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February 22, 2020

Governance & Politics

The Craft of Reform

By Nitin Desai


Keynes said that “If economists could manage to get themselves thought of as humble competent people on a level with dentists, that would be splendid.” Montek Singh Ahluwalia is one such dentist who, quietly and steadily helped to repair the damaged ones and insert new ones to give Indian economic policy a sharp set of teeth to bite into, digest and absorb the opportunities offered by economic globalisation. In this book he has recounted a detailed narrative of how  this repair took place despite moans and groans from the patient.

This book “tells the story of how that change came about, and how policies that were once reviled came to be accepted.” It is a detailed event by event account, but written in a manner that brings out a general message: “While the pace of change was slow, the direction was unmistakeable. The approach to change was a combination of gradualism and what I have called reform by stealth.” (pg xiv) The narration elaborates this theme for each reform track.

The book begins with a very short narrative of his growing years and early professional work which tells us a lot about why he is what he is. One very striking feature is the role of his wife, Isher Ahluwalia, herself an economist of note, in helping and encouraging him in his rise to the top.  The other is his special relationship with Dr. Manmohan Singh which became deeper and stronger particularly after 1991. The intellectual influences that shaped his thinking came basically from what I would call the soft market fundamentalism of his Oxford teachers and his mentors in the World Bank where he started to work after graduation.

The main part of the book begins with the eighties when he joined the Government and began the long exercise of repairing our policy teeth.  He started in the Finance Ministry but soon emerged as a key adviser to Rajiv Gandhi and later to Dr. Manmohan Singh, a role that he played with great discretion and diligence. But the narrative in the book is much more about the dynamics of policy-making then on his contribution. He does mention some of his initiatives including the influential M document which helped to shape the policy revolution of 1991.

The narrative is detailed and the understanding of general issues like the absurdities of the licence raj, gradualism and reform by stealth come through very specific examples rather than as generalised descriptions.  For instance the idea of reform by stealth is illustrated with the specific example of how the exchange rate was changed without an explicit devaluation by recalibrating the basket which was the basis for setting the rate. (pg 65-66).

The reform process in the eighties was a product of steady advice from professional economist within and outside the Government that change was needed, an acceptance of this by some in the political world like Rajiv Gandhi and Dr. Manmohan Singh, but done slowly because the overall political climate was not ready for a dilution of public control on the economy.

The narrative after the 1991 crisis changed because of the manner in which Narsimha Rao and Manmohan Singh coped with the political push back and the solid support they got from the bureaucracy where the reformers ruled and the dissenters were marginalised. As Montek states: “India’s transition to high growth, which is the story narrated in this book, was not a chance development. It was achieved by deliberate policy steps taken by those who had conviction and belief in the need for change.” (pg409)

The primary impact of the shift to a market oriented economy was on the relationship of the central government to the private corporate sector for that is where the departures from market orientation were greatest. The promotion of public private partnership in infrastructure, which was promoted by the planning commission when Montek headed it was different. It opened the door to private investment but the operations of infrastructure entities remain subject to controls on input supplies and costs, tariffs for services provided and other regulatory restrictions. That and the lack of an effective financial market for long term debt is an important part of the reason for today's twin balance sheet problem, whose resolution, Montek correctly recognises as a critical short term challenge.

But reforms need to look beyond the organised sector and aim at deep policy changes in the regulations and manner of public support for agriculture, micro and small enterprises, education, health and urban development. The epilogue in this book recognises this as also the need for major reforms in the organisation of government and the interface with public enterprises.  The key craftsman of past reforms also argues “The time has also come for policy changes in the future to be put on a much faster track. Gradualism made sense at the start of the reform process because we were not sure how the economy would respond to economic reforms. We now know that it can respond well.” (pg409) He also recognises that effective reforms now require cooperative federalism.

Unfortunately our politics is making deep reform and Centre-State cooperation more difficult now than at any time in the past. Public policy and public spending  in areas like agriculture, micro and small enterprises, education, health and urban development is being driven more by populism than by planning. An alphabet soup of schemes delivers immediate freebies but does little to resolve deep-seated systemic infirmities. What is missing today is what drove the liberalisation reforms- a body of well-informed advisers and implementers working in close coordination with political leaders who could mould public opinion. Montek Singh Ahluwalia is a prime example of what we had then and do not have now.  His book should be read not just by those who want to understand the past but also those responsible for planning our future.

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