Implosion (15 page)

‘Your Legacy Is at Risk’

Singh’s overstated reputation as a liberalizer took a beating after he became prime minister for a second term in 2009 and mostly failed to win support for reforms from either Sonia Gandhi or coalition partners. As his reputation sank, his friends and colleagues gathered in Delhi one evening in April 2012 to launch a new edition of a book that updated what had been written in 1998 as a ‘festschrift’ or celebration of the 1991 reforms.
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The event took place at a time when the government seemed to be losing control of events. International investors’ views of India had been seriously upset by retrospective amendments to corporate taxation laws that hit foreign companies including Vodafone, the mobile telecom operator, and other factors such as project delays and corruption scandals.

Unfortunately, I could not be at the launch, but Adam Roberts,
The Economist’
s South Asia correspondent, was there and neatly caught the mood in a blog article. Headlined ‘Manmohan Singh, India’s prime minister, cut a lonely figure on the evening of April 14th’, it said: ‘The evening had the mood of an intervention: when friends and relations get together and, without warning, confront a loved one who has some sort of destructive habit that he won’t admit to. In normal life, it might be an addiction to drugs or booze. In India’s political life, and the case of Mr Singh, it is a desperate failure to push on with reform.’
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I talked to some of the speakers and read their speeches that were more critical than anyone could have expected. The prime minister had sat silently while economists and others, far from lauding his recent achievements, told him, in the words of one of those present, ‘your legacy is at risk’.
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It was surprising and sad for Singh, then 79, to hear this from experts, colleagues and friends who had worked with him for decades. The approach was set by Isher Ahluwalia, head of ICRIER, a leading economic policy institute and joint-editor of the book, who made the important point that India had been taking strong economic growth for granted. She implied that the government had been sitting back and failing to take the steps needed to sustain that growth, which was ‘under threat from a deteriorating macro-economic environment and a downturn in the investment climate’.

Developing this into a potent social issue, she pointed out that Indians born in 1991 were by then 21, and that half the population was below 25. ‘This half of our population started life in India with 5.5 per cent growth which accelerated slowly and steadily to 8 per cent as they grew up. They are restive for more, not less.’ Sharpening the criticism, she pointed to the ‘unsustainability’ of fiscal policies, incomplete financial sector reforms, infrastructure construction and regulatory frameworks, plus ‘macro-economic management in an uncertain international economic environment’ and ‘challenges of overall governance’. By this point, the prime minister must have wondered why he had, reluctantly I was told, agreed to attend the event. Ahluwalia was not only a leading economist, but also a family friend along with her husband, Montek Singh Ahluwalia.

Raghuram Rajan went further. After saying how 1991 had changed India for the better, he warned of a ‘paralysis in growth-enhancing reforms’ that had been papered over by the high growth. This had made India ‘dependent on short-term foreign inflows to a dangerously high extent, at a time that the international investor is increasingly sceptical about the India story’. By the early 2000s, he said, India had needed a second generation of reforms that included higher education, public sector industries, and allocation of resources such as land and telecoms spectrum. ‘But powerful elements of the political class, which had never been fully convinced about giving up rents from the Licence Raj in the first place, had by then formed an unholy coalition with aggressive business people, whom I will refer to simply as the connected’. That led to ‘coalition dharma – a coalition of the bad’, which replaced the pre-1991 Licence Raj with a Resource Raj and led to ‘massive fortunes generated by the connected and by politicians’.

Duvvuri Subbarao, then the governor of the RBI and previously economic adviser to the prime minister, warned that 1991’s ‘twin deficits’ were back again. The fiscal deficit was 7 per cent in 1991 and was now rising at 5.9 per cent while the current account deficit at 3.6 per cent was higher than the 1991 figure and short-term debt at 23.3 per cent of GDP was now far above the 10.2 per cent it was in 1991. T.N. Ninan, who runs the
Business Standard
, then mocked (without naming them) the way that Manmohan Singh had allowed Sonia Gandhi to dominate policy, saying, ‘We have copied the Communists, for whom the party is supreme and the government secondary.’ The prime minister, he said, was also hampered by ‘presidential-style chief ministers in the states’ and coalition cabinet ministers who ran their own policies.

Through all this and much more, the prime minister sat silent for over an hour, speaking at the end only to say that he had agreed to come provided he did not have to speak. Many of those there found this stance not only inexplicable but worrying – had Singh really lost the wish to debate as well as the will to govern? The book’s editors and contributors, the prime minister said, had ‘thrown a new light on old problems’ and had mentioned many challenges. ‘There are difficulties. Life will not be worth living if there are no diffi culties. I am confident, with great determination, we will overcome,’ he said.

Privatisation – A New Word and Its Origins

Where, one wondered, was the ‘great determination’ to be found? What came to the fore that evening was a belated and unspoken realization that, despite his image, Singh had never been the sort of enthusiastic liberalizer that Chidambaram became from 1991. Neither he nor Rao provided the zeal and leadership that are essential to pursue a continuing programme of active reform against the political odds, such as Margaret Thatcher showed when she was prime minister of the UK ten years earlier,
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nor the vision and strategy that Deng Xiaoping brought to China’s opening up from 1979 as the country’s supreme leader. Thatcher’s approach was that of a bulldozer, pushing through opposition on the road map she knew she wanted to follow. Deng was more subtle and talked of ‘crossing the river by feeling the stones under the feet’.
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Privatisation was not initially a priority for Thatcher though she became an enthusiast once she realized the potential, and it was not a target for Singh, who has never believed in changing India’s economic base. In March 2009, he said: ‘We are a mixed economy. We will remain a mixed economy. The public and private sector will continue to play a very important role.’
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Just after he became prime minister in 2004, he said that no profit-making public sector unit (PSU) would ‘normally’ be privatised. To underline the change of policy from the former BJP-led NDA government, the Disinvestment Ministry, which aimed both to privatise (i.e., sell control) and divest (sell partial stakes) was scrapped and merged into the Ministry of Finance. That echoed the ‘M’ policy paper where Ahluwalia wrote that privatisation ‘as a general strategy is ruled out’.

Privatisation became one of Thatcher’s most significant legacies – not only because she introduced the policy itself, but also because she brought the word into the world’s everyday vocabulary. I played a role is that when we launched the word on 28 July 1979 in
The Financial Times.
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The day before, I had telephoned Nigel Lawson (now Lord Lawson), a Conservative Party MP who had just become Financial Secretary at the Treasury, for a background briefing on denationalisation, as selling off government stakes in business had always been called.

During the conversation, he used the word ‘privatisation’, which I had never heard before. I put it in the first paragraph of an
FT
leader-page feature I was writing with an economics correspondent, Anatole Kaletski, saying: ‘A new word has been circulating in Whitehall in recent weeks. It goes to the heart of the government’s policy for reforming the ownership and bureaucracy of state-owned industries, but few ministers would admit to using it. The word is “privatisation” which, to those close to the centre of Tory thinking, means the government’s well-known interest in selling public sector assets to private individuals, financial institutions, and anyone else [apart from foreign interests in some sensitive cases] who might want to buy them.’ The
FT
features editor refused to put it in the article’s headline, saying something like, ‘no one will know what it means’. Instead, with vintage
FT
caution and precision, the headline read, ‘Long and short term aims of denationalisation’.

People of course rapidly came to ‘know what it means’, and the word became used internationally. The Thatcher government’s purpose was simply to put a positive and permanent private sector spin on the negative sounding policy of denationalisation, though some of its proponents wanted it to lead to wider public ownership by private individuals and interests, which did not happen. National businesses and services such as the railways, the steel industry, an airline, an aircraft manufacturer, gas supplies and a telecom provider were successfully sold off. But the policy went too far and broke up services such as water, electricity and airports (and, most recently, the post office) that were sold off to large corporations, including some based abroad, which were more interested in making profits than providing what the public needed.

The policy also developed into a worldwide craze for PPP (public– private partnership), which often blurs and confuses the confl icting priorities of providing adequate public services and making private sector profits. The private sector cannot be trusted to deliver public services in terms of quantity and quality, as has been seen in Britain with railways and hospitals, and in India with airports, where deals have been corrupted by land and other scams, and highways, where companies shirk responsibilities.

India has debated how far to go along the Thatcher path for over 20 years, but its lack of willingness to face major change has been demonstrated by more progress being made on divestment, which involves selling only minority stakes, than on privatising control. Manmohan Singh’s reluctance to sell off profi table businesses reflects both India’s old socialist approach, and maybe also justified scepticism about how far the Indian private sector could be trusted with the family jewels.

Lessons and Debate

Looking back, Ahluwalia has pointed to some lessons from the events of 1991 that are relevant today.
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The main one is that ministers need to be prepared to give up discretionary powers in favour of ‘transparent market driven processes’, as Chidambaram and others had been in 1991. This is urgently needed now, not only nationally but even more so in the states – especially in infrastructure, mining rights and changes of land use, which lead to extensive corruption. Ahluwalia might have added that it is useful for the prime minister to be in charge of ministries where reform is planned, as Rao was in 1991 with industry.

Second, both Singh and Chidambaram were prepared to take risks over how a new trade policy would work in practice, even though finance ministry officials were not willing to do the same. ‘They suffered from the fear of flying syndrome,’ says Ahluwalia. Third, the events showed that, if political decision makers are ‘clear about what they want’, opposition from bureaucrats can be overcome. The other three points he listed were: it is easier to make changes when there is already some consensus among policy experts; individual reforms need to be part of a broad ‘holistic’ approach; and ‘our much maligned system can deliver results very fast when necessary’.

The bigger lesson, not mentioned by Ahluwalia, is that the reform process since 1991 has been based on weak foundations, with little real substantive debate or popular acceptance. There has been a popular mantra mouthed by politicians and others from the mid-1990s that the ‘reforms are irreversible’. That is broadly true, but it misses the point that this does not mean that new measures can be easily introduced. A parallel claim that there has been a consensus behind the reforms has never been true, as has been shown by resistance to the government’s plans from vested interests and political opponents during 2009–2014.

There is now not even a consensus on the priority that should be given to economic growth, and how much it should be restrained in order to protect the environment and the livelihoods of people currently occupying land that is needed for mining and other development. There is an apparent consensus on the need for foreign investment, but that breaks down when vested interests try to protect their business prospects in, for example, the defence sector and in one or two other major areas such as insurance and retail trade and distribution.

There has been little debate on all this, and most policy changes after 1991 have been the result of pushes and pulls by vested interests (often, euphemistically, carrying suitcases). Many reforms that have (or have not) happened in industries ranging from telecoms and banks to airlines and retail stem far more from such pressures than from reasoned analysis and debate. Ratan Tata has said that he was told in 2000 that a government minister needed a Rs 15 crore bribe before he would approve a joint venture between Tata and Singapore Airlines. This would have opened up the aviation sector to foreign airlines but the move was successfully opposed by India’s well-connected Jet Airways and others.
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(Ratan Tata did not pay the bribe and the tie-up with SIA did not move ahead until 2013.)

This approach is a major weakness for an economic liberalization policy.
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Foreign or domestic companies push for changes, supported by their governments, especially in the case of the US. That is then resisted by rival companies inside and outside India, supported by political parties that often reflect vested interests as much as their own policies. Ministers and bureaucrats are persuaded to tilt one way or another, sometimes nudged by various inducements and sometimes by legal action. Eventually someone wins and reforms are introduced – or aren’t.