India Transformed: 25 years of economic reforms

so welcome everyone we are here to celebrate the publication of a book entitled India transform 2025 years of economic reforms edited by Rakesh Mohan the book consists of 32 essays by various observers and some of the key participants as well including Rakesh on the economic reform program that was initiated in 1991 in India and Rakesh was actually one of the key architects at the time the economic reforms in in India that began in 91 consisted of a lot of things the most the biggest change was in trade policy where tariffs were reduced gradually over a 20-year period from 100 over 110 percent on average to currently about 10 to 15 percent opening up of the economy to foreign investment and deregulation so that's going to be the topic we're going to have strobe is going to make a few remarks about Brookings India and the and the genesis of the book then Rakesh will speak for about 10 minutes on on the whole program and then we'll have a panel discussion thereafter for for about 40 minutes and then we'll open up to questions from the audience thank you I should have introduced myself - okay great among other things I'm strobe told it in the foreign policy program here I was introduced to rock cash at your house some years ago and you have been a wonderful wonderful friend to him and to me and to a lot of people in this room and a terrific trustee of the Brookings Institution I want to just yet a little bit of backstory in here a couple of years ago vikram nefta who i assume a number of you know and you probably also know that he is the chairman of Brookings India and he asked Rakesh to come up with a substantive way of noting the 25th anniversary of the beginning of the Indian reform process I had the honor of being in the the Clinton administration a state department around the time when this was going on and I went to India quite often including early in the 1990s when India was opening up its economy for its own good and for the world I had several opportunities to meet with Prime Minister Rao and his finance finance minister Mohammed's Mehari mondawmin Singh these were two city-states Minh who were genuinely visionary and I think that's part of the discussion today to make it clear that where there have been ups and downs is and isn't true is true in all countries their vision has really come to be very important and very solid last year the book that you are hearing about today was launched by mr. Singh and the finance minister arun jaitley co presiding and i'm glad to see that the world's largest democracy still finds opportunities for bipartisanship Rakesh Rakesh will tell you a little bit more about the constellation of crit contributors of the book and we are also going to have the a lively conversation an edifying conversation and I'm now going to turn the proceedings over to Rakesh first let me thank Brookings Stroupe Tolbert homie Kara's whole Brookings team for putting this event together I know how much of an effort it has been since they're organized as things in the past just starting off a strobe left off it was in 2015 after I'd spent three years at IMF that I went back to India for about eight months before coming back to this country teach at Yale when I was filling the gap at Brookings India and so I sort of had to do something to show that I was actually doing something and this opportunity came along and as Rob said Rick Hamas you do this and I reflected in that that it's 25 years had gone by since 1991 basically anyone under the age of 40 in 1996 would have really any idea what India had been like before 1991 and how dramatically it has changed over this period and therefore it was a very good idea to launch this project of really covering the whole economy and covering how changes took place in almost every area and then the question was how does one do this should I write the whole thing that seemed like too daunting a task so I thought I should get 30 others to join me in this and it was a it is I will see in the book it's a combination of prima donnas both sort of from the policy side people like Montek and others who actually doing the policy change Montek Singh Ahluwalia there is along with business leaders in some sense who who both responded to the reforms that have taken place from a comparative period before 91 when they were restrained by a lot of government policy in what they could do and in some sense the people who both responded and benefited the most and that includes people like Mukesh Ambani I had succeeded in getting Ratan Tata to also agree to write a chapter but other things took over during that period so I couldn't get him to do that but then I have very good contributors like Deepak Parekh Sunil Mittal and others I can't name all the authors because they are 31 of them actually so I don't mean a disrespect to the ones that I don't name also some major commentators like tn9 and and againand and others and also I thought there should be something on foreign policy so Shivshankar Menon was also I guess the Distinguished Fellow workings who's contributed a chapter in foreign policy trade I should mention Harsha where are you his hardship are those things right at the back he was act so when the book was launched in India he was in fact the executive director of Brookings and he is written I think the longest chapter in the book which is on trade and quite appropriately because trade has indeed been among the big success stories as Liaquat had mentioned so the idea essentially of the book is to bring together people both policy types commentator types business types to bring their own experiences in through giving an idea what has happened India in the last twenty five years a couple of chapters from the business side also which document how the composition of the top business companies or top business houses has changed completely from 1991 to now which again attests to the success of the reforms in that it did shake up the whole system whatever feature of the book which is not quite stated explicitly in the book but I think it comes through is I think one of the most remarkable things in in our reform process is that over this 25-year period we've had I think this is the seventh prime minister during this period and as many finance ministers and and during this period the parties in power have been of all colors including the Communist Party of India is also a member of coalition in the late 1990s so they were all colors and yet the reform process has continued really without much of a break obviously they've been ups and down sometimes from frosting faster sometimes somewhat slower there very few reversals except a couple of them recently so in that sense it's it's quite a remarkable tale that in a country that is argumentative and despite ativ if that's a correct word that this has happened and you wouldn't get a sense at any time brings 25 years that there was actually a consensus in the country on these kind of economic reforms taking place but looking at the out looking at the consequences of the reforms you can see that there was some kind of a basic democratic consensus for this to continue it was such a long period of time now in terms of the actual consequences we've had growth rate in excess of seven percent on average during this whole period since the early 1990s in fact actually it's an excess six and a half percent real growth rate average since the early 1980s which is pretty little appreciated so it's a long period of high growth of course it's not the same as China's 10% and cumulatively over 30 years the different 10% is huge and that's the different of China in India today one of the point I would like to make is that the initiation of the reforms was done by three people collectively who neither of whom were what he Michael charismatic that is narsimha Rao as a Prime Minister Manmohan Singh as a finance minister and the third who's very little-known was the principal secretary to prime minister mr. a and Varma the adversative in-charge and since I had the fortune to watch this very closely so narsimha Rao brought the absolute political cover in terms of he had to do all the negotiation table negotiation across the aisle to get all these things done Manmohan Singh provided the intellectual framework and cover and Ian Varma actually had to bang all the bureaucratic heads and I've seen those heads being banged which he visited mission in Varma who was a principal secretary to the Prime Minister narsimha Rao he held a meeting every Thursday over lunch for five years whenever they were in town to actually takes all the reforms so the point the reason of mentioning this is an unusual case of reforms where there wasn't some kind of a charismatic leader bringing out a whole change in economic policy in a country it was a bunch of colorless individuals who who that who had a sort of who had a very nice or a nice kind of agreement in terms of what each of their roles were and it's fascinating to watch and again that is kind of continued over time in India another feature which strobe mention is the is the cooperation across the aisle which has happened over the 25 years an interesting part of that is that all the larger reforms were brought about by government which did not where the leading party did not have an absolute majority in parliament and so they had to negotiate both within the government between the coalition and across the aisle as well to get things passed and one example of this continuous reforms which have which which have added bipartisan consensus even though at any given time you don't think there's a consensus is the example I can give of the most recent big reform that is the introduction of the goods and services tax otherwise in other countries known as a fact so the first time that the country is economically unified through a countrywide VAT value-added tax what we call the goods and services tax bring in goods answer was a tax net and consistency because all the states and the central government so the original design of that was started the first design of that was started for the central value-added tax in the late 1980s late 1990s under yes once it out the finance minister and this has gone on then the Senate then the VAT was introduced with the states under mr. Chidambaram as finance minister and final the unified VAT has come under mr. Jaitley as the finance minister and this is getting cooperation across 29 states can you imagine Strube in the u.s. 50 states cooperating to do a unified tax system you can't even imagine it actually even though I'm told the IMF recommends it every year in their article 4 reports to the US Treasury so I think that what I sort of tried to do is to put together in this book these articles and different aspects macro policy industrial policy infrastructure the business articles there are there is however one area where we've just not done enough and that is the area we should probably constrain our growth in the coming years and that has helped key areas of health in education so we also have chapters of health education documenting how we filled in those areas and the still isn't really a good good program forward how that's going to to happen so what we hope to do through this book is one of course is has a document what has happened to document successes also as failures but also to demonstrate that it is possible through policy through policy so intentional policy to transform a country how country works how his economy works and hopefully to inspire the next 25 years if he achieves 7% a year or plus for 25 years why can't we do better in the next one in ideas or hopefully future policymakers will take some inspiration from this look it's possible to do these things even as fractious and argumentative country as India thank you very much again for all for coming and there are lots of people to thank but I'll perhaps take too much time but I do want to say that I was really the the cooperation that had got from all the 31 authors and I said each of them was a primadonna so it was a real struggle to get them to do the articles but they did and in less than a year and was real struggle to send back drafts them at least three times each for them to do corrections and improvements so I and all this happened just because of friendship so I do acknowledge the sort of friendship that they that they don't actor friendship that they contributed to this volume thank you [Applause] great so this one yep okay thank you so let me introduce the panelists on my immediate right is an Krueger who was the first deputy managing director of the IMF from 2001 to 2006 and prior to that she taught at Stanford and Duke next to her is Rakesh then next to him is r.j. Chiba who's the chief economic adviser to the Federation of the Indian Chambers of Commerce and as a distinguished visiting professor the National Institute of public finance and policy and to the far right is Alisa Ayers who's the senior fellow for India Pakistan and South Asia at the Council on Foreign Relations and before that she was the Deputy Assistant Secretary of State for South Asia so first we're going to start by me directing one question one big question to each one of the panelists and then we'll take it from there I should mention that the book is on sale at the back of the room so when you leave be sure to buy a copy so let me direct the first question to Anne and we asked had to and is has had long experience with programs of economic reform and she's been involved with economic reform across a range of countries and I think Rakesh did a great job of outlining quite how dramatic the change in India was so so and talk a little bit about the scale of the change in in India's economic reform particularly on trade and then make an assessment did they did they took slowly too fast you know how could they have done things differently thank you okay thank you thank you very much and thank you for the invitation to be here the first thing to be said is that everything they've said about the book is right only not crazy enough is it very very good I think it will be the reference work for a long time to come on the Indian reforms there are a lot of other people writing individual documents which are very good your own experience but this one I think covers the waterfront and covers it very well as we already said my focus is going to be untrained which was all important in terms of the reforms quite aside from whatever else Aled the Indian economy in the early 1990s and that was a lot ah the trade regime was choking everything and it choked it big time and I thought I might give you just a couple of minutes of a feel for how badly it was choking because people here can't even imagine it and I as I think hinted even young Indians I don't think know just what life was like it into you before 1990 as it happened I was there in the nineteen in late 1960s and early 1970s trying to do get some feel for how costly the import substitution regime and what went with it was and decided I was gonna do a case study of the auto ancillary industry which was a a chose in part because they were producing the parts for cars which could not be imported of course neither the parts nor the cars could be important and I could get information from both the buyers and the sellers which was of course much better than taking all the information from one side three shorts are four I guess short stories yet one interesting thing was that the producers basically felt the problem was with the regime and did not recognize that their own costs were high I remember in particular one pharmaceutical plant and not as it then was Madras where two British managers were busy telling me how their costs of materials in India were above the sales price of the product in England which was true but that night when I went home I looked at the sales price which was three times the price of India so that while the cost of the cook components had been twice at the cost of other things have been four times that namely the domestic things were even more important and they didn't even know it they told me the great pride how they were very efficient and all that but they couldn't understand what that took second story as I was touring India as I was that winter for a long time going from place to place I fortunate was fortunate to have the hospitality of the auto assemblers which was very helpful and in that process saw a lot of factories in the ancillary industry and related things and what was interesting was after about the fifth or sixth place I'd gone by or fact regular but all kinds of partially assembled things were stay as stacked up did everybody's around the factory they weren't in the factory their October it was clear they weren't bicycles with missing parts all kinds of things with missing parts what trade out there was one critical strike of one firm in India and because of the regulations in the way they had been organized the economy was so fragile that that one strike held everybody back so they were keeping on producing and just stacking things up until finally the strike would end and they could finally get the final parts they needed for the things that was second third thing there was a joke at the time which you may not think was funny but at the time people thought it was very funny which had to do with a very sad fellow who looked to sew down saw his friend and his friend asked why why are you so sad well he had to have surgery well a friend basically thought that had to be very serious and sorry well what kind it has to be something awful for that my fellow would be this unhappy and that's what well it's a skin lesion they're going to take off well why are you so sad that's not a serious operation but I have to have a local me and at that time anything local had that bad a name if it wasn't important it was no good and producers knew it because they didn't have to make it good to make it sell because it was no alternative I visited actually the Jamshedpur truck Factory in yeah along the way and the first thing I saw as I was coming in was there's a big fire pit in front in the ground and glass was being delivered to the factory and workers were busy having a glass to break it into pieces so they could reforge it and get imperfections out because as they showed me you couldn't see through the glass which would not have worked very well on wind screens unless you somehow redid the glass I could go on I mean the stories were myriad but it was everywhere it was not one thing it was not two things that everybody could legitimately blame everybody else it was a mess there was lots war bad about it and so on but I won't go out at the two papers on trade are both very good although Martin wolf has a paper in there it's fairly short he gives some policy conclusions and so on with a great deal of analysis I think it will be one that's read and appreciated by many the other paper is I think we're good in that regard but also in documenting what in fact went on over the course of the things and Fred office Singh basically has gone ahead and and done an excellent job I think of documenting a lot of what I recommended to you not only now but when you want to look back on things and have questions about them it's a fairly complete description I think you're fairly good but I'm gonna focus you in a couple of things I think I can nitpick a bit and disagree so I was simply because I think that makes it more interesting and the last question is where do we go from here and part of the answer is that defensive part of where you at and so let me say something about it one one of the things he has an almost as an aside is that there's still some continued protection and that's in order to protect you Indian companies against foreign competition we shook me up because I thought what are the very valuable purposes we'll trade was to give competition and I suspect the protecting companies from competition is not the way to go and I think that was very very true in in the earlier days of import substitution when nobody had any competition everybody was a little monopolist quality among other things went to and they can doing the sort of delivery dates so did everything else secondly I do not think the reforms are anywhere nearly complete the big disappointment in terms of trade which has not been a disappointment overall well in turn in terms of trade itself the big problem is that there's an India has never developed a successful unskilled labor intensive manufacturing sector at all that in turn has bottled up about 70 the population in rural areas so those four slobs have nowhere to go so they stay on the farm they're out of it there are lots of reasons for this but many an Indians say that well because of the id Software Revolution because of what happened with Infosys and other firms Indians skipped that stage I respectfully disagree I think India still has to go through it and there still needs to be something done to get a lot of that wonderful they were forced out of the rural areas where they're busy doing almost nothing and into more productive activities in other areas there are a lot of reasons for it let me just tick off a few first off is just the problem that basically there is very little that anybody can do to get into the formal sector of the economy I have a friend or I had a friend I haven't seen him in several years who came back to India decided to do any economic consulting firm and when he had 25 economists working for him he decided he ought to make it a formal sector ah enterprising so he began the business of getting the formality approved so he could be in the formal sector of the economy what I start last saw him was about three years after that and he was still working at the process he'd put two people on it full-time and could not get it done within three years and I don't think that was unusual in any regard things took forever to do the formal sector employment is last I saw was 17% of total employment that is a shockingly low number and more than half of that is in Agra is in the public sector private sector has very little formal employment you can't be formal unless you're big and you can't get big if you're small because you can't do it and so there's sort of a catch-22 in the whole thing that's very hard on top of that the Industrial Relations Act is far too much power to unions employers were there out as they say are locked in their offices because they wouldn't give appropriate a cup change in compensation or whatever it was the workers had to work that day one union would go on strike one day somebody else would organize another unity the next the industrial production after the reforms tripled between then in about 2005 with no increase in employment in industrial industries done three times the output you know therefore that some capital went into capital saving techniques which could have been used for more employment had there been a different regime I could go on on that I feel strongly that is really a crime against humanity for those poor Indians who were stuck outside there's also by the way a land bottleneck if you haven't seen that excellent book that are ensure he wrote some years ago called governance one of his early chapters described what he was First Minister for disinvestment which at the time was the polite word for privatization and he describes how the first thing he wanted to do was privatize some hotels the only problem is it couldn't be done because the government of India couldn't find titles to the land the government could not find titles to the land think about that for a minute and if the government couldn't get titles to the land think about a private sector entrepreneur wanting to do something and go through as you know taught us had the proposals for the Nano it may or may not have been good on other grounds but they couldn't do it because they could never break loose the land to do what where they wanted to in that particular case I could go on no time now we have Prime Minister Modi saying he once made in India quote unquote well not there's nothing wrong with that I want things made in India too I want more of them I want more productivity and more people outside the informal sector and more productive work but what he's proposing is not the right way to do it he wasn't you need to do it you need to get a level playing field and you induce more efficiency and more competition and more ability to sell at reasonable prices and compete with foreigners and so on you cannot do it I there's nobody's done it yet by imposing tariffs and protecting and subsidizing individual companies and individual industries at different rates and without sufficient exports who's going to go into the export business in that circumstance everything is too unpredictable and that's been proven over and over again the Modi government I think just last week or week before raised tariffs on imports of about 19 billion dollars of goods which is 8 percent of the total other grounds that they were not essential and it was supposed to help correct the trade imbalance trade not goods and services trade and of course India's export services as much as trade but nonetheless to do that that's what they said and yet as every economist has taught forever in econ one or even in high school week on you cannot correct the trade balance by imposing tariffs it doesn't work and it won't work another less that's what the Prime Minister is doing now so I would argue that at the moment we are seeing a bit and I hope it's only a bit of backsliding but backsliding it is last set of comments I want to make quickly agriculture where I think I have more disagreements there's just a study out by Gulati for Rodia Jew which estimates that if you take the subsidies to agriculture which are about 8% of GDP or about a hundred and seventy million crores of rupees if I have my digits right and crores I could never do it right but at any event and the minimum support prices which the government of India imposes which are below market and export prices the net protection to agriculture which does vary by crop on average is about minus six percent of GDP agriculture he says has averaged Terrace of fifty four percent on imports but that's a funny number because it doesn't include all these other things that happen the subsidies that go to some and of course a bit of a support prices and so on and so forth it also as far as I can tell doesn't include entrega which of course in a way has very big distorted effects on lattaker cultural labour and other things but I couldn't tell whether that was included enough if you were but the lucky at all studied does conclude that the return to the poor in the rural sectors I'm spending money for a public public money for investment is much higher than that I'm passing money to them directly and if you took that subsidy money which was I said eight percent of agricultural gross receipts and since they spend money it's much more than that I'm done income and instead took those subsidies and put it into investments in that would increase agricultural output it would already raise G on my back of the envelope so it's probably average per capita income in farming about twenty percent with a bias toward helping the poor so it would be fiscally valid good it would be equity good and it would be productivity good it would be all three and yet somehow it hasn't happened so my conclusion and I'm going to quickly as reforms have done much but there's a long way to go India started down the track and boy they needed to do some things than they did and those first things have had a big payoff like Rakesh I hope that that seems to be the case it goes then the second step that everybody learns that that worked before and does it again India in the 1970s and 1980s everybody said well we can't do the reforms we can't trade in the world economy because the competition is too stiff there's too much protection of the world and so on and so forth some other countries at that time ignored the protection and went ahead and did very well I think India could learn from that to do the same thing now despite the fact that the world environment is not quite as good as you were I would like thank you thank you Ann and I think we'll come back to the manufacturing versus services issue because it's one of the most intriguing aspects of India as a country so next set of questions is directed to r.j. and as Rakesh said the the self-admitted shortcoming in the whole economic transformation was in the areas of health and education so can India grow with the sort of abysmal indices that it has in human development yeah Thank You Rocky yeah let me just say that just before I get to health and education let me say that I've been part of Rakesh his lunch group in Washington and Delhi for many years and I knew he was up to something but poker-faced as he is he wouldn't reveal what he was up to he would keep asking these questions about various topics to everybody and take it all in and now I realize how big a project he was undertaking and I must commend him for it and Brookings and everybody involved with it as we were discussing earlier you know not many people buy an edited book but this is one worth having so please do buy the book when you leave today coming to your question Liaquat let me say that let me also just say one more thing which is and I think you were beginning to bring it out Rakesh which is while there was an IMF program in a World Bank program these were genuinely homegrown reforms and I mean Kemal is here and I was not associated with the Indian reform but I was associated with him on the Turkish reform after the 2000 crisis and that was another very good example of a homegrown reform so I I mean those are very important because I'm F and World Bank programs work well in certain places but don't work well in at many places and I think the key is whether the reforms were homegrown or not and the Indian case clearly brings it out because it took a long while as maan takes paper in the book brings out to get all of it actually done and that could only have happened if they were genuinely homegrown reforms but coming to your question jacket you're absolutely right there are many things that were missing and the book brings them out but the most one of the most glaring is the health and education but I would add to that also more importantly from the work that we know now wash water sanitation hygiene and although there's no chapter in the book on wash I think that is a big big missing element in addition to health and education on health and education I mean you know we've known for a while that we India was way behind I mean the UNDP Human Development Index where India is 130 out of 189 shows that very clearly more recently am artisan and john drehs have shown how Bangladesh has been doing better than India and nobody wanted to actually accept that and now with the World Bank's latest human capital index that was unveiled in Bali where India scores one seventeenth out of 157 countries and Lord and Nepal Bangladesh and Sri Lanka and certainly lower than Bhutan if Bhutan was in that index it's only higher doing a slightly better than Pakistan which is no great achievement India is of course disputed the the index itself and maybe there are quibbles with the index but I think the weight of the evidence is that it's it's it's a glaring missing item in the reform and part of it I think is is that it's a broader issue of public finances that India has never shifted despite all these reforms its public finances to what would be required for a genuinely developmental state so we are underfunding in health hugely India's health expenditures public health expenditures less than 1% of GDP under spending hugely in education it also under spending for a long while on infrastructure and the fact that we have a huge banking sector problem today is partly because we haven't opened up the space for in our public finances for these genuine expenditures in in these areas so there's a broader public finance shift that is required if you really want to move faster on the growth rates and I think they that that plus now with this whole issue of water sanitation and hygiene is is a big big glaring problem that India will have to address in addition to all the others that and some of which which ant mentioned like labor market reforms and others etc thank you thank you so ELISA I mean I think one of the most fascinating things that Rakesh pointed out was the fact that there was this room a couple degree of continuity across different governments in a reform process now there has been a similar transformation in Indian foreign policy particularly towards the in relation to the US was there the same degree of continuity and foreign policy what explains this degree of continuity either in economic policy or foreign policy thank you for that great question and let me also join the other panelists in commending this volume this volume has chapters on almost every aspect or sector you can think about and how the importance of economic reforms shaped those sectors there are several chapters on reforms and Indian foreign policy and so for people who are focused on foreign policy those are very rewarding sections I would encourage everybody to make sure to pick up a copy on your way out after the end of this panel so Lia can ask a question about continuity continuity and thinking about economic reforms and continuity and thinking about India's foreign policy evolution let me say first I think that these are related questions I think that as some of the chapters in the volume point to the beginning of India's economic reforms took place right alongside with the end of the Cold War so India was beginning to become a more open market right at the time that for a lot of us certainly for many of us in the United States it seemed as if the end of history was here and that markets had indeed won and that was the future of the whole world of course now this is being called into question in a variety of ways but I still believe that the the reform process in particular India's economic reform has unleashed the economy in ways that we couldn't have imagined before 1991 the continuity in the sense of India's economic reforms I think it's true to say that there has been a continuity and believing in the importance of reforms but it has not always been the case that governments whether coalition or single party majority have been able to effectively implement everything that some parts of the Herman would like to see implemented and that is where you have a real challenge in India and I expect this to continue because it isn't the case that everybody always agrees on what exactly needs to be done next you can even take a look at what's happened with the Modi government since 2014 a government that actually ran a campaign focused on reform and governance and found itself stymied on some of the really tough reforms reforms like as Professor Kreuger mentioned land land reform this is very difficult to take care of in India the Industrial Disputes act the labor reforms that could help unleash a manufacturing sector in India and help India move to the kind of economic growth at the bottom of the pyramid that countries across East Asia have already experienced those are reforms that remain very difficult to convince public's of their merits and so you have a continuity and the idea of reform and what it can do for the country but not a consensus on some of the really really tough politically divisive kinds of questions and so in foreign policy what I think has happened and I take a look at this in my own book I think that the growth of the Indian economy and India's economic heft on the world stage has helped added to India's rise to global power India had for decades particularly during the narrow years seen itself as a foreign power of moral leadership economic growth has helped move India into the world of being a desirable market where businesses around the world want to be there want to compete in and so you see the rise of the intersection of business and foreign policy and I think that's actually been quite important for India it's been important for the way India sees its own interests internationally you now see business lobbies in India that have their own ideas about what Indian foreign policy should be pursuing around the world chief among them are issues related to India's services sector it's very important for India to talk about movement of persons for example mode for in trade negotiations India is a kind of world leader on that front and and you see the way that businesses around the world in prioritizing having access to a level playing field in India has also raised India's visibility on the world stage in foreign policy so you have a continuity in that sense but you also have some differences let me talk about another aspect of the geopolitical change that's taken place that has been unfolding sort of simultaneously to India's ongoing economic reforms and that is India's slow transition from the world of non-alignment to thinking about strategic autonomy to now currently having a focus on multi alignment or the world as a family the world as a family we can see that that India has been focused in its foreign policy geopolitically first in not formally participating in any of the camps of the Cold War as the Cold War ended and markets became more important than as India's own economic reforms became an important part of its domestic as well as its international priorities we saw non-alignment starts to fade in its importance it didn't completely disappear it's not completely gone but we did see a transition in India to a theory of strategic autonomy where non-alignment wasn't the kind of lodestar for foreign policy but the idea that India should not be formally aligned with countries in a manner that could preclude any future foreign policy decisions that became an important component of the way India thinks about its foreign policy and I think you see that in some of India's international economic negotiating behavior I think you see that in a desire to try to establish relationships economically with different powers with different countries in a desire not to have agreements that will prevent taking fresh decisions at any particular time even though it very often the purpose of an agreement is actually to help create a smooth pathway that can enhance both countries even though all options will not be on the table anymore and I think the importance of this idea of transferring India's focus from non alignment you having a kind of strategic autonomy to the way the mode government discusses having the world as a family having equal and appropriate relationships with as many countries as could be possible to help assist India's domestic transformation and its rise to power on the world stage I see these as part of a very similar process for me just one last comment it will be interesting to see what future Indian governments might decide to do the Modi government has really stopped using the framework of strategic autonomy although in many ways seeing the world as a family is very similar to that concept of strategic autonomy so it will be interesting to see how future governments do or do not frame this idea of how close to be to any particular countries at any particular time and whether those decisions do or do not help assist India's rise to power thank you so let's circle back to one of the most intriguing questions and I'm going to direct this initially to Rakesh which is the manufacturing versus services because I don't I don't think that there's a lot of disagreement you know Dara I think professor Kreuger expressed the opinion that you couldn't really grow by being a service service certainly economy there are others who say that the the era of labor-intensive manufacturing is over and actually India is going to leapfrog over that stage and so how should we think about the excessive or the high dependence of India on services Thank You Elliot that indeed is that I think one of the most important questions going forward that if I do believe that if India is to accelerate its growth and not be content with six and a half to seven percent for the next 25 years and let's put that in perspective that even if India grows at 7% per capita for the next 20 years our per capita income level 20 years from now won't be very different from what Thailand is today so that gives a little bit it won't be much higher than what Thailand is today 20 years from now even if the Indian per capita income grows by seven percent a year of the next 20 years so there is no there's no time for complacency and just pure arithmetic will tell you right apart from policy and everything else as fuels will tell you that that can't happen you can't grow to 7% per capita a year which means eight percent plus in term GDP unless manufacturing grows at more than eight percent a year near a ten percent because agriculture will never grow at more than four percent a year you'll never achieve four percent I'm just first pure aesthetic so those people who argue that we can grow by leapfrogging further they should just look at arithmetic second that again if you that that the issue of employment terms mentioned by an IJ one simple statistic that I think it was a month or two ago that their Indian Railways announced vacancies for I think 70,000 lowest level jobs 20 million people applied 20 million god knows how they'll ever selected for how they'll process 20 million applications but that is an indicator of in some sense the crime that we have done in not encouraging labor-intensive manufacturing that's the background so it is a bit it remains that when we did these reforms for designing the reforms in the early 1990s one hour one of our expectations was that as we correct the incentive structure through trade reform tax reform etc and you level the playing field in some sense then automatically India's comparative advantage of labor-intensive many facts you will come out and will start manufacturing labor intensive goods that hasn't happened and I I for one really do not understand and I mean I obviously understand the number of issues and it mentioned that is labor reforms that are being done some land from not being done but nonetheless I would still have expected some more action not as much as you would get with labor reform that's another puzzle in the sense that the most reforms in the country have been done when they've been coalition governments and I think the reason for that is that they have to work harder to achieve consensus the times when we've had a pejorative that is Rajiv Gandhi's time and now mr. Modi's time you have much less reform because it's much less incentive to reach across the aisle also and to even show your achievement because you have a full majority so I think that's up to question but it is the case that mr. Moody's government has not done or not been able to do the labor reforms the land reforms etc and when you sort of think that if you can do D monetization which inconveniences each and every person in the country it's very difficult to imagine any action by any government anywhere in the world when you can do something that increases everyone in the country not that there's some winners some losers if you can do that why can't it do some other things that are supposed to be popular so yes I have answered your question that it seems to be that we will have real problems if we don't focus on Lebanese manufacturing and this is a very good time because as Chinese wages are going up there's a huge move is already started and it will accelerate in India duly large enough country there actually take that if we really go become active and second interest in the same connection that if that if you do projections of growth in demand for goods over the next 20 years so just Asia which means China all over CERN and all of South Asia there is more than three billion people most projections suggests that this whole region will grow at at peace five percent a year in real the next print twenty years there's no shortage of demand for goods including goods which be labor-intensive in production even if there's some impact of new technology etc so I don't buy the new technology issue of course the labor intensity for the same goods it is less compared before but there's no shortage of demand so the sort of Fable that people put out you lost them that we have missed the bus is not true and i of course agree with Rakesh on that one simply to add that the arguments about technology etc in India were the same arguments in the 1970s and 1980s I mean this is nothing new the Indians have always sort of said of the rest of the world we just missed the bus mr. West missed the bus so now we will miss the bus again but I I think of it as but a couple of other points just to reinforce what you said first one is that yes India has been very successful in software in some related things software does not hire unskilled labor it really does not and yes of course that's what three or four million people employed in that industry India has a labor force of on the order of 400 million and even if you think of software going very rapidly that is not going to bring people out of agriculture and out of the rural sector anything like the kind of rate at which they could be brought under alternative policies the second kind of comment is the land reform which is essential to this has to happen anyway even if you say we won't do anything on unskilled labour will sit on the land mess has to be straightened out in my view if India's even to sustain the six or six and a half or seven percent growth or whatever it is and finally just to say that the Vietnamese are very happy to see the Indians doing what they're doing and the on the unskilled labor stuff is shifting already to particularly Vietnam that looks as if Indonesia will start getting into the act too and with all of that India's once again just sitting there and letting it happen thank you so I'm gonna address asked a question about something we haven't yet talked about which is crony capitalism one of the books in the short list for the FT Book Prize this year is the billionaire Raj by James Crabtree and the book makes the point that if you take India adjust adjust it for the size of the economy it has an unusually high concentration of billionaires it's a wonderful book by the way so a full of gossip about what billionaires do with all that money so let me start with r.j. and then we can open it up because you're the chief economic adviser to the premier Indian to the crony capitalists so so does India have a crony capitalism problem is it a problem well let me just say that they don't always listen to me but anyway so yes that the thing is that you can go even much further back I've just written a paper for a book being edited by Meghnad Desai and Sanjay baru on something which you may never have heard of called the Bombay plan the Bombay plan was a plan put together by India's top industrialists in 1943 in that when India got independence what direction should India take so you would expect businesspeople of at that time Tata Birla all of them were involved to have said looked at around the world and looked at Japan and Korea I mean you know what the Japanese did with the Koreans did with the J balls and the Zaibatsu etc and got together and made a plan in which they would be the center of the future of the economic progress of India when you read the Bombay plan I was shocked at how much the business community of that time ceded control of the economy to the public sector don't focus on this for a moment I'll just come to this and what's amazing is that they said we needed you know it was almost like they wrote the what came the five-year plans that we had the whole socialist planning system is all laid out in the Bombay plan and the Bombay plan was not made by planners it was made written by business people so I mean this idea of a crony capitalism is the word crap pre uses but you know we have another word that's being used in India called stigmatized capitalism that is this idea that you know capitalism is grubby making money is bad and this is not for India and you know you would even have industrialists and business people with that viewpoint now it's very interesting the chapters that you see here in a book by in by Rakesh is book of course you have some of the most dynamic of the ones that that are there and whether they're some of them have to rely on cronyism or not is another story but of course the the most crony chronique of them are not in this book but what it does show is that there is still even the ones that are here are still heavily reliant on the government to get ahead and that tells you that there has been huge reforms as documented in the book and a lot of decontrol and a lot of the growth of course in the last 25 years has come from the private sector but yet the government's control at critical points remains huge and heavy just to give you an example take the regulatory system we have now 36 regulators in India and a few years back writing something I looked at who's heading these regulatory bodies 25 of the 36 regulatory bodies in India were headed by ex bureaucrats who have no link to that industry know no particular knowledge of that industry they're just there because they are senior bureaucrats once they retire in Japan you have the AMA code re system once you retire you go and join a private business in India once you retire you become the head of a regulatory body and then your attitude is how can I control this industry not let it grow so you have this sort of very dual mixed relationship between business and government and government is still looked at Modi started his reforms to some extent in the beginning and then Rahul Gandhi the head of the Congress party in the opposition referred to his government as suit boot kisser car that in English it means the suited and booted government meaning you are now beholden to the suited and booted business and industrial people and as a businessman who I will not name member of wiki said to me yeah AJ we do wear the suits but we also get the boot so suddenly with this jive mr. Modi changed course and for several years then didn't want to be seen with business people didn't want to be known by business people etc so I do feel it's very strongly that there are of course bad pennies everywhere but that the Reform has not deepened enough and not been liberal enough so far and that's where we need to go and I think that comes to my slide because now what you have is with the US with its tariff war and many countries now resorting to this there's now a license being given back to many people in India to lobby for higher and higher tariffs and a pay-for-play on tariffs is underway we have elections coming in a few months it's very easy to go to government and say here's the reasons why you need to give me more tariff controls on these these items and by the way they you know I will be contributing to your you know political fund as well you know going back to your point about cronyism so there is a very strong risk and several people have written about it that we could slide back to what my old professor Raj Krishna used to call the Hindu growth rate the Hindu growth rate was the growth rate of India for about 40 years before all these reforms that Rakesh has documented started and you know we were growing pretty slowly so if you look at that possibility and the fact that if we don't fix our public finances and get more spending on infrastructure in health and education etc you have these for the next 2025 years you have these scenarios where you have going back to back to sort of the four percent growth rate a muddle through scenario and then of course if we do have a very strong reform scenario with a much more liberal market oriented economy the differences are stark in where we will end up by twenty four twenty thirty you can see already that you could double so so let me ask each of the panelists but shall we turn it to the audience you have to pick one of those and I you know I think I know the answer they are all going to be optimistic but what do you think so Alyssa let me start with you because you your book is very optimistic about the future and you you say something like the next 25 years could be even more transforming the next I'm assuming you you are gonna pick the nine percent yeah I am optimistic about India's rise to power on the world stage that doesn't mean that I think that India will solve all of its problems not today not tomorrow not perhaps in 10 20 years India has many problems I think we all know what they are they are in the front pages of the news every day and it's not a secret so I do think that we are seeing India reach out become more confident on the world stage demand more from the international system of governance and we are seeing more of a push within India to enact some of these reforms that will help it get to that stage but it isn't easy and many of these reforms continue to be politically difficult to enact so I would say we are likely to see a muddle through local highway though I would love to see a golden Turnpike I just think that the political dynamic is such that you end up not often seeing the golden Turnpike I'm very worried at the at this point I'm very worried that we are sliding back towards the dirt road and already told us all about the tariffs that are being raised and maybe the GST that you mentioned will help increase public finances by 3/4 percent of GDP and hopefully all that will go into the health and education but you know I I'm very worried we are probably likely to be in the muddle through but I'm still very worried that we could slide easily into a dirt road especially if the next election does not show very despite what you said about coalition governments if the next election doesn't show very clear results then we could have a slide back taking place I'm glad to find an occasional disagreement around here I disagree with you AJ that no sorry agree with you that we're likely to move on the model path otherwise doing the middle path I am disagree with you that we will not go back to the dirt road I'm certain of that and third I think it's very feasible to go on the Turnpike difficult to put a number on feasibility okay right feasibility something that can happen right but when my opponent that is that it is not a pie in the sky right what I mean by the feasibility is that look if you take certain decisions and certain steps you can clearly do it I do think that it will only happen if you don't have an absolute majority in the government whichever party it may be regardless of party I'm in between a lot of things in the sense that I think if it's muddled through that the growth rate cannot stay six and a half or seven I think it will fall somewhat I think that much of the gains from what things were terrible and there were a lot of big big gains and rightly so from their stories that were made but lots deeds still to be done and if things more or less stay where they are now then I don't think you get that six or seven percent I think you get back to four to have to five it to have somewhere like that now it you mentioned of course what some of the reporters I think the bankruptcy reform if it works could also be very important in doing the SEC industry thing in India has been huge as a drink dragged on things and that could be corrected to some extent and so it's to some extent if they're even better enforcement of something of the right things not all things in India that could make a difference I think there can be fall back I was a little bit discouraged some of the things I've read pronouncements by people whom I thought believed in the reforms who nonetheless think that there are ways of going back you know we could do this we could do that the rhetoric has not changed as much as the economy has changed and I take that to be in the thinking has not changed as much as the economy and that gives me more concern about fall back thank you okay so we open it up to questions come on the first point is on the labor intensive manufacturing I I do believe this is actually absolutely key given the numbers and I don't think we've any of us fully understands how the new technologies are going to affect production so I don't want to take it a position there but but I want to say that is gonna be extremely important and probably should be looked at together with the education sector because the labor substitution that's happening is is dramatic and so you know this is a strategic point that I think one has to look into because you need that labor intensive manufacturing but what kind how what kind of technology technology policy that goes with it I think is very important the other quick it's not really I wished somebody wrote a comparison between India and the European Union because really I mean one of the key factors of success that India has achieved over the decades is something the European Union is unable to achieve and I just want to make that comparison because in many ways India and the European Union are comparable you know in terms of different languages religions different size of countries and so on so I think it is it is very interesting point which maybe hopefully one day I'll have some time or somebody will have some time but it's it's a it's a fantastic point I mean the fact that 1.3 billion India have been held together in a democracy with with the tax rate now we equalised partially across states and all that it's something really remarkable thank you and then we'll go to the back yeah I'm just gonna build on camels pointer okay so let's start with first about human capital development okay if you just look at the University Rankings which just came out in the top 200 universities India doesn't have a single University right the US has 60 China has seven India has zero the second issue that I think is that we need a much more efficient legal system which the common man can really rely on okay employment generation in India is gonna be almost impossible without having a fantastic expansion of the metal stunt in the small scale industry okay and for that you need in in in in a sort of a capitalist democracy a legal system that can adjudicate contracts efficiently and quickly third thing is that as Kemal said with the digital revolution which we are sort of up t at the early end a it could be much more difficult to create employment and what we are seeing around the world is that to grow in this sort of so-called transformative economy there's gonna be a much much healthier relationship between the private sector and the state okay we're increasingly dealing with information issues we're dealing with data and there it has to be a partnership between the public and private sector because the lines between private and public and becoming more and more diffuse and so unless the state develops the capacity to actually becoming a partner in say fundamental research in creating the universities it's going to be very very hard to see that golden Turnpike result materialize and not have having to do some kind of muddle through great thank you for those two comments and we're gonna point you honorary panelists but from now on everyone has to ask a question at the back cuz I see a hand up I'd like to congratulate Rakesh and his group that have written this book because I think we have a huge amount of information questions which need to be answered and I think it will provoke the kind of debate which would be productive I found one fascinating lacunae in terms of coverage and I'd like to ask Rakesh why this was left out because I think it could make a huge difference to economic development in India and that's defense production was this looked at and now the small stumbling steps to bring the private sector into it and so on but this to my mind when you look at what President Crump says you know his main foreign policy decisions are based on defense production why is this not being looked at in India I have no good answer to that I didn't think about it to be quite frank I did see that India is the largest power of in the world yeah it's it is that is it it is actually very interesting and when you talk about the private sector production of in defense that whereas we never allowed private sector production on defense obviously all the arms it will buy except for Russia are from private sector companies abroad there is one issue though that does come up which is actually coming up right now in in terms of debate in the country that defense production implies that really leads to crony capitalism just because this one buyer that is the government and because defense equipment prices are totally not transparent and so there's a real governance problem in terms of end of course it comes the issue comes even from foreign but to think of the kind of governance you would need to have a good quote private sector defense production is something to be thought about so answer the question is it look I didn't think about this issue partly because it is not a reason in the sense there wasn't private sector production but yes it is an important issue on that given the kind of the given the size of the country and a listener has been saying that its position in the world that you will need to have up gradation of Indian Defence equipment and so what do we do how should you go about different equipment issues just to say that I think it's a very good question because now that I'm working with the chamber of Industry and Commerce this is in a way the lowest hanging fruit because as you said Liaquat India is now the world's largest importer of of weapons and if you cannot even produce a kind of a Kalashnikov rifle I mean if you can send rocketry to the moon and and it's amazing that you can't do that and you have private industry now that is quite capable of at least starting at the low end of this not necessarily at the highest end and I think there are creative governance solutions to the problem that you have raised a rakish that's possible with the parliamentary committee that can be multi-party that can look at it and etcetera so I think this is an important area just to say to Kemal on the EU I mean I've often thought about this issue okay because we have you know differences between the parts of India just like you you go in from Norway to - all the way to Greece or somewhere else but the big difference is of course that we have a fiscal unity that we have a you know no it's not partial it's very well I mean there is a it's not it's partial and it's becoming less and more and more sort of combined but we do have you know of fiscal sort of debt system that has some rules and regulations that states have to follow etc so I think that's a big huge difference between us now of course I wish India could be at the level of development that's the European Union but but you know so we have a lot to learn from them but on this issue I think the history is quite different between the two how the two came together and so that's a big difference and I think one your point on governance is is very important because they that's fairly well documented in the book but more than judicial reform there's police reform and then there is very basic administrative reform people would forget that if you look at China or Malaysia or some of these countries they put equal importance to economic reforms as they did to administrative reform premier Truong ji carried out a major administrative reform in China fifteen years after Deng Xiaoping started the economic reform in India we did think about it an administrative reforms Commission was set up and there was the possibility that in the second UPA government after 2008-2009 some of that would be carried out by dr. Manmohan Singh but maybe it was the global economic crisis or whatever the reason you know that just stalled over there and has remained stalled and in fact I think mr. Modi probably likes the way that things are because he likes to use the existing administrative system to implement whatever he needs to implement I mean he looks upon it as that the eius system that sits in India and the regulatory system where you know the Prime Minister can control everything through these bureaucrats in fact people say that he even bypasses his own ministers and works directly with the bureaucracy so he actually likes this system sort of top-down command control type approach and therefore is unlikely to therefore carry out and a major administrative reform but it's badly needed I just wanted to add a note on the defense question because I think it's very important when you do the revision of this volume 35 years of economic reforms in ten years I think the defense sector would probably be one that's included because that is a sector that's developing as we speak we've seen how important India's own defence requirements are for its own security in its immediate region and beyond India's ambition to be the power of primacy across the Indian Ocean India needs a lot and so developing that defence sector has been an important component of India's diplomacy with the United States you can see that the defence trade and technology initiative has been an aspect of us-india relations that is consistently deepened over the course of the past eight years I think it is likely to continue deepening and you can see this is a piece of India's diplomacy with its other partners with which India has very deep defence ties as well any for any questions oh wow suddenly everyone comes out so Dudley I see a lady in white white hair hi I'm Meg lund Sager and I worked with Rakesh on the IMF board which was a pleasure but my question is what's the role of foreign investment and trying to bring about this reform path I expected to hear more of that frankly from each one of you I mean they were tangential I think touching on it and a lot of the reforms you've talked about I think have a big influence on foreign investment but what's the scope for that to get you to that that high road in terms of the growth rates over the next few years thank you great so who wants to take that and yeah well first off I think foreign investment is most productive when the framework for private economic activity within the country is appropriate and in those are consensus it can play a nice complementary role if the country wants it we have hand countries however such as Japan and Korea which have developed it very satisfactorily without direct foreign investment they haven't wanted enough of it and they haven't taken it and it's perfectly okay so I see the economic policy framework is central and if then FDI is encouraged forthcoming fine but I do not see it as a key to development or anything like that one comment on that mega is that the fact that we haven't mentioned it is itself a comment which is that has become so accepted and normal that if if I was speaking here in 1990s I would have really talked about how India is opening up to foreign investment where was a big deal at that time now it's kind of normal and it's it's part of total investment there's domestic private-sector investment this foreign investment so you don't even think there is a big deal and in terms of numbers it's kind of normalizing at around 2% of GDP in terms of net FDI flows into the country there in addition portfolio inflows etc to put on a macro framework that it can't be much more than that because if you that the the the net capital inflow in terms of absorption can't be larger the current account deficit of course it could be more if you're putting stuff in the reserves etc so given that India's GDP is around 2 trillion now they're about 2 percent means around 40 million or so then if you thought look can we have a hundred billion a year foreign direct investment it's not about five percent GDP current account deficit absorb this stuff so in that sense I think 2 3 percent of GDP 40 50 60 70 billion as the economy grows is about appropriate it is very important in the sense of being connected to the world what has not happened in FDI in India which was very important in China is what everything we've been talking about that is we have not had almost any FDI into labor intensive manufacturing that's why India is not connected in the global supply chain that is extremely important and now what we need to do is get the Chinese to be investing and we have to be actively going out grabbing them and bringing them to India and that of course is not happening ok we've got a couple time for a couple of questions this second row I was wondering if the panel had written read no corn is rebooting India which is about why spent 10 years developing a billion person digital identity because he then goes on to use it to say about 20 reforms that can now be made in government and I would therefore think my scenarios would be maybe 9% of you reform government naught percent if you don't so I think yeah so I was actually in the government when he was doing it and so I had a chance to meet him quite often and it's it's it's a very very critical reform but there are issues with it it has helped in many ways in reducing leakages and all kinds of things the potential is huge but there's also severe criticism of the fact that it is also now leading to some exclusion of particularly very poor people who cannot easily get these guards and get themselves registered etc properly and the costs of it are also high so it's an ongoing debate at this point in time but I think India is clearly moving in the direction of having a universal card and there's also huge confusion in India Nilekani himself when you talk with him he says this is not and this is not a card to verify your nationality but that is often the way it is also sometimes being used he thinks of it as just a simple ID card but that can be helpful together so there are lots of issues with it at the moment but it's sort of creeping along and I think they the weight of the evidence is that now there are what eight hundred eight eight hundred million eight nine hundred million almost a billion more than a billion people have already gotten on to it so there are glitches with it now there's also now this whole issue of data privacy that has come up but that's a broader issue than just I think the other card but the digitalization itself if it can be made to work can be of huge benefit to India in many ways and in fact India would be quite advanced in this in the developing world time for one question it's just one I asked him for a chapter and he was too busy to write it so the second lady well thank you for this great talk my question is what is the impact of the rate of population growth but positive or negative on the economic reforms and transformations and I have grown up in India in the 1516 70s and 80s oh I know what it was like the difficulties before so we're already at 1.3 billion and there's all the projections are that we will peak at 1.6 now it may be that it will come down to 1.5 in the end I don't know you know it's somewhere in that range but will certainly be the largest country in the world the more interesting issue is there is a huge divergence in the growth rate of population between different parts of the country so the southern states which have developed first and fastest are actually growing population is growing much more slowly and the big issue will be when we the issue has already come up a Finance Commission is working right now under NK Singh and his team and one of the big controversies there is how will you allocate resources because you know you get this resource allocation through the Finance Commission based on partly based on population and the southern states and some of the Northeast states and also West Bengal are arguing that because they have done well under development and therefore have reduced the population growth rate why should they now be penalized in the allocation of resources because some of the northern sort of so called the cow belt as it were yupi Bihar where development has been much less and therefore population growth is much higher we'll end up with a much population so this is one minefield that mr. encasing will have to and I'm sure he is a droid enough to deal with it but I'm just raising it a bigger problem is going to come in 2026 when the allocation of seats in parliament will be have to be revised and then of course the southern states who are already clamoring some of them for we should secede etc that will become a huge issue at that point in time and I'm sure they're asked creative solutions like you in the u.s. you have Vermont and small Idaho gives two senators and California and New York have to send it I mean there are solutions that are possible but these are the issues that the population dynamics among other things are going to throw up in the coming years as well great very very quickly there is a second issue which I probably subordinate to what you said but they're so difficult demographic dividend is happening in that the note fraction people within the working age group is rising relative to both deal especially relative to the young but right now but that's gonna be a temporary thing and as that group goes through if there hasn't been something done on the labor front by that time it's big trouble for a whole variety of political and economic reasons great I okay well I want can we give a big hand to the panelists [Applause] thanks for watching be sure to LIKE and subscribe for more videos from Brookings [Music]

Channel: Brookings Institution

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Keywords: Brookings Institution, india, economic reforms, rakesh mohan, book, economy, economics

Id: Dya0d7_Zoeo

Length: 92min 37sec (5557 seconds)

Published: Mon Oct 22 2018