India lost for words 20 years after its 1991 reforms

Twenty years ago tonight, three top Indian officials burned the midnight oil tearing up old import controls and preparing a package of economic reforms that would slowly lead to the booming India that is widely admired today, with growth of 8-9%, 300-350m people enjoying the benefits of a consumer economy, a strong rupee, and businessmen operating internationally.

But India seems to be in no mood to celebrate that momentous event, just as it wasn’t at India’s 50th anniversary of independence in 1997 when the feeling was downbeat. People then were unsure of what to celebrate, since so little had been achieved in terms of economic development, care for the poor and industrial efficiency since the British left in 1947.

Ten years later, that had changed because of the economic boom of the intervening years. But the 1997 mood is now back again. People are aware that, despite all the economic and business successes, 800m people are still desperately poor and under-nourished, with poor access to clean water and health and education services. Public infrastructure and services are crumbling, national security and defence preparedness is woefully inadequate, and governance is sliding into a greedy, corrupt and inefficient abyss with no bottom in sight.

No 20-year celebrations or major events have been planned, though the Confederation of Indian Industry is next week beginning to pull together some conferences to examine what has been achieved and look ahead. Apart from occasional references to the reforms by prime minister Manmohan Singh, the government is mostly silent – possibly, one frustrated leading economist suggested to me, because Sonia Gandhi, leader of the coalition, and her son and heir Rahul, do not favour tough reforms. A National Advisory Council (NAC) that she heads is populated by soft liberals who prefer expensive and often wasteful pro-poor aid schemes.

Finance minister Pranab Mukherjee has been briefing journalists this week on what he sees as signs of success (more pending than completed), though this has received a mixed reaction, including a damning piece on the Wall Street Journal’s India web page that lists what has not been done.

Yesterday, in an apparently desperate effort to show some signs of activity, the government approved a $7.2bn investment by BP in Mukesh Ambani’s Reliance Industries’ (RIL) oil and gas business, and moved a little closer approving contentious foreign direct investment in general retail stores.

But that was offset by a cover story in today’s India Today weekly news magazine  (below)headed India goes global as government chokes economy – an over-stated reference to Indian companies’ big investments abroad at a time when Indian projects are being slowed down by government controls (often justifiably, in order to follow environmental regulations). Listed there are the mass of bills on land, mining, pension funds, banking, insurance, tax codes that India’s unruly and protest-prone parliament has failed to pass in recent sessions

Popular contrasts of India’s elephant and China’s tiger economies are being trotted out in various articles and studies, as they have been for 20 years. When this blog was created by Fortune magazine, it already had a China blog called Chasing the Dragon, so I was asked to ride the elephant.

But the contrast is simplistic because India has its tiger industries such as information technology (IT), autos, pharma, and mobile telecoms that have been spurred by entrepreneurial drive and technological change. There are also rapidly industrialising states – notably Gujarat and Tamil Nadu (despite its political corruption). These are taking the place of India’s earlier internationally lauded cities, Bangalore and Hyderabad, the capitals of Karnataka and Andhra Pradesh that have been swamped by the greed and corruption of politicians and businessmen in areas such as land acquisition, mining and real estate. (The Karnataka chief minister is this week accused of facilitating multi-million dollar illegal mining).

India’s blundering elephant is the government establishment that has refused over the past 20 years to change the way that the country is run. The July 1991 reforms removed trade and industrial licensing controls and opened India up to foreign investment, but this whittling-down of the government’s role has not been followed through.

The government still controls the mostly unreformed banking and defence sectors as well as a vast array of public sector industries and, in various ways, land useage and licensing, especially in the corrupt telecom sector. Such government controls skew development. As a simple example, with 70% of banking still government-owned, 20 banks have sought to please Pranab Mukherjee by opening branches in his Jangipur (West Bengal) constituency, even though most do little business there. Banks did the same in Palaniappan Chidambaram’s constituency when he was finance minister.

The reforms that were announced in a budget speech on July 24, 1991 by Manmohan Singh, then the finance minister, had been ordered by Narasimha Rao, the prime minister, who a  month earlier had formed a new government in the midst of a critical foreign exchange crisis. Singh had already devalued the rupee in two stages and dramatically flown 47 tonnes of gold to the Bank of England to cover a desperately needed bridging loan. The July 24 reforms had been prepared along with Chidambaram, then commerce minister and now home minister, and Montek Singh Alhuwalia who was then commerce secretary and now runs the Planning Commission.

The road to reforms had begun at least a decade earlier when, towards the end of her prime ministership, Indira Gandhi started to decontrol cement prices (1982) and commissioned L.K.Jha, a veteran bureaucrat, to loosen many of India’s tough economic controls that he had helped put in place. This trend was continued by Rajiv Gandhi when he was prime minister in the mid-1980s, but he faced too much opposition to make much progress, as did Narasimha Rao and Manmohan Singh by 1994, when Rao became politically nervous and slowed progress.

Rao told Gurcharan Das, for India Unbound (published in 2000), that India had had “the right pace of reform and a faster pace might have led to chaos”. He was also not in favour of wide-ranging privatisation, telling Das: “You don’t strangulate a child to whom you have given birth”. And he favoured pro-poor and politically useful employment schemes like those that Sonia Gandhi’s NAC now advocates, even though they are often corruptly and wastefully administered. “Growth was not enough. We had to attack poverty directly through employment schemes,” said Rao.

No reforming zeal

Singh did not demur about the slowdown. Despite his image as the “architect” of the 1991 reforms, he has never been an enthusiastic liberaliser, and India has not been subject to the sort of reforming zeal and leadership shown by Margaret Thatcher in the UK ten years earlier. But the Soviet Union, which had always supported India, had just collapsed, economic reforms had begun in China – and then the financial crisis made instant action essential.

Singh however was always – and still is – more worried about the effects of change on the poor, as he used to tell me in the 1980s, when he was the Governor of the Reserve Bank of India and I was the Financial Times’  correspondent in Delhi. When the United Progressive Alliance (UPA) came to power in 2004, led by Sonia Gandhi and Manmohan Singh, reforms were initially held back by the Communist-led Left Front that supported the government. Since the 2009 general election, many reforms have been blocked by the disproportionate power of other small coalition partners that have 20 or fewer MPs out of the coalition’s total of 262.

The main problem however is that Sonia Gandhi is not a firm enough believer in reforms to push Singh and his government into a tougher line. Consequently, a raft of reforms have been delayed including divestments of stakes in public sector businesses, increasing FDI in various sector such as defence, insurance and retail, and – most important of all – curbing subsidies

Energy, water and urbanisation

Montek Ahluwalia, whose Planning Commission is currently finalising a new five-year plan to start next year, recently argued in a lecture to the ICRIER policy think tank that there is too much public focus on FDI and divestments as the touchstones of liberalisation achievements. The focus for future should, he said, be on three urgent areas that would otherwise block economic progress.

One was the use of energy, with India importing 80% of its oil, and with coal prices and the need for imports rising. Next came water, whose supply (unlike energy) could not be increased despite current inadequate polluted supplies and growing demand. Third was urbanisation, with only 150m of 300m people currently in urban areas receiving adequate municipal services, while another 300m are expected to arrive in cities within 20 years.

These areas need changes of approach and implementation by the central government, and even more by state governments, that have eluded India for the past 20 years.

Expanding and controlling energy and water supplies means, Ahluwalia says, that states must accept realistic pricing so that users pay – both in order to finance development and to curb unnecessary useage. That however is the same sort of problem as curbing subsidies for the poor, which no government has dared attempt.

Coping with urbanisation – and the use of land – needs new laws and regulations at both central and state level to avoid the corruption and crony capitalism that is currently evident across the country at all levels.

Basic reforms in governance are needed – the scale of the problem is illustrated by 150 out of 542 seats in the 2009 general election being won by politicians with criminal records, and by the corruption stories involving politicians and bureaucrats that daily fill the newspapers.

It is hard to see how India can tackle these issues, given that it has failed to do since 1991. People who are well off will of course do better, and the 300-350m people now enjoying varying levels of consumerism will increase in number and satisfaction. Companies will become more profitable and will become more internationally active. But social tensions will increase, with growing battles over the use of land and other scarce resources, and it will take major reforms to reverse the trend of bad governance and corruption.

It is an irony that, though the past 20 years began and now end with Manmohan Singh, he was neither in charge at the beginning, nor is he at the end. That is not a  criticism, but in the early 1990s he could only do what he did courtesy of Narasimha Rao, and now he cannot do what he doesn’t do courtesy of Sonia Gandhi and the UPA’s coalition partners. Something surely needs to change.