India Transformed Read online

  On the US side, there was concern and disapproval of India’s ‘Smiling Buddha’ underground test of a nuclear device earlier in May 1974 (just a little over three months before the Kissinger mission). American protestations exacerbated Indian resentments.

  While Kissinger’s plane was en route from Moscow to New Delhi, Mrs Gandhi gave a press conference denigrating the importance of the impending visit and thereby the visitor himself. To accentuate the snub, she announced that she would be giving the American secretary of state only forty-five minutes of her time before leaving on vacation.

  As though that wasn’t bad enough, Kissinger had to spend three days in India. He put on a brave and polite face in public, but he was furious, not least because he had to a give a speech to a New Delhi foreign-policy organization on non-alignment, a subject he hated in general but particularly in the case of India, given its cordial relations with the Soviet Union.

  Once, to his undisguised relief, Kissinger was back aboard his Air Force Boeing 707 and was leaving New Delhi behind, he came from his luxurious suite behind the cockpit to the back of the plane. That’s where the press corps (including me, now reinstated) was crammed into economy-class seats, pens poised and notebooks ready for a background readout on the diplomatic downer from ‘a senior American official on Secretary Kissinger’s plane’.

  Kissinger had clearly not gotten over his annoyance at Mrs Gandhi. Yet, he also allowed that she was a formidable politician and, like himself, a hard-headed realist.

  Leaving personalities aside, he mused about what underlay ‘the chronic disharmony’ between Washington and New Delhi. He saw it as a regional manifestation of a global division between two ideological and geopolitical camps: India’s uneasy, often conflicted, relationship with Pakistan was vexing and dangerous in its own right, but all the more so given the not-inaccurate perception in New Delhi that the US ‘tilted’ towards Pakistan, and the equally defensible sense in Washington that India leaned toward Moscow—to wit, India’s Soviet-designed military aircraft, not to mention its reliance on five-year economic plans of the sort favoured by Fabian socialists.

  Kissinger was turning his attention to Pakistan because it would be one of the next stops on the trip. In contrast to Mrs Gandhi, he knew that Zulfikar Ali Bhutto would treat him royally. There would be no talk of non-alignment there.

  The secretary concluded his airborne seminar with the reporters by remarking that a genuine partnership between the US and India would be impossible as long as the Cold War lasted. All of us, including him, expected that to be for a very long time, most probably well past our own lifetimes and maybe our children’s. Little did we know that the USSR would last just long enough to reach the biblical lifespan of a single mortal: three score and ten years. The prologue of its demise—though we didn’t realize it as such—came in the form of the Soviet invasion of Afghanistan in December 1979. The administration of Jimmy Carter saw a chance to bog the Soviets down by fighting a proxy war by arming the Afghan mujahideen.

  During that period, I made a number of trips to Kabul, primarily to interview a series of Moscow-manipulated presidents, all of whom came to violent ends. Each of these trips took me through New Delhi, partly for the connection to Ariana Airlines but also to pick the brains of Indian specialists and government officials. While helpful, these conversations invariably contained two messages: expressions of deep misgivings about yet another instance in which the US was reliant on its Pakistani allies, and stark warnings that the mujahideen would eventually radicalize Afghanistan itself, make common cause with likeminded elements in Pakistan, and turn their jihadist furore on India and, very possibly, on the West.

  So, there it was again—a reminder of how the Cold War had kept morphing in ways that hindered mutual trust, not to mention strategic cooperation, between the US and India.

  Suddenly, in the late 1980s, what John F. Kennedy called the US’s ‘long twilight struggle’ with the Soviet Union ended, first with the reforms of Mikhail Gorbachev, then with collapse of the Berlin Wall, the Iron Curtain, the Warsaw Pact, and, on Christmas Day 1991, the USSR itself.

  Thirteen months later, Bill Clinton was inaugurated as the forty-second President of the United States. He came into office determined to take full advantage of how the world had changed, including by not just improving but transforming US–India relations. He understood that there were twin reasons why these two democracies should pass from estrangement to engagement: one was the end of the Cold War, and the other was India’s reaching out to the world economically and commercially. As deputy secretary of state, first under Warren Christopher, then under Madeleine Albright, I participated in the diplomacy necessary to take advantage of the opportunities that came with these propitious trends.

  My first visit to New Delhi in that capacity came in 1994. I met with Prime Minister Narasimha Rao and his finance minister, Manmohan Singh, who initiated many of the economic reforms that Rakesh Mohan and his fellow contributors analyse in this book.

  The following year, the First Lady, Hillary Clinton, took a long tour of South Asia, concentrating on India. On her return, she told me that she was more convinced than ever that the administration should make ‘a new opening’ to India a hallmark of its foreign policy.

  My most intense experience with India came in the final three years of the Clinton administration. The precipitating event was the May 1998 nuclear tests at Pokhran in the Rajasthan desert, which led to a strategic dialogue consisting of fourteen meetings with Prime Minister Atal Bihari Vajpayee’s designated representative, the then minister of external affairs Jaswant Singh. The immediate task was to see if we could narrow the gap between our countries’ security interests and non-proliferation policies, an effort that eventually led to the US–India civil nuclear agreement consummated by the George W. Bush administration and the government of Prime Minister Manmohan Singh in 2005.

  But the diplomatic engagement produced another, earlier and, I believe, no less significant achievement: the Indian government’s willingness to permit an American President to involve himself in a conflict between itself and Pakistan. A Pakistani incursion across the Line of Control in the Himalayas in the early spring of 1999 escalated to a full-blown crisis with the potential of going nuclear. Pakistani Prime Minister Nawaz Sharif made a desperate flight to Washington, hoping for a mediated resolution favourable to Pakistan or at least a face-saving compromise. Intense negotiations were under way in Blair House, across the street from the White House, over the course of the Fourth of July weekend. Meanwhile, in India, Prime Minister Vajpayee feared yet another tilt towards Pakistan. Instead, Bill Clinton succeeded in convincing Nawaz Sharif that there was no alternative to full withdrawal of Pakistani forces back across the Line of Control.

  Once the danger was defused, Jaswant called me from New Delhi. ‘Something terrible has happened these past several months between us and our neighbours,’ he said. ‘But something quite new and good has happened this weekend between our own countries, yours and mine—something related to the matter of trust. My prime minister and I thank your President for that.’

  When Clinton visited India the following March, he made clear to the government, Parliament and the people of India that, in his mind at least, the prospects for the relationship were now in line with the two nations’ interests and values.4

  After my stint in government, I spent an academic year at Yale University, where Nayan Chanda—a friend and fellow journalist whom I had known for decades—and I established the Yale Center for the Study of Globalization. Nayan also founded Yale Global, a web-based journal, that he still edits from New Delhi, an arrangement that is in itself an example of globalization.

  When I came to Brookings in the summer of 2002, I was pleased to discover that my predecessors had long given significant attention to India. In the late 1950s, John P. Lewis, an economist whose career alternated between academe and government, spent considerable time in India and became a far-flung affiliate of Brookings. He
had a pied-à-terre in Friends Colony in New Delhi and travelled widely around the country, sending reports back to Brookings for scholars there to use in their own research and public events. The Planning Commission requested that he prepare memoranda for its consideration while it was preparing the Third Five-Year Plan.

  Lewis’s Brookings reports were praised by John Kenneth Galbraith when he arrived in New Delhi as President John F. Kennedy’s ambassador. President Lyndon Johnson later put Lewis in charge of the United States Agency for International Development in India (USAID).

  In the 1960s and 1970s, the Brookings Institution Press published several books on Indian social and economic policy.5 In addition to that encouraging legacy, Brookings has had, since 1988, in Stephen P. Cohen, a world-class expert on South Asia. He, like many Brookings scholars, combined academic distinction and government experience (he served on the State Department’s policy planning office in the Reagan administration).

  Another Brookings scholar, Barry Bosworth, had developed expertise on Asian economies. Two South Asia hands from the Foreign Service Office, whom I had gotten to know in the 1990s, Teresita and Howard Schaffer, have also been affiliated with Brookings.6

  Soon after I had found my sea legs at Brookings, I asked the help of these colleagues in upgrading our work on—and in—India, with the ultimate goal of setting up a Brookings presence there.

  As a first step, we joined with the National Council on Applied Economic Research, then headed by Suman Bery. He, Barry Bosworth and Arvind Panagariya (then affiliated with Brookings as well as Columbia University) founded an annual publication, The India Policy Forum, modelled on The Brookings Papers on Economic Activities, which, for more than forty-five years, has been the premier forum drawing together top economists to write papers and discuss pressing macroeconomic policies.

  I travelled to New Delhi in 2004 for the rollout of the first issue, a well-attended and widely covered event at which Montek Singh Ahluwalia, then deputy chairman of the Planning Commission, delivered an address. The India Policy Forum is now in its thirteenth year.

  It took more than a decade for Martin Indyk, now the executive vice president of Brookings, and Tanvi Madan, the director of our India Project, to achieve our ultimate goal, Brookings India. The realization of this dream was made possible by the generosity, advice and—that word again—engagement of our Founders’ Circle. Also crucial was Vikram Singh Mehta’s willingness to become the chairman of the enterprise and Subir Gokarn providing his own leadership as research director.

  Brookings India cleared all regulatory hurdles and was registered as an Indian non-profit entity in June 2014. Vikram and Subir steered it through this initial phase and then, when Subir moved to Washington DC as India’s executive director on the board of the IMF, Rakesh Mohan, his predecessor there, returned to India and provided the much-needed leadership support in the interim, before departing to teach at Yale. This volume is the result of his endeavours at Brookings. We are now fortunate to have as executive director of Brookings India a leading trade economist, Harsha Vardhana Singh, who, as deputy director general was, for eight years, deputy to Pascal Lamy at the World Trade Organization (WTO).

  The establishment of Brookings India has been made possible by the generous and visionary support of the Brookings India Initiative Founders’ Circle, a group of over thirty donors that believes in the importance of independent policy research at this critical juncture in India’s history. Brookings India started operations in 2013 with support from its Founders’ Circle, each donating equal amounts. This was important to ensure a working environment that no individual or corporation had influence over. The Founders’ Circle has emphasized and encouraged independent research, along the lines of the emphasis by Brookings India scholars on determining their own independent and objective research agenda.

  We look forward to Brookings becoming a mainstream think tank, contributing constructively to the argumentative intellectual and policymaking firmament in India.

  This book has brought together many of the intellectuals, policymakers and business leaders who have contributed to the incredible transformation that has taken place in India over the past quarter century. We hope that it will serve to inspire the next generation leaders who shape India’s destiny in the coming years.

  Rakesh developed the idea of this book, prodded skilfully by Vikram Mehta. He conceived of its content, approached the authors, reviewed and edited the contributions and finalized the manuscript with the publishers. This book is the result of his singular contribution, for which Brookings India owes him a debt of gratitude.

  I

  INTRODUCTION

  1

  The Road to the 1991 Industrial Policy Reforms and Beyond: A Personalized Narrative from the Trenches

  Rakesh Mohan

  For those of us beyond the age of fifty, India has been transformed beyond what we might even have dreamt of before the 1990s. In real terms, the Indian economy is now about five times the size it was in 1991. This, of course, does not match the pace of change that the Chinese economy has recorded, which has grown by a factor of ten over the same period and has acquired the status of a global power. Nonetheless, the image of India, and its own self-image, has changed from one of a poverty-ridden, slow-growing, closed economy to that of a fast-growing, open, dynamic one. Though much of the policy focus has been on the economy, change has permeated almost all aspects of life. India now engages with the world on a different plane. The coincident collapse of the Soviet Union opened up new directions for a foreign policy more consistent with a globalizing world. With the acquisition of nuclear capability in the late 1990s, its approach to defence and security has also undergone great transformation. Though much has been achieved, India is still a low–middle income emerging economy and has miles to go before poverty is truly eliminated. Only then will it be able to hold its head high and attain its rightful place in the comity of nations.

  This book chronicles the process of reform in all its different aspects through the eyes of many of the change-makers who have been among the leaders of a resurgent India. The contributors to this volume include some of the key policymakers of the period who designed and implemented the reforms; business leaders who grasped the new opportunities that emerged and built some of India’s most successful businesses; and analysts and observers who have been among the most critical and thoughtful of this tribe.

  In this introductory chapter, I focus on how it all started: the genesis and implementation of the 1991 industrial policy reforms, which constituted a transformational break with the long-standing ‘command-and-control’ Indian economic policy stance that had broadly survived since Independence. I have had the privilege of being associated with the overall process in different ways, on a continuous basis from 1990 till 2015, but most closely with the design and implementation of the original comprehensive industrial policy reform of 1991. Though this was only one segment of the comprehensive reforms that have been in process over the whole period since 1991, it was symbolic of the mindset change that has contributed to India’s new economic trajectory. It is important to understand how such a change took place; hence, this detailed account of the process of change that really started in the early 1980s.

  There have been a number of accounts narrating the process with which the 1991 reforms were initiated. These accounts have essentially given a top-down view of what transpired during that time. What I propose to do is to give a much more workmanlike, technocratic view of how the industrial policy reforms were initiated and then implemented in 1991. In some sense, this is a worm’s-eye view from the trenches, where much of the work was done. I leave the larger political questions to those who were nearer the political decision-making process.1 Since the 1991 economic reforms were a clear break from the direction followed in the previous forty years since Independence, how was it that such reforms could take place? There was no ideological break as exemplified by the ascendance of Margaret Thatcher in the UK and Ronald
Reagan in the US, which led to the spread of market fundamentalism in the world in the 1980s; or the market-oriented big-bang lurch in the hitherto socialist countries in Eastern Europe and Russia, which took place after the fall of the Soviet Union in 1990. In India, it was the same Congress party that had presided over the central-planning-dominated, import-substituting Licence Permit Raj earlier, which ushered in the new India in 1991. Moreover, the progenitors of the 1991 reforms were a trio of self-effacing leaders: Prime Minister Narasimha Rao provided the political leadership; Finance Minister Manmohan Singh the intellectual and technocratic heft; and Principal Secretary Amar Nath Verma was the indispensable bureaucratic enforcer. How did this happen? In this essay, I attempt to provide some answers to this question by giving a detailed genesis of the industrial policy reform that formed the backbone of reforms of 1991. To quote Finance Minister Manmohan Singh’s 1991 budget speech (citing Victor Hugo): ‘No power on earth can stop an idea whose time has come.’

  But let me start with some of the questions that have typically engaged observers of the reforms:

  Who was more responsible for the 1991 reforms: Prime Minister Narasimha Rao or Finance Minister Manmohan Singh?

  Were these reforms home-grown or were they pushed down India’s throat by the IMF and the World Bank?

  How was it that such radical reforms could be undertaken at that time despite long-lasting resistance by the Indian political and bureaucratic elites for a very long time?

  Until recently, the general view had given Finance Minister Manmohan Singh the pride of place as the key driver of reforms during the 1991–96 period. However, the revisionist view now gives greater prominence to the role of Narasimha Rao in actually getting the 1991 reforms politically accepted and implemented.2 It was clearly a partnership: Manmohan Singh certainly provided the intellectual leadership to the comprehensive nature of economic reforms carried out over that five-year period, while Narasimha Rao’s political sagacity, management skills and courage were essential to the reform project. It was perhaps his very lack of flamboyance and charisma that provided the necessary gravitas that made political acceptance feasible. And he clearly gave full, explicit political backing to Manmohan Singh to do what had to be done. The fact that, since the early 1970s, Manmohan Singh had held every conceivable leadership position in the Ministry of Finance, the Reserve Bank of India (RBI) and the Planning Commission—the highest organs of economic policymaking in the government—provided confidence in the measures that were taken.