India Transformed

by Rakesh Mohan

  Infrastructure investment is crucial for accelerating the growth process. Although this had been a preoccupation of the planning process, the quality and extent of existing infrastructure was much below par in the 1990s. Power shortages were endemic; there were no four-lane highways; port capacity was inadequate; airports and airlines were underdeveloped; and the railways were severely stretched in terms of both capacity and quality of service. The 1994 World Development Report of the World Bank happened to focus on infrastructure development. I took this opportunity to suggest to Finance Minister Manmohan Singh to commission a similar report for India. He responded by saying, ‘This is your idea, so you do it!’ A distinguished expert committee was assembled, and we took two years to produce a report that proposed commercialization of infrastructure, along with much greater participation of the private sector, which had hitherto not been permitted.58 In their chapter, N.K. Singh59 and Jessica Seddon have skilfully provided a relatively comprehensive account of the many twists and turns that have characterized developments in the infrastructure sector ever since. Despite much progress made since the mid-1990s, Vinayak Chatterjee gives a first-hand view of the difficulties that the private sector faces in contributing significantly to infrastructure investment in the country. This is another area that remains a work in progress despite considerable development in some sectors such as telecommunications, civil aviation and roads. Significant problems continue to dog expansion and modernization of the railways. Although there has been relative success in capacity expansion of power generation, particularly through private-sector investment, much remains to be done in terms of pricing and organizational reform in the sector.

  Among the consequential changes that have slowly begun to take shape as a consequence of loosening of central government economic regulations and control, and retreat of planning, are the evolving contours of Centre–state relations. Y.V. Reddy60 provides an overview of how Centre–state fiscal federalism is gradually shifting fiscal powers to the states. Before coming to the central government in the early 1990s, he had spent most of his administrative career in Andhra Pradesh. As exemplified by his recommendations as chairman of the Fourteenth Finance Commission, he is a clear proponent of getting greater fiscal autonomy to the states. The abolition of the Planning Commission is another move in this direction. The contribution by Laveesh Bhandari shows how states have begun to respond to the new degrees of freedom that they are now experiencing in the economic sphere. These are new uncharted waters of fiscal federalism in India, and we can expect constant adjustments in the years to come.

  The opening up of the Indian economy continued over more than a decade through a continuous process of trade reform, encompassing gradual elimination of trade restrictions on the one hand, and reduction in tariffs on the other. In his chapter, Harsha Vardhana Singh documents the progression of trade reforms in a comprehensive chapter that provides new data on the openness of the economy that has now been achieved. It shows that the current effective tariffs are now not very different from some of the most open economies in the world, even though some foreign perceptions of the economy being relatively closed are yet to change. In his contribution, as one of the most perceptive international economic commentators, Martin Wolf61 has used his long-standing engagement with the Indian economy to provide an external view of how perception of the Indian economy’s stance on trade has changed over the reform period. With India’s newly found status as a market-oriented, open economy, he feels that India will increasingly need to take a leadership role in the evolving global economy.

  As the Indian economy became more open and started becoming significant on the global scene, India’s foreign, strategic and security policies also had to adopt corresponding new approaches and directions. Ambassadors Shyam Saran62 and Shivshankar Menon63 provide first-hand accounts of this progressive change in their insightful essays in this volume. The initiation of economic reforms in 1991 being accompanied by the geopolitical shift that occurred by the fall of the Soviet Union necessitated a fundamental rethinking on the part of the Indian foreign-policy establishment. In his contribution, Sanjaya Baru64 shows how the increasing Indian defence expenditure contributed to the fiscal excesses of the 1990s. He also goes on to document how fiscal prudence that followed the 1991 reforms has served to possibly handicap the Indian defence forces to reduce expenditures.

  The Way Ahead

  The chapters in this volume document the considerable success of the New Industrial Policy that has indeed lasted over the last twenty-five years. In the initial phase, there was exuberant response from domestic industry in the first five to six years. The ex ante real-exchange rate devaluation had helped in providing some continued effective protection as new competition was introduced, trade restrictions were relaxed and tariffs were reduced. There was some slowdown in the late 1990s as the real-exchange rate caught up and some companies perished because of increasing international and domestic competition. Industrial growth then accelerated again in the 2000s, along with creditable growth in manufactured exports, as meticulously documented by Harsha Vardhana Singh in this volume. After the impact of the North Atlantic financial crisis, there has been somewhat of a pause in industrial growth and exports once again. Global trade has, of course, slowed down considerably, but even within this context, Indian export growth has been too low in recent years, leading to a loss in the Indian share in global trade. Moreover, there is no sign of any pickup in the labor-using industrial activity leading to exports in those areas. With the emergence of balance-sheet stress in many of the largest Indian companies, with a corresponding reflection in banks’ balance sheets, industrial investment is exhibiting a new low, along with that in corporate profitability.

  The time is therefore ripe for new thinking and action on industrial policy to inject new enthusiasm for industrial investment in the country. This has to be done with the realization that the global economic environment is going to be less hospitable than it was in the first decade of this century.

  The great churning that occurred in the late 1990s among the leading companies in the country is documented in a very evocative fashion by Omkar Goswami and Gita Piramal in their respective chapters. As exemplified by Mukesh Ambani, Baba Kalyani and R. Gopalakrishnan, those who grabbed the new opportunities flourished beyond their wildest dreams. Others fell by the wayside. Narayana Murthy, Sunil Mittal, Deepak Parekh and Vinayak Chatterjee illustrate the new entrepreneurship that recognized the new opportunities provided by economic reforms over the years. The largest service-sector companies now eclipse the old industrial titans. While the flourishing of the new service sector is to be welcomed, there needs to be new introspection on how the manufacturing sector can become the leading growth generator for India again. We need to see the emergence of new Indian manufacturing entrepreneurs who can successfully leverage the burgeoning market provided by Rama Bijapurkar’s new Indian consumer to attain competitiveness in international consumer markets.

  Naushad Forbes provides new data on the lack of technology investment in Indian industry relative to East Asian countries, and suggests some solutions. What becomes clear is that Indian industry has simply not evinced enough interest in technology investment and that there has been excessive dependence on foreign technology, without adequate, corresponding domestic technology generation for efficient absorption and substitution. The one area where there has indeed been greater attention to technology investment, both through technology imports as well as domestic technology generation, has been pharmaceuticals. Kiran Mazumdar Shaw has provided us a very personalized account of her own journey in biotechnology: what stands out is the consistent positive support that she received from the government at different levels, particularly, the department of biotechnology. This is unusual in that this technical department provided both promotional and technological support, which helped this nascent industry; being a new department mostly staffed with technical personnel, it does not seem to have exhibited a control mindset
. This is a pointer to the kind of promotion that can be done to help Indian industry.

  Average industrial growth in the twenty-five years since 1991 has been around 7 per cent, higher than any previous twenty-five-year period, but not spectacular in comparison with the fast-growing East Asian countries. If India is to ascend to middle-income levels from its current low- and middle-income status, economic growth has to be consistently above 8 per cent a year over the next couple of decades. This cannot be achieved without a consistent growth in industry of around 10 per cent, along with similar growth in services. Even with such a growth, Indian per capita income will only reach the current Chinese level in about twenty years from now. So, there is no time to be lost.

  This will not happen in a business-as-usual context. There has to be a renewed, focused effort towards the revival of Indian industrial growth in a manner similar to what was done almost a quarter century ago. Such an effort would include specific policy reforms in the areas of:

  labor legislation;

  social protection of labor in the context of industrial restructuring, of the national renewal fund variety;

  specific encouragement through fiscal and other measures for large investments in areas that were hitherto reserved for small-scale industries;

  promotion of investment in industrial technology, including both research and development; and

  trade promotion measures, in particular trade facilitation.

  The high industrial growth achieved by East Asian countries shows that there was continuous and active organized communication and cooperation between the government and the private sector. Even though it was not as well organized, such communication and cooperation did exist during the 1990s years of reforms, as portrayed by Tarun Das in his chapter. Devising a successful strategy for implementing the kind of reforms necessary for accelerating industrial growth once again, and on a sustainable basis for the future, requires a similar process of continuous interaction between the government and the private sector. It is essential to build such mutual trust for the strategy to be successful. Export growth did respond to the successive opening of the external sector, as shown by Harsha Vardhana Singh in his comprehensive chapter on trade, but once again, perhaps, not as much as had been hoped for. In particular, there has been no exuberant investment in large labor-using export-oriented industry as exhibited by all the successful East Asians.

  A review of East Asian countries that have particularly succeeded in achieving consistently high economic growth shows that consistent attention to human development was a key component of the strategy for rapid economic development. One lasting puzzle of the democratic political economy in India is the consistent neglect of health, education and agriculture through both the earlier import-substituting closed economy period and the period subsequent to the economic reforms. As narrated by Ashok Gulati and Shweta Saini in this volume, policy towards agriculture has seldom received the kind of attention it deserves, except during the green revolution period of the late 1960s and 1970s. The reduction in industrial protection did benefit the agriculture sector but little else has been done. Given that more than half of the Indian labor force is still in agriculture, the case for a major reorientation of policy to agriculture is compelling. Similarly, as shown by Nachiket Mor, Diva Dhar and Sandhya Venkateswaran, despite some attempts at reform in the 2000s, and noted improvements in health outcomes over the twenty-five years since the reforms, public-health services in India remain very poor. The improvements that have taken place are basically due to the tremendous expansion of the private sector. The poor have little recourse to affordable health services. The success stories from other developing countries do suggest a more active role for the state in the financing and delivery of health services; the governance challenges facing the health sector are yet to be resolved.

  A similar situation exists in the education sector, which has seen explosive expansion over the twenty-five years post-reforms, including in higher education as documented by Devesh Kapur in his contribution to this volume. Once again, most successful countries exhibit the provision of free or low-cost education services up to the secondary level. Just as in the case of health, the Indian state has failed in serving its young through a quality education system. That people recognize the value of education is demonstrated by the resources that families are willing to spend, usually beyond their means, at every level. The private sector has responded to the increasing demand at every level but quality remains poor in both the private and public sectors at all levels of education. Once again, policy solutions are yet to be found in this intractable sector.

  As these examples suggest, the way forward for accelerated growth in India is being held back by major governance deficits in all areas connected with the delivery of public goods and services. Sarwar Lateef’s thoughtful contribution on governance provides much food for thought on the way forward. The economic reform process so far has concentrated on empowering the private sector to do what it can do best. But it has done little to empower the public sector, broadly defined, to do what it has to do to serve the public interest. In fact, it is probably the case that the private sector is now being constrained because of inadequate progress in the delivery of public services, particularly those related to human development. The demographic dividend can become a demographic burden if the quality of India’s burgeoning youth population continues to be handicapped by poor health and poor education.

  I hope that this volume will help in focusing our minds to launch a new, focused strategy to accelerate India’s industrial development that will sustain itself over the next quarter century.

  Annex 1

  GOVERNMENT OF INDIA

  MINISTRY OF INDUSTRY

  STATEMENT ON INDUSTRIAL POLICY

  New Delhi, 24 July 1991

  POLICY OBJECTIVES

  Pandit Jawaharlal Nehru laid the foundations of modern India. His vision and determination have left a lasting impression on every facet of national endeavour since Independence. It is due to his initiative that India now has a strong and diversified industrial base and is a major industrial nation of the world. The goals and objectives set out for the nation by Pandit Nehru on the eve of Independence, namely, the rapid agricultural and industrial development of our country, rapid expansion of opportunities for gainful employment, progressive reduction of social and economic disparities, removal of poverty and attainment of self-reliance remain as valid today as at the time Pandit Nehru first set them out before the nation. Any industrial policy must contribute to the realisation of these goals and objectives at an accelerated pace. The present statement of industrial policy is inspired by these very concerns, and represents a renewed initiative towards consolidating the gains of national reconstruction at this crucial stage.

  In 1948, immediately after Independence, the Government introduced the Industrial Policy Resolution. This outlined the approach to industrial growth and development. It emphasised the importance to the economy of securing a continuous increase in production and ensuring its equitable distribution. After the adoption of the Constitution and the socio-economic goals, the Industrial Policy was comprehensively revised and adopted in 1956. To meet new challenges, from time to time, it was modified through statements in 1973, 1977 and 1980.

  The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution of 1956, which had as its objective the acceleration of the rate of economic growth and the speeding up of industrialisation as a means of achieving a socialist pattern of society. In 1956, capital was scarce and the base of entrepreneurship not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the State to assume a predominant and direct responsibility for industrial development.

  The Industrial Policy statement of 1973, inter alia, identified high-priority industries where investment from large industrial houses and foreign companies would be permitted.

  The Industrial Policy Statement of 1977 laid emphasis on de
centralisation and on the role of small-scale, tiny and cottage industries.

  The Industrial Policy Statement of 1980 focused attention on the need for promoting competition in the domestic market, technological upgradation and modernisation. The policy laid the foundation for an increasingly competitive export base and for encouraging foreign investment in high-technology areas. This found expression in the Sixth Five-Year Plan which bore the distinct stamp of Smt. Indira Gandhi. It was Smt. Indira Gandhi who emphasised the need for productivity to be the central concern in all economic and production activities.

  These policies created a climate for rapid industrial growth in the country. Thus, on the eve of the Seventh Five-Year Plan, a broad-based infrastructure had been built up. Basic industries had been established. A high degree of self-reliance in a large number of items—raw materials, intermediates, finished goods—had been achieved. New growth centres of industrial activity had emerged, as had a new generation of entrepreneurs. A large number of engineers, technicians and skilled workers had also been trained.

  The Seventh Plan recognized the need to consolidate on these strengths and to take initiatives to prepare Indian industry to respond effectively to the emerging challenges. A number of policy and procedural changes were introduced in 1985 and 1986 under the leadership of Shri Rajiv Gandhi aimed at increasing productivity, reducing costs and improving quality. The accent was on opening the domestic market to increased competition and readying our industry to stand on its own in the face of international competition. The public sector was freed from a number of constraints and given a larger measure of autonomy. The technological and managerial modernisation of industry was pursued as the key instrument for increasing productivity and improving our competitiveness in the world. The net result of all these changes was that Indian industry grew by an impressive average annual growth rate of 8.5% in the Seventh Plan period.