The Rise of Goliath

by AK Bhattacharya

  At a structural level, the rise of India’s telecommunications also had an indirect positive impact on the domestic economy. The spread of telecommunications across the country significantly improved efficiency in the delivery of a wide range of services. Productivity levels in the manufacturing sector went up. The market size for providers of goods and services increased with improved access to consumers through the rapidly growing telecommunications network available at falling tariffs.

  India’s financial sector, too, has witnessed a major disruption, even as the government tried to achieve higher growth through increased bank financing. Growth gets a boost if the pace of investments rises with the help of bank finances made available in plenty and at reasonably competitive rates of interest. Post-reforms India saw a dramatic rise in bank lending for projects, including many long-gestation infrastructure projects, which contributed to economic growth. But this also gave rise to the twin balance-sheet problem of the Indian economy, which was a reflection of the increasing indebtedness of Indian companies and rising levels of sticky assets or loans of Indian banks. This posed the biggest challenge for growth in the Indian economy. On the one hand, the banking sector was under increasing stress to lend more to the corporate sector for investments in new or existing projects. On the other, India Inc., which by now was groaning under the burden of huge debt and unable to repay its past loans, was reluctant to invest more as it was heavily indebted. Making the situation worse was the Indian industry’s relatively low-capacity utilization level, which meant there was no urgent need for increasing investments to meet demand. The steps taken in quick succession to tackle this challenge included the legislation of the Insolvency and Bankruptcy Code and a massive bank recapitalization programme. The Reserve Bank of India (RBI) was empowered to force banks to refer indebted companies unable to repay loans to the insolvency process, even though the central bank’s stringent norms for recognition of stressed loans and initiation of recovery proceedings had to undergo significant alterations after being challenged by the Supreme Court. On the whole, however, the enactment of the Insolvency and Bankruptcy Code meant that financial creditors (mainly banks) and operational creditors (vendors and suppliers of goods) could move specified courts to secure the recovery of their dues from companies that had defaulted on their repayment obligations. The recovery of such dues was ensured within a fixed time limit and often promoters of defaulting companies lost their companies to those who could repay the banks and take them over. Many stressed loan cases could not be resolved within the stipulated time limit, but the new law instilled a greater sense of discipline among borrowers, who realized that it was no longer possible to get away after not repaying their loan dues. At the same time, the stressed banks were recapitalized so that they could get back into the business of lending and some other banks were to be merged with each other. The net result of all these measures was a kind of disruption that India’s financial sector had never seen in the past.

  In terms of visibility and the abruptness with which it was implemented, demonetization, or the act of annulling almost 86 per cent of the country’s total currency in circulation, has few parallels perhaps anywhere in the world. The disruption was engineered in November 2016 in a bid to attack black money, choke off sources of terror money and reduce the use of cash in transactions, hopefully leading to greater digitization. At the end of the nearly seven-week long exercise, however, it was still not clear if black money or terror-money sources were fully extinguished even though tax coverage had improved and there was less cash in the economy with more use of digital transactions. Looking back, demonetization was a flawed idea and its adverse impact on society, politics and the economy was widespread. There are those who believe that the government surprised everybody and took even its own ministers and senior officials unawares before announcing demonetization on 8 November 2016.

  However, if you reflect on some of the decisions that the government took almost eight months before the actual announcement of demonetization, it would appear that this mother of all disruptions was not a sudden action. It only appeared to be a sudden action since the government had been planning it for at least eight months, in complete secrecy, before it was actually announced. Key officials in the central bank, the finance ministry and the prime minister’s office were entrusted with the responsibility of planning demonetization. The inevitable question that arises is if demonetization was indeed planned many weeks before it was actually implemented, why did the government machinery mess up its execution causing widespread hardship and inconveniences? The disruption of demonetization was made worse by its execution.

  In sharp contrast, the rollout of the GST, from July 2017, was a planned disruption and nobody could really quarrel with the logic or the need for introducing the new indirect tax regime. It was the most ambitious indirect tax reform that the Narendra Modi government has launched. Yet, nobody was in doubt even before its launch that its impact on the economy and businesses would be hugely disruptive. GST as a disruption posed many challenges at many levels—governance, public finance, fiscal reform, federal structure of the country and technology. How the pain of this disruption was managed and what new challenges and gains it creates for the Indian economy is a fascinating story of governance.

  What kind of disruptions can be expected in the days to come? Of course, the disruptions of the future are difficult to anticipate. But there are some visible signs of what those disruptions could be. In the political sphere, there is a strong likelihood of an electoral reform that may combine the holding of the general and state elections at the same time. One mega election once in five years will also require other changes in the way governments are formed after the elections. ‘One country, one language’ is an idea whose implementation could cause yet another disruption. Its consequences could be far-reaching. Privatization of public-sector banks is a possibility and this would certainly cause a huge disruption, with economic and social consequences. Finally, the delimitation of electoral constituencies could be a disruption that could even strike at the root of India’s continuation as one country in its current shape. But whether such changes will be actually introduced or these disruptions will remain only as ideas in the minds of some policymakers, only time will tell.

  A few broad trends are noticeable in the kind of disruptions that have been captured in this book. Not all disruptions in the country have been adverse in their consequences. Even though they might appear to be adverse in the beginning, the long-term consequences of many of them have been positive. Take, for example, the disruption of the food shortage, the oil price increase or the balance-of-payments crisis that hit the Indian economy in the 1960s, the 1970s and the 1990s, respectively. Thanks to these disruptions, Indian agriculture today is far stronger, the Indian petroleum sector is more resilient (though its self-sufficiency continues to be a big cause for concern) and the economic reforms of 1991 have laid the foundations of a new India that could help ensure growth and development at a pace that was not seen earlier.

  There is also an unmistakable linkage between disruptions and secrecy. Take, for instance, the manner in which Indira Gandhi nationalized fourteen banks on 19 July 1969 or Narendra Modi demonetized as much as 86 per cent of the country’s currencies in circulation on 8 November 2016. Both decisions were planned in utmost secrecy and their announcement came as a surprise to many. But they were not actually sudden decisions. In the case of both bank nationalization and demonetization, the disrupters—Indira Gandhi and Narendra Modi—had engaged in deep and secretive consultations with their key advisers for weeks together before they sprang the surprise. So, at least two of the economic policy disruptions were planned in secrecy, but it would be fallacious to say that they were sudden.

  Many of the disruptions also bring out the critical role played by the close network of advisers around the disrupter. This often raises the question on whether the disruptions could have taken place without the assistance of the close group of advisers. Woul
d it have been possible for Indira Gandhi to have nationalized the banks without the kind of support and advice she got from her advisers like P.N. Haksar? Similarly, would a disruption like the declaration of the Emergency have been possible if Haksar had been around her in 1975? And could Narendra Modi have rolled out the GST without the support of his finance minister Arun Jaitley? The chapters on the various disruptions described in this book will provide some clues to answering a few of these questions.

  What, however, is incontrovertible and beyond dispute is the close linkage between disruptions and decisive leaders. Whether it was Jawaharlal Nehru, Indira Gandhi, V.P. Singh, P.V. Narasimha Rao or it is Narendra Modi, each displayed elements of a decisive and forthright leadership in executing policies that have either tackled disruptions or contributed to disruptions. The following twelve chapters are ample testimony to this thesis. Enjoy the rise of this Goliath, marked as it is by disruptions.

  Section 2

  Partition of India

  CHAPTER 2

  A TRYST WITH DESTINY

  A few months after the birth of India and Pakistan in August 1947, Kishan Lal Thapar walked across the newly created international border between the neighbouring countries. It was a walk that Thapar still remembers. His father, a hygiene-conscious Punjabi who had a flourishing medical practice in Lahore, had decided to get him circumcised soon after his birth. The decision turned out to be an ordeal for young Thapar at the border checkpoint, and a reminder of what Partition meant for millions of Hindus and Muslims who had become refugees in the Indian subcontinent.

  Communal fires blazed across the Indian subcontinent in the aftermath of Partition. Hindus felt aggrieved that they had to leave the newly created state of Pakistan while many Muslims decided to stay on in what came to be known as India. Hindu vigilante groups were active and deployed in full strength at the border checkpoints. Their goal was to make sure that only Hindus could cross the border to enter India. And the way of checking, at least men, was to see if they were circumcised. Humanity had sunk to low depths!

  Thapar realized he would not pass that test easily and feared that he would be singled out as a Muslim faking to be a Hindu! The consequences could be fatal for him, Thapar quickly sensed. As the Hindu vigilante group subjected him to a thorough body search, Thapar intervened and showed through proofs of his birth certificate that he was born of a Hindu father and that it was only a medical advice that led to his circumcision. After many tense moments and heated arguments, Thapar salvaged himself. He and his family lost almost everything that they had built and nurtured in what is now Pakistan and the challenge of rebuilding life all over again was a daunting task. But the trauma of that single incident is still etched in Thapar’s memory.

  * * *

  In 2002, Joga Jiban Chakraborty was back in Karoitoli village near Chandpur in what is now Bangladesh, after leaving it in the dead of night almost fifty-five years ago. Chakraborty’s decision to go back to Karoitoli was prompted by his desire to see his village home that he left when he was barely sixteen.

  After Partition, Chakraborty’s ancestral village happened to fall in a territory in what then became East Pakistan. Along with his father and younger sister, he left the village, seeking safety and a new home across the border in India.

  He remembered the warnings his father received from local Muslims, urging them to leave the village lest they were forced to physically eliminate them. The apparent act of mercy in the form of warnings—many other Hindu families had simply been killed without notice—was shown to Chakraborty’s family because his father was a homoeopath and the local residents wanted to be kind to the man who had treated them when they were sick. Even so, Chakraborty’s journey, partly on boat and partly on foot, was remarkable for the many raids from violent mobs who let them off only in return for money or a piece of jewellery.

  On that morning in November 2002, when Chakraborty saw his village home, he found the Gaab tree (also known as Malabar ebony) still standing, its branches spread all around the house that was once his home. It was the same tree in whose branches he had kept himself hidden all night before he bid his childhood home farewell. The sight of the tree brought alive memories of the pain, trauma and fear of the future and of the challenges that lay ahead after his displacement from what he had known as his motherland.

  The Stage Is Set

  A radio address to the nation by two gentlemen, Jawaharlal Nehru and Mohammed Ali Jinnah, on 3 June 1947 settled the big question of how India would gain freedom from British rule.1

  Just before the radio address, the British Viceroy Lord Mountbatten had laid bare the plan on how England would transfer power to India. The question on whether power would be transferred to a divided India or an undivided India had been raging for many months and the new plan showed that while Nehru’s fears were confirmed, Jinnah’s dream was coming true. Yes, India would gain freedom from British rule but not as one independent country.

  A few months previously, on 20 February 1947, the British government had announced its intention of transferring power in British India to Indians by June 1948. It had then hoped that the major parties in India would work towards evolving a Constitution acceptable to all concerned.

  But the statement on 3 June noted with some disappointment that the task of framing a Constitution for all had made little progress. Large parts of British India where the Congress leadership held their sway wanted independence from British rule as an undivided country, but areas where the Muslim League was dominant were keen that the country should be divided such that Muslims get a country for themselves. The delay in framing the Constitution for a new country was largely caused by this fundamental difference of opinion on how India would emerge after freedom from British rule—as a united country or a divided country. Thus, while representatives of the provinces of Madras, Bombay, the United Provinces, Bihar, Central Provinces and Berar, Assam, Orissa, the North-West Frontier Province, Delhi, Ajmer-Merwara and Coorg made progress in the task of framing a new Constitution, the Muslim League Party, including a majority of the representatives of Bengal, the Punjab, Sind and British Baluchistan decided not to take part in the Constituent Assembly that was entrusted with the responsibility of framing a Constitution for India after it became free from British rule.2 The Constituent Assembly was set up after elections were held in August 1946. Members of the Assembly were elected by provincial assemblies. But after the elections, the Muslim League refused to take part in the process and that led to a deadlock, forcing the British government to explore the option of dividing India.

  The British government set out its game plan under three broad heads. One, it reiterated its desire that the power to rule India be transferred in accordance with the wishes of the Indian people. But that task got complicated as there was no agreement among the Indian political parties on whether they would like to get freedom as a united country or after Partition as the Muslim League had desired. The reference was obviously to the growing differences between the leaders of the Congress and the Muslim League. Two, the British government made it clear that in the absence of an agreement3 among the main Indian political parties on the transfer of power, it would take upon itself the responsibility of formulating a method that it deemed appropriate. Three, the British government had no intention of taking upon itself the responsibility of framing the Constitution for India. This responsibility in their view was to be undertaken by the Indian people, and the plan it outlined did not preclude the possibility of Indians deciding among themselves their future course. This did not rule out the possibility of different communities agreeing on a united India after freedom.

  The reality before the British government was too stark to be ignored. It had to take care of the sentiments of both Hindus and Muslims before deciding on any course of action. It had no desire to disrupt the proceedings of the Constituent Assembly that had already begun its work in right earnest. But at the same time, it could not allow a Constitution to be enforced only in parts
of the country willing to accept it. The options were clear: either the Constituent Assembly already set up and functioning was accepted by all or there would be another Constituent Assembly that would comprise representatives of areas not agreeable to participating in the consultations held by the existing Assembly or, in other words, those keen on forming a separate country.

  The parts of British India that seemed to lack unanimity in taking part in the Constituent Assembly consultation taking place at the time—Bengal, the Punjab, Sind, North-West Frontier Province, British Baluchistan and Assam—provided a clue to the shape of things to come. The provincial legislative assemblies of Bengal and the Punjab were expected to meet in two parts—one would represent the Muslim-majority districts and the other the Hindu-majority districts. The die for India’s Partition was cast.

  When Jawaharlal Nehru delivered his radio address on 3 June, he was not his usual ebullient self. He laid bare his dilemmas at the prospect of the dream of united free India lying shattered but, regardless, did not flinch from justifying the need for independence at that point. He said with a heavy heart: ‘It is with no joy in my heart that I commend these proposals to you, though I have no doubt in my mind that this is the right course. For generations we have dreamt and struggled for a free and independent united India. The proposals to allow certain parts to secede, if they so will, is painful for any of us to contemplate. Nevertheless, I am convinced that our present decision is the right one even from the larger viewpoint.’4