A.K. BHATTACHARYA
THE RISE OF GOLIATH
Twelve Disruptions That Changed India
PENGUIN BOOKS
CONTENTS
Section 1: What Is Disruption?
Chapter 1: The Many Faces of Disruption
Section 2: Partition of India
Chapter 2: A Tryst with Destiny
Chapter 3: Making the Best of an Inevitability
Section 3: Turn towards Statism
Chapter 4: A New Economic Vision
Chapter 5: Nationalization as the New Mantra
Section 4: The Food Crisis
Chapter 6: From Ship to Mouth
Chapter 7: A New Experiment by Indira Gandhi
Section 5: Nationalization and More Statism
Chapter 8: The Era of Nationalization
Chapter 9: Politics of Robin Hood
Section 6: The Oil Jolt
Chapter 10: India’s New Disruption
Chapter 11: The Search for Black Gold
Section 7: The Emergency
Chapter 12: Toppled in Court
Chapter 13: Why it All Happened
Section 8: The BoP Crash and Reforms of 1991
Chapter 14: A Pound of Flesh
Chapter 15: An Anatomy of the Crisis
Section 9: Reservation and Mandir
Chapter 16: The Game of Life and Death
Chapter 17: The Politics of the Mandir
Section 10: The Telecom Bump
Chapter 18: In Search of a Landline
Chapter 19: The Fallout after 1994
Section 11: Twin Shocks of NPAs and RBI Autonomy
Chapter 20: The Genesis and Rise of NPAs
Chapter 21: Recognition, Recapitalization, Resolution and Reform
Section 12: Demonetization
Chapter 22: Shock Therapy or a Boomerang?
Chapter 23: The Hand of the RBI and Modi
Section 13: GST: Widening the Tax Net
Chapter 24: One Country, One Tax
Chapter 25: From Critic to Supporter
Chapter 26: The Aftermath of the GST
Section 14: Disruptions Ahead
Chapter 27: India of the Future
Appendix
Notes
Bibliography
Acknowledgements
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Copyright
Advance Praise for The Book
‘Demonetization and the GST were not the only disruptions that changed India. A.K. Bhattacharya provides a fresh perspective on many more such disruptive events that shaped India in the last seven decades. The Rise of Goliath presents a riveting account of these transformational moments.’—Nandan Nilekani, chairman and co-founder, Infosys, and founding chairman, UIDAI (Aadhaar)
‘The Rise of Goliath uses the prism of disruptions to lucidly capture India’s journey in the last seven decades. Equally illuminating is its prognosis for the disruptions that might take place in the coming decade.’—Vijay Kelkar, vice-president, Pune International Centre
For Jharna
Section 1
What Is Disruption?
CHAPTER 1
THE MANY FACES OF DISRUPTION
The five years of the Narendra Modi government in India have given rise to an impression that the country has seen too many disruptions in a short period of time. There was demonetization, which many people believe was the mother of all disruptions, where 86 per cent of all currencies in circulation were declared invalid in one stroke. There was the Goods and Services Tax, or GST that promised to usher in a single indirect tax across the country, replacing over twelve different central and state-level taxes and a host of surcharges and cesses. There was also the Insolvency and Bankruptcy Code that ensured that promoters could lose their companies if they defaulted on repayment of loans from banks. Thanks to these disruptions, the economic landscape in India changed quite fundamentally in these five years. They have also given rise to the view that disruptions have been a hallmark of the Modi regime.
The basic premise of this book is that the Modi regime may have caused as many as three major economic policy disruptions in a relatively short period of five years, but disruptions per se have not been uncommon in India’s journey of more than seven decades as an independent country. Indeed, it can be argued that India’s journey as an independent country can be better understood if seen through the prism of disruptions. This book, therefore, will take you through a dozen such disruptions, starting right from India’s Partition in 1947 to the launch of the GST in 2017. The list is not comprehensive. There will be legitimate scope for a debate on why a certain decision has been included as a disruption and why another disruptive decision has been excluded. The purpose of the book is not to present all the disruptions that India experienced in the last seven decades or so, but to indicate the nature of a few of these disruptions and how they made a difference to India’s politics, society and economy.
It is also important to note that the disruptions captured in this book have played a significant role in the way India, like Goliath, has risen and grown in the last seven decades. Some disruptions have constrained the pace of India’s change, while others have led India to a new trajectory of faster and rapid growth. Either way, the rise of this Goliath has been defined and shaped by these disruptions. Take away these disruptions and India’s growth story could have been different.
The literature on disruptions tells us that disruptions are caused by both internal and external factors. Consequences of disruptions, however, vary depending on the nature and quality of internal or external forces. The next twelve chapters will check the validity of this argument and examine if all disruptions in India can be traced to endogenous or exogenous factors or whether some other factors were responsible for them. In the process, these chapters also answer many obvious questions about the dozen disruptions that changed India. Were all the disruptions sudden? Or did they represent an outcome of a series of developments? Were these disruptions always a planned effort or a culmination of events over which policymakers had little control? What was the politics and economics behind these dozen disruptions? Personalities behind disruptions are even more fascinating than the disruptions. Who were the key personalities directly or indirectly behind those disruptions? Some of them have played a key role in executing them, while some others may have just played along. Who were the protagonists of disruptions?
India’s Partition in 1947 is the first disruption that we discuss in this book. It was a disruption about which many Indians as also their leaders were quite ambivalent. Could the leaders have delayed the country’s freedom to prevent the partition of the country? Perhaps, yes. But it seems the top Congress leaders at that time were reluctant to take the risk of gambling on securing the country’s freedom only as a united India. For so many years they had been leading a mass movement to throw the British out of the country that they feared any further delay in gaining freedom could be counterproductive and that might even be rejected by the people. There was, thus, an element of inevitability about accepting freedom with Partition. In any case, the idea of Partition had gained currency quite a few years before it actually happened in 1947. And when it happened, it had an impact on various fronts—on the nature of politics that would be practised in independent India and on the domestic economy and industry. The radio address of Jawaharlal Nehru on 3 June 1947 was what gave the first clear hints to the nation that India would soon become independent, but not as an undivided country. Was Nehru the only disrupter or was Mohammed Ali Jinnah, who pressed hard for the partition of India before the British could announce India’s freedom, a bigger disrupter? Was Mohandas Karamchand Gandhi, too, in some ways a tacit disrupter?
The rise of statism is the se
cond disruption that the Indian economy faced, and this became evident soon after Independence. The seeds of statism were, however, sown even before 1947. The Bombay Plan, a blueprint penned in the 1940s by leading lights of Indian industry such as Jamshedji Tata, Ghanshyam Das Birla, Kasturbhai Lalbai and Purshottamdas Thakurdas, envisaged a strong dose of government funding in key infrastructure sectors to revive the Indian economy to overcome the devastation of Partition, influx of refugees and communal riots. For India’s private sector, that blueprint was a big jolt. The first industrial policy announced in 1948 confirmed that the private sector would only play a peripheral role. The state of the newly independent India would take over the responsibility of making investments in basic infrastructure and the production of a wide range of inputs for industrial activities. The launch of the planning process; the formulation of the Industrial Policy Resolution in 1956; Nehru’s ideas of building huge public sector projects and showcasing them as temples of modern India; and the nationalization of the Imperial Bank of India along with a clutch of life insurance companies and the takeover of Air India, a successful commercial airline run by the Tatas till then, were all indications of how the disruption of embracing statism played out on Indian politics and economy.
Nehru allowed Indian agriculture, in sharp contrast to the statism of the industrial sector, to remain in the private sector. This was partly because of the obvious limitations of state capacity in undertaking agriculture in the public sector and partly because of the political risks of alienating farmers from the land—an automatic outcome of the state playing a bigger role in farming. Farmers and their rights to cultivate without any controls were part and parcel of India’s freedom struggle. Nehru was obviously concerned that any state control over agriculture could upset farmers and militate against the spirit of freedom that the country had just secured for itself. Unsurprisingly, Nehru and, indeed, all his successors have not only let agriculture remain a private initiative but also kept it out of the reach of the organized corporate sector. An unintended consequence of this approach was the poor state of India’s agriculture. The absence of organized farming also meant that Indian agriculture suffered from poor productivity and lack of technology. Farmers continued to remain poor, and unchecked population growth led to fragmented landholdings. This was a recipe for a food crisis. The disruption here was the acute food crisis the country experienced in the 1960s as also the Green Revolution that followed immediately thereafter. Apart from increased production, reducing the country’s dependence on imports, the Green Revolution also led to a sharp increase in the use of hybrid varieties of foodgrain, which caused yet another disruption to the Indian economy. It was largely a positive disruption, but it also gave rise to income inequalities among the Indian farming community and laid the foundations of a support regime for agriculture in the form of minimum support prices and subsidies for inputs. This had its own adverse consequences for state finances.
Around the same time, i.e. from the late 1960s and the early 1970s, India experienced a stronger dose of statism, with the government deciding to nationalize a host of sectors such as banks, coal, petroleum and general insurance. Laws on the concentration of economic wealth and market dominance were introduced to tighten the government’s levers of control on private industry. The economic disruption it caused in a wide range of sectors of Indian businesses and the economy was actually a response to a political challenge to the then government of Indira Gandhi. The Indira Gandhi-led government faced a challenge from a clutch of Congress leaders, who believed that she should act at their behest because they supported her candidature as prime minister. But Gandhi refused to be their puppet and instead came out with a raft of economic policies to firmly establish her leadership within her party as also in the government. Her response to this political challenge was to nationalize several industries to strengthen the role and sway of the public sector in the Indian economy and tighten laws on economic activities. The disrupter here was Indira Gandhi, aided and guided by some of her key advisers in the government. On the face of it, there was an economic rationale that Indira Gandhi presented to defend her decisions on the nationalization of banks and companies in a wide range of sectors, including coal, petroleum and general insurance. But dig deeper into the reasons for such decisions, and you will see how Indira Gandhi used nationalization as a tool for achieving her political goals of staying in power and isolating her opponents. Thus, the nature of statism in this phase was quite different in character and emphasis from the earlier round seen during Nehru’s premiership.
Next in line of India’s long list of disruptions was the oil shock. It was a disruption that was caused neither on Indian shores nor by Indian political leaders. It was triggered by a decision taken by the Organization of the Petroleum Exporting Countries (OPEC) to stop supplies of oil to the US and raise prices. It was an act of retaliation against US actions in support of Israel, which was at war with Syria in 1973.
India was a collateral damage as its dependence on oil imports was already huge. Its dependence on oil imports was its Achilles’ heel and the cause of one of its biggest economic disruptions. It changed the way economic policy planning would be undertaken in the decades to come. India’s economic policy focus shifted from one of import substitution to export promotion, wherein the new slogan was ‘export or perish’. The reason was not far to seek. India needed precious foreign exchange to meet its requirement of oil imports, which also led to a gradual shift in its policies on trade and tariffs. An additional fallout was a new focus on oil exploration on Indian shores.
If the sharp increase in oil prices was a disruption triggered by developments outside India, the cause of India’s next disruption was very much rooted in domestic political factors. And yet, the role of the increasing deterioration in India’s economy in that disruption could not be underestimated. The proclamation of Emergency in 1975, which essentially abrogated the democratic rights of the people enshrined in India’s Constitution, had its roots in the woes of the Indian economy that began with the oil shock of 1973.1 Growing restlessness in large parts of north India, on account of unemployment, culminated into a political movement to unseat the then government. Indira Gandhi’s response to that challenge was political. The declaration of Emergency was the biggest jolt to India’s nascent democracy, and this turned out to be the strongest force for growing deep democratic roots in the country. This was a disruption that clearly had short-term negative outcomes but also made the voters more watchful and guarded against any tendency on the part of any political-party leader that threatened to abridge their democratic freedoms.
The celebrated reforms of 1991 were also an outcome of a major disruption in the economy. The pursuit of growth through debt incurred by the government was among the factors that contributed to the twin shocks to the Indian economy. At one level, this resulted in the worsening of the imbalance in the Central government’s fiscal situation. But at another level, the country’s balance of payments, too, became unsustainable as its exports were not good enough to meet its rising import bill. What, however, led to the disruption of reforms was a combination of three forces: deteriorating balance of payments, growing fiscal indiscipline and increasing political instability. Each of the reforms in the areas of banking, insurance, aviation, telecommunications, trade policy and industrial policy changed India in a fundamental way.
Two political factors played a big disruptive role around the time the Indian economy was going through a crisis in the 1990s that led to reforms. It was an irony that the short-lived National Front government led by Vishwanath Pratap Singh in 1989 would be known less for its campaign against corruption, for which it was largely voted to power, and more for its decision to extend the scope of affirmative action or reservation of seats in educational institutions to backward communities in addition to those already reserved for scheduled castes and scheduled tribes. Both economically and politically, the acceptance of the recommendations of the Mandal Commission, a commit
tee that was set up to extend the scope of reservation, caused a massive disruption. India’s politics changed fundamentally from 1990, and its impact on the economy was no less significant. Politically, it was a big blow for the Bharatiya Janata Party, which relied on the Hindu vote bank that till then had a largely monolithic character. Reservation for backward communities splintered the Hindu vote into many smaller divisions, eliciting a bigger challenge for the BJP to use its community card. It could be debated whether the reservation politics led to the BJP’s mobilization of Hindus to demand a Ram temple in Ayodhya or the other way around. Extending reservation for other backward communities led to further fragmentation of what was till then a largely monolithic Hindu vote bank. The BJP, therefore, found its Hindu vote bank fragmented into castes and galvanizing the entire community for electoral gains became a bigger challenge. Community politics was challenged by caste politics. Unsurprisingly, the agitation for demolishing the disputed structure at Ayodhya and the demand for building a temple there got a big push after the V.P. Singh government extended the scope of reservation in jobs and educational institutions by accepting the recommendations of the Mandal Commission. The rapid rise of the BJP was arguably an offshoot of the disruption caused by reservation. But in the end the country had to contend with the twin shocks of disruptions—reservation politics and the demand for a Ram temple at Ayodhya after the demolition of the disputed Babri mosque.
One of the key outcomes of the economic reforms of 1991 was seen in India’s telecommunications sector. As the events unfolded, the rapid spread of telecommunications after the economic reforms fundamentally changed the way Indians led their lives or did business. The growth in telecommunications created more choices for consumers and ushered in the growth of a sector that also needed regulation.
The role of the government in the telecom disruption cannot be underestimated. While it brought about significant improvements in productivity levels in different sectors of the economy, the rise of telecommunications created a big challenge to producing skilled manpower and living up to increased expectations of improved governance.
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