by minute of dissent. For example, in the first Narasimham Committee, people don’t realize that Manu Shroff and one other person—Manu, by the way, at that time was an additional secretary in the ministry of finance. Anyway, Manu Shroff was a former government person who was in the Narasimham Committee. He had recommended that we should get rid of dual control of the public-sector banks and let the public-sector banks be controlled by the Reserve Bank on the same basis as a private-sector bank is.
This was not in the Narasimham Committee report, but it was in the dissenting note. I think it’s a very good idea, and in public in India on many occasions, I’ve said that this is the single most important reform. It is very difficult, and I have to confess that I was finance secretary at one time, and I failed to implement this then. You learn a little bit later. But it just doesn’t surprise me at all that the finance ministry can add no value to the functioning of a commercial bank.
Whatever they want to do as owners, they can do in a discussion with the managing director based on the assessment reports of the RBI, and they can have separate reports. But the idea of a joint secretary somehow being on the board of the bank, it’s just ludicrous. I’ve said this many times, and no finance minister is willing to make this change, but to my mind, this is the biggest change that we should actually consider. Let me say that in terms of human skills, in a bank like the State Bank of India, it’s a very strong bank.
Now what they are doing is, they’re thinking of privatizing some of the weaker public-sector banks. I don’t know how far we’ve got, but there are a couple of banks that are being looked at. I have no problem with that if you want to privatize them. If somebody’s willing to take them, and you find the person acceptable and the terms acceptable, by all means. But to me the most important thing is, please get the State Bank of India out of the clutches of the finance ministry.
This is the most important reform. The rest is really minor. Again, maybe you need another committee of very distinguished people who can look at this and persuade the finance ministry. Usually, such a committee will only be appointed when the finance minister has decided at the highest level that this is a good thing, and the committee is giving the rationale for it.
Regulating Public-Sector Banks
RAJAGOPALAN: I had a conversation with Viral Acharya, who was deputy governor of the RBI. He wrote this wonderful book on fiscal dominance. I asked him that “you talk about the difficulty of the RBI in regulating public-sector banks, but you’re not doing a great job of private-sector banks either, Yes Bank and things that have happened in the recent past.”
He said it’s very difficult for the central bank to have different standards of regulation for public-sector banks and private-sector banks. What this does is, it overall weakens the regulatory and supervision standard, because you have these dual standards and the people are the same people. They don’t fundamentally morph when they go from one kind of bank to another kind of bank.
AHLUWALIA: No, there I disagree with you. I don’t know exactly what Viral said, but let’s face it, the Reserve Bank has shown its muscle when it comes to private-sector banks because they have deemed certain people unfit to be CEOs. They can exercise that muscle and remove them. They’ve never done that for a public-sector bank no matter what scams have emerged.
The principal reason for that is that they don’t have that regulatory control. If you were to put the public sector under the regulatory control of the Reserve Bank on the same basis, there’s no question that within the Reserve Bank people would say, “Look, we removed this guy; now we should remove this guy.” But since they don’t have that at the moment, nobody ever says anything.
RAJAGOPALAN: I don’t think Viral said that they can’t regulate private-sector banks at all. It’s just that having multiple standards overall weakens the regulatory and supervision control that they have, which also impacts private-sector banks.
AHLUWALIA: That’s fair.
RAJAGOPALAN: Yes. One of the things I’m curious about—and you have the finance ministry perspective on public-sector banks. There have been many, many, many recommendations that public-sector banks should be outright privatized, or if not privatized, their management needs to be separated from the ministry of finance; their leadership should not have people explicitly from government and IAS officers sitting on the board of these banks and so on. How much of this is a function of having public-sector banks do a lot of the spending and lot of the lending that the government wants to do, for which this has now become the conduit?
You have public-sector banks to lend in priority sectors. And you know that it’s very hard to just overnight increase welfare entitlements. But this is one way to increase it without facing the full cost of it, or it showing up in deficit numbers and so on. Was that your experience when you were finance secretary? Is this the thought process? Or is it just, we don’t want to give up control of these banks, it’s a whole host of reasons, it doesn’t just have to do with deficits and numbers?
AHLUWALIA: If you ask the finance ministry, they would always say that, look, there are social things that you have to do. But the social stuff can be put down as a requirement, and you can do an ex post judgment on whether the bank has lived up to those standards. I have no problem, for example, in saying that banks should have a priority sector lending requirement. Then there’s a question of what is defined as priority sector.
I think Raghu [Rajan] at one stage had made a very sensible point that you should be able to trade priority sector lending, in the sense if some banks are particularly strong in lending to agriculture, they should be able to trade that credit with others. Simple things like that, which I think make a lot of sense. At a broad level, unless you want to give a nod to the bank that “please lend to this person,” you don’t need anything to do with the management of the bank.
We forget that when you say management, a lot of times it can just be an irritant. If you’re a managing director of a bank, and the joint secretary who is on your board is there or says, “Why don’t you postpone the meeting because I can’t quite come?” or whatever, the tendency will be to defer because you don’t want to get into the position of having a quarrel with the government representative. I’m not saying that they necessarily interfere in lending decisions. Some might, but more importantly, I think they contribute to the failure to create a truly professional form of credit appraisal, and that is a problem, I think.
RAJAGOPALAN: I think one would agree with you. One of the best things that happened in the early stage of the ’91 reforms and the runup to that, it started with your M document, right? The thing I find most interesting about the M document—and you alluded to this at the head of the conversation—is that it was a very general-equilibrium approach. Usually when we think about specific policies and policy reforms, it’s very partial equilibrium, tinkering with a particular sector, not thinking through the ripples across all the other sectors in the economy, and some have more, and some have less.
While we need a general-equilibrium approach for big structural reforms and change, government of India operates in silos, as you already pointed out. Each ministry operates in a particular way. If it goes to cabinet, you have slightly more success, but sometimes they can just send it back to ministry, and again you go back to the silo. What is a way to get better coordination between the different silos?
Is this a question of fundamentally changing how Indian ministries and governments are run? Is it just a question of creating another layer through which there can be coordination both in the civil service class and the politically elected executive class? Or is this something completely different, like we just need a whole new approach that needs to be able to handle this kind of coordination?
AHLUWALIA: I think there’s no question that government must organize itself to recognize that many problems require what nowadays is called a whole-of-the-economy approach. It’s not something that you tell one ministry to do. Now, not every problem requires that, but the interactions between policies is a very important one. For example, nutrition. Well known in India, although things are improving, that the standard of child malnutrition is too high. What is it that causes child malnutrition?
I had long discussions at one point, because the only scheme that orients itself toward nutrition is the Integrated Child Development Services (ICDS), which provides a midday meal for preschool children. We also have a midday meal for schoolchildren. That doesn’t come under the ministry of women and child development, it comes under the ministry of education. Nutrition is not just determined by how much food you put into the kids’ mouth. It’s powerfully affected by the quality of sanitation and availability of clean water. Otherwise, kids suffer from diarrhea. Whatever they take just gets ejected by the system.
In that very simple thing in the government of India’s thinking, if somebody used to say, “Child malnutrition is a problem,” immediately the women and child development ministry would say, “We have a scheme to deal with that. That’s the Integrated Child Development Service.” I would frequently explain to the minister that, by the way, yours is not the only scheme, because MGNREGA that provides wages to households that lack income is raising the income levels of the poor. Hopefully, some of that is flowing into better nutrition for the children.
ICDS only affects the children up to age five. That is a critical age because the biggest damage on nutrition is done actually up to the age of two, which is before ICDS. There, the whole issue of educating the mother, exclusive reliance on breastfeeding for the first six months, most people don’t actually appreciate the importance of that. They don’t appreciate the importance that—also because the upper-class women whom they know don’t necessarily do it.
RAJAGOPALAN: They have clean water and—
AHLUWALIA: Yes, that’s the point.
RAJAGOPALAN: —access to all the sanitation and so on.
AHLUWALIA: In poorer households, unfortunately, giving your kids milk powder-based thing has acquired a superior cache. Women actually think they’re helping their children become stronger, although they’re actually weakening them because of the water problem. These are examples of multiple factors. Now, frankly, this is largely a state government issue. It’s not a central government issue.
RAJAGOPALAN: It’s actually a local government issue because sanitation and clean water differs so much even within state.
AHLUWALIA: Absolutely. In other areas, for example, if you want to promote exports, for example, it’s very important to get the logistics right. Lots of studies were done in India that factory-level skills were not that much poorer than they are in China, but the logistics was terrible in the sense that what took in China X days for inputs to get from the port to the factory, or Y days for the output to get from the port to the ship, in India took three to four times more, even though the actual person making the product was just as skilled.
Logistics is completely outside the realm of the commerce ministry, but they can talk about it. It requires very complicated decision-making, multi-modal, accepting documents seamlessly, whether you’re sending stuff initially by truck, loaded onto a train, hundreds and hundreds of problems that need to be overcome. These problems can only be overcome by bringing in committees which have experts, which have export stakeholders, the regulatory guys to work out what the problems are. In some ways, I think we’re now looking at reform in the crevices of the system. In some ways, they’re simpler, but they require more specialized knowledge.
RAJAGOPALAN: And coordination, for the same reason.
AHLUWALIA: Coordination for the same reason, yes. That’s not impossible if we recognize—look, if the prime minister, who is at the moment in a very strong position, were to say to a bunch of experts that, “Look, I need a list of 20 things that you think need to be done in order to improve our logistics, to bring it, let’s say, up to the Vietnam level,” but to tell his office that, “Look, let’s do 15 of these at least. I can understand that we may not be able to do everything,” you’d find a lot of progress.
But that list of 20 has to be prepared by knowledgeable people, not trade economists and guys who know there’s logistics but don’t know exactly—I’ve discussed this with some of the people who’ve done work on it, and the details are quite fascinating. At times, it’s the customs that have a problem because they don’t want to change the way they work, et cetera.
GST Rate Proliferation
RAJAGOPALAN: This is also why the industry consultative process that you talked about earlier in the conversation is so important. In fact, at some level, some may say it’s lobbying and clientelism and so on, but at another level, it’s just feedback. Feedback that you cannot get when you’re sitting in north block or south block.
AHLUWALIA: There’s nothing wrong with lobbying. The United States has made it into a profession. Virtually everybody who’s held a senior position in the government of the United States joins a lobbying firm, and they’re registered as lobbyists. At least that way, you know what you’re dealing with. When you don’t make that evident, somehow in India, lobbying looks like some underhand activity which is to be disapproved of.
RAJAGOPALAN: I think there are multiple kinds of lobbying. One kind of lobbying, which is just this protectionism. One thing I see which is quite worrying to me is the kind of lobbying going on with the GST Council, and I’m trying to track this through all the changes in rates. But one issue with the multiplicity of rates is, a few years ago there was a lovely column—I think Vivek Kaul wrote it—which said, it’s an existential question, but is KitKat a biscuit or a chocolate? Because biscuits and chocolates are actually taxed at completely different rates. They’re almost 10 percentage points apart. Now everyone’s going to lobby to be whatever is the lower tax rate, right?
AHLUWALIA: Yes. Absolutely.
RAJAGOPALAN: I’m talking more about those sort of things.
AHLUWALIA: What I mean is, this is a violation of the fundamental principle of GST, which is to have very few rates so that this lobbying stopped. We’ve gone the other extreme. Now, the other interesting thing is that virtually every political party has said we want fewer rates, but somehow the GST Council doesn’t seem to be able to do it.
RAJAGOPALAN: I think the trouble is, it can only function at two rates: one rate which is for really very essential goods, and one higher rate. The trouble with few rates—let’s say we go down from eight to four—immediately this lobbying activity is going to start proliferating it again. It’s one of those weird things where there are only two stable equilibria. You either have one nonzero rate, or you have lots and lots of rates.
AHLUWALIA: I think the case for multiple rates is usually made by people who feel that they’re more progressive, but the crux of that argument is that the progressivity of a fiscal system is not to be judged by the differences in rates. It’s to be judged by the total effect of how is the money distributed. Actually, my guess is that if you count zero as one rate—at the moment, almost 50% of consumption items have been exempt from GST. Could we agree that this should be reduced to 25%, let’s say? That means we should list the 25 items that have to graduate up. They would graduate up to the lowest rate, clearly.
In addition to that, forget about gold, which comes in very low. It’s a special problem. We probably have about three or four rates, which we need to combine into maybe two. You could, if you really wanted some progressivity for a set of luxury goods, have a surcharge on the rate, which would not be allowed as a deduction in GST. It would be a pure additional tax, but reducing the number of zeros and then simply going to maybe something like eight and 15, and then have a surcharge on very luxury cars and yachts, and this and that on the 15. At the moment, first, we need an agreement in principle. I don’t see why the GST Council can’t get that agreement.
RAJAGOPALAN: I have a paper coming out, I think, anytime now in Social Philosophy and Policy, which talks exactly about the rate proliferation in GST because people are worried about regressive nature of taxes. One thing they don’t consider is that a proliferation of rates is regressive on a different margin, which is compliance. Very large firms can more easily comply by spending a smaller percentage of their revenue and profit on dealing with this multiplicity of rates versus small mom-and-pop shop stores or MSMEs or Kirana shops.
They also sell 100-plus goods, and now they have to hire a chartered accountant and get into “is KitKat biscuit or KitKat is a chocolate?” and so on. I think, even if it is less regressive or more progressive on the consumption side, it is actually more regressive on the compliance side.
AHLUWALIA: That’s a very good point.
RAJAGOPALAN: India is a country of small firms and small shops. We have not achieved scale except for the very large corporate houses yet. I think that’s one part. The other aspect about the regressive nature is also when it comes to lobbying. What’s happening—and I’m trying to track this through the tables in the GST Council changes, which is quite complicated as I go through them. And what I’ve observed is areas which are not well organized—that is, things like matches or cloth or footwear, where you have very large number of small manufacturers—they see rate increases.
Whereas those industries which are well organized, fewer players, more oligopolistic or monopolistic, they are better able to lobby in front of the GST Council, and they get the rate reduction. Because all rates can’t be reduced to please everyone. Some rates have to increase while others reduce. The ones that tend to increase are the unorganized sectors which necessarily have a large number of small players. The regression comes in in all these other places. I’m happy to send you this paper.
AHLUWALIA: Yes, do that. I’d very much like to see that.
RAJAGOPALAN: The paper’s only 20, 22 pages, and then the table of GST Council rate changes and cesses is about 35 pages appendix in the end.
AHLUWALIA: That’s fine. That’s perfectly okay.
RAJAGOPALAN: That fact alone tells us that something is terribly wrong.
M Doc 2.0
RAJAGOPALAN: I want to end with one last question. If you were to write an M doc 2.0 today, what would be the big things that you include in that? The first M doc looked at four or five sectors that needed to be reformed, at the same time, hand in hand in a way that it all fits well. How would you think about that today?
AHLUWALIA: First, thanks for the opportunity to pronounce on this, because this is my next and last book. I basically want to write a book which is addressed to, let’s say, a 24-year-old in the next year or two, signaling to that 24-year-old that these are the areas in the future—forget about the past and who did what. That’s very exciting politically, but not very interesting for young people—but signaling to young people that if you’re taking an interest in economic policy, these are the areas you should be looking to, to see whether sensible changes are being made.
The question is, what are those? My first point is, any list I give now is obviously a first cut preliminary, since I’m thinking of the scope of this book, but some things are quite obvious. Number one, it’s clear that there’s a very wide consensus in India now that the public sector is not the place to engage in production. That’s much better done by the private sector, whether of goods or services. However, it’s not true that the role of the government should be reduced, because as a matter of fact, compared to more advanced countries, the size of government expenditure in India is much lower than it should be.
Clearly, as we develop, the role of the government will increase, but it’s absolutely vital that it doesn’t increase the way it did in the past. What is it that it should do? I think it should do, number one, health and education. We are backward in that; we are lagging. We are actually improving, but nobody gives us much credit for that because we haven’t yet got to where we should be, 100%. What exactly that should be, it’s not just a matter of expenditure. It’s a matter of innumerable things, curriculum reform, energizing teachers. Who’s to handle it? Should it be center, state, local government? Very complex issues.
In my view, in these areas, since the final delivery is at the local level, we need much greater flexibility across states. We have to recognize, therefore, the fact that different states may follow a different path. For the central government, this becomes critical because the usual way in which the central government, as it were, pushes the states into one jacket, a straitjacket, is by designing a scheme which says that if you do A, B, C, D, E, we’ll give you money. I think I’m more inclined to the view that the state government should be given money for education and health.
I’m departing from the old notion that you just give them unconstrained money, but earmark what you give. That’s got to go into the health and education budget, but you decide. That would even go to the level of if a state doesn’t want to expand public schools but support private schools, let them.
It’s not generally realized that Kerala is the exemplar of education. The majority of schools in Kerala are not government schools. They’re government-aided schools, but they’re schools set up by missionaries and so on. If you had to learn from what other states are doing, it is not multiplying the places that have 100% government schools, like UP and Bihar. They’re not an example of where we should be going. That’s one set of issues.
Trade, Infrastructure and Logistics
AHLUWALIA: Second, I do think on foreign trade, we did the right thing to open up. There were critics and there probably still are critics, but I think on any stretch of the imagination, if you look at exports of goods and services to GDP ratio, or even to world shares, they have risen. So we did the right thing, but the world has changed. Earlier, we had a global consensus to an integrated global world with multilateral rules of trade. That has practically disappeared.
With the WTO’s dispute resolution mechanism effectively dead because the U.S. has not agreed to fill out the quorum of people who can run the appeal system, today you can violate any WTO rule you like. You will be shut down at the dispute settlement level. You will then appeal that, which you have a right to do, and the appeal will go nowhere because the appellate process is dead. Basically the WTO is ineffective today.
On the other hand, what is happening is the proliferation of regional trading agreements. I think India has no alternative but to join some or all of them. Can’t always join all of these, but recognize that we have to be part. Now, we are not at the moment. We are doing something with EU, something with U.K. The U.S. doesn’t want to have any free trade agreement, so we can’t do anything there.
There is an issue on Asia, are we going to join RCEP [Regional Comprehensive Economic Partnership]. If we don’t want to join RCEP because it gives access to China, which I know that our industry guys may not be happy with, we could always join the CPTPP [Comprehensive and Progressive Agreement for Trans-Pacific Partnership], which the Japanese are leading. It’s deeper integration, but it doesn’t include China.
But I think India needs to take a position on that. I don’t think there’s adequate discussion of it at home, and young people need to think. There’s a very strong anti-FTA view in India, I think based on false reasoning, but it should be agitated, and people should take a view on that. That’s critical. I think that in my view, one of the very positive things, other than health and education, the government has to do infrastructure, and they’re doing it.
We should do more, and that’s fine. In addition to infrastructure is logistics because logistics is much more sophisticated, and the great advantage here is, digitalization enables you to do a lot of things logistically which will speed up clearance processes. If you view digitalization as simply helping the customs do what they’re doing, that’s one thing. If, on the other hand, you want to reconfigure what customs should do, given what digitalization makes possible, this is practically scrapping what they do and redefining what they should be doing.
This is where they need an external committee, a committee of experts, global experts, trade people, economists. Of course you can always throw an economist into anything, but they don’t make the most critical contribution here. That’s another area that I think we’ve not even begun to scratch the surface. Yet another area obviously is climate change. I don’t want to go on and on. I have written extensively on the subject. We’re just beginning to scratch the surface. It’s good that we’ve set ourselves some targets, which earlier we were not willing to do.
Independent observers like Climate Tracker, et cetera, they’re saying that all countries, including the U.S. and India, are insufficient. The actions of all countries are insufficient to achieve the targets they’ve set. Now, this is a first-level feedback, so we shouldn’t get too concerned about it. I think the fact is that if you ask yourselves, “Is India doing nothing on climate change?” the answer is no. We’re clearly doing something. Is India doing enough? The answer is no. That’s a very big challenge.
Now, behind that challenge is, where’s the money going to come from? That is actually linked to the fiscal position. Too many people think that somehow either the money is going to come from abroad—which is just nonsense. I mean, regrettably, I don’t see any evidence on the part of the multilateral, multinational community to do very much by way of assistance. There’s a lot of private-sector money that could come in, but for that, you have to organize yourself differently. Are we ready to absorb all that much? That requires a lot of pretty hard thinking, which somebody should be doing.
Finally, I think we need to think about how different states are going to react. They’re not all going to react uniformly. Some states are going to move ahead much faster. This is going to put pressure, if you like, or a strain on Indian federalism. We need to think about what that is and how we need to manage it, how to anticipate it and so on.
RAJAGOPALAN: I think the underlying theme in all of this has been something you’ve been a champion of all along, which is economic growth. The higher our growth rate, the easier it is to do every single aspect of this. In some sense, if we solve things like logistics, it will also boost the growth rate. It’s like a two-way street almost, right? Without this next stage of reform, it’s difficult to do that.
AHLUWALIA: On the growth front, it’s really quite simple. It’s very difficult to look at our recent performance because we’ve had the pandemic. Everybody’s had the pandemic. We were badly hit. We did slightly worse than the average. On the other side, we did better than the average in recovering.
RAJAGOPALAN: And vaccination and those sort of things.
AHLUWALIA: I haven’t seen a really good international independent study of how India has done, but it is certainly true that a year ago, people did not think that we would be able to vaccinate as many people as we seem to have. The latest data that I have seen, 95%—
RAJAGOPALAN: Yes, above 95.
AHLUWALIA: —for first dose, and 88% for second dose. That is really incredible.
RAJAGOPALAN: That’s extraordinary.
AHLUWALIA: Yes. All credit to the millions of people at the state level. This is actually a state-level activity because vaccination is done right down at the local level. Of course, the central government provided the vaccines.
RAJAGOPALAN: And the funds.
AHLUWALIA: And the funds. That I think has worked out quite well. Some people criticize that we should have been, let’s say, three months earlier. That may be. Taken as a whole—mind you, what the COVID thing really points to, of course, is that if we get hit by another such thing, then we don’t have spare capacity in the health system. That has a medium-term implication that, are we doing enough to build that up? That too depends.
I’ve not, for example, seen a good study on how different states have done in this whole vaccination thing. It’s a wonderful thing for you to study because India on the whole has done well, but is it the case that every state did exceptionally well, or are there some states that didn’t? Do we have something to learn? That’s something we should really be looking at.
RAJAGOPALAN: Absolutely. The point that you make about spare capacity, one, we have no spare capacity virtually anywhere in government. The second part is if we get hit by another pandemic, the fiscal room to maneuver—given the current global climate, the slowdown, the levels of inflation even in Western developed countries, their high interest rates—there is very little room for the government to maneuver and boost the economy through a fiscal stimulus or other things.
That was already limited in the first iteration. It’ll be even more so in the second one. In some sense, economic growth is the underlying engine that can drive all the possibilities, whether it’s improving capacity of the states, whether it’s improving spare capacity, state capacity in healthcare and everything else.
Investing in the Private Sector
AHLUWALIA: One consequence of all this is that if the growth is going to be dominantly private sector-led, then apart from investment in infrastructure, which the government has to do, there has to be a huge amount of investment in the private sector. That emphasizes the importance of the central government making room, giving them space. They can give them space by reducing the size of their deficit.
Now, they have to reduce the size of the deficit in the following context. Number one, reduce the deficit. Number two, not reduce total expenditure—infrastructure, education, health and, quite frankly, defense. We spend very little on defense, less than 2% of GDP, and we’re living in a dangerous neighborhood. Quite frankly, that is another area. Finally, research and development. As we get out of the low-income category, government ought to be spending much more on research.
Now, the pattern of government spending doesn’t have to be government laboratories. It ought to be competitive funding of research projects by the private sector, or jointly by the private sector and government laboratories, but the amount of money that should be given is large. And the money should not be given as a budgetary grant to individual laboratories. It should be pooled as a fund, and laboratories and private sector should—
RAJAGOPALAN: Should compete.
AHLUWALIA: —compete. Now, I had suggested this way back when I was deputy chairman. There’s absolutely no willingness on the part of the scientific ministries to accept that. They applaud you when you say you should spend more on research, but they totally do not agree that it should be done other than through expanding their own budgets. A very big problem that the government has to somehow or the other tackle. These are all big issues, but they’re not like the earlier issues of we must allow our private sector to be free and all this kind of stuff. They’re pretty sophisticated, and we need hard thinking on how to make progress in that area.
RAJAGOPALAN: Absolutely, and I’m looking forward to the book. I’m looking forward to all the different chapters and aspects, and the M doc 2.0 version of what we need over the next 50 years. Thank you so much for doing this. This was such a pleasure.
AHLUWALIA: Thank you, Shruti. Thank you for inviting me.