by Rakesh Mohan
As if this old set of controls was not enough, new forms of control were added over the years. There had traditionally been great concern in India with the concentration of economic power. As a result, the Monopolies and Restrictive Trade Practices Act (MRTP) was promulgated in 1969. Under the provisions of this Act, companies with assets over a specified limit16 had to obtain separate clearance from the MRTP Commission. Moreover, such companies could invest in only a specified set of industries; foreign direct investment (FDI) was also permitted (up to a limit of 40 per cent equity) in the same list of industries.17 Further, the promotion of small-scale industries had been an objective of Indian planning from the beginning. It was assumed that most consumer goods were produced with low technology, which was labor-using and exhibited constant returns to scale. Hence, manufacturing employment would be promoted by confining the production of such items to small-scale enterprises, thereby disallowing their production in large manufacturing units. The list of such items was expanded significantly during the Morarji Desai-led Janata Party government during 1977–80, when the Left-leaning George Fernandes was the industry minister. By 1990, as many as 836 items of production were reserved for production in small-scale enterprises.18 Almost all consumer goods items that led the East Asian manufacturing push in the 1960s, 1970s and 1980s, such as clothing of all kinds, shoes, toys, hand tools, dinnerware, cutlery and stationery, were included in this list.
Indian manufacturing was thus rendered uncompetitive in world markets and, ironically, manufacturing employment growth was severely stunted in the bargain. By the mid-1990s, while India had fewer than 10 million organized manufacturing-sector workers, China had more than a hundred million. There was an additional list of industries reserved for exclusive production in the public sector. A prospective investor had to make sure that he did not intend to produce an item included in any of these lists. From 1977, there was also a ban on the location of industries in the twenty to thirty largest cities. In 1988, this ban was extended to include municipal areas of all towns and cities and to specific areas of influence around the twenty-one largest cities. This was among the most irrational policies adopted, bordering on the bizarre; ever since the industrial revolution, industrialization and urbanization have gone hand in hand. By prohibiting the location of industries in urban areas, they were deprived of the productivity gains that arise from agglomeration economies, and towns and cities were deprived of the energy and entrepreneurship that industries bring with them.
Such a system of detailed physical controls can be interpreted as the private-sector arm of the command economy. If the desire is to run a command system in the private sector, the natural inclination of a bureaucracy is to use quantitative and physical controls. The instruments of an indicative fiscal system are too indirect for administrators whose general training is for control. To turn an old saying on its head, you can stop a horse from drinking water but you cannot bring him to it!
In the presence of such a Byzantine system of industrial and trade controls, it is a miracle that Indian industry grew at all over the long period of forty years since 1950. In fact, Indian industrial growth averaged around 6 per cent per annum over the 1950–90 period as a whole, and over 7.5 per cent from 1950 to 1965 and during the 1980s. In the beginning, when the primary aim of planning was to push up the extremely low levels of savings and investment rates, and when brand-new investments into new areas were being planned in the public sector, the command mode of planning proved to be quite successful in helping to achieve a high growth rate in industry and in the economy as a whole. This very system found it difficult to adapt to the changing circumstances and to the series of serious exogenous shocks that the economy was subject to between 1965 and 1975. The failure of Indian planning and economic policy was that it did not adapt to changing circumstances as the country grew, and the industrial economy became more complex, and as the international environment changed from the relatively stable period of the 1950s and early 1960s to an environment that was characterized by rapid change on a regular basis. The higher industrial growth of the 1980s was brought with fiscal excesses financing higher public-sector investments, along with the beginning of hesitant liberalization of the control system.
In retrospect, it is very difficult to understand why such a system persisted over this long period, particularly when the rest of the world had moved on, especially in East and South East Asia with spectacular results. Remarkably, and what is ironic is that, even by the early 1960s, it was well understood that this system was ill-suited to directing investments. Accordingly, in the 1960s, the government appointed one committee after another to examine the industrial licensing system (see Government of India 1964a, 1964b, 1965, 1967, 1969a, 1969b).19 According to H.K. Paranjape, a member of the Industrial Licensing Policy Inquiry Committee of 1969, the committee had firmly concluded that the system had failed practically on all counts, whether it was regional dispersal, import substitution, preventing concentration of economic power, enforcement of licensing conditions, or even implementation of planning priorities.20
Even with such damning indictments, it is instructive to examine what such committees actually recommended. They would typically conclude that, despite its defects, the industrial licensing system was useful and should continue. Although they recognized that since preparing detailed perspective plans for all industries was neither necessary nor practicable, and industrial licensing should be confined to industries in the basic, strategic and critical sectors, no significant change took place in the industrial regulation system until the 1980s.21 Instead, what the Industrial Licensing Policy Inquiry Committee of 1969, for example, actually recommended were:
There should be a list of reservations for small-scale industry production.
Bans on further capacity creation should be utilized to prevent the creation of ‘undesirable industries’, particularly the production of non-essential luxury goods.
This committee recommended a host of other measures that would require more, not less, detailed quantitative direction. The findings of these committees illustrate the kind of thinking that dominated the Indian industrial regulatory environment. There was always a persistent reluctance to learn from past experience and to change course. The disjunction between plan aspirations and the war-derived control instruments persisted. It would be easy to ascribe this impermeability of the system to vested interests, rent-seeking, etc. Bureaucrats gain due to the vast discretionary powers such a system grants them, in addition to the opportunities for corruption. Politicians gain in a similar manner. Bigger industrialists gain because of the advantages of preferential access they enjoy. Such a system always favours incumbents while discriminating against those who are not. Entry is made expensive in more ways than one. Perhaps it was the structure of the Indian administrative service that explains this persistence. The top levels of Indian ministries are staffed by generalists who have spent most of their time as administrative officers in Indian states. Apart from exceptions, they are usually talented generalists who have little domain knowledge. Their prior training is really on exercising control in an administrative fashion. So, what comes naturally to them is control rather than informed development. It was therefore not surprising that this ‘command-and-control’ system existed for such a long time. What is more difficult to comprehend is the continued allegiance of the majority of informed academic opinion to this system.
It was only in the 1980s that deregulation gained some support; ironically, there was more support for deregulation in the bureaucracy than in academe. It is difficult to find scholarly articles from Indian economists arguing for industrial deregulation during that period. The majority of academic opinion still believed that this control system supported the ideals of planned development.
The complexity of the system itself challenged the comprehension of most observers despite a comprehensive description of the system in all these government reports. Interestingly, there was also little academic pressure for
deregulation, apart from the seminal work of Jagdish Bhagwati and Padma Desai,22 which came as early as 1970. A further exhaustive update was provided by the 1979 Dagli Committee report commissioned under the Morarji Desai government.23 Again, there was no action taken; perhaps the interlinkages within the control system were such that it was difficult to implement incremental change and the framework and mechanisms available in the government militated against systematic change. There were also considerable risks attached, which made it difficult for anyone to take responsibility for radical changes. As a result, the fig leaf of planned development through licensing and controls remained for a long time. That the emperor had no clothes was too painful for the system to acknowledge.
The Impetus for Industrial Policy Reforms
Such was the situation at the beginning of the 1980s when Indira Gandhi returned to power as prime minister. Stagnation in industrial growth since the mid-1960s had started becoming obvious,24 so political perception of the need to act gathered some force. She laid the groundwork for tentative economic policy reforms towards deregulation by appointing a succession of committees headed by noted technocrat civil servants, L.K. Jha,25 M. Narasimham,26 Abid Hussain27 and Arjun Sengupta,28 on overall deregulation, trade reform and public enterprise reform respectively. The reports of these committees were in the direction of some liberalization, however tentative. Similarly, the Bureau of Industrial Costs and Prices, which had hitherto acted as the czar of administered industrial prices ranging from steel to cement, copper to pharmaceuticals, and all manner of other industrial intermediate inputs, began to change track in the 1980s under the successive leadership of another set of modernizing civil servant technocrats: Lovraj Kumar, Yoginder Alagh and Vijay Kelkar.29 A succession of reports on steel, cement, aluminium, etc. ensued, each of which recommended some price deregulation. The success of East Asian economies had perhaps made the government more receptive to these recommendations Thus, as Rajiv Gandhi came into power after his mother’s assassination in late 1984, the environment for trade and industrial deregulation became more positive, but still resulted in rather half-hearted measures, which Arvind Panagariya has characterized as ‘liberalization by stealth’.30 Nonetheless, positive results were seen with industrial growth recovering from its previous stagnation.
Back to My Story
It was towards the end of this period that I came to the Ministry of Industry as economic adviser in December 1988, full of enthusiasm to work on further industrial policy reforms. By this time, however, the reformist steam in Rajiv Gandhi’s government was beginning to peter out in the aftermath of the political maelstrom caused by the Bofors scandal unfolding over the next few months. So, there really was not much to do in the ministry and, as mentioned earlier, I busied myself with research and sponsorship of research projects. But then came T.N. Seshan, as Cabinet secretary, who started a flurry of activity in the government as a whole. He, of course, later achieved great fame as a very effective chief election commissioner from 1990 to 1996. Seshan was seen by many as a control freak who saw himself as a no-nonsense leader who needed to know everything going on in the government. The post of Cabinet secretary was perhaps too inactive for him, so he asked all the major departments to prepare detailed presentations on what they did and where they were proposing to go. The bureaucracy, of course, saw this as a time-wasting, fruitless exercise that the joint and additional secretaries were loath to do. Such thankless tasks were generally placed in the laps of economic advisers so that the others could continue with their licence-permit activities!
Thus, I was confronted with the task of preparing the ministry’s presentation before Seshan. The question I had to answer, in principle, was fairly simple: what is India’s industrial policy? It turned out that this was actually quite a complex task in light of the description I have already given of the many different components of what comprised industrial policy at the time. The complexity had actually increased as a consequence of the piecemeal reforms of the previous few years that I have alluded to, and which the ministry was very proud of. The very process of compiling and collating all the existing industrial licensing policies, and lists of industries subject to different provisions, involved interaction with all parts of the ministry so that an accurate rendition could be given to the fearsome Seshan. This, ironically, was perhaps the first step that then led to the industrial policy reforms of 1991. Personally, it gave me an opportunity to document and become familiar with all aspects of industrial licensing and control policies, and also to establish relationships with all parts of the ministry. The resulting presentation was perhaps the first time that the many different licensing and control mechanisms that existed could be seen in one place, giving rise to the possibility of designing a package of comprehensive industrial policy reforms. However, although the exercise was thus very instructive, not much came of it as the Rajiv Gandhi ministry started unravelling towards the end of 1989—new elections were called for, the Congress party lost power, as did Seshan in the process.
When the V.P. Singh government came to power in early December 1989, the new non-Congress government wanted to differentiate itself from the Congress history of Licence Permit Raj. Moreover, during his time as finance minister in Rajiv Gandhi’s government, Singh had acquired a reputation for being a liberal reformer in the context of those days. And so, when V.P. Singh became the prime minister, there was a renewed expectation that economic reforms would be undertaken towards liberalization of the economy.
Ajit Singh was appointed the new industry minister. Though relatively unknown at the time, he was the son of former prime minister Charan Singh, the most prominent farmer leader of India. He was also a breath of fresh air. While today, his reputation has been sullied for repeatedly and opportunistically changing parties and coalitions, he was then seen as a smart ‘techie’. His IIT education followed with further specialization in computer science at the Illinois Institute of Technology, and experience working within the American corporate culture of IBM, had made him impatient and instinctively critical of the industrial Licence Permit Raj of the time. With the new government came a reshuffle of secretaries. Amar Nath Verma, the commerce secretary at the time, succeeded Otima Bordia as industry secretary. Verma had spent a number of years in the UN ESCAP (Economic and Social Commission for Asia and the Pacific) secretariat in Bangkok. Therefore, he had also become familiar with the East Asian economic miracle. He was very open and reform-minded, as evidenced by his inclination to empower his imported economic advisers wherever he was! In the commerce ministry, he had made extensive use of my friend Jayanta Roy. I was therefore able to establish a great rapport with him as soon as he came.
Whenever a new minister comes, the civil servants make a presentation describing the ministry and its work content. With Verma being new, this new thankless task again fell on me. So, what did I do? In no time, I dug out the presentation prepared earlier for Seshan, impressing Verma no end! He could brief Ajit Singh very quickly and in detail.
Living up to his image of a technocratic modern man, Ajit Singh’s reaction was one of shock, something to the effect of ‘What is all this nonsense? How can we function this way?’ And we were tasked to prepare an agenda for industrial reforms.
The lightning rod was the annual World Economic Forum summit at Davos, held in late January 1990, where developing countries eager to attract global attention and capital displayed their wares to the assembled collectivity of ‘Davos Man’. V.P. Singh was keen to promote a reformist image of India and nominated Ajit Singh to lead the Indian contingent. This in itself was significant since any action attracting foreign direct investment to India would be a departure from previous policy.
Once again, a presentation had to be prepared, this time for the minister, including a pitch for liberalization of FDI. I had already had the opportunity to see the whole picture on control mechanisms that were in place, including industrial licensing, phased manufacturing programmes, monopolies regulation, control of cap
ital issues, export–import controls and foreign-technology control. Having got the opportunity, I now went further in proposing changes that could possibly pass muster with the powers that be and which could be put forward in an elite international setting. With only a few weeks to go before the end January Davos meeting, those were busy weeks, with frequent meetings between the minister, the secretary and me as he prepared for the trip. We were encouraged by Ajit Singh’s positive receptivity. Since none of us had known each other earlier, it also meant an intense effort to understand each other’s views in the short period. This was then the second stage of preparation of what later became the industrial policy reforms of 1991.
