‘Backstage’ by Dr. Montek Singh Ahluwalia is the second major book to come out this year by a top economist. Earlier this year, Prof. Arvind Panagariya came out with ‘India Unclaimed’, which covers the next set of reforms this country needs to compete in the global economy. There is a sharp contrast between the two books, while India Unclaimed looks at the future, much of Backstage covers what has been done in the past and traces the major players responsible for it.
The contrast between the two books takes us back to the early months of 2014 when the UPA government was on the verge of exiting the power corridors, and the two stalwarts were pitched against each other in the India Today Conclave. The debate had Prof. Panagariya representing a growth-led model of development, and Dr.Ahluwalia providing a defense of the social scheme adopted by the government. While Prof. Panagariya came on top in that debate questioning the performance of the government, Dr. Ahluwalia took pains to highlight that the differences in their views were not so sharp, and encouraged Prof Panagariya to bring the reforms he so seeks with the oncoming government.
While reading the book, it becomes immediately apparent that Dr. Ahluwalia did profess much of the same reforms in his years at the North Block. It takes us through the early years of the command and control economy, narrating the instances where reform was brought in either through stealth or through persuasion. Some of the tales of the stranglehold over the economy are perhaps unimaginable in today’s globalized world, but they were very much the norm till the late 1980s. Take, for instance, V. Krishnamurthy and his struggle to get Maruti Suzuki on-road and ensuring it does not end up another Public Sector Undertaking (“PSU”) reeling. He ensured that Suzuki has a stake in the venture and key decisions could only be taken by Suzuki’s consent, effectively insulating political interferences. When the pressure was being created to have Hindustan Machine Tools, another PSU, to supply engine on the pretense that it was already manufacturing Bajaj scooter engines, R.C Bhargava, the then MD of Maruti, had to physically bring in the two engines in the meeting with the Minister of Industries to convince him of the difference between the two. Another such instance was Narayana Murthy, the founder of Infosys, having to struggle to get a 300 MB computer in the country, and getting caught up in tedious and protracted litigation that lasted almost 9 years when he refused to pay a bribe for the import.
Back then there were very few prominent voices who were able to discern the harmful effects of the large and ever-growing state apparatus, chief among them Jagdish Bhagwati, mentioned on quite a few occasions throughout the book, can be seen as the lone dissident. While Prof Bhagwati spent much of his time aboard, Dr. Ahluwalia chose the path of reform from within and entered the government in 1979 as an economic advisor. Incidentally, this was the time when Indira Gandhi was finally beginning to realize that her wrong turn to socialism had derailed the economy and the political space for economic reforms was slowly building. The early crucial steps, like deregulating the cement industry and devaluing the rupee to reflect the inflation differential with foreign currencies were taken in these years. Four years later, Rajiv Gandhi took the reins and it seemed that he would usher in a new era of reforms that were perceived previously too radical for the old congress guard. Despite a flair for modernization, Rajiv Gandhi years saw limited reforms like the expansion of the telecom sector through the licensing of STD booths and the introduction of Modvat, which ultimately culminated in the GST. Much of his tenure was spent in controlling the political exigencies arising out of regional discontent in Punjab and Assam and placating the Muslim and Hindu vote bank in the aftermath of the Shah Bano judgment. An attempt at modernizing the Indian military led to the Bofors scam and left a significant deficit, which later made the 1991 reforms inevitable.
Much has been said about who was the real architect of 1991 reforms, was it the political deft of Prime Minister Rao that made them possible or was it the plain demeanor and intellectual brilliance of Dr. Manmohan Singh that carried the day. Dr. Ahluwalia who was in the thick of the action as the commerce secretary has given due credit to both in the book. His reverence for Dr. Singh is apparent throughout the book, for this reason, he places a great deal of emphasis on Dr. Singh ensuring that reforms were brought in, at times, in defiance of PM Rao’s requests and concessions. Whether these requests and concessions were genuine or not, is something we will never know. PM Rao was a master strategist, and his helplessness was at times manufactured to convince his rivals and detractors of his inability to decide otherwise.
The following NDA years marked a major continuity in the legacy left by PM Rao, the disinvestment in PSUs continued with VSNL, Maruti and Hindustan Zinc all being sold to private players. A significant investment went into infrastructure in the form of constructions of roads and highways. Petrol and Diesel were linked to the market. The Telecom sector began to deregulate itself.
The high growth rates of UPA-I are a contested legacy, there is no denying the effect of NDA reforms was felt much later and to an extent fuelled a high growth rate in the early years of UPA-1. However, UPA-I did spearhead the 123 agreement which was a major achievement, here the fortitude of Dr. Singh played a big role in ensuring that the agreement sees the light of the day, even at the risk of losing power. It ended the nuclear apartheid and paved the way for energy self-sufficiency in the years to come. UPA-1 also increased FDI caps in aviation, Telecom, and insurance and it boosted investor sentiment. It brought in significant healthcare reform in form the of Rashtriya Swasthiya Bima Yojana, which has now been expanded in form of Ayushman Bharat by the present government.
Yet this where the reform cycle ends, UPA-1 also reversed the market linkage of Petrol and Diesel prices, which it struggled to bring back towards the end of UPA-2. Towards the end of UPA-1, the first farm-loan waiver was initiated, which has since become an election norm. The Mahatma Gandhi National Rural Employment Scheme (MNREGA), which is stoutly defended by the UPA politicians and social scientists alike, continues to soak in huge resources with limited outcomes. Incidentally, Vijay Kelkar, who often appears in the book as a colleague and comrade of Dr. Ahluwalia, in his recent book ‘In service of the Republic’ mentioned the confusion that surrounds MNREGA, which is on different occasions defended as a poverty alleviation program and an infrastructure building measure, while in practice it falls short on both. A simple indicator of its inefficiency is the fact that the number of people availing the benefits under MNREGA has not gone down. The talks of linking MNREGA with skill development so far have remained elusive, leaving the people no better off after they have availed the benefits under the scheme.
Some of the achievements of the UPA such as initiating the PPP (Public-Private Partnerships) in infrastructure mentioned in the book have since also gone bust. A great deal of those projects eventually became financially unviable, fuelling the NPA crisis. To be fair, this is partly attributable to the Global Financial Crisis of 2008 as identified in the book, but this has also to do with the easy money available post the crisis due to the lowering of interest rates. The reckless lending also fuelled the inflation towards the end of UPA-2, prompting RBI to jack-up interest rates, eating into the potential growth under NDA-2 after 2014. Much has been said about the slow implementation of the Insolvency Code to control the crisis, but it is equally true that UPA was slow in identifying the problem. Some of the other debacles include the retrospective amendment in the IT Act to fasten liability on Vodafone, the new land acquisition Act that made land acquisition substantially difficult, and the slew of scams that rocked the UPA-2.
Here Dr. Ahluwalia has made some convincing arguments that deserve more scrutiny, his chief contention is that the CAG report on 2G was speculative and measured the loss to the exchequer in a highly questionable fashion. He argues that the government intended to allocate the spectrum at low cost to ensure ample competition in the market, thereby ensuring lower cost and more proliferation. There is no denying that this is a sound policy, as we subsequently saw, the high taxation in Telecom in the form of competitive bidding for spectrum and a revenue-sharing model led to numerous bankruptcies. However, if this was the intention of the government, it ensured an effective death of future discretionary allocation of resources by employing a high degree of arbitrariness in spectrum allocation. Since then governments have avoided discretionary allocation even where the sector can be benefited by it, as in the case of 5G spectrum allocation.
Overall, the book is highly readable. It offers a great insight into the world of policymaking at the helm. Dr. Ahluwalia played a significant role in the turbulent years of UPA as the Deputy Chairman of the Planning Commission. On numerous occasions he tried to ensure that UPA does not stride too much off the path of growth-led development by arguing against right-based legislation, lobbying for better administration in areas of power generation, water usage, and subsidies with state Chief Ministers. The book briefly covers the NDA years from 2014 to 2019 in the epilogue, where a similar derailment from growth started in 2016 with demonetization. Dr. Ahluwalia does not mince his words, offering a sharp critique. Incidentally, these years saw Prof. Panagariya at the helm in the capacity of Deputy Chairman at the NITI Ayog, the successor of the Planning Commission. Although NITI Ayog had a much more limited scope than the Planning Commission, NDA did not usher in many of the reforms recommended by it. This gives us an insight into the tough world of navigating and implementing sound economic policy in our political climate. In conclusion, despite its biases, the book is honest, reflective, and convincing in its justifications, criticism, and concessions, making it a must-read for anyone interested in economics and policy-making.