A key element of the 1991 economic reforms was dismantling of the industrial licencing regime. Rakesh Mohan, in his role as economic adviser in the industry ministry starting 1988, was an influential part of that change. Mohan, an engineer by training and who studied at Yale and later did his Ph.D from Princeton, first joined the Planning Commission in 1986. Later, after the reforms programme, he was chief economic adviser from January 2001 to May 2002 in the Vajpayee government. In 2002, he was appointed deputy governor of RBI, from where he moved to the ministry of finance as secretary, economic affairs, between November 2004 and June 2005, before returning to the RBI. He continued as deputy governor under Y V Reddy until 2009, after which the government appointed him as India’s executive director on the IMF Board from 2012 to 2014.
Edited excerpts from the interview:
What are your recollections of the industrial licensing reform of 1991, a critical element then and a policy with which you were associated?
Most of the work leading to the 1991 reforms was done suo motu by the Ministry of Industry in 1990. Mr A N Varma was the secretary in the ministry, then under V P Singh as Prime Minister, and Ajit Singh was the industry minister. So in a sense, an unlikely person, Ajit Singh, started the reform process along with V P Singh. As I understand it, Ajit Singh had then recently returned from the US where he had worked with IBM, so he had a very modern mind. Because of the Mandal business people have forgotten that V P Singh, when he was finance minister under Rajiv Gandhi, had been regarded as a reformer. So there were these expectations on him when he was the prime minister. And because it was the first non-Congress government in a long time after Morarji Desai, there was a view that we need to do something different, and that Congress socialism and controls needed to be removed. So it was in that context that we worked in 1990 and Mr Ajit Singh actually announced a new Industrial Policy in Parliament, one year before the 1991 policy. Most of the work had been done under A N Varma who was then secretary and I was the economic adviser. The policy was approved by the Cabinet and placed in Parliament. But all the home work had not been done and it could not be implemented.
So how did it pick up pace after that in 1991?
So nothing happened with the policy after that (1990). People have also forgotten that Chandra Shekhar rebelled against V P Singh on that industrial policy announcement: he was opposed to much of the liberalisation and particularly to opening up of FDI… And then, of course, after the V P Singh government fell, he became prime minister and kept the industry portfolio. Narasimha Rao, who succeeded him, also kept the industry portfolio. When Chandra Shekhar became PM, he came to Udyog Bhawan, which houses the industry ministry, held a meeting and told us, “Don’t worry about what I said earlier on the policy you people have made. I want the best possible advice on industry. Keep giving me your frank views in the interests of the country.” Then, of course, nothing happened as it became a caretaker government. Chandra Shekhar had appointed Manmohan Singh as adviser with Cabinet rank. So one day, Dr Manmohan Singh called me and said, “I am told you have an industrial policy document.” I said yes, and gave it to him the next day. These are the coincidences of history when Narasimha Rao became PM, Manmohan became the finance minister and A N Varma the principal secretary to the PM. A N Varma knew that this work existed and had full confidence in it since it was all done under him. Ánd Narasimha Rao took the industry portfolio. I don’t know who induced that.
So essentially, that made a difference?
When Rao took over, the crisis was at its peak. Manmohan Singh knew that this work existed and A N Varma was the author of the policy. That’s why we could do things quickly. That’s why the industrial policy could be announced within six weeks. In fact, Manmohan Singh held a meeting on the second or third day of becoming the finance minister and called all economic secretaries and all secretaries in the finance ministry, external affairs, commerce, industry, petroleum, and the CEA. He had a little slip of paper with him and he essentially gave the full reform programme in that meeting. “These are the things that have to be done and I have the full authority of the prime minister to carry out these policy changes. If anyone of you has any disagreement with these polices, say so now and we can find you other things to do,” he said in that meeting. And then over the next few weeks. A N Varma created and chaired the steering committee on economic reforms in the PM’s Secretariat, which met every second day until the Industrial Policy was cleaned up. Then there was a Group of Ministers meeting and the CCEA and then the Cabinet. And we had to rewrite it almost very night depending on the meetings of the day.
How was the policy response to the crisis?
Things had started unravelling in the economy. The balance of payments was under severe stress, we were about to default, the fiscal deficit had been high, inflation was going up to unsustainable levels in 1990. These were all exacerbated by political instability and the first Iraqi war. So Manmohan Singh was there and Montek (Singh Ahluwalia) had continued in the PM’s secretariat with V P Singh. He had crafted the M-paper, the famous leaked document which apparently had a full programme of economic reforms. I have never seen that paper. It was a sort of co-incidence or whatever you may call it, but there were a whole set of economic advisers who were like-minded: Montek in the PM’s office — this is Rajiv Gandhi’s time — I was there in industries, Jayant Roy was in commerce, Arvind Virmani was there in Planning Commission and in the finance ministry there were like-minded civil servants such as N K Singh and of course, A N Varma. There has been nothing like that since, where you had at least say 10 people at the highest levels in the bureaucracy who would work together. We were all like-minded and have been friends since… I would say the biggest role in the 1991 to 1996 reforms was played by A N Varma; he is the most unsung hero… So this is a constellation of circumstances — Manmohan Singh giving the intellectual umbrella, A N Varma hammering the bureaucracy, and Narasimha Rao keeping the industry portfolio.
What, according to you, are the reforms we should be carrying out over the next 25 years?
First, for the private sector to flourish, we need better governance, which cannot happen without significant enhancement in the technical competence of the government and the public sector. Second, we need to step up investment in infrastructure, particularly in Railways. Third, we need to step up overall public investment in infrastructure. Finally, much more attention must be given to making urban local governments more competent.
I have often said that it’s easy to do reforms in India — all you have to do is come up with a notification. It might or might not need legislative approval. The great difficulty, however, is that any reforms need processes. So take labour reforms. Yes, on one hand we can announce it but for it to be implemented, you have to do a lot of processes. So one thing we did in 1993-94 — which did not succeed — is that after the 1991 reforms, we argued for industrial restructuring. Therefore, we argued that we need to do labour reforms. So in 1993-94, we set up the National Renewal Fund and the principle was to set up a fund which gives full protection to labour both in terms of compensation at the time of being fired and also unemployment insurance… All of it had been worked out but it didn’t get implemented. Labour reform will be difficult to implement without putting in place labour protection mechanisms.
Having been part of monetary policy management, what are your thoughts on the new monetary policy framework? Also, how should India handle the relationship between RBI and government?
I have never been a votary of inflation targeting, though when it was introduced in UK and in many Latin American countries, it was in a particular context that may have justified this framework. It is certainly not appropriate for India where the determination of inflation is much more complex than just the setting of interest rates. Moreover, it also promotes the illusion in the public mind of the simplicity of monetary policy making. Having said that, there is no question that the dharma of a central bank is indeed the maintenance of price stability, but tempered with concerns for financial stability and growth. Regarding financial liberalisation, we still have some distance to cover, but we always need to keep in mind the level of financial sophistication and development in the country. Finally, whereas it is absolutely essential is that the RBI should be insulated from the day-to-day political vicissitudes that any finance ministry is subject to. They have to walk together, but perhaps not hand in hand.
Twenty five years after the reforms, how do you look at the ground we have covered?
The biggest thrust to the reforms of 1991 was industry. So the biggest puzzle today is that despite the Make in India programme etc, what isn’t doing well today is manufacturing. And no one seems to have an idea of what to do. I am very puzzled. One contributing factor is that we have a clearly overvalued exchange rate for manufacturing. There are some structural and policy issues there. The structural issue is that we have continued to have remittance flows of about 2.5%-3% of the GDP on a regular basis for the last 15 years and a similar amount — 3 to 3.5% of the GDP — on software, BPOs etc. So we have something like 6 to 7% of the GDP — unrequited inflows — which means even with the 7% merchandise or trade deficit, you have a balance on the current account. From that point of view, the exchange rate is fine. But a 7% trade deficit is biased against industry. Suppose you think that a 2-2.5% current account deficit is all right on a consistent basis, which many people believe it is, that is like saying that in these circumstances, you have a consistent 9 to 10% merchandise deficit. That’s telling. That’s one key issue, which I believe needs analytical and policy attention if Make in India is to be successful and if we are to generate sustainable labour using manufacturing growth, which is necessary to eliminate poverty on a long term basis.
What is that strikes you about the reforms which are being talked about now?
One strange thing that has taken place is that from a time when the economy was closed and people were suspicious of foreign money, foreign investment, foreign advice, everything… we have turned turtle completely. Now reforms seem to mean – you do a little bit chutput of FDI regulations. Anything favouring foreign and you say that’s reform. The media and the hundreds of portfolio investors abroad… their whole conversation is all geared towards what do you do with foreign investors. That is not reform. Yes in the beginning, it was big reform because we were closed and we had to open. And we should be open. But now the situation is odd — if you take total current account transactions, that is imports plus exports, it is more than 50% of the GDP. On this metric, we are more open than most countries in the world. We are certainly more open than the United States. And people still say we are a closed country. And we say ‘sorry sir, sorry sir’.