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This episode is a deep labour of love. I've been writing about economics for a couple
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of decades now and I've done many many episodes of the seen and the unseen on it. And yet,
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when I see what the popular discourse on economics is like, I feel so dismayed. Sometimes people
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just mentally switch off when the subject turns to economics, as if it is an abstract
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field with numbers and graphs and doesn't affect them in any way. And I want to shout
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out, no, economics is awesome. First, it's a study of human behaviour, a study of society.
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It explains the world around us. Also, economic policy affects everyone. Policy can have humanitarian
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consequences. Good policy can put food on plates, roofs overheads, hope inside the hearts
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of those who had given up. Like the 1991 reforms, for example, that lifted hundreds of millions
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of people out of poverty. So listen up, it matters. I also feel dismayed when people's
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reactions to some policy or the other come from a shallow place. Maybe they just go by
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the stated intention of the policy and think no further. Maybe they give in to tribalism.
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If a party they like suggests a policy, they support it, and vice versa. And I want to
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urge you, don't demean yourself like this. Don't be a follower of a tribe or a slave
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to an ideology. We must think independently, we must build our own frameworks, and we must
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test those frameworks against reality and against history. And that's why I'm doing
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this episode. I love this country and I regard it as a moral feeling that millions of Indians
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are still in poverty. And it's possible to look back at the last 75 years, look at what
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went wrong, what went right, and draw some conclusions from there. We can talk about
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first principles, we can look at what works and doesn't work in the real world, we can
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build a frame through which we can evaluate our governments and hold them accountable.
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What kind of democracy are we if we don't do that? What kind of citizens are we if we
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don't demand good policy from our governments? And spoiler alert, we haven't gone into this
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episode looking for heroes and villains. People are complex, all our parties have failed us
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in some way or the other. There have been sparks of hope, there has been much despair,
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and there's a lot to be worried about in this present moment. Indeed, I love a phrase my
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guest today used. Talking about the economic phenomenon of a K-shaped recovery, she described
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our economy as a K-shaped economy. One section is plugged into the global market and is reaping
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the benefits of economic freedom. But much of the country is still mired in jobless despair,
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as poor as sub-Saharan Africa, oppressed by the state and still not free after more
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than 75 years. We need to think about how we got here. We need to think about what went
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right and why, and what went wrong and why. We need to think about the way forward. All
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that and more in the next few hours.
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Welcome to The Scene In The Unseen. My guest today is Rajeshwari Sengupta, a brilliant
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economist who's been on this show three times before. I bumped into Rajeshwari at a friend's
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office on the day the election results were announced, and I said, hey, come on over,
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let's record an episode about the state of the economy. She agreed, but as we started
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discussing what to talk about, I got more ambitious. I decided to try and make this
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a one-stop episode to understand the Indian economy, the ultimate resource, as it were.
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We would talk history starting from 1947. We would talk first principles and economic
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concepts. We would discuss all major policies under Nehru and Indira and the post-1991 period,
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all the way up to now. We'd dive deep into what happened, why it happened, and why it
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worked or didn't work. We'd take lessons from the world and lessons from our own past.
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My thought was that if anyone in future asked me about one source to understand the Indian
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economy, I could point them here, not just to this conversation, but even the show notes
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of this episode, which I've tried to build into a comprehensive resource. You'll find
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relevant episodes of The Scene and the Unseen and my YouTube show Everything is Everything,
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and all of Rajeshwari's work, and many relevant books and papers and resources. Unlike many
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other episodes of mine, I don't examine my guest personal journey today. I've done that
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in past episodes with Rajeshwari, and today we just dive deep into a subject we are both
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so passionate about, the Indian economy. Once again, this episode is a labor of love
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for both of us, and I hope you find it useful. Before we begin though, let's take a quick
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Hey, the music started and this sounds like a commercial, but it isn't. It's a plea from
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me to check out my latest labor of love, a YouTube show I am co-hosting with my good
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friend the brilliant Ajay Shah. We've called it Everything is Everything. Every week, we'll
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speak for about an hour on things we care about, from the profound to the profane, from
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the exalted to the everyday. We range widely across subjects, and we bring multiple frames
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with which we try to understand the world. Please join us on our journey, and please
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support us by subscribing to our YouTube channel at youtube.com slash Amit Verma, A-M-I-T-V-A-R-M-A.
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The show is called Everything is Everything. Please do check it out.
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Rajeshwari, welcome again to The Scene in the Unseen.
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Thank you, Amit. It's always a pleasure talking to you.
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So you know, this is the fourth time you've been here. The first time we did an almost
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cult episode on the GDP, for which I believe some people now call you GDP Rajeshwari, instantly
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turning you from a respectable Bengali into an also respectable South Indian. And the
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second episode that we did together out of the three we've done before this was in 2019,
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in September 2019, and it was 12 dream reforms where we got together with Shruti Rajgopalan
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and Vivek Kaul. And we did four reforms each. And I'm like thinking ki kya hua yaar, I don't
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remember what those reforms were, but clearly none of them came close to sort of being carried
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out. How do you feel in the journey since, you know, and we've recorded once in between
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where you came with Shreyaana and you spoke about the state of the economy, which was
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I think a year and a half ago. How have you felt about what's happening in the last few
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years? Because for a large part of our adult life, there was a euphoria that India has
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opened up, the world has opened up, we are globalized and so on and so forth. And from
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being sort of a consumer of that opening up as it were, you actually become a part of
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the policy apparatus and you're seeing things close up, you're seeing the beast from within.
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A lot of that momentum just went and here we are, this is 2024 and there are reasons
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to be bleak, there are reasons to be hopeful. How have you felt during this journey?
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So first let me say that I think I needed the work on GDP to actually justify my name
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as Rajeshwari because it is originally a South Indian name. And then now when I get called,
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I actually get referred to as GDP Rajeshwari, then it's like coming a full circle, right?
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I've basically shed my Bengali identity and I'm a full-on tamil. So first of all,
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on the dream reforms episode that we did, I almost feel that I don't want to use a strong
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word like delusional, but we were very idealistic. And there is a saying that dilulu is the solulu.
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I think we were trying to solve things in our own heads by being slightly more delusional
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and idealistic of those dream reforms and they remained dreams, the true sense of the term.
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Of course, none of that even came close to materializing. I think in terms of
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the Indian boom or the Indian growth story. So I had an interesting journey when I was young,
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India was opening up and it was fantastic. I grew up in communist Calcutta
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when practically nothing was available from electricity to bread, everything was in short
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supply. And then after quite a few years, I go to the US and of course there everything is
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exactly the opposite. And when I come back, this is in 2011-12, and I was told that India had this
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massive growth boom. Of course, I was doing my PhD. I wasn't following it that closely.
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India had that massive growth boom and everything. And this is India's decade,
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India's century, all of that. I thought, oh great, I've come back exactly at the right point of time.
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And like all my friends who are working in the IT, in the financial industry, I'll get to ride
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the great Indian growth wave. And I'm still waiting. I'm still waiting to do that because
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from 2011 onwards, ironically, after I come back, everything goes down south.
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And I never really got to witness the massive wave that my friends did. So I feel it's almost
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unfair. I come back and what happens to the economy? So that's the journey. And as I said,
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I'm still waiting for that wave to take off. And maybe it will at some point of time. But
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the narrative at least seems to be that there is a wave that we are not really feeling. Maybe at
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some point we will start feeling that wave. But having said that, in terms of the policy involvement,
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that's again something that I thought that, yeah, fine. You then start analyzing and studying the
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Indian economy. I really take interest in understanding what's happening around me.
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And I thought that the policy process is something that not just I, many of us,
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could get involved in and start making an impact. One of the big reasons why I came back, so to speak.
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But that also is something that we have been waiting for because as we know that,
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I don't want to call myself an expert, but as a generic term, a lot of the intellectuals and
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experts have been alienated and they've moved away from the so-called policymaking process.
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So again, that's something that I believe we are waiting for. So I think there's a long wait.
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And the hope is that at some point of time, the wait will come to an end and things will start
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working the way I thought it would. So, you know, among many of the economists who have been on the
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show have this consensus that, look, our best years were 91 to 2011 and everything went to hell
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after that. And I don't want to imply causality, but hello, you came back in 2011. What are you
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doing? Yes. Is there a prospect of you shifting back? Maybe I should. So, you know, at this point,
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I should sort of, I think, clarify for all the listeners why we are doing this episode.
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Very often what has happened is every year or every 18 months, I do a State of the Economy
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episode where we talk about the economy and all of that. You and Shreya and I had come for one of
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those. I've had Mohit Sathyanand and Pooja Mehra before that. I had Ilaiput Naik before that.
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This is not one of those episodes, right? I don't want to do just a State of the Economy as it is
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now. Instead, the way we conceptualized it is to do something that is more comprehensive,
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which is why the title of this episode is Understanding the Indian Economy, because
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too often what I've realized is that we throw about terms and phrases and refer to things
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that happened as if it is common knowledge. Everybody knows what is going on. And too often
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also people don't, you know, people like you and me suffer from the curse of knowledge. We assumed
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that we know all of these things. Everybody must. But a lot of people don't. A lot of people don't
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have those frameworks. They react to policies in piecemeal ways, sometimes judging them by intention
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and not outcome, sometimes judging them by whether they are for or against a political party in charge
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at that point in time. And what Rajeshwari and I are setting out to do here is to sort of
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talk about post-independence India 1947 onwards, talk about what has happened with the Indian
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economy and get specific. So contextualize it. Don't just use terms like central planning or
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opening up the economy or economic freedom or all these broad phrases which people throw about,
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but actually contextualize key. We did ABC and this is why they were wrong or this is why they
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were right. And then this is why this happened. So we want to take that walkthrough history. So
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I think half this episode will really be about taking that walkthrough history and getting to
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the present time, contextualizing what we did also in the context of other countries like China,
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for example, when we talk about growth. And in the second part of the show, we'll really
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talk about the current time and that will be a state of the economy thing, but with the context
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of the frameworks and where we are coming from. So that's part one of what I want to say. And the
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second part of what I want to say is that we have a framework today which is based on knowledge
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that has grown over the decades. When most of the policymakers we speak about were acting,
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when most of the politicians were making their plans, they had none of that. In fact, looking
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back, it is actually frightening how little they knew. I once, you know, in an Ask Me Anything
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episode we did of Everything is Everything, someone asked Rajeev, if you're a time machine,
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what would you do? And he said, I would send back a whole bunch of books for Nehru and Ambedkar to
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read, right? Because they were absolutely brilliant people, but the state of knowledge simply wasn't
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advanced. And there is one key thing we know today, which many, many economists still haven't
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internalized. And that key thing is the importance of growth. I did a recent episode with Land
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Pritchett, which we'll link from the show notes. And Land has a bunch of absolutely seminal papers
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you must read. I'll link only the seminal ones. Please read them all. They're amazing. Where he
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points out that, number one, economic growth is both necessary and sufficient to take care of
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poverty. And he's done studies across various indicators of human welfare, whether it is to
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do with health, whether it is to do with any indicator that you can think of in terms of
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social progress or personal health and whatever. And all of them correlate to one thing, and that's
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per capita GDP. Ninety-nine percent of the effect that you get, the positive impact you get on them,
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is from per capita GDP, which is basically economic growth. And less than one percent is from things
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like welfare risk measures and redistribution and other things that you might do. And this is
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incredibly important, I think, to recognize. And another key insight of Land in those papers
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is that the poorer you are, the more growth matters. And I strongly believe that our moral
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imperative, the only thing Indian policymakers should care about, is the poor. We have to get
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people out of poverty. The 91 reforms for the 20 years that they had a great impact got hundreds
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of millions of people out of poverty. That is a great humanitarian good. You forget everything else.
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Only one thing matters, that you get people out of poverty, you fulfill their basic needs.
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And the only way to do that is through growth. And growth comes from economic freedom. Because
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people often, through the centuries, have committed the zero-sum fallacy. Again, Ajay and I have an
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episode on five economic fallacies. One of them is a zero-sum fallacy, which assumes a pie is fixed,
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you can redistribute from A to B, you know, tax the rich, give to the poor, you've solved poverty.
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Actually, no. It's something that a rich country can afford, but a poor country simply cannot
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afford because it is not a solution for poverty. Again, Ajay Shah and I have an episode of
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Everything is Everything on Why Freedom Matters, which is basically an economic history piece.
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So I'll link that also from the show notes. But the framework is growth. And now with the
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hindsight bias, which is why we are not being judgmental about the people we speak about.
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But with this, knowing what we know in hindsight, when we look back on the last 75 years,
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you know, what we see is that wherever we prioritized growth and economic freedom,
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good things happened, wherever we didn't, and the state went in with the engineering mindset,
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you know, we'll do everything that status mindset that is default now, even among many economists
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in this country, you know, it held us back terribly. And it had a humanitarian cost because
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poverty is a whole thing. So a little bit of a rant, but I just wanted to contextualize what
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we are trying to do with this episode and why I think it's damn important that we do this.
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So a few things I want to add to that, Amit, and of course, completely and wholeheartedly agree
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with you. So Robert Lucas, who's Nobel Prize winning economist, once said that if you start
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thinking about economic growth, then it becomes very hard to think about anything else in the
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context of poverty. Exactly. And it's an all consuming thing that you basically have to just
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obsess about why some countries are growing, why some countries are not growing, just understanding
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growth, the factors, all of that is extremely important. And it's also true that in India,
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for example, recently, there has been that kind of an obsession with just one number, which is the
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GDP growth rate, right? The entire discourse, the entire narrative about the state of the economy
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is completely dominated by that one number, right? 7% or 8%, et cetera. That's not right either,
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because it's not just that one number, but it's also the kind of growth that you're getting,
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right? For example, we can say, oh, we are growing at 8%, we are the fastest growing large economy
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in the world, which is true. Look at China, everybody compares us with China, but then China
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is only growing at 4% or 5%, whatever. But the thing is, China's per capita GDP is $12,000 per
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year. Our per capita GDP is 2400 US dollars, right? We are at a completely different level
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when it comes to China. So just comparing GDP growth rate, or just looking at that one number,
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saying, oh, but yeah, we are getting growth right, because we are growing at 8% is not right,
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because that has many, many flaws about you need to look at per capita GDP, you need to look at
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what kind of growth you're getting, right? Is the growth driven by just one sector in the economy,
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which I believe is happening right now, as opposed to the growth getting distributed across multiple
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sectors, a more balanced growth perspective. And the third is, there is again this obsession
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that, oh, we have to grow at 8% for the next 10 years, and then we become an OECD country.
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I think that's wrong as well. What is really important is to get a steady and consistent
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growth rate for the next 50 years, right? You go at 5% for the next 50 years, and by 2074,
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you are at the levels that US is in today, which is great. That's what the dream should be. The
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dream shouldn't be like, get a short, sudden burst of high growth, and then it just peters out as
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well, which is pretty much what happened from 1991 to 2011, right? We got a high growth episode,
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and then we have basically been stuck since then. So I think it's very important to understand that
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yes, growth is very important, but there are many nuances of the growth story that need to get
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into the whole policy discourse. So that's one thing. The second thing I want to add is
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the reason this getting this whole panorama of Indian economic history since independence
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is so crucial is because exactly as you said, when we talk about policy, when we criticize the state
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of the Indian economy, when we analyze it, we look at a slice of time and we say, oh, this is
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not going right, so let's do this. Manufacturing sector is not working. Let's do a PLI scheme.
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There is inequality. Let's do some welfare distribution. The entire world is turning
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protectionist. The state should increase import tariffs, and that's not correct at all because
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given that we have had a 78-year-old history since independence, there are many experiments
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in policy that have been tried. Many things have worked and many things have not.
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And it's very important for us to learn the lessons from our own past that exactly in the
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context of state versus market, in the context of welfare versus growth, inequality versus poverty,
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what worked and what did not work. And once we have that sense of economic history,
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what can we do now that we are where we are? What should we do? What we shouldn't try?
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And all of that. So I think that's why getting this whole panorama is extremely important.
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And many of the audience today would probably not be aware of it because much of the audience
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were probably born after the 1991 reforms. So for them, the pre-1991 period would be this whole
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blur. Yeah, there was some central planning and there was some socialist experiment. It didn't
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work and that's it. But there are many important details in it that are extremely crucial for us
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to understand in order to lay down the path from here on that where do we go? And the third thing
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is I often feel that we have gotten into this isolated corner where we are only looking at,
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but this narrow slice is not working and that is working and let's tweak this and let's tweak that.
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We're not learning lessons from other countries. And I'm not saying that India has to emulate any
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other country. Of course not. Every country has a different path. Every country has a different
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structure, different political formation. But it's very important to learn some of the lessons
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from countries which have done some things right. And this is where when I talk about the history,
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I want to talk a little bit about China, not just because India is always pitted against China.
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And I know China, there are many things China did not do right, but there are some things China did
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very right. And it is important for us to learn those right lessons in terms of both what we
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should do and both in terms of what we should not do. And why China? Let me just quickly add a few
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points to it. If there's one country with whom India had remarkable similarity in terms of income
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levels for the longest period of time, that's China, right? We often have comparisons with
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South Korea, et cetera, but no, it was China. From 1700 to 1980, India and China were exactly
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at the same level of income. That's a remarkably long period of time. They both have their separate
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journeys, but the levels of income remained exactly the same. In fact, there were some years
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in the 60s and 70s when India's per capita GDP was a little bit higher than China's, right?
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And from then on, China just takes off spectacularly. And it's the only country
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which has been able to create vast amounts of wealth for a really, really large population.
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That doesn't apply to South Korea, Taiwan, Singapore, Israel, Chile, any of these countries,
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because these are much smaller countries, right? And secondly, the comparison is important because
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all these other countries had a very small domestic consumer market, right? So it was
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imperative for them to start taking advantage of the export market, the globalized world.
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China, like India, had a very large domestic consumer market as well. And despite that,
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they did that as well as exports, right? So we often hear this thing, oh, but India has a large
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domestic consumer market. Why do we need to export? But that's what China did, right? So I think the
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comparison with China is more useful than harmful because we often get into this wrong narrative
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that, oh, but it's an authoritarian government. Look at what's happening now. They're all falling
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apart. All of that is true. And that's why I'm saying India doesn't have to imitate China. We
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can't. But there are some useful lessons about some things China did in the policy journey
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from 1980 onwards that we didn't. And we had other compulsions, fair enough. We are a messy
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democracy. But maybe those are the things we need to learn from now and then chart out a path forward.
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So I think that's why to have this sense of history, to have a little bit of sense that,
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what are the other countries doing? Can we learn something from them? I think this is what Salman
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says in his really nice book that we never learn lessons from other countries for whatever reason.
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We have this high and mighty opinion that whatever we are doing is right. And oftentimes we end up
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learning the wrong lessons. And I'll talk a little bit about that as well. So I think that's why this
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episode is important because it gives this very broad sweep of history. It gives a little bit of
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benchmarking against another very important economy that was very similar to us in a lot of
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respects. And then it gives a little bit more of a balanced nuance about the growth story.
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So wise words. Again, I agree with everything you say. I'll double click on some of them.
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Your first question about GDP, we did an episode on GDP. So we examined the meta question there
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of why GDP may not be a perfect indicator of human welfare. But nevertheless, it's a pretty
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good indicator. It's not perfect, but it's pretty good. We also spoke about problems of
#
measurement given India's statistical system. And you could say that there's been a degradation
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in that whole stats ecosystem in the last few years. And so are the GDP numbers even reliable?
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How are they being calculated? How much of it is spent? But leaving that aside, the bottom line is
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that the GDP is important. It is not the be all and end all. But we should not forget that,
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like you said, there's a low base. So your percentage growth will be higher than a big
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lumbering economy, which may grow at 2% and that's perfectly fine with them. And second,
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we don't know counterfactuals. Like when I look at the policies of the last 10, 15 years in the
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policy directions, I don't see economic policies that are meant to increase GDP. I think the fact
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that GDP is increasing is, you know, in the words of Gurcharand Das, India Works at Night,
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that despite the state, the Indian people have enterprise, have resourcefulness, and despite the
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state they're growing. My sense is that if you just had good policies in place, you build that
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good environment, the state did what it was supposed to and didn't do what it was not supposed to.
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We'd have much better numbers. And those numbers do matter because imperfect as a measure is,
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Nithin Pai once calculated that every 1% growth in GDP lifts 2 million people out of poverty.
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It was initially 1 million, he revised it to 2 and I have a vague sense it's now 3, which just
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tells you that this is not economists playing around with numbers on charts. This has a real
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sort of humanitarian consequence. Now, as far as your second point was concerned, again,
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I agree completely. I think what has happened too much is that Indian policy making has been
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reactive, that something will happen and there will be a sense of, we need to do something,
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this is something, let's do it. And that default will always be statism, that default will always
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be the state as a solution. Oh, this one state body is messing up, let's put another oversight
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body on top of that, as if that will not make the problem worse. And so that's kind of something
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to keep in mind. You spoke about how our attitude to change is so piecemeal things now and then,
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it's all kind of broken up. And I remember Deng's incredible phrase, crossing the river
#
by feeling the stones. And that's such a beautiful way of thinking about policy,
#
that you try different things. And we'll speak much more about that at length, how he kind of,
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all his SEZs in a sense were laboratories for policy changes and how that kind of
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showed the way forward. So I think that's important to think about. And also I'll come back to Lant
#
and Lant believes in what he calls national development, which is that you take a nation
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out of poverty, basically economic growth for a whole nation. It's a very difficult and thorny
#
problem, hard to measure, hard to attribute any growth that you see to a specific policy.
#
His lament, and I love the phrase he uses for this, is that a lot of development economists
#
have turned to what he calls kinky development, right? What they'll do is they'll focus on
#
incredibly small problems. And they'll do RCTs and all RCTs are one tool of these kinky development
#
people. And RCTs could be like, you know, do mosquito nets help stop malaria? And the answer
#
is like, duh, like, what are you even talking about? And, you know, Rohit Lamba and I discussed it,
#
Lant and I discussed it, Ajay and I have a full episode forthcoming on everything is everything
#
about this. It's just ridiculous. It's a waste of time. And again, what Lant has shown conclusively
#
is that most of the really small problems that RCTs and that whole way of kinky development,
#
way of thinking address, don't move the needle in terms of poverty at all. They don't make a
#
difference. Then why do people do it? One is it's a fashion of the times. But two is that it is
#
attributable. You can say I did something and it worked. That's how you get ahead in your career.
#
That's how you get Nobel prizes. There is an illusion of movement. But is there actual real
#
movement rather than tackle the difficult question? And what I admire about Deng enormously is that he
#
tackled that difficult question and he found a way to tackle it. I also completely agree with
#
the third part of the thing that we need to look at China. Now one, you know, danger in looking at
#
the West and seeing what they have done right is the danger of isomorphic mimicry, as it is called,
#
that you just take a policy that has worked there and you implant it here, you know, which many
#
foreign educated economists will do over here. And then you find that Indian conditions are complex
#
and different. Now that's an obvious problem and easy to avoid. And it's really a kinky development
#
problem at the level of small scale solutions. But there are larger lessons and we'll talk about
#
many of them. But the thing to avoid is that a lot of people when they look at China and India today,
#
they look at it as if to say as if to say that that political authoritarianism and what happened
#
in the markets kind of have to go together, almost justifying what might be happening here.
#
And I just want to say that no, dammit, no, that happened to be their system. There was nothing
#
Deng could do about it. He couldn't tear that wall down. But what he did with markets in terms
#
of economic freedom, what he even did in terms of reforming the state, the Indian state is too
#
central and the Chinese state is way, way, way more decentralized than India is, I think is by
#
a factor of 17, according to Karthik Muralidharan's new book, that so many decisions get taken at the
#
local level and all of that. And so at the local level, they are crossing the river by feeling the
#
stones. And that's where you feel the stones the most. So there's a sort of lot to learn from. And
#
again, you know, at different points, you refer to the 91 reforms, I have episodes on that,
#
I'll link that from the show notes along with episodes I've done with Montek Singh Alwalia
#
and KP Krishnan and all of that. I think I've done a ton of episodes on this, but never trying
#
to unite it as you know, as we are today. A couple of points before we get into the
#
real meat of the episode, so to speak. I did a TEDx talk a couple of years ago on
#
state versus the market in the Indian context. And while I was prepping for the talk, I was
#
just making a list of the different areas of economic lives of our average Indian citizen
#
where the state is present. And I figured more than half of my TED talk would just be all about
#
listing all of those areas. It was mind boggling. I don't think on any given day we realize how much
#
the state is pervasive in omnipresent almost in every aspect of social and economic life,
#
and which is getting worse over time. One is to realize how much it's present. And the second,
#
to realize why it's not always a good thing. And exactly as you said, there are some things
#
we need to learn what Deng did and what China did right. There are also some things we need to
#
learn that they got really wrong. For example, look at China now. The extreme statist mentality,
#
the state intervention, the state coercion has gone to the next level, has taken a life of its own,
#
and it's clearly not working for the economy. Everybody's looking at China, appalled that the
#
China story was supposed to continue for the next 50 years. What just went wrong?
#
This went wrong. And that's the lesson that we should learn as well, that let's not take
#
the wrong advice from China and become all statist and authoritarian. Let's take the
#
good lessons that Deng did during the reform period, and then put it in the Indian context,
#
which is all about looking at the Indian backyard. The isomorphic mimicry even from China will not
#
work. So we combine that with a little bit of looking at the Indian backyard. And of course,
#
it's not easy. If I were to become a policymaker, would I be able to come up with the exact recipe
#
for policy? No, it is extremely hard. But we need to keep talking and discussing, and then
#
tell people what's the right framework to think about some of these issues. And I think that's
#
what we are trying to do today. And the second thing I want to mention is, I think it's our
#
favorite topic to debate about as well, which is that in India, there's an overwhelming discourse
#
about inequality, which took over the election campaign in the last few months from almost
#
every party that was campaigning. There's one thing, there was no distinction across parties.
#
We love to talk about inequality. We love to talk about how we're going to solve inequality.
#
We love to say that, oh, it's really gone up. It's a bad thing. The rich are bad. The poor are
#
helpless. We need to take money from the rich, give to the poor. And the development economists
#
love it, of course. It is so wrong. I almost get worked up when I think about it. Because what we
#
should really attack is poverty. It's poverty which is humiliating, apart from the economic
#
costs of it. It is humiliating. It is insulting. It is degrading. That's what we should be attacking.
#
That's what Nehru wanted to attack. That's what the reformers in some level wanted to attack.
#
But it's not inequality that's the enemy, because inequality is a state of the nature. You can't
#
solve inequality. And we have discussed this several times. Where would you rather be? Would
#
you rather be poor in Bangladesh or would you rather be poor in UK or US? I think the answer
#
is obvious. Or should we all be equally poor as opposed to equally rich? It's like a debate that
#
just should not be there in the discourse. And unfortunately, the political parties in the
#
campaign, they just love to talk it up. And that seemed to have gained a lot of currency.
#
And we can talk about it more when we come to the current period in the episode. But I think it's
#
very important to keep in mind that just as growth, exactly as Lance said, national development is
#
necessary and sufficient to alleviate poverty. That's the line to keep in mind as a takeaway
#
throughout the episode. Growth is important to alleviate poverty. China lifted millions from
#
poverty in a span of just three decades. If we keep obsessing about inequality, we'll just forget
#
about growth. And then we'll basically reach nowhere because then we are killing the incentives
#
of the people who are creating GDP. And we are perpetuating the poverty of the people because
#
we are saying, we'll just give you some welfare subsidies and freebies and please be happy with
#
it. And I want to say that the current election results showed that that's not the right way to
#
go. And if I can just bring us back to the current situation, what happened with the national
#
elections? I think the results of the national elections, irrespective of what happened with
#
the parties and seats, et cetera, they throw a very important light on some economic issues
#
that need to be highlighted. The first is that for the last 10 years, of course,
#
the government has been run by pretty much a single party, which had absolute majority.
#
So despite it being a coalition government, the one party was running the country.
#
Now, it is astonishing to me that in a country where GDP growth, the one thing that we all seem
#
to care about, has been upwards of 7% for the last three consecutive years, which is remarkable in
#
and of itself, especially in a very unfriendly, slowing down global environment. In a country
#
where this has happened, and the party in power which has delivered this, that party loses absolute
#
majority. I don't think this has happened at any point of time in modern history, where you deliver
#
consistent high growth rate. It's the fastest growing large economy in the world, slated to
#
become fifth largest, third largest, all of that. I think we're already fifth largest, becoming the
#
third largest by a certain number of years. In that country, after ruling for 10 years,
#
that party doesn't get absolute majority. Forget about the super majority that was expected.
#
I think that says something about what is going on in the economy. Clearly, things are much worse
#
than what the average voter has been told. Clearly, things are not really going at that 7%, 8% growth
#
rate that the narrative seem to be talking about. The second thing is, it is also clear by now from
#
several poll surveys, et cetera, that some of the most important reasons why the election results
#
turned out to be the way they were, were related to economic discontent. Particularly with regard
#
to unemployment, there's a lack of adequate meaningful jobs, inflation, distress in rural
#
sector, once again, in a country growing at 7%, 8%. Also, let me remind you that what has also
#
happened in the last few years is that the government has been given free food grains to
#
800 million Indians. It's the largest welfare program in the world. Country which is growing
#
at 7%, 8%, a country where 800 million people are getting free food grains, some of the main
#
reasons why the election results turned out the way they are, are economic discontent.
#
How do you square the two? Once again, clearly something is off. If the government is giving
#
free food grains to so many people, they know that the reality of the economy is not consistent
#
with the narrative that is getting talked about. The third thing I want to say is, in context of
#
this inequality issue that has been drummed up quite a bit in the run up to the elections,
#
oftentimes the recommendation of the development economists and even the policymakers is that how
#
do you solve inequality? You redistribute wealth. You do a lot of welfare schemes.
#
In the last 10 years, the current party in power has had 300 welfare schemes on which they have
#
spent $400 billion. That's massive. Despite doing so much of welfarism, they did not get, again,
#
my point, absolute majority in the parliament, which means welfarism, giving freebies,
#
giving free stuff, is probably not what the voters want. There is something else about
#
their economic aspirations, about the well-being of their lives, which is not getting addressed by
#
the current policy. That's what we need to think about. Maybe they want jobs. They just don't want
#
to be given free stuff. They may want meaningful employment of their time. They may want to stand
#
on their own feet and say, I want to use my time more productively. The children of the farmers
#
may be saying that, no, I don't want free food. I want to study engineering and get a job,
#
but that's not what they're getting. I think that's a real failure of economic policy.
#
Lastly, since we're talking about elections, we have often wondered what matters for Indian voters.
#
It's the largest electorate of the world. The way they vote is important. Democracy, I think
#
we have just seen, is not dead in India. The average voter matters. They are not indifferent.
#
They care about issues. It's not just in this election. If you remember in 2014,
#
when the current party, which is ruling the government, came to power, the incumbent government
#
at the time was voted out. Again, one of the very important reasons was economic discontent,
#
because inflation was high, growth was slowing down. That shows that the average voter cares
#
about growth. The average voter cares about economics, about the way that affects his or
#
her day-to-day life. Hence, I want to say that if any government wants to stay in power, irrespective
#
of the political party, I'm absolutely nothing to say about that, but if any government wants
#
to stay in power, they have to worry about economic policy. Doing welfarism is not something that's
#
going to keep them in power for a long period of time. They have to care about the economic
#
well-being of the voters, and they have to address the issues that the average Indian voter is facing.
#
That's very important. What has happened in the last few years is, we talked about GDP data,
#
circling back to that, there was a point of time when if you just looked at the GDP numbers,
#
you could say something about the state of the economy. For the longest of time, we could do
#
that. But now, in recent times, that confidence is gone. We have done the episode. There are many,
#
many papers and articles which have been written, many of whom you can link from the show notes.
#
That time is gone when we can just look at the GDP number and confidently say,
#
oh, yeah, this is right. This is the state of the economy. We can't say that anymore because
#
there are measurement problems and all sorts of stuff. As a result of that, what has happened is
#
economists, statisticians, experts, policymakers have started looking at a whole host of data,
#
and this high frequency, low frequency firm, household, banking, every possible data,
#
which is good in and of itself. It's by now a very complex economy. We should look at all kinds of
#
data. But in many occasions, what happens, given how complex and diverse the economy is, some data
#
are inconsistent with the way the GDP data is moving. What has happened in the last few years
#
is because of the polarization of the intellectual discourse, depending upon which side you are on,
#
you're picking and choosing the indicators and the data to make your case. Therefore,
#
there are two classes of people have emerged. One class is saying, oh, the economy is going gung ho,
#
this is booming, et cetera. The other class is saying, no, wait, our indicators, the data that
#
we are looking at, it conveys a different story. It's become all very confusing that what really
#
is the state of the economy. I want to say that something happened in the last couple of weeks,
#
which is that we didn't even have to look at the data. I think the voters spoke for itself.
#
If you look at the way the election results turned out, I think that spoke for itself a lot,
#
based on exactly what I was saying earlier. That is very important. In a democracy,
#
you need to listen to what the voters are saying, and then think that maybe just spinning a narrative,
#
maybe just choosing some indicators to say, oh, everything is going great to almost being in denial
#
doesn't help. That is when it starts biting in this beautiful thing, which is a democracy,
#
which will not happen in a country like China. It's very important, I think, to have that in mind
#
now when we talk about state of the economy and all of that.
#
Bunch of things to respond to. Firstly, that formulation, where would you rather be poor
#
in Bangladesh or USA is actually mine. I brought it up for a column. This is again
#
like you. I get just mad at this because in a zero-sum world, inequality and poverty would
#
go together. If people stay poor and the rich are getting richer, then obviously there's a
#
problem. They go together. It's not a zero-sum world. It's a positive-sum world. The pie keeps
#
growing. It is possible for both the rich and the poor to grow richer at the same time. The rich,
#
starting from a broader base, will obviously grow richer. Inequality grows up. Now, the point is,
#
since the 1991 reforms, what happened in India was poverty went down and inequality went up.
#
That's exactly as you'd expect. That's a damn good thing. That's what you'd expect in a poor
#
country. The reason it matters is that the policies with which you tackle each of them
#
are completely opposite. They are literally opposite. There is that trade-off between
#
redistribution and growth. Even the term trade-off, I hesitate to use it anymore because it implies
#
there's some kind of equality between those two. Actually, no, there isn't. Growth is
#
a whole game. It's 99% of human progress of whatever well-being you measure, whether it is
#
health or nutrition or height or whatever. Everything depends on per capita GDP. It is
#
all about growth. Therefore, that's something we should keep in mind. The second thing, and here
#
I'll push back a little bit, but I'm not just pushing back against you. I'm pushing back against
#
literally every commentator who said anything about the election, is that my sense is that
#
I hate the term mandate. It is used as a metaphor, but there is no such thing as a mandate. An
#
election is not one country uniting and saying X or Y or Z. An election is hundreds of millions
#
of people voting separately for separate individual reasons. What an election is, it's a mechanism.
#
It's one mechanism to actually put a party and power there because somebody needs to run the
#
state. We can argue about different forms of that mechanism. India, we have first-past-supposed,
#
you could have proportional voting, but at the end of the day, it is a mechanism. The people are
#
not speaking as one. Any narrative that is advanced about what the people want, I am
#
fundamentally skeptical of it. On the one hand, it is absolutely true that the BJP is entitled to
#
say that our vote share is the same. Their vote share is literally the same as 2019. They haven't
#
lost support. It is not that people who supported them earlier in absolute numbers are turning
#
against them. The percentage is the same. At the same time, it is also true, and studies have shown
#
and I'll refer to one of them now, that many of the people who voted against the BJP voted for
#
economic reasons. Now, it is not, again, less people misunderstand you. It is not economic reasons
#
that somebody sitting in a hut in a village somewhere is thinking GDP has gone down. They
#
are looking at their own lives. In the 1984 US elections, when Reagan was campaigning in 1980,
#
when Reagan was campaigning and Carter was president, Reagan asked one question to the
#
American people. Are you better off today than you were four years ago? And it is a simple question
#
for every individual to answer, just looking at their own life. It's a masterful question,
#
and that is, I think, what many voters did. Now, a couple of points there, my friend Mohit
#
Satyanand had this great newsletter where he refers to an ASUS study. This is ASUS's annual
#
survey of unincorporated sector enterprises. So it's looking at the informal sector, which is
#
most of our economy. And what the survey finds is that in this informal sector, between 2016 and 2023,
#
employment dropped from 111.3 million to 109.6 million. So the absolute number dropped at a time
#
when the population is growing up. And Pranab Sen, the chairman of the standing committee on
#
statistics, told the business standard, according to Mohit, that because of this, you have 25 million
#
fewer jobs than you otherwise would have. And Mohit's point here is that, look, the GDP numbers
#
are not actually that impressive. If you look at it, if you adjust for inflation and you take into
#
account what's happening in the informal sector, the numbers are pretty drastic. I'll link Mohit's
#
piece from the show notes. You can look at them themselves. Now, another great piece of commentary
#
that I have come to, which speaks to a point you made, is by Pratap Bhanu Mehta, where he points out,
#
where he talks about the welfarism. And he says that the Indian government does very well in
#
mission mode, but it doesn't do a great job at governance. Now, mission mode is, like COVID has
#
happened. You do mission mode, you can do some things well, though they messed up a lot there
#
as well. Or if you want to do polio vaccination, you can get into mission mode. It is something
#
to be done. It is basically event management. And you can do that at a grand scale and do it.
#
But it is not so good at everyday jobs of governing. And what happened is that when I take his words a
#
little further, I look at, for example, the welfarism of the UPA, you know, towards the end
#
of the auties, where they did MREGA and all of those, which, you know, Sonia Gandhi was pushing
#
so much. It was a mission mode operation done for a political reason, not an economic reason,
#
because we know it doesn't help the poor, but for a political reason to get votes. Now, similarly,
#
the BJP doubled down on that. And in 2019, if you actually look at the numbers, and I had an episode
#
with Ugank Goel on this as well, you realize it's not Hindutva or Balakot which won them 2019. It is
#
welfare delivery, especially in the Hindi heartland, where they basically took a lot of the
#
UPA welfare schemes, renamed them, and they got in welfare schemes of their own. And the last mile
#
delivery was exceptional. And it all worked for them. But it was mission mode. You know,
#
I was chatting with a friend of mine, Siddharth Raman, who you also know, and kind of discussing
#
why it didn't work this time, because the same welfare delivery is happening. And he pointed to
#
what is called the hedonistic treadmill, and said that there might be a version of that for welfare,
#
like a welfarist treadmill, where once you get used to a particular welfare scheme and it is
#
normalized, it is no longer a reason for you to vote. Right? And in fact, Pratap's point in his
#
great column is that the same thing has happened with Hindutva. You know, they've delivered on the
#
temple and they've delivered on some of the mission mode things. And now what is your vision? Now what
#
are you going to do? Right? And this brings us to the question of what is a larger vision? And here
#
I'm going to be extremely negative about these elections that at one hand, yeah, people obviously
#
ask, many people ask themselves the question, am I better off than I was four years ago? And it is
#
clear that they feel that they are not the data indicates that they are not. So we need to take
#
these high GDP numbers with huge amounts of salt. But it is also true that all the parties think the
#
same way. They think in status ways. They keep talking about inequality. You know, the Congress
#
manifesto was also essentially a shit show going in completely the wrong directions. It was batshit
#
crazy when it came to economics. They are all going in the wrong direction because they don't
#
get it. They are all thinking of economics in terms of what will win me votes. What can I say
#
which will make poor people think I care about them? Just as you know, Indira Gandhi read Garibi
#
Hatao and then she completely obliterated the poor, poor of this country as it happens. So yeah,
#
so that's my final thing that I feel that as citizens, we need to be skeptical of what all
#
the parties say. It is not as if one party has done bad governance and the other parties have
#
figured it out and will solve this. No, the political discourse does not agree with you and
#
me and everything we are going to say in this episode, the political. And I've heard from people
#
in the Congress that, oh, he's saying these things to get votes, but they'll come to power and,
#
you know, everything will be hunky dory and we'll get back to UPA1. And I'm sorry, I don't buy that,
#
you know, so the dominant thinking is statist and short-termist and reactive. So a couple of
#
points to add, and I think after this, we should go back, we should start the history. So I really
#
like what Mohit, the analysis that he did, and I obviously have no problems in believing it. And
#
for example, you know, as I said, we can figure out how many surveys and what all is happening.
#
Recently, there was a survey by a consulting firm, my friend Harsh Vardhan sent me this, that
#
it shows that a staggering 77% of low-income households in India reported that they had
#
witnessed no increase in their household income over the last five years. 77%, exactly. And at a
#
time when inflation has been on average 5%, that is crazy. Forget about even elections, forget about
#
voters, et cetera. Just in and of itself, in a country which is apparently growing at 78%,
#
I can't get the number out of my head, you have 77% of low-income households who have not experienced
#
a rise in income in five years. Even if maybe critics will say, oh, but there may be sample
#
methodology problem, which households, even then, how wrong would you get it? And I'm sure if there
#
are endless other surveys would come up with very similar numbers, exactly as Mohit found that the
#
informal sector has shrunk. So there is something that is not working in the economy. I'm not an
#
expert of everything, and I'm sure you would agree as well. It's not like we know exactly what is
#
right and what is wrong. But by and large, I think there's the sense that we are getting from all of
#
this discussion. We can use the election results as a crutch or whatever it is, or the surveys,
#
et cetera. The things are not going the way the narrative is. I think that's the problem. Is there
#
some amount of denial in the powers that be? And if you're in denial, if you're not even
#
acknowledging the problem, that is worse, right? At least if you acknowledge, you can come to the
#
position of figuring out what needs to be done to solve it. But if you're not even acknowledging it,
#
I think everything is great. And yet all of these data start pouring out. And then, of course,
#
as I said, maybe election outcomes do confirm, do not confirm whatever it is. If you don't have
#
that sense, that humility of saying maybe what something we are doing is not working out well,
#
we are wrong. And how do we course correct? And when we talk about history, it will come up that
#
how important is course correction? There was a point of time we continued with the same paradigm
#
for 40 years and how costly it probably proved to be. So that, I think, is extremely important at
#
this juncture to understand that, okay, let's take a holistic view of what's happening. Let's really
#
be a little bit more pragmatic about the state of the economy and then figure out, okay, what is the
#
course correction that we need to do and what are some of the policy changes or reforms, whatever
#
you call it, that we need to implement? Now, one last thing I'll say before we start the discussion
#
of the historical episodes is that at some level, maybe we also have to be a little bit cognizant of
#
the fact that it is a messy, noisy democracy. And this we have discussed outside of recording as
#
well several times that at all points of time, the government in power, the political parties are in
#
campaign mode. It's not that we have a five-year election cycle that is wrong. There are about
#
six states which go for assembly elections in any given year. Now we have three assembly elections
#
lined up. So if the parties are constantly in a campaign mode and what really matters is an
#
electoral approach, not even a political approach, forget about an economic approach,
#
if an electoral approach is what really matters to you, then you obviously sway towards doing
#
the more easy things, which is, of course, welfare schemes, increasing our revenue expenditure,
#
giving freebies. And that's been the culture for a very, very long period of time. And it's
#
extremely difficult for any government in power to say, no, we are not going to be a welfarist.
#
We now start doing the really hard, difficult reforms because by the time the reforms will
#
start yielding results, I may not be even in power. So I think that the dilemma in a democracy like
#
India is, let's assume that you have a party in power, you have a government that really wants
#
to do the right stuff. They listen to a podcast, they figure out, oh, fine, these guys maybe know
#
something about what's to be done. And let's do something like this. But in order to actually be
#
able to do all of these things, you also need to stay in power. If you just get voted out after
#
five years, how will you implement some of these hard reforms? But then in order to stay in power,
#
you need to do the easy things as well because voters will not see that, oh, you are doing
#
education reform or doing agriculture reform, which is going to take a very long time.
#
Solving that puzzle, that I think is an extremely difficult thing, which I'm sure
#
party after party, government after government has struggled. And we'll see again from our
#
discussion of history how the political compulsions become so important and such binding constraints
#
on even a well-intentioned government who wants to do the good things. So I think that's something
#
we need to keep in mind. And that's the big difference from a country like China. But because
#
they don't have all of these, even they do, they also can't do something which is just really
#
unpopular, but they have it much, much less than we do. And I think it's important to have that in
#
mind as well, instead of just saying that this government is doing this wrong and that government
#
is doing something right, because there is this undercurrent of welfarism that probably will always
#
be very, it's always easy to do and it gets you votes. So that's why I wanted to draw the connection
#
and maybe I'm wrong, but it just seemed immediate obvious to me that you are doing a lot of welfare
#
schemes. And yet it's possible that people have just gotten used to it. So that's clearly not
#
sufficient. There's probably something else that needs to be done as well. And we are perhaps at
#
that juncture that what is that something else that's not working? And maybe after this,
#
we'll just start the historical discussion. Yeah, but I can't help responding to what you said.
#
The obvious question that comes up when you come up with that 77% figure, which I totally believe,
#
is why are these people not voting in the numbers we would expect? And the reason for that is that
#
by now after 75 years, there is this widespread apathy and the sense that no government will
#
deliver and all parties are equally bad and you've just taken that for granted. So the choice that
#
the voter has is, do I vote for the party that gives me one bag of rice or do I vote for the
#
party that gives me one and a half bags of rice and gives me biryani when I come to the rally?
#
You know, it has exactly become that. The other point I want to sort of make is that,
#
you know, there is often a problem with language in that words in their common meaning don't
#
really express what's going on behind the scenes. So welfare sounds good, right? But
#
welfarism, as we call it, that specific economic term doesn't actually need to lead to welfare.
#
Welfare comes in a sustainable way where you have jobs. What you need is to provide jobs. You're
#
not increasing jobs. That is the only sustainable way. You know, my friend Kumar Anand refers to
#
what is happening in India as PPP, which is perpetually planned poverty, you know, and that's
#
sort of exactly what we get here. And it's a long journey we've made to get here. And I think,
#
you know, let's begin that journey. So I think it's because we are taking a very long sweep
#
of history, it's important to sort of break it down into parts, right? Because it's like almost
#
70, 75 years. And depending upon the growth dynamics, depending upon the economic policies
#
that were adopted, I think, and you would agree that there were four distinct parts during this
#
last 70 years. One is, of course, right after independence, when Nehru becomes the Prime Minister,
#
we go from 1950 to roughly 1966. That's the first phase. Then Indira Gandhi gets elected,
#
the Prime Minister. We have 1966 to 1990. And as we talk about the different phases,
#
it will become more apparent why we are doing this kind of a split. And within this, we can do
#
sub splits as well. Then from 1990, of course, based on the reforms that were undertaken,
#
a complete paradigm shift, we go from 1990 to 2011. Now, ideally, I would have loved to not do
#
any split after that, because you know, hey, you did reforms, why would you want to do after that?
#
It should all just be incremental. But lo and behold, that's not. That's when I come back from
#
the US. And hence, that's the structural break. And that's 2011, right? So 1990, 2011 is the phase.
#
And when we talk about it, I may tweak it a little bit in terms of the endpoints,
#
but that's just trivial. And then from 2011 to now, which is the fourth phase,
#
and of course, an extremely eventful lot of things happening. So these are the four phases
#
that we will talk about. And let's start with the first phase. So what happens in 1950?
#
India achieves independence in 1947. In 1950, India is the world's largest democracy.
#
And this is one thing that whenever I say it, I almost get goosebumps. It's
#
respective of what has happened. We have retained democracy. It's not trivial. We take it for granted.
#
But for a poor country like India, the way it started after 200 years of colonial rule,
#
to become a democracy, and then to retain it for the next seven, eight decades,
#
is a massive achievement. And this is something I think we need to credit everybody involved for
#
this. So that's just an aside. Now, when Nehru becomes a prime minister, he inherits an economy
#
that is extremely poor. There is mass scale poverty, there is widespread unemployment,
#
there are food shortages, and it is an essentially agricultural economy.
#
What does Nehru want to do at that point of time? He wants to industrialize this agricultural
#
economy. He wants to bring in modern production with the state taking the lead in investment.
#
And almost every phrase in this sentence is important. A modern production,
#
rapid industrial development, with the state taking the lead in investment.
#
He wants to combine the British parliamentary democracy, that's the political system that we
#
inherited, with Soviet-style central planning. Now, that's a really weird combination,
#
come to think about it. Because here you have central planning model that you are picking up
#
from a country, which is anything but a democracy, and putting it in a very nascent democracy,
#
which is coming out after 200 years of colonial rule, in and of itself is a very, very strange
#
concoction. And his vision was that the state would play a critical role in every sector of
#
the economy. And that is how, using that state-led model of economic development,
#
we will gradually catch up to the frontier, we will catch up to UK levels of income. This was
#
the vision. Now, before we talk about what are the things that he did, I want to take a little
#
bit of time to understand, and this has been discussed quite a bit in hindsight, why did he
#
did this? Was it a mistake? Did it set us back by several decades? And that's how we are where we
#
are today. Because he did have the opportunity to build the modern nation, the modern economy,
#
from scratch, literally. And while it is very easy for us to say, oh, Nehru got it all wrong,
#
socialism doesn't really work, state-led model of growth and development doesn't work.
#
I think at that point of time, there are several factors which were at play. And all of them are
#
very, very important to give us a perspective about why he did what he did, and why he probably
#
couldn't have done anything else. The first thing is that, at that point of time, there was no
#
vibrant private sector, or free markets, lots of business enterprises all over the country,
#
that could make the large scale investment for a long period of time, and build the kind of
#
industries that are required in order to create a modern economy. It simply wasn't there. It was
#
there in small pockets, for example, it was there in Bombay, et cetera. But that's about it. And
#
I don't know how many people know this, but there was this document called the Bombay Plan,
#
which was published in 1944, even before independence. It was signed by the eight
#
leading industrialists of the time, including the Tata's and the Birla's. And the Bombay Plan
#
document basically said that the state needs to take the lead in developing and growing the
#
economy after independence. These are the industrialists saying that the state has to
#
intervene because the fledgling industries in the private sector will not be able to withstand the
#
competition if it's opened up to foreign producers, foreign enterprises. And also it acknowledges that
#
the private sector will not be able to raise the amount of capital that is required to build these
#
heavy industries. And it even goes on to say that if the private sector is not able to do this,
#
then the state needs to set up public sector enterprises in these heavy industries. And at
#
least for the next 15 years, that's the state-led model of growth and development that should
#
continue. And very specifically, they say that maybe private sector can put in 40% of the capital,
#
the rest should all come from the state. Now it's remarkable because this is way before
#
Nehru starts his planning model. Now I'm not sure he ever acknowledged the Bombay Plan,
#
but he basically went on to do exactly what the Bombay Plan laid out. And that shows that this
#
was not the time when the private sector, by its own acknowledgement, could have played a very
#
important role in taking the growth forward. The second, of course, I think it always helps to
#
understand what are the influences of these leaders in and of themselves when we try to evaluate
#
their policies. Nehru was a Fabian Socialist. He was deeply influenced by economists like Harold
#
Klaski, who himself believed in planned economy and the state owning the means of production.
#
This was the influence for Nehru amongst many other Fabian Socialists of Britain at that point
#
of time. And Nehru himself didn't believe in this whole cutthroat capitalist model. He thought that
#
profit was a bad word. He thought that private enterprises were all out to make profit for
#
themselves and that capitalism would basically self-destruct. Once again, a relatively Marxist
#
way of thinking. That's what his influence was. And then the third point is that at that point
#
of time, you talk of any economist in the world, they are advising the Indian government. Because
#
India is like the crown jewel in the British Empire, just become independent and everybody's
#
curious and interested to see this democracy. How is it going to fare in terms of economic
#
development? And the advice that all of these economists gave India is that you must have a
#
state-led model of industrial growth. Why? Because back then, right after the Second World War,
#
state domination was the rule. That was not the exception. State-led economic development was
#
happening everywhere, including in the United Kingdom. And Nehru was, of course, a very integral
#
part of this ecosystem. He had studied in London and that's basically what his training, what his
#
influence was. And he was not an outlier in the context of the time then. It was the flavor of
#
the day that that's basically what you should do. And the fourth point to sort of get in perspective
#
of what he did is that when India got independence and it's such a poor country, resources are scarce,
#
right? Economic resources, natural resources, et cetera. And if you leave it to, and this was,
#
of course, Nehru's thinking that if you leave it to the private sector to get hold of these resources,
#
then everything is just going to go haywire because they will not be able to do the proper
#
distribution and allocation of resources the way it should be done. So hence, the state needs to
#
step in and the state needs to decide how to allocate these scarce resources among the sectors
#
of the economy that the state thinks would help in economic growth and development, right? So
#
when you think from that perspective, that yeah, that makes sense because yeah, there's a fledgling
#
private sector. You can't leave scarce resources at their disposal because they may just squander
#
it and use it for maximizing profit, which again from Nehru's parlance is a very bad thing to do.
#
It wouldn't build a country. It wouldn't forge the nation together. So it's important to understand
#
that in this context, when you put all of these things together, it perhaps makes a lot of sense
#
why Nehru adopted the model of central planning, state ownership of means of production,
#
and pushing the private sector to the background in his vision of building a self-sufficient
#
industrial modern economy where you would be able to bring millions out of poverty.
#
That was the ultimate objective. So this is the framework within which he starts his economic
#
policies. Let me add to that because bang on with the context. It's really important
#
to talk about all of this. You know, one simplistic reading of the economic history could be that,
#
oh my God, Nehru made so many blunders, but it's like I think of Nehru as just one of the great men
#
of our history did. He got many things right. He got many things wrong, but even the things
#
that he got wrong, which are specifically in economics, are because of understandable reasons.
#
Sitting there in that moment in his shoes, it is difficult to believe that he could have done
#
differently. Everything kind of made sense. Now, one, let's talk about his intellectual
#
influences. Time magazine did a piece on him in 1951 where they wrote, quote,
#
Beatrice and Sidney Webb, the godparents of Fabian socialism, are in a truer sense,
#
his creators and Vishnu and Shiva, stop quote. So Vishnu and Shiva, of course,
#
wouldn't have economic ideas. So in terms of economics, it's the webs who are there.
#
John Kenneth Galbraith once said the center of Nehru's sinking was Lasky,
#
again, Harold Lasky, and Ram Guha quoted an unnamed wit in one of his books who says, quote,
#
In every meeting of the Indian cabinet, there is a chair reserved for the ghost of Professor
#
Harold Lasky. So his whole frameworks of looking at the world come out of all of these people. Now,
#
the Time magazine piece on him in 1951 also has these lines, quote, He shares all the socialist
#
emotional tenets about the capitalist order. In consequence, he has a socialist undisguised
#
contempt for capitalism reinforced by the aristocratic Brahman's contempt for the
#
Baniyya shopkeeper caste. He speaks of quote, Baniyya civilization of the capitalist west,
#
quote ends and the Time magazine piece continues. He speaks of the Baniyya civilization of the
#
capitalist west of the west cutthroat civilization and Nehru's words. Utterly unlike Gandhi,
#
he admires modern production methods and wants to bring them to India. He has announced that India
#
will in time develop her own atomic energy program. But as a socialist, he believes that
#
capitalism after its prodigies of production is bound to make a cruel and bloody mess of
#
distribution. This view is based on the standard British socialist reading of 19th century economic
#
history. His understanding of 20th century American capitalism is negligible, stop quote.
#
And here I will say that at that moment in time sitting in 1950, what you are looking at is you're
#
looking at America and seeing the Great Depression of the 30s and everything that happened there.
#
Allegedly at that time in the popular imagination caused by the stock market crash of 1929,
#
though of course it wasn't if you look at the numbers closely enough. Thomas Harville has
#
written a lot about this separate subject, let's not go there. And he's looking at the Soviet Union.
#
And today we look at the Soviet Union and it's like, oh my God, what a monstrosity. But at that
#
time in the fog of war with no internet, with information not flowing, from a distance you
#
bought the Kool-Aid. It looked like, you know, something that was successful. Nehru in his
#
autobiography says, quote, I had long been drawn to socialism and communism and Russia had appealed
#
to me. I realized more and more how the very basis and foundation of our acquisitive society
#
and property was violence, stop quote. And this is a fashionable thought, property is violence,
#
but it is complete rubbish, right? In a free market you are getting consenting adults trading
#
with each other to mutual benefit. You know, that's where the notion of profit comes from.
#
Profit is a virtuous thing. It is what, you know, John Strossel famously described as a
#
double thank you moment, that I buy a coffee at a Starbucks, the Starbucks values the money, I pay
#
for it more than the coffee, I value the coffee more. We are both benefiting. The more you have
#
such double thank you moments, the more economies grow. That is why economic freedom, that is why
#
prosperity. Nehru did not get this. He once famously said to J.R.D. Tata, do not speak to me
#
of profit. It is a dirty word. So this is sort of the whole mindset happening, this whole mindset
#
that, you know, profit is a dirty word. And underscoring this is also the fact that India
#
was basically colonized by a company, right? It was a East India company and then the British
#
Empire came in. So automatically you're thinking of companies in a bad way. Now, other things to
#
note about that period of time also is that as far as a Bombay plan is concerned, whether or not
#
he directly took inspiration from it, you know, Ram Guha, I think in his great book on India,
#
India after Gandhi mentioned the Bombay plan and said, see, even the capitalists supported it,
#
to which my response is like, duh, of course they would, you know, pro-business and pro-market are
#
opposite things. Pro-market means that you want competition, you want economic freedom,
#
that's how consumers benefit. But pro-business is the opposite. Any capitalist who is already
#
there running a large company will want competition kept out, will want to get as close to a monopoly
#
as possible, will want a protected marketplace where they don't have to provide value for money
#
and they don't have to face competition. So firstly, that is, secondly, you know,
#
I'll quote Jagdish Bhagwati here. Now, people will speak of the Bhagwati, Amartya Sen battles,
#
and Bhagwati was a free market guy, Amartya Sen was on the other side. But it wasn't always like
#
this. And first of all, Amartya Sen is a far, far more nuanced thinker than any caricature can
#
capture. In my view, a great philosopher as well as an economist. But even Bhagwati initially,
#
at that time, was with that Nehruvian consensus. So he writes at one point, quote, let me first
#
observe that a number of economists like me and Amartya Sen came back from the West after
#
studying at Cambridge, Oxford in the London School of Economics. We were all trained in
#
our left-wing tradition. Our teachers had been radical or progressive economists from a little
#
left of centre to all the way to the left with luminaries such as Nikki Calder and Joan Robinson
#
stop quote, and he kind of goes on and on. Now, it's easy to look at it in hindsight and see the
#
problems like Chidambaram at one point wrote about that period, that quote, India suspected
#
capitalists, it suspected the profit motive, it tried to nail it down, block it and thought that
#
all growth would come from government planning. By the late 1980s, Korea was a miracle economy and
#
India was a stagnant, slow trot kind of economy. The whole idea that there was a big market out
#
there did not strike Indian planners, stop quote. And you have voices of dissent. You have people
#
like B.R. Shanoi dissenting right at the time of the second plan in 55. I won't go into details.
#
You have Milton Friedman writing that famous 1955 memorandum, except that Friedman was not such a
#
mainstream name at the time. Those debates were still on, you know, and India having allied with
#
the Soviet Union sort of suspected US deeply. Now, there are many other counterfactuals
#
one can go into. What if Nehru wasn't there? You know, if you look at all of the other leaders,
#
I think it is likely that our direction would have been quite different, but not too different.
#
It would still, that engineering mindset of let's fix it would still, let's fix it from the top down
#
would still have been there. Maybe it would have had slightly different manifestations. So looking
#
back, I think passing judgment on historical figures is almost a ridiculous thing. The person
#
is dead. The past is over. It's done with. But what are the lessons that we can learn from history?
#
And here's where I'll come back to you. And, you know, if you want to add more to context,
#
you can. And then let's talk about, you know, the actual specific things and what happened.
#
Absolutely. And to add to a couple of things that you said, one is that in terms of the
#
Bombay plan, one, of course, is that the private sector would love protection, right? And we are
#
seeing that today as well, an exact replay of that. I think it was also the case that the 1940s were
#
a decade which was extremely volatile. There was a lot of discontent, a lot of anxiety, a lot of
#
stress. And there was a fear that the movement against colonial rule can morph into a movement
#
against private property, right? And therefore you need that protection that guarantee that shelter
#
from the state. And the context of that time is, I think, is extremely important because we can't
#
just live in today's India and say, oh, but no, but the private sector should have played a role.
#
I think that's very important. The second thing is, and since you talked about counterfactual,
#
I love counterfactuals, who doesn't? I think another interesting counterfactual is to think
#
about what if Nehru continued beyond 1960s, right? I mean, he got some very long life,
#
he didn't die in 1964, and he lived for 10 years more, right? Would he have still continued with
#
a model that he had started, knowing that it was really not yielding the results and there were a
#
lot of inefficiency that was getting built in the system, in the society? Would he have still stuck
#
to that system? Or would you have become more open, because at that point of time, exactly as
#
you said, by 60s and 70s, countries like South Korea, et cetera, start embracing a very different
#
route of development under the aegis of the state, right? It was a state-led model of development,
#
except the state was giving a lot of importance to exports in the private sector.
#
So would Nehru have changed his mindset at that point of time? And I think that's a very interesting
#
counterfactual experiment, because I think what we have to realize is it's perhaps not the mistakes
#
of Nehru. I don't want to use the mistakes, but the problem with the model was not what he did
#
in 1950s and 60s. I think the problem was it continued for too long, right? It continued for
#
an inordinately long amount of time, and that is where the problem is, right? There was a point of
#
time when we could have done the course correction. Of course, in hindsight, it's very easy for us to
#
say and speculate, but I think there is something to it, right? It was a point of time. A lot of
#
other countries, which were also state-dominated, were moving a different direction, but we not
#
only continued on the same path, we just got worse on it, right? So I think that's what was really,
#
really wrong about this model that was started. And I know I'm digressing. We'll come back to this
#
again, but I just really wanted to make that point. And one last thing, because-
#
I'll address this first. My sense of this counterfactual is kind of two-way. Two things
#
could have happened. One is that Nehru, through the 50s, was actually quite rigid and dogmatic
#
about a lot of his sinking on a lot of issues. He brushed away Rajaji, and basically by Rajaji,
#
of course, I mean C. Raj Gopalachari, who was at one point considered a contender for the Prime
#
Minister, but there is one sort of report that Gandhi preferred Nehru because Nehru was younger,
#
and Nehru actually died much before Rajaji. But he brushed away Rajaji. He was pretty dogmatic
#
about this particular thing, and he was pretty dogmatic in a lot of his views, like on foreign
#
policy in China, for example. He trusted China far more. I've had episodes on this earlier from
#
the show notes, but it was only after we got hammered in the war and humiliated in the war
#
that he realized that he was wrong to trust V. K. Krishnamenon, and he was wrong to trust China.
#
So he had been dogmatic about that. Having said that, great men of that age did contain multitudes
#
and did keep changing their lives, and a classic example of that is Ambedkar. I had a great episode
#
with Chandrabhan Prasadji, and while the constitution was being framed and all of that,
#
Ambedkar correctly realized that villages were a den of localism and ignorance in his words,
#
and the caste problem was so massive that he was very skeptical of anything but socialism.
#
But by the early 1950s, he had kind of moved fully, and when people read Ambedkar's collected
#
writings, I think it's really important to see the years because he's changing his mind throughout.
#
And by the 50s, he's beginning to embrace, like Chandrabhan Prasadji has two heroes,
#
Ambedkar and Adam Smith, and by the 50s, you find that Ambedkar is beginning to embrace Adam
#
Smith much more, talking about capitalism, talking about markets. So people do change their minds.
#
Nehru hadn't really shown signs of it on the big issues, but who knows? But yeah,
#
so I thought I'd put my two bits in. No, I think that's an excellent point, and I think
#
I, of course, have deep respect for Ambedkar, and precisely because of this point. I mean,
#
he was a great thinker and philosopher who was able to change his mind, and we disregard the
#
importance of how important it is for a luminary, for a political thinker, for a leader to be able
#
to change his or her mind and say, I was wrong, and I have learned, and now this is what I believe in.
#
Again, coming back to the current day, that's what we need to do now. Is there something that
#
is not working? Can we change our mind? Can we do course correction? Now, I think let's go back to
#
some of the specifics of the Nehruvian socialist era to understand what exactly are we talking
#
about. Beyond the broader description, as you said, of central planning and socialism,
#
what were some of the specific economic policies that he was undertaking? The first thing, of
#
course, as I said, was rapid industrialization and capital accumulation was the chosen path
#
to win this battle against poverty. That was his singular mindset, that that's what I want to do.
#
And what I want to say here is that it was an extremely capital-intensive path to growth.
#
Over and above the point that you're doing a state-led model and all of that,
#
you are doing a capital-intensive model of growth in a country which is massively labor-intensive.
#
It's a labor-abundant country. And our biggest resource are our people. And I know you've written
#
on this, and I completely agree, that why would you not want to do industries where you are not
#
only producing output, but you're also creating jobs. And you're taking advantage of the biggest
#
resource, which is your people. Maybe the thought is that you need to educate them, skill them,
#
bring them up to speed. But at no point of time was there recognition that labor-intensive
#
industries need to get importance because we need to create a ton of jobs for a rapidly increasing
#
population. And once again, I'm just so tempted. That is exactly what we are doing today. When
#
we do a PLI scheme, we are giving subsidies to electronics industry. Nehru gave it to heavy
#
industries. They're all very capital-intensive in a country where the biggest resource is the people,
#
where there are millions and millions of people who are jobless. That just doesn't work. And this
#
is exactly a digressing a little bit what China did differently. And we'll come to that. So anyhow,
#
that's what Nehru wants to do. And in the words of what Lenin used the phrase of commanding heights,
#
he wants that the public sector enterprises would occupy the commanding heights of the economy.
#
And the result is that a mixed economy emerges. What is a mixed economy? Whether both private
#
sector and public sector would operate, except it was heavily skewed towards the public sector.
#
Now, we have this private industrial empires, of course, the Tatas and Billas, but they had
#
basically given up. They had thrown up their hands because they really, really didn't have a
#
huge role to play. Now, what was Nehru doing? He was a rational thinker. And of course, he was a
#
great statesman. And he wanted to use science and technology. He was a great believer in the power
#
of science and technology. And he at all points of time during his planning, during the central
#
planning, he wanted to make it a very scientific process. He would keep inviting great scientists,
#
statisticians, et cetera, to help him understand how you can formalize this idea of central
#
planning. And one of the great statisticians, of course, that he invites is Prasanta Mahalanubis,
#
who was in ISI Calcutta at that point of time, brilliant statistician. And he gets invited by
#
Nehru. And Nehru basically tells him that you think about how to plan the economy. I want to
#
plan it. How do I go about it? Now, Mahalanubis goes about it in a very mathematical way. He does
#
complex mathematical formulation, what we call dynamic programming. At that point of time,
#
economic growth models are just coming about. There is a growth model called Harrod-Domar growth
#
model. And he uses concepts from growth and dynamic programming and complex statistical models
#
to plan the Indian economy in terms of a very mathematical formulation, which he uses to
#
basically allocate fractions of investment to industries that are producing capital goods
#
versus industries that are producing consumer goods in order to maximize long-run economic
#
growth. To essentially take principles of growth models in order to figure out how the economy
#
should be planned. But essentially what is happening is you're using mathematical formulation
#
to plan a less than perfect real world. And of course, it cannot go right. Just as we are
#
seeing it, I think it's pretty obvious that that's not how you go about planning a very,
#
very diverse and poor country like India at that point of time. But anyhow, that's what Nehru did
#
and that's what Mahalanubis came up with. So all the ideas, therefore, that Nehru had,
#
started getting implemented through the five-year plans, which is of course an import from the
#
Soviet style of central planning. And what are these five-year plans? That every five-year,
#
the planning commission, which was set up in 1950, would come up with these detailed documents
#
that would plan every aspect of economic production. And I can't tell you how detailed
#
and complex those plans were. They would set targets for specific sector, this much agricultural
#
output, this much industrial output, targets for overall GDP growth, how much money is to
#
be allocated to which sector, all the details. And the most important plan during this period
#
is the second five-year plan. It's 1956. In fact, at the inauguration of the second five-year plan,
#
Nehru calls a lot of famous economists from all over the world because he's very proud of the
#
second five-year plan. And this is the plan that sort of lays out his strategy for the rest of his
#
time. In fact, this is called, and I'll come to this, as a part of the second five-year plan,
#
he comes up with this industrial policy resolution, which is passed in 1956.
#
And the industrial policy resolution almost came to be regarded as the economic constitution of the
#
time. And it pretty much cemented Nehru's mistrust of the private sector. It just neutered the private
#
sector. So what is this industrial policy resolution? It basically says that public
#
sector enterprises will be the commanding heights. And in terms of specifics, it creates three
#
schedules of industries. And it's very important to remember as we go forward in this history
#
discussion, there was a schedule A, which said that the whole bunch of industries will be entirely
#
under state ownership. What are these industries? All the heavy industries that you can think of,
#
right? I mean, this is iron and steel, machinery and plants, heavy airports and ports and railways
#
and telecommunication and power, everything. And of course, we still have vestiges of that even
#
today, right? So all of these industries will be under state ownership. Schedule B is not that
#
important. It basically says that state ownership will gradually increase in these industries and
#
the state will set up some enterprises in these sectors. And schedule C is what is reserved for
#
the private sector. Now on paper, this looks fine. Nehru's vision, public sector will do the heavy
#
industries because private sector cannot raise the capital to do all of this. But there is a
#
schedule which is left to the private sector. Now the catch is the second point, which is that
#
the private sector was subjected to what is now known as the permit charge, right? So everything
#
that was reserved for them in schedule C was not really free for them to get into because for every
#
step of the production process in those industries, they had to apply for a permit, a license, a quota,
#
which meant multiple rounds to the bureaucrats in Delhi. And we can go into the details of it if
#
you want, which basically means that if you want to import capital goods, if you want to get foreign
#
exchange, right? If you want to expand production, if you want to get into a new industry, all of
#
these require detailed permission from Delhi and it's time consuming, right? You're running pillar
#
to post or from ministry to ministry. Who knows how long it may take. So while there were industries
#
that were left to the private sector, there was not really any semblance of economic freedom,
#
even in those industries. So that became a hallmark of Nehru's time. The other thing that
#
he did was he set up some institutions which started playing a very important role. For example,
#
he sets up this controller of capital issues, which is eventually replaced by SEBI in 1992.
#
And what's the idea of the controller? That of course, we can't let these private guys to
#
raise capital in the stock market openly. So the controller of capital issues will decide
#
how much capital can you raise at what price and nothing of course in that sounds right, right?
#
I mean, ultimately price should be determined by supply and demand, but of course we have left
#
that behind long ago because that's not what Nehru wants. Then in 1950s, he also starts the
#
Essential Commodities Act, right? And it's all very interesting because the Essential Commodities
#
Act is extremely relevant in today's age. Why is that? Because the farm bills that were introduced
#
by the Modi government in 2020, one of the elements of the farm bills was amending the
#
Essential Commodities Act. So back then, the Essential Commodities Act was brought about by
#
Nehru to say that I don't want unfair pricing practices to affect consumers. So I'm going to
#
start imposing stock limits on traders and control every aspect of the production and
#
distribution of food grains or any other commodity that is deemed essential. What the farm bill of
#
2020 said in the amendment is that a lot of these commodities they wanted to remove from the list of
#
essential commodities and they actually wanted to liberalize the farming sector. But of course,
#
that's history by now because the farmers protested, although it was from a liberalization
#
perspective, a very good move, but that's the history, right? That's when in the 1950s,
#
Essential Commodities Act is passed. The other thing that happened during this time was,
#
as you can imagine, that there's a lot of expenditure that is going on, right? The
#
state is heavily investing in heavy industries, doing all these plans. Where is the money coming
#
from? Because there is not a lot of tax revenues. The formal economy is extremely small. So how is
#
the government finding the money to do all of these expenses? Two elements to it, right?
#
One is foreign aid, a very, very important element for the next 40 years, right?
#
Development economists, policymakers love foreign aid. At that point of time, sure, maybe there was
#
no other option, but we continue to depend on foreign aid for a very long period of time. In
#
fact, by 1980, India was the country receiving the largest amount of foreign aid to the order
#
of $55 billion. And William Easterly, of course, he has done a lot of work on aid.
#
And there's a fantastic paper that we can link from the show notes. And I just want to read out
#
just one passage. Although he talks about this in the context of 15 years after the fall of the
#
Berlin war in context of the really poor countries in Africa, but I think it applies even to India
#
back then. And this is what William Easterly says in the paper. And I quote, these exercises,
#
meaning this aid exercises only make sense in a central planning mentality in which the answer
#
to the tragedies of poverty is a large bureaucratic apparatus to dictate quantities of different
#
development goods and services by administrative fiat. The planning mindset is in turn linked to
#
previously discredited theories, such as poverty is due to poverty trap, which can only be alleviated
#
by a large inflow of aid from rich country to poor country governments to fill a financing gap
#
for poor countries. The aid inflow is of course administered by the same planning apparatus.
#
So there is this intricate link between central planning and foreign aid. And why is that? Because
#
when you are doing central planning, you are not really generating a lot of tax revenues. And if
#
you have to continue doing central planning, you need a lot of money. So what do you do? You depend
#
on foreign aid. So it almost becomes like a vicious cycle that dependence on foreign aid keeps on
#
increasing. Not necessarily a good thing for an economy where the vision of Nehru is that we want
#
to become self-sufficient. It's exactly contradictory to the self-sufficiency objective.
#
Then a couple of more things. And after that, I'll stop and hand it over to you in terms of what are
#
the things he did. There was a very deep suspicion of foreign trade. And I think now it almost
#
becomes obvious. I mean, this is a guy, this person who doesn't like the private sector,
#
doesn't like capitalism broadly. Foreign trade is simply a part of it. And maybe it's because,
#
as you said, the whole colonialism, the whole colonial rule was started by a foreign company.
#
So this whole suspicion of foreign trade, foreign investment was very deeply entrenched
#
in his economic model of planning. In fact, there was no export strategy in any of the five-year
#
plans that he came up with. And interestingly, this was discovered by guess who? By Manmohan Singh,
#
when he wrote his PhD thesis, questioning the whole idea of export pessimism. Until then,
#
it was almost taken for granted that exports are a bad thing, foreign trade is a bad thing.
#
You can at best do imports of essential capital goods and raw materials, but at that also will
#
be rationed and licensed by the government. And indeed, what happened was, at that point of time,
#
the finance minister, Shanmugam Chetty, devised three different lists of imports, free, restricted,
#
and prohibited. And very quickly, the list of free imports basically vanished. And all you're left
#
with is restricted and prohibited. And that starts the time of import licensing. So at every step of
#
the way for the private sector, not only do you have to apply for license and permits to produce,
#
you're also having to apply for import licenses to import anything that you may not have access
#
to domestically. And that incidentally, and we don't realize this perhaps, it's a very big
#
departure from what was happening under the British. We may think, oh, the British bad guys,
#
they colonized us, and therefore I'm sure we did not do much of a trade. That's absolutely not true.
#
We had free trade during the British times in India, and there was no restrictions in cross
#
border transactions financially or in terms of trade. And ships were moving in and out of the
#
ports of Bombay and Calcutta freely. But that's what changed with Nehru. He essentially closed
#
down the economy. He made it an autarkic economic model. And of course, we know in hindsight,
#
and through many economic models, that autarky doesn't work. But that's exactly what happened.
#
So along with this very state heavy model of development where private sector is subjugated,
#
there is also a lot of restrictions on foreign trade. And in terms of where that money would
#
come from, I had said two points. One was the foreign aid. The other thing that was happening
#
was there was a very important role played by the central bank, which is the Reserve Bank of India.
#
The RBI gets set up in 1935. During the time of Nehru, it actually gets nationalized because
#
until then it was basically held by a whole bunch of private shareholders.
#
During this time, when there is a constant shortage of money and the government is spending way beyond
#
its means, the RBI gets called upon to print notes. Of course, every monetary economist today
#
would cringe because that is exactly what the central bank should not do because it's going
#
to fuel inflation. So there was an acknowledgement that yes, inflation would happen. But what was
#
more important was to subjugate monetary policy to the fiscal requirements of the day because
#
planning was the overarching goal. So RBI did that. It goes about printing notes. It starts
#
doing what is called printing ad hoc treasury bills to itself. It's basically issuing treasury
#
bills in the name of the government to itself. And it made it so automatic that every Friday,
#
RBI would print 50 crores of money. And during the week at any point of time when needed,
#
they would print 20 crores. And this became just the standard formulation.
#
And this was a given thing and RBI had to accept that this is what we have to do.
#
So when inflation started increasing, what did they do? They started doing credit rationing.
#
So they basically told the banks that this is how much you lend to this person at this rate.
#
And that continued for the next 40 years. It's insane now that we think about it. In fact,
#
an interesting anecdote is that by late 1980s, there were as many as 200 interest rates in the
#
economy. And the saying was that show me a business and I'll invent an interest rate.
#
That was exactly what it came down to because they've accepted that all you're really doing
#
is printing money to finance the central planning. And therefore, if there are consequences,
#
you just have to deal with this extremely distortionary manner. The last thing I want
#
to say, which was extremely important in this model is when you are averse to foreign trade
#
and foreign investment, but at the same time, you're doing this very heavy industrialization,
#
you obviously have to import capital goods. You don't have all the raw materials in the country.
#
So there is import licensing or allowing you to import. What do you need to import? You need
#
foreign exchange. Now, imagine the imbalance that you're creating. There is an extreme export
#
pessimism. You don't let the enterprises, even in the public sector, to export, but you need foreign
#
exchange to import. And of course, there is no foreign investment whatsoever. So where will the
#
foreign exchange come from? And the reason I'm mentioning this is because this is another
#
constant theme that continues for the next 40 years. At all points of time, there is a foreign
#
exchange shortage. And of course, that's basically what culminates into a 1991 crisis. Because at
#
all points of time, you're importing way more than what you're exporting or simply not exporting.
#
So what Nehru did was, ironically, he was actually open to the idea of full convertibility on the
#
current account. What does that mean? That I should be able to convert rupee into any foreign
#
currency if I want to trade in goods and services and vice versa. So in principle, he was ironically
#
okay with the idea. This is a bit of a contradiction. And in fact, I'm going to quote what he said,
#
and I'm quoting now, Indian capital is to be supplemented by foreign capital,
#
not only because our national savings will not be enough for rapid development of the country
#
on the scale we wish, but also in many cases, scientific, technical and industrial knowledge
#
and capital equipment can best be obtained along with foreign capital. So he acknowledges,
#
he realizes that there is an importance of foreign capital that we need, but it's just
#
not fitting into his overall plan. So what he did was, he comes up with FERA,
#
the Foreign Exchange Regulation Act of 1947. And interestingly, and Bhargavi Zavedi has a very nice
#
article as a part of Shruti Raja Gopalan's 1991 project on this, that when FERA was started in
#
1947, it was actually conceived as a temporary measure. That because times are volatile, there
#
is so much of uncertainty. We don't know how to manage a foreign exchange. We're running out of
#
Forex. So let's have FERA for just five years. There was even a timeline. And after five years,
#
it will automatically expire because by then the RBI would have built enough foreign exchange
#
reserves and all will be well. And what did FERA do? FERA basically said that nobody can
#
do any foreign exchange transaction without the permission of the RBI, even for foreign travel,
#
et cetera. And that FERA, of course, continued for the next 40 years. And we'll talk about it,
#
how it morphed, how it became significantly more restrictive, and then what happened even
#
after liberalization in 1991. But when it started, Nehru had that vision to say that,
#
I don't want to impose so much control on foreign exchange, which is only justified
#
if there is a war. But in peacetimes, I don't want to have Forex control. So let's just have
#
it for five years. After that, it'll get discontinued. So there are these sparks of,
#
you get this. He understood that this is important, but it still was inconsistent with the overall
#
model that he was trying. So at this point, I'll stop and hand it over to you. And after this,
#
we can talk about the consequences of many of these things that he tried.
#
I want to double click on a lot of these, but masterful narrative, you summarize the whole
#
thing so well and just the right amount of detail. And I think of one overarching metaphor for that
#
period, actually in my mind revolves around the word free. Now, when India became free
#
on August 15th in 1947, General Kariyappa had to tell his troops that we become free,
#
but his Hindustani, as it were, wasn't so good. He was an English speaking guy. So what he wanted
#
to tell them was, now you are free, we are free, the nation is free. What he said was,
#
Iswakt aap muft, hum muft, mulk muft hai. And muft for non-Hindi speakers, muft is basically
#
free as in free of charge, kind of paying for it. It is sort of a cheapening of the people. So as
#
a metaphor, it works really well for me. So I'll go and order and I'll double click on a bunch of
#
those things. And in the first part of your answer, you sort of had that little aside about how those
#
capital intensive investments still goes on. And in Raghuram Rajan and Rohit Lamba's book,
#
there is an example of this, where they write quote, take for instance, a micron semiconductor
#
plant agreed upon in June 2023 intended for a site in Gujarat, assuming it goes through,
#
it is a $2.75 billion investment, out of which 70% is a direct subsidy coming from the central
#
and Gujarat governments. This is expected to create 5,000 jobs. So we are spending nearly
#
$2 billion for 5,000 jobs, which is $400,000 or 3.2 crores per job, stop quote. And this is
#
absolute nuts. Now let's go back to the broader narrative. I had a great episode with Nikhil
#
Menon on Mahalan Abyss and the planning commission in those years and excellent book because it also
#
paints a portrait, not just of the times, but of those men, Mahalan Abyss and Nehru, both flawed,
#
great thinkers, both following the scientific temperament, and both of them perhaps committing
#
this great sort of fallacy, which is a fallacy of imagining themselves in Adam Smith's words as a
#
man of system. So now I'll quote Adam Smith because here we are doing an episode on economics. I have
#
to quote Adam Smith once, where Smith says quote, the man of system is apt to be very wise in his
#
own conceit and is often so enamored with the supposed beauty of his own ideal plan of government
#
that he cannot suffer the smallest deviation from any part of it. He goes on to establish
#
it completely and in all his parts without any regard to the great interests or to the strong
#
prejudices which may oppose it. He seems to imagine that he can arrange the different members of a
#
great society with as much ease as a hand arranges the different pieces upon a chessboard. He does
#
not consider that the pieces upon the chessboard have no other principle of motion besides that
#
which the hand impresses upon them, but that in the great chessboard of human society, every single
#
piece has a principle of motion of its own altogether different from that which the legislature
#
might choose to impress upon it. And the thing here, this is a classic central planning conceit.
#
And the, you know, the story I have to illustrate how stupid this is, is something that Frederick
#
Basia once asked, where he said, how do you feed the people of Paris? Right. And it's a question I
#
will forget Paris, Andheri. How will you give breakfast to every person in Andheri? If a central
#
planner is to try to figure it out, you are headed for madness because you have to somehow
#
figure out in advance what each person will feel like eating. And you have to then organize the
#
eggs. You have to organize the transport to get the eggs. You have to organize a bread. You have
#
to organize a poha. You have to organize the fuel for the poha. It is impossible. It cannot be done.
#
It always breaks down. And, you know, Walter Lange once in the 1940s wrote this paper on central
#
planning, recommending it. And in response, Frederick Hayek, one of my heroes, wrote the
#
greatest essay of the 20th century, in my view, called the use of knowledge in society. And Hayek
#
speaks about exactly this. He speaks about this coordination problem. Society is so complex. How
#
can any central planner know? And then he writes, and these are the keywords, quote, if we can agree
#
that the economic problem of society is mainly one of rapid adaptation to changes in the particular
#
circumstances of time and place, it would follow that the ultimate decisions must be left to the
#
people who are familiar with these circumstances, who know directly of the relevant changes and of
#
the resources immediately available to meet them. We cannot expect that this problem will be solved
#
by first communicating all this knowledge to a central board, which, after integrating all
#
knowledge, issues disorders. We must solve it by some form of decentralization. Stop, quote, right?
#
And this is where the great insight comes, that, okay, central planner cannot do it too complicated.
#
We've got to decentralize it. How the hell do you decentralize it in a way that works? And Hayek's
#
answer was prices. That's what prices do. If suddenly eggs get more expensive, because
#
supply got disrupted somewhere, I can choose to have poha. Or ideally, if I'm doing intermittent
#
fasting, I won't have breakfast only. So I can adjust to all of that. Prices tell us about every
#
member of society. Where are the shortages? What are the needs? Prices coordinate all of that
#
beautifully. And when you interfere with prices, you basically go to hell and everything falls
#
apart. And this is, of course, a fundamental mistake, that we have a state which is trying
#
to run society, but it does not and cannot know what society wants, because the best mechanism
#
for understanding so many of the minutiae of people's needs and desires and capacities
#
happen through prices, right? Now, you mentioned permissions also, how permit Raj and how that was.
#
And, you know, there is, in Montaigne's book, and Montaigne did a great episode with me,
#
and in Montaigne's book, at one point, he writes, quote, N.R. Narayanamurthy, the iconic co-founder
#
of Infosys, told me of his personal experience in 1983, when Infosys wanted to import a data
#
general MV8000 computer with three removable disk drives at a capacity of 200 MB each.
#
They had to make several trips to New Delhi to get the import license. By the time they got the
#
license, a new disk drive with a capacity of 300 MB had become available 30% cheaper. Naturally,
#
they wanted to import the latest model. However, the original license specified the model number
#
and several additional visits to Delhi had to be made to modify the license. In an area where
#
technology was changing rapidly and timely delivery of export orders was crucial, long delays in
#
getting equipment was fatal for exporters, top quote. And at this point, I'll also plug
#
episode I did with Ajay on everything is everything about what we call I18N or internationalization.
#
There are so many letters that people call it I18N for short, where the idea is that exports are
#
amazing. Exports are amazing, not because of what wealth they might bring to the exporters,
#
but because you're forced to compete in an international market, automatically your standards
#
rise and you start making better products and services for the domestic market as well. And
#
this is a route to prosperity. And this is what really worked for Korea, for example. Now you
#
mentioned the farm laws and the Essential Commodities Act and all of that. And
#
this point I'm also going to briefly talk about the impact of the Essential Commodities Act.
#
Now you stated Nehru's intent beautifully. Nehru's intent is that we need to control the process so
#
people aren't getting cheated on either end and so on and so forth. At which point I will now read
#
out a share from the great farmer leader Sharad Joshi. Sharad Joshi once said, and this is in the
#
voice of a farmer speaking to a consumer. And he said,
#
Right? And the English translation of that, my translation is, I die my friend and so do you.
#
I die my friend and so do you. I sell my produce cheap and die. You pay so much that you die too.
#
And what is this referring to? This is referring to the APMC. The APMC was basically the state
#
mandated middleman. There was no other middleman. Only the APMC could buy from the farmer. Only the
#
APMC could sell to the consumer. And therefore it's a monopoly and a monopsony. Right? And so
#
what would happen is that often, and this is a real example, a farmer might sell a unit of tomatoes
#
to the APMC for two rupees and the consumer would buy it for 20 rupees. The farmer is getting
#
screwed. The consumer is getting screwed. Right? And ideally what would happen is you have competing
#
middlemen. And therefore the margin of the middleman is maybe two rupees somewhere. And
#
the farmer gets 10 rupees for the tomato and the consumer buys at 12 rupees. And both of them are
#
better off, you know, by a massive amount. The farmer much more, so five times better off. And
#
yet, you know, that system is in place. And the politics of the time really irritated me because
#
when the farm laws came, everybody knew, the Congress knew, all the parties knew that this
#
was a good reform, that getting rid of the APMC was great. Many of the reforms in the farm laws
#
were in the Congress manifesto for the elections before that. Right? And yet they opposed it because
#
hey, politics, we have to. Right? Which disgusts me so much because you know that, you know,
#
the reforms are sort of good for the people. And, you know, with all this sort of rhetoric of,
#
oh, you know, capitalists will now take over completely and et cetera, et cetera, as if
#
competition is ever a bad thing. And as an aside, it disappoints me because it wasn't always thus.
#
You know, earlier also you spoke of the incentives of politicians. Why should they not do only
#
welfarism? But if you look at what happened between 91 to 2011, political parties at different times,
#
including while changing government, actually worked together. You know, the new pension scheme
#
was designed under the Vajpayee government. He left it for the next government and Manmohan
#
and Chidambaram supported it. Similarly, you know, inflation targeting was again prepared
#
in early 2014 by the Chidambaram government. But as a courtesy, he left it for the next government
#
because elections were happening and Mr. Jaitley saw the wisdom in it. And there was no politics
#
ki ye toh unhone kiya hai. So there was a sense that there is a higher purpose there and everything
#
is not short term election cycles. Of course, you do your, you know, politically profitable moves,
#
but you also do the good work that has to be done. Anyway, that's an aside. Now moving on to
#
Forex, you quoted Easterly and I will, you know, firstly recommend to readers Easterly's great
#
books, especially The White Man's Burden, which is precisely about this. And then I will also
#
quote Easterly myself because why not? He has this great essay called The Searches and the Planners,
#
we linked that from the show notes where he writes, quote, the planners have the rhetorical
#
advantage of promising great things, the end of poverty. The only thing the planners have against
#
them is that plans don't, plans didn't and don't work to help the world's poor. Poor people die
#
not because of the world's indifference to their poverty, but because of ineffective efforts on
#
behalf of those who do care. To escape the cycle of tragedy, we have to be tough on the ideas of
#
the planners even while they salute, even while we salute their goodwill. Stop quote. And then he
#
talks about searchers who are much more sort of, you know, navigating the river by feeling the
#
stones as it were, sort of a much better approach. And speaking of, you know, again an aside and a
#
little bit of trivia that in the fifties, if I remember correctly, and it was a Ford Foundation,
#
if I remember correctly, made some of their aid conditional on family planning measures because
#
at that time, you know, people believed that population was a problem. Now I have had an
#
episode of Everything is Everything about this and I'll link to my column also. People are brains,
#
not stomachs. Overpopulation is not a problem. That is why we move from, you know, villages to
#
cities. Population density is an amazing thing. And it is incredibly condescending to say that,
#
oh, the people are the problem, but of course I am not part of the people, but you people are
#
the problem. So, you know, and part of the result of all of these incentives was India's drive
#
towards population planning, which was partly mandated by foolish ideas of, you know, similar
#
central planners from the West giving their Gyan. And, you know, some of it percolated into, say,
#
Sanjay Gandhi's brain, for example, which is why you had the disasters of the emergency. Again,
#
I don't want to speak too much about, you know, British times, but it is interesting to, I'll share
#
a phrase here with you, which Venice Itapati first told me. And the phrase was, and his argument was
#
that the liberalization of 1991 should be called the re-liberalization of India. Because he said
#
under British times, actually, that it wasn't quite so bad. The typical Marxist view is that,
#
oh, British rule was laissez-faire and global trade screwed India, so the state must step in.
#
The Thunker Roy has a great essay, which I'll link from the show notes, which became a book
#
on exactly this, which critiques this, which talks about, you know, how there was a manufacturing
#
boom in Bombay and Calcutta. Calcutta flourished under the British and got screwed in independent
#
India after that, under our politicians. And he also explains a low growth rate and everything.
#
So, you know, everything contains nuances that, yes, colonialism hurt us enormously,
#
but in economic terms, if you look at it in a different way, it wasn't quite all that bad.
#
But that's a sort of different kind of story. Yeah, I mean, these are sort of my responses to
#
many of the things that you said, I thought I'll add some little bits of meat or salt to the
#
narrative. No, no, no, that's fantastic. Because now I want to re-double click on some of the points
#
you said, and then we'll go back to the consequences of some of the measures that Nehru took. So on the
#
semiconductor industry, it's almost like a separate podcast, because it's just, it's taking a life of
#
its own. I have an episode with Rane Kutasane and Abhiram Manchi. Fantastic. So I completely agree
#
with what Raghu and Rohit Lamba wrote in the book. And in general, there has been a discourse about
#
this as well, that, you know, if you have, as a government, if you have unlimited resources,
#
right, then your triage is very different, right? Then you can pursue, fine, I want to build a
#
semiconductor industry, because I don't want to become excessively dependent on Taiwan or any
#
other country. Because if something happens that I don't want to lose access to an extremely
#
important ingredient in every step of the manufacturing process. But when you are the
#
government running a poor country, right, where the per capita GDP is $2,400 a year, you are
#
constantly having to fight a fiscal deficit, you're always spending beyond the means,
#
then your triage is very different. And there are many, many other things that you need to do,
#
basic stuff that all of these other countries which are doing semiconductor industry from US
#
to European Union, they have sorted it out long back, right? You are still struggling to build
#
basic public goods, which is essentially what the state should be doing, right? You talk about
#
defense, you talk about criminal justice system, you talk about general judiciary, you talk about
#
the civil courts, you talk about, I mean, where would I start, right? It's just enormous list.
#
Instead of that, you are choosing to spend billions of dollars in subsidy in an industry
#
where we have no expertise. This is just the cost to set up plans. And of course, it's just going
#
to be a whole different journey altogether because it is an extremely risky endeavor, right?
#
There are different versions of the chips, by the time you start manufacturing something,
#
the technology is rapidly changing, all of that, right? Why would you want to put your money into
#
something like that? It doesn't make any economic sense whatsoever. Maybe there's a nationalistic
#
sense, right? You want to become self-sufficient on all of that, but do you really have the
#
resources, the wherewithal to do that? And I don't think so, right? So I think that's completely
#
agree that that's really not a good idea at all. I wanted to add on this whole Andherian
#
feeding breakfast to people, you know, just as an aside that a true central planner wouldn't
#
really listen to what the people want to eat. The true central planner would tell the people,
#
this is what you should eat, right? Everybody should eat poha on Monday,
#
dosa on Tuesday, et cetera, et cetera, Wednesday, and that's what will be served, right? There is no
#
freedom of the society or the people to decide or have choices that this is what I want.
#
And this brings me to what you said about the price system. Of course, during this entire
#
period of the central planning model, there is no importance of the price system, right?
#
I remember whenever I would teach in the Center for Civil Society, I would have this slide show
#
in order to convey the importance of the price system, where the traffic signal has stopped
#
working. All the cars are in a complete chaos because nobody knows which way to go. And that
#
is exactly what happens when the price system falls apart, because the price system operates
#
as an extremely important signal to say exactly as you said, where the demand is high, where the
#
supply is low, for the producers to decide what to produce more, for the consumers to decide what to
#
eat more, what to buy more. When that falls apart, suddenly that entire signaling mechanism has
#
completely gone haywire and it's a chaos of all these cars not knowing where to go, which is
#
exactly what happens in the economy. And now, because you don't want that chaos to happen,
#
what do you do? You subjugate the private sector, right? Because in the public sector,
#
price doesn't matter because as it is, the state is telling you what to produce in a five-year plan.
#
So you subjugate the private sector, you don't want them to come up with this crazy price system,
#
who wants the prices to work, right? And then you're creating all these distortions because now,
#
because you're not letting the private sector work, you're not getting enough tax revenue,
#
your deficit is growing, right? You're spending way beyond the means, which is also inflationary,
#
right? Because you're spending so much, there is always a shortage economy, which means there are
#
prices working which are conveying to you, hey, there is a shortage building up. You need to
#
produce that, not according to what the five-year plan says. But no, I can't do it. So what do I
#
tell the central bank? Impose price controls, right? And that's the other really bad distortionary
#
thing continuously happening during this time in India. The central bank starts imposing price
#
controls, the government starts imposing price controls. What happens when you impose price
#
controls, right? Any economist will be able to say that that doesn't work. What it creates
#
is a separate economy, which we call the black market, the underground economy, whichever name
#
you want to use. And that is exactly what started happening in India. Because there is a certain
#
market price that everybody can see, but the government is in denial, they are imposing
#
price control. So the black market, the underground economy will say, we want to profit from this,
#
we want to arbitrage this. And that is exactly what happened. At some point, the underground
#
economy was bigger, I believe, than the formal economy. That's just crazy, right? So when you
#
let the price system go completely out of whack, then you start getting all of these distortions,
#
and there is no way that you can build a so-called modern economy and all of that thing.
#
The third thing I wanted to say is, in terms of aid, maybe yes, at that point of time,
#
given the design that Nehru came up with, with Mahalanobis, there was no money, you had to be
#
dependent on aid. But as I keep on saying, the problem was we just went on with it for such a
#
long period of time, that at some point of time, nobody is beyond a point of time, nobody is really
#
giving you aid simply out of charity. There is always a string attached, right? And the string
#
started becoming extremely valuable. For example, there is this story that when Indira Gandhi becomes
#
the prime minister, there are acute food shortages all over the country. We are dependent disproportionately
#
on the US for food aid. And Lyndon Johnson, who's the president, refuses to release food shipments.
#
Why? Because Indira Gandhi had said something against the US in the context of US actions in
#
Vietnam, right? So that's the power that you're giving to this aid-giving country on something
#
as essential as food. So once the US president says that I'm not going to release the food
#
shipments, we are completely screwed. We basically can't feed our people despite all of these years
#
of saying we are going to become self-sufficient. So Indira Gandhi has to make multiple trips to
#
the US literally begging for food. That's humiliating for anybody, let alone the leader
#
of a country. But that's what happens when you start becoming so dependent on foreign aid that,
#
of course, the country will say, I'm going to start using it for my own benefit. Or you said this,
#
I don't like it. I'm not going to send you aid. That doesn't help you achieve self-sufficiency at
#
any point of time. The last thing I want to say is in terms of this Narayan Murthy quote, which,
#
of course, is legendary by now, is in terms of creating a protected and sheltered market,
#
which is exactly what Nehru started doing and it got perpetuated, that you're cutting out all
#
competition, innovation, everything. It's a very interesting story that Hindustan Motors,
#
which was set up in 1956-57 around this time, starts producing ambassadors. All our favorite
#
cars back then. My family, I remember, had an ambassador, which almost became the pride of the
#
neighborhood because who had an ambassador back then had to wait for years. The king of the roads,
#
this car, H&M starts manufacturing it. 20 years after, Toyota manufacturers in Japan
#
starts manufacturing Toyota. Now, move ahead a few decades. Hindustan Motors is manufacturing
#
about 13,000-15,000 ambassadors a year. Exactly the same design that it started in 1957. Nothing
#
has changed. The numbers are just 15,000. Toyota, which started 20 years before, is manufacturing
#
more than 5 million cars a year. Why? Why would Hindustan Motors not do that? Why would they not
#
change the design? Why would they not manufacture much larger number? Because there was demand.
#
We all had to wait to buy a car or even our previous generation. The reason is because there
#
was no incentive. Hindustan Motors simply did not have the incentive to innovate, to come up with
#
a new design of the car, to manufacture more cars because, A, the price signal was lost. You didn't
#
really see that there was demand. B, there's no incentive to innovate because there's no
#
competition. The only two car manufacturers we all know was this Fiat Premier Padmini and ambassador.
#
Why would I want to spend money in innovating and all of that? This is the state of the affairs,
#
and this is just one example of how inefficient the system had become as a result of all of this.
#
So anyway, I think let's go back to what we were talking about, the consequences of some of the
#
Nehruvian socialistic measures. Let's talk about that after the break, but before we go into the
#
break, a couple of sort of quick triple-clicking, quadruple-clicking. You know, you mentioned cars,
#
and if you listen to our 1991 reforms episode with Shruti and Ajay, you will find the factoid
#
that in those days, in the 70s and 80s, a second-hand car costs more than a first-hand car
#
because a brand new car, you'd have to wait seven years or whatever the waiting period was,
#
but a second-hand car was available. It didn't matter if it was second-hand or falling apart,
#
but it was available. So second-hand costs more there, and families would often,
#
like if a daughter is born, they'll often book a scooter when she is born so that it is delivered
#
in time to be her wedding gift, as it were. And finally, I'll say, prices kind of get me
#
every time that, you know, price controls always, always, always lead to scarcities.
#
It's a classic example of good intention, bad outcome. You know, people will judge a policy
#
by the intention, they won't look at the outcome. The thought experiment I like to give is what if
#
the government said that, hey, everyone should afford cars, we want to be advanced, so you
#
restrict the price of a car to say 10,000. Now, what will happen if you do that? The first thing
#
that will happen is that there will be scarcity because any car which is, you know, which costs
#
more than 10,000 to make, which is all cars, will essentially not be there in the market at all.
#
And secondly, then you'll have a black market and all kinds of shit will be happening behind the
#
scenes. So always, always, always don't go by the intention that, oh, everyone should have a car.
#
But the outcome always is scarcity because once you disrupt the traffic lights, as you put it in
#
your excellent metaphor, everything is kind of going to go out of whack. And I'd say prices are
#
even better than traffic lights because traffic lights, which work like prices, would actually
#
take real time traffic into account and optimize the length of each light exactly for that.
#
You know, right now, it's like a second best solution where you have fixed timings and over
#
time, people will study that and they will change that. But you would, if they work like prices,
#
you'd have real time adjustments all the time, which would be quite wonderful. But, you know,
#
let's go grab a bite and then we'll come back and talk some more about Nehru. We are just getting
#
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Welcome back to The Scene in the Unseen. I'm still here with Rajeshwari and it's time to
#
talk about now the consequences of what Nehru did in India's economy through the 15th and 60s.
#
Yes, and I think you mentioned Amit about B.R. Shanoi and he was one of the very vocal critics
#
of what Nehru did. He himself was a student of Hayek, of course, that explains a lot. He made
#
two very significant points. One was that this dependence on deficit financing,
#
what I was saying, the RBI was printing money to finance the fiscal deficit.
#
This dependence on deficit financing will continue to be inflationary in a persistent manner,
#
which is exactly what happened. The other thing which he said was quite prescient, which is that
#
the growing role of the government could eventually undermine democracy. That's exactly
#
what we saw in the 1970s. I thought that that particular criticism was extremely important
#
and to the point. Now, in terms of the general economic consequences of the steps initiated by
#
Nehru, what was going on? The plans, of course, were highly inflationary. What was that? Over
#
and above the generic understanding that this was a shortage economy, specifically what was
#
happening was that there was a greater production of capital goods because ultimately what you're
#
doing in the plans, as I was mentioning, is all heavy industries. A lot of capital goods are
#
getting created and this is creating incomes. Now, when you're creating incomes, there is also
#
greater demand for consumer goods and food, but you're not really producing that because the plans
#
are very heavily focused on capital goods. There is this intrinsic shortage of food and consumer
#
goods that is getting built in and you can't import consumer goods. That's not allowed. Food,
#
of course, given the shortage, basically what we are doing is food aid. On top of that,
#
the deficit financing, as B. R. Shenoy correctly pointed out, was of course adding to the inflation.
#
Inflation becomes entrenched in the system. There are, of course, periods of highs and lows,
#
but by and large, it's there. The counterpoint of this, of course, was that what was happening
#
to growth? Since we started this episode with the idea that growth is the all-important objective
#
of economic policymaking, it is true that despite every reservation that we might have about the
#
central planning model, it is true that this model from 1950s to the mid-1960s did deliver
#
growth. Economic growth was greater than 4%. I think it was about 4.3% or so in terms of GDP growth.
#
Now, it may not seem like a big number when we compare to the current 8%,
#
but back then, it was quite significant. Why was that? Again, this is a newly independent country
#
coming out of a colonial rule. During the last few decades of the colonial rule,
#
Indian economy was not even growing at 1%. Compared to that 1%, when you see this 4.3%
#
growth rate, that's pretty remarkable. That's what the central planning model ended up
#
of delivering. Now, of course, the causality is not clear. Was it the central planning?
#
Was it something else? It's also possible that when you've achieved independence, there's a lot
#
of newfound optimism, all the tensions, stress, anxiety, volatility, all of that is stabilizing.
#
There is an economic vision. We can debate whether it's right and wrong till the end of time,
#
but there was an economic vision. There was production happening, incomes were increasing.
#
All of that combined together produced GDP growth. The third consequence, which is extremely
#
important, and I'll tell you why, which was that given this combination of control on imports and
#
export pessimism, along with the fact that second five-year plan onwards, heavy industrialization
#
was getting so much focus and much of these needed imports of capital goods, India had its first
#
foreign exchange crisis in 1957. We all know of the 1991 foreign exchange crisis, but the first
#
one was in 1957, and from then on, almost every decade we have had a foreign exchange crisis
#
because of the fundamental way the system was designed. You're always importing more than
#
you're exporting. You're always falling short of foreign exchange, and there's no foreign
#
investment happening either. There is no source of foreign currency coming from anywhere. Yes,
#
you are imposing forex controls, but that's not enough to hold on to as much foreign exchange as
#
you need to justify the imports. At that point of time, India had barely one month worth of foreign
#
exchange reserves to pay for imports. Again, a common theme that'll run across. What was done
#
by the policymakers? It's interesting. There's an article by VKRV Rao, a very prominent economist,
#
and I'll send it to you for your show notes. There was this discussion that you have to
#
drastically reduce the requirement of forex. You can't increase the supply because you've basically
#
just stopped all of that through export pessimism, so you have to drastically reduce the requirement
#
of forex. How do you do that? You impose further import licensing. You now start giving licenses
#
only to very specific capital goods and raw materials, definitely no imports of consumer
#
goods. Then very interestingly, there's a discussion that maybe we need to start exports as well.
#
Now, the debate there was, but if you start exporting goods like oil seeds or raw cotton,
#
et cetera, there won't be enough output left for domestic consumption. That's the dilemma that they
#
had because production is limited because it's a very controlled command and control planned economy.
#
At all points of time, production is limited. If you now start diverting output to exports,
#
then domestic consumption will not be enough for me, domestic consumption. That was the tradeoff.
#
In fact, there was even this insane, I call it insane now, but it was the case back then. There
#
was even a discussion that maybe we should clamp down on domestic consumption. We should put
#
restrictions on domestic consumption so that we can start exporting oil seeds and raw cotton,
#
and that's how we get foreign exchange. All of that doesn't sound right at all.
#
It sounds like a dystopian novel. Exactly. Then there's even a discussion,
#
oh, but that's not going to help our main exports, which is U10T, where we in any case export almost
#
all of our output. Maybe net-net, it's not going to be that much helpful in getting foreign exchange,
#
so let's not increase exports. That's pretty much the discussion that happens, and that's that.
#
Now, because this whole export discussion ends there and you need foreign exchange,
#
what happens as a corollary, as I was saying earlier, is FEDA, the Foreign Exchange Regulation
#
Act, doesn't expire after five years. It continues because government realizes, oops, we need to
#
preserve this precious resource called foreign exchange. Therefore, let's just continue FX
#
controls. Common people don't need it. People traveling abroad don't need it. We need it to
#
import capital goods for our plants. That's the dystopian world that was getting built
#
into the system, and of course it continues. The other outcome that happens is when you're
#
living in this shortage economy, and this came up earlier in our discussion as well,
#
there was of course severe shortages of food grains. Now, think of what happened.
#
Nehru has inherited a basically agrarian economy, where majority of the population is employed in
#
agriculture. There is no discussion of agricultural reform from second five-year plan onwards.
#
It's all industry, industry, industry. As I said, you're creating income. There is a demand for
#
food. You're not meeting it. What's going to happen? Severe shortages of food grains. Another theme
#
that runs throughout the next few decades. Of course, going back to the theme of foreign aid,
#
we become dependent on the U.S. We sign an agreement called the PL480. The PL480 was basically
#
an agreement that U.S. would sign with multiple other countries, but we became the biggest
#
beneficiary because our population is rapidly growing. It's a large country. We became the
#
biggest beneficiary of this PL480 food aid that we started getting. The last point I want to say is
#
that all said and done, this is what was happening in the real economy in terms of output production,
#
inflation, deficit financing, et cetera, et cetera. There's something fundamentally,
#
and this is where I believe even if I want to give that great states person the benefit of doubt
#
because of the flavor of the time, et cetera, there's one thing where I feel that he really
#
didn't pay enough attention and that probably cost us dearly for the next 70 years is building
#
institutions. He had the central planning model. State was doing all the work, but the heavy
#
industries are not the foundational pillars of a modern economy. The foundational pillars of the
#
modern economy are the institutions, your judiciary, your banking regulation, your
#
criminal justice system, your police force. That's basically what is meant by the pillars
#
of a modern economy, which is what almost all the developed economies got right. They took time
#
over centuries to build those institutions. We did not. Nehru did not. None of the plans talks
#
about building institutions. This is a problem, a disease, I don't know what to call it. It's
#
something that we are still suffering from today. No matter what we talk in terms of policy, job
#
creation, investment, exports, fundamentally the weakness of the Indian economy that keeps coming
#
up over and over again is weak institutions. This starts way back in the 1950s and never really gets
#
corrected. We, of course, bumble about, but at any point of time, there is no concerted effort to
#
say, oh, we have to do institution building. I will definitely, as pompous it may sound, but I will
#
discredit this, what was happening in Nehru's time. Along with this institution building,
#
the other thing which also never finds focus in the five-year plans is reforming, as I said,
#
agriculture, reforming education, primary education, and reforming healthcare. Once again,
#
you can't build a modern economy unless you have an educated workforce who's healthy,
#
and unless you have a modern agrarian system, agricultural system, where people are creating
#
demand for manufactured goods. You simply can't go about, there's no country in the world which
#
has achieved a modern economy or a developed economy status without reforming its agricultural
#
sector. All of these basic things got missed out in the central planning model. Of course,
#
there is this whole economic freedom and all of that, which is more abstract. In terms of
#
specifics, I felt that these were the glaring shortcomings of the planning period.
#
Let's move on to the 1960s. Nehru dies in 1964. After he passes away, the longer-term consequences
#
of his central planning model are significantly worse. Why? Because the model loses steam by the
#
time he passes away. The experiment is breeding a lot of inefficiency, there's a lot of shortage,
#
there's a lot of inflation. This is what I said earlier, that when all of these problems are
#
getting compounded, at some point of time, there had to be a course correction. It's just not
#
working. It's not like, fine, in 1940s and 50s, there was no other model, so Nehru did central
#
planning because of his own beliefs and what he was advised, what he was looking at the world.
#
By 60s and 70s, there are countries which started changing the course,
#
which started going the other way of opening up to exports, of giving more
#
importance and incentives to the private sector. We did not learn those lessons.
#
That's why I said in this episode as well, learning lessons is so important by looking
#
around what's happening. We did not learn the lessons. What we did post-1960s, after his death,
#
is that not only did the state do what Nehru had started, the state started doing much more of it.
#
Forget about a course correction. We actually went backwards. We just doubled down on everything
#
that had gone wrong in the first 20 years. We said that, oh, this is not working,
#
let's just do more of it. We'll talk about it. That's where I want to end the whole Nehruvian
#
socialistic era, that this is where the economy was in the mid-1960s, which is when his daughter
#
takes over the government and gets elected the prime minister. This part I'll hand over to you
#
and then we can talk further. You've summed it up beautifully. I don't have too much to add, but
#
with regard to agriculture, I will point out other distortions of the price system which
#
came into play like MSPs. MSPs, minimum support prices for farmers seem to have such a great
#
intent to them, that you support the poor farmer and you give them a guarantee that
#
even if there's no market for something that you're making, that the state will buy it from you.
#
But MSPs, what they did was the traffic light is gone. You are putting an incentive in place
#
for farmers to do something for which there may be no demand and which has all kinds of unintended
#
consequences down the line. For example, in the 1670s, we instituted MSPs for cereals because it
#
was encouraging farmers to grow cereals, etc. But what this did was that not enough farmers
#
grew pulses. It came at the cost of pulses. So what inevitably happened is that because of what was
#
there, which wasn't necessarily what people wanted, but what had been decided by the central government
#
that they should eat almost as absurd as planning breakfast for Versova. You will have this, you
#
will have that. That's what the MSPs ended up doing, which led to a carb-heavy diet and not
#
enough proteins, especially for vegetarians, and is certainly one factor in the diabetes
#
explosion that has since happened in India. So imagine state policy leading to an unexpected
#
healthcare outcome. Similarly, those of you who are listening to this in Delhi, who do you blame
#
your foregone? You can blame it on bad economics because MSPs were given for rice to farmers in
#
Punjab. For example, now Punjab is arid. Ideally, you should not be growing rice there. The way the
#
market would adjust is it would be too costly for you to grow rice in Punjab. So Bengal and all would
#
do it, or places with more water, and Punjab would do something else and everything would sort itself
#
out with the price system. Instead, you have Punjab taking over rice production. And because there is
#
free electricity for farmers, you also have bore wells and tube wells and all of that, which are
#
leading to a depletion in the underground water supply. So there's a water crisis happening.
#
And since you're growing rice, you've got to get rid of the rice trouble. That is a cost-intensive
#
thing to do between seasons. So what farmers do is they burn the rice trouble. That drifts further
#
down towards Delhi, and that is a big part in making the air pollution over there much worse
#
in autumn and winter. So another crazy unintended consequence is it just tells you that don't mess
#
with prices. All kinds of terrible downstream things happen, which you can't possibly control.
#
Speaking about education, I won't say much on it, but I've had episodes with Kartik Malidharan
#
and Amit Chandra and Parth Shah on this. I'll link them from the show notes. And we have a forthcoming
#
Everything is Everything episode on this in three or four weeks' time, where we go into it in great
#
depth. But here's the thing. What you said earlier about the government saying, quote,
#
this is not working, let's do more of it. Exactly that happened in education, where the idea was
#
that, number one, we won't let the private sector operate because it's too important.
#
So you let the private sector, eventually, after 1991, the private sector got into airlines,
#
and what was once unaffordable became absolutely affordable for everyone. It got into telephones,
#
and where you had eight-year waiting periods for telephones, now you get them in eight minutes,
#
if that's how long it takes to walk to the nearest store. But education was kept out of that.
#
For-profit schools are still not allowed. People have to find Jogarways out of that.
#
The government kept throwing good money after bad, thinking that the answer is you spend more. You
#
spend more and more and more. But output alone doesn't guarantee you outcomes. And what people
#
like you and me would say is not that the government should stop spending, but it's the
#
river and the stone thing again. You allow the private sector in. You see what happens. At least
#
allow them. You do whatever you have to do, spend more money, do whatever, but allow the private
#
sector to operate, which also hasn't happened. I've had episodes on that. I won't belabor that.
#
But there is also another great misconception I had, which was of something that is intuitive,
#
and all of us believe, but which Lant Pritchett found was untrue, which is basically that there
#
is a common belief that for growth, you need education, that first you educate the people,
#
give them skills, and then growth will happen. And Lant actually then did a study on this across
#
many, many countries to figure out if this is true, if this is a part of the puzzle. He expected
#
that the role of education will turn out to be smaller than he thought. What he did not anticipate
#
and took even him by surprise was that it was exactly zero, that the way it actually plays out
#
is that education plays no part in growth, that the typical trajectory is that growth happens and
#
then education happens, and the two are not related. Now, regardless of this, regardless
#
of whether it leads to growth or not, education is a good thing and we have to get it right. It
#
is our duty to get it right for all our kids, especially at the primary level. And the state
#
has messed that up completely by being inefficient, where it should do things, and by getting in the
#
way of others who can do things, that's a different matter. But it just tells you that stuff which
#
seems obvious, which seems intuitive, it is always good practice to question everything,
#
to look at the data and you can find unexpected things. I completely agree with everything you
#
said and I want to double click in your language. I love this word double click. On some of the
#
points that you said, one is that when you're talking about the private sector, you actually
#
got low prices and everything with eight minutes walk to the store, et cetera. Almost like I was
#
visualizing a play on the stage where there are these big skeptics who say the private sector is
#
bad and everything is going to go haywire if you leave the economy to them and they just
#
only want profit, which is, of course, as Nehru said, is a dirty word. And then suddenly you move
#
a few years and the private sector actually has control over the means of production, lo and behold,
#
and prices actually start coming down and consumers have access to varieties of goods
#
and they don't have to wait for 20 years to get a car. All of these start happening and these
#
people on the other side of the stage are like, how did that happen? That was not supposed to be
#
because these are the bad guys. The price is not supposed to come down. Consumers are not supposed
#
to be happy when private sector is working. They are the evils. And they say, oh, no, no,
#
there's something wrong. They're corrupt. They're crony. So let's attack them from that angle. And
#
it goes on and on. So it's at all points of time. And then, of course, you say that there are market
#
failures and state needs to come in, which is all fair. But I feel at all points of time,
#
there is this overarching belief that whatever the state does is good and whatever the private
#
sector does is bad. There's this massively simplistic black and white view of the world,
#
which probably got entrenched because of this 40 years of socialist mindset. That private sector
#
cannot do anything good. Anything that touches basically is going to just fall apart because
#
there's greedy people going after profits. But the state is benevolent. The state really cares
#
about us. What we say the Maibab Sarkar and they can't do anything wrong. Hey, but for 40 years,
#
as we are discussing now, there are many, many things that went wrong. By the time Nehru dies
#
in the mid 1960s and Indira Gandhi becomes prime minister, what do you have in the economy? Your
#
food shortages, which is like the worst thing that can happen. You have inflation. There's a
#
shortage economy for every consumer good possible. The government doesn't have enough money. The
#
public sector enterprises don't have enough money to import. There's a foreign exchange crisis
#
happening. Other than the fact that you got a little bit of GDP growth, yes, because there's
#
a base effect on all of that. There wasn't really anything good that was happening in the economy.
#
I think that perspective, that's why the sense of economic history is so important. That's why
#
it's so important to learn lessons from what we did wrong and why are we now perpetuating and
#
repeating the same mistakes over and over again and then hoping for other outcomes. It's like
#
exactly the same. You keep doing the same thing and you hope for a different outcome. Then it's
#
just plain stupidity, which is basically what's going on. Now, the other thing I want to add about
#
MSPs and the Essential Commodities Act. I think maybe there's one way to think about it. It's
#
back then when there are so much of food shortages. There is no agricultural market,
#
of course, and the farmers are really, really poor. Maybe at that point of time, in that limited
#
slice of time, it made sense. You wanted to give farmers some kind of a price guarantee.
#
You wanted the consumers to be protected from the volatile rises in prices. Maybe for those 10 years,
#
MSP and Essential Commodities Act comes up in 50s. MSP is done by Indira Gandhi during the 60s and
#
70s. Maybe during that time and age, it made sense. But again, at some point of time, that
#
had to be repealed. They just ran out of steam. There was an expiration date that needed to have
#
been respected. What we did was, again, like central planning, we went on and on and on.
#
Even as the economy is liberalizing, we're opening up to market forces, agriculture just fell behind
#
and we continued the vestiges of central planning and said, no, but this is exactly what's good for
#
the farmers. In the process, it's like a drug which is really bad for you, but you just get addicted
#
to it. The farmers got used to it. Today, if you try to lower MSPs, the first people who will really
#
protest against it, which is exactly what happened, are the farmers, because they are just so used to
#
being given MSP, even if it creates all these distortions that you talked about. I think that
#
became the real problem, that you just continued this bad policy for way too long. I think that's
#
something that this government tried to change with the farm bills, but of course, as we discussed,
#
that didn't really work. Lastly, on education, I think Lance's finding is pretty spectacular,
#
because a lot of growth models, actual empirical work on growth models done by Robert Barrow and
#
others, which finds the opposite. They actually find that education and health, human capital,
#
play a very significant role in increasing growth rate of countries in long cross-country studies.
#
I think it's both ways, but maybe what is really happening is you need skilling. You need skilling,
#
you probably need an apprenticeship model, you probably need certification, something that will
#
make the workforce employable, so that they can actually get the jobs which are being created.
#
Currently, what I keep hearing and what I keep reading is that there is not only a supply problem
#
in the jobs market, there's not enough adequate supply of meaningful jobs. There is also the demand
#
problem, because there are not enough employable people. While there are lakhs of workers entering
#
the workforce every year, not many of them are employable in these jobs which are getting
#
created, if at all. There is a lack of jobs, and then there is a lack of employable people.
#
Of course, solving that is a massive puzzle. How do you do it? But I think to some extent,
#
the skilling or having the kind of vocational training that will make you employable is important.
#
For that, you need the basic level of primary education. You can't go to that
#
without getting this. Maybe a combination of that plays a role in growth, and not just primary
#
education itself, because you could be educated, but if you can't really have the skill or a
#
vocational training to do a job, then what's the point? Let me give you a spoiler alert into
#
the Everything is Everything episode, which we've already recorded and will be coming out in a couple
#
of weeks after this is released. We discussed land study there, and both Ajay and I agreed with
#
one thing, that one is if you look at the paper and how rigorous it is and what it looks at,
#
even Land himself was dubious. He thought something must have gone wrong. It can't be zero,
#
but it is zero. But what explains it to me is very simple, and it is that we're defining education
#
wrong, that the education system is completely moribund. What it provides is not anything that
#
should be called education. It doesn't equip you for anything in the real world, not just in the
#
terms of skilling, but just in the terms of how to think about stuff, like that supply demand
#
mismatch, that on the one hand, we have the high rates of unemployment that we do where people
#
simply can't get jobs. And on the other hand, I have friends who run companies and startups in
#
Bangalore saying that we cannot fill the vacancies. There aren't enough trained people. People keep
#
skipping jobs because demand is more than supply. So there's a supply demand mismatch that companies,
#
the private sector needs people to work for them. And everyone that we are educating is actually
#
being taught nothing. There is nothing of value there. So it is a definition of education. It
#
still seems intuitive to me that if you educate people in a true sense, there will be value that
#
will come out of it. But I feel we are not doing that, this empty shell that passes for education.
#
And I don't just mean it in the bad Indian implementation of primary education. I mean it
#
in the paradigm itself. My sense is that this whole paradigm that kids of the same age study
#
together, they study the same bunch of subjects. This is how many years they do it for. This is a
#
paradigm that came up in the early 19th century for the industrial revolution and to bring out
#
workers for the British colonial empire and officers for the British. And it really is utterly,
#
completely outdated. If you have a monkey and a fish, you can test the monkey on how to climb
#
a tree. You can't test a fish on how to climb a tree. It is complete madness. This is another
#
rant I keep going down on, that I can go to a supermarket and find 40 varieties of tomato ketchup,
#
right? Whatever individual need I have, that can be fulfilled. The education system doesn't do that.
#
When 40 kids go into a classroom, each of them actually has separate needs and capabilities and
#
wants and desires. And ideally, when it comes to private goods in the market, the market provides
#
for all of those. It customizes for each person. That's the beauty of it. Whereas over here,
#
you simply don't have that. The whole paradigm is fucked up. And this is not Nehru or Indira's fault
#
and per se, this paradigm being fucked up. It's just, I think, fucked up across the world,
#
frankly. And it's just that in more advanced societies, you have better ways to mitigate it.
#
And it's at least implemented a little bit better. So in India, that's not the case. But either way,
#
this is just a, I don't have a policy recommendation coming out of this finding
#
of lands. It's just interesting. We have to reform education and I've spoken at length about
#
the various ways to do that, of course. No, I think that's a great point you made,
#
that maybe one of the big mistakes we make in studies or in discussion is that we can't
#
really define education. I'm defining it wrong. For example, the Robert Barrow literature,
#
I mean, lots and lots of studies came up in the growth literature after that. What they do is
#
measure education by number of years of schooling. And we know now, of course, with India,
#
with all the Pratham studies and SR survey, that number of years of schooling mean absolutely
#
nothing. I mean, I'll give you an example from my own personal experience. I teach a bunch of
#
slum children in Bandra. And the other day, I was talking to this kid who is in the sixth standard.
#
And he has been taught, imagine sixth standard guy, he knows how to write English by looking
#
at another book. So he can copy paragraph after paragraph, absolutely perfect, no problem.
#
But he can't read it. He can't read a single sentence. So when I asked him that you're
#
reading this full two, three paragraphs, what do they mean? He said, and this is what, this
#
guy is in sixth standard, talk about number of years of schooling. So I think that you're
#
absolutely correct. The way we are defining education using some of these measures are
#
probably deeply flawed. So we've digressed quite a bit. So now coming back to what we were talking
#
about, I want to take a little bit, I will step aside a bit from discussing Nehru and India,
#
et cetera, since we talked about China as well. Now, whenever we think of China during this time,
#
of course, we think of Deng Xiaoping and his great dream reforms, et cetera, and the spectacular
#
growth that China experienced. But what is important to recognize and appreciate is in
#
the 1950s and 60s, China was really not doing well at all. And as I said, India was exactly
#
the same power with China. And this is a time when Chairman Mao is the premier of China,
#
is basically the leader. And interestingly enough, the remarkable similarity with India
#
is that China also adopted the five-year plans because they were also influenced by Soviet
#
Union style of central planning. And Mao also wanted to convert the economy from an agrarian
#
economy to an industrial economy, except the way he went about it was, of course, significantly
#
more draconian. He did in 1958, what is called the Great Leap Forward, which is essentially a
#
forcible conversion of the economy to an industrial structure, where he forced thousands and
#
lakhs of households actually to live in communes. He collectivizes agriculture, there is no private
#
ownership of farmland. He forces his household to live in large communes where everything is decided
#
and provided by the state. And they are producing agricultural output as per the targets set by the
#
state with the sole objective of feeding the urban cities. And this is the kind of model that Mao
#
comes up with. And he thinks that this is going to convert because of course, there's also heavy
#
industrialization happening simultaneously. And I think this is going to yield the results of an
#
industrial development. But of course, what happens, we experienced food shortages in India,
#
China just experienced it at the next level. Because as heavy industries started coming up,
#
the demand for food started getting compounded significantly. But because these communes were
#
given targets, and they are not really doing it out of their own incentives. This is not the price
#
mechanism, this is not free incentive, you're forced to do something. So there was of course,
#
a massive shortage of food grains. And this created, I think it was the second largest
#
manmade famine in China, where the estimates are between 15 to 50 million people died,
#
right? It was just absolutely crazy. So this was the other extreme of the food shortages that
#
India also experienced. But because of Mao's experiment with a great leap forward, they
#
actually ended up creating a famine. And of course, after that, there's a great cultural revolution,
#
where all elements of any semblance of capitalism is rooted out. So the reason I'm saying that is
#
China is not a country that was always growing at a rapid pace, that was always doing great in terms
#
of manufacturing, exports, etc. In 50s and 60s, China was in some sense worse off than where India
#
was. And it's important to have that sense of history. Now, moving forward to the post 1966
#
period in India. And I think Amit, you'll agree with me that from 1966 to 1977, I think that was
#
the darkest period of the Indian economy in a post independence period, right? Of course,
#
we got the emergency, which is an absolute disaster and really embarrassing moment for
#
a democracy. But the economic implications of what happened in those 10 years were really,
#
really bad. I mean, I almost get really worked up when I start talking about these things,
#
but setting aside all of those emotions, what happened during this time was that the initiatives
#
of Nehru got compounded. They took a life of their own. The laws became significantly more
#
draconian. The answer to every problem was greater state control, right? State intervention became
#
all pervasive. The loss of economic freedom was near complete. And the state became the predatory
#
state that we keep talking about, right? In the true sense of the term. And of course, I mean,
#
we can talk about the broad brush, but I want to get into the specifics of it, right? What went on?
#
What happened, of course, politically and socioculturally, many things went wrong,
#
but let's just focus on the economics, which is what we're doing. Indira Gandhi inherits a
#
significantly weaker economy, right? In the sense that once again in 1966, we had another foreign
#
exchange crisis, right? Same problem as 1957. Imports are way greater than exports. We don't
#
have enough foreign exchange to pay for the imports. We went to the IMF asking for bailout,
#
exactly similar to what we did in 1991. And IMF of course attached conditions. And the condition
#
was that the rupee had to be devalued. So we got the 1966 devaluation. And what is devaluation?
#
Back then, the rupee was basically a fixed exchange rate, right? This was the Bretton Woods
#
system. The rupee was pegged to the dollar. And when you ask IMF for aid, IMF's condition is,
#
I'm going to give you money. I'm going to bail you out, but you have to let the rupee move.
#
And because it's a poor country, it's a weak country with very high inflation,
#
the moment you get rid of the peg even a little bit, right? The rupee devalues, it falls, right?
#
So that's the rupee devaluation. So we have the devaluation of 1966. Along with that, of course,
#
there was very high fiscal deficit coming out of this whole planned heavy industrialization expenses,
#
food shortages, common theme. There was serious threat of famines, right? I mean,
#
not the manmade famine that China had, but this was monsoon shocks related shortage of food,
#
serious threat of famines. Now, Indira Gandhi did actually try, there was a little bit of
#
attempt at, I don't want to use the word liberalization, but a little bit of
#
restoration of freedom, of loosening of regulations and control, because that was
#
also demanded by the IMF when you're giving the bailout. But then, of course, the whole Lyndon
#
Johnson thing happens, right? I talked about that this whole humiliating begging for food.
#
Indira Gandhi comes back and says, basically, to hell with liberalization. I'm not going to
#
count out to this foreign powers. And she basically pledges that no more food aid.
#
The next time we get food from US, it will be a food import, commercial import, just like all
#
the other countries do, right? And that was that. And then, of course, she starts off on her own
#
path. And it is true that apart from this economic background, she also had political compulsions,
#
right? She decided to ally with the left-centric sentiment of greater state control, get greater
#
state coercion, et cetera, which was inconsistent with everything that was happening in the central
#
planning model. So what did she do? Central planning continues, of course, aggressive
#
expansion of the public sector in even more areas than before. And how did she go about it?
#
The word of the day was nationalization, right? By the way, mind you that the first national
#
nationalization actually happened during Nehru because Air India was nationalized in 1953,
#
life insurance around the same time. But Indira Gandhi, of course, takes it to the next level.
#
She starts with the nationalization of the banking sector. This is my favorite topic. I keep on
#
talking about the financial sector for a different episode. 1969, she nationalizes 14 large banks.
#
The logic, the rationale was that right before that, there were many private bank failures.
#
Banks were not doing what they're supposed to do, so they cannot be allowed to operate freely,
#
and hence let's nationalize them. So that happens. Now understand the import of this, right?
#
Nationalizing banks essentially means that you are taking over the savings of the households,
#
literally, right? Now the government says that financial capital is limited,
#
it's a scarce resource. Instead of developing the financial sector, instead of coming up with ways
#
of improving savings, the government says, I'm going to take over the financial sector,
#
I'm going to expropriate the household savings, and I am going to decide where this savings is
#
going to be allocated, to which sectors, at what rate, at what amount, at what duration, right?
#
So the entire operation of a financial sector, which should be based on the risk and return,
#
like a business, was completely ended. And it was important because even today as we speak,
#
we are paying an extremely heavy price for that decision.
#
India is the only country other than China that has a very large government-owned banking sector,
#
right? It just sounds crazy even when I say it, why would the government own banks, right?
#
Banks are financial intermediaries which will take savings from households and channelize it
#
to investment for the private corporate sector. That's the role of the banks. What's the government
#
doing in that? But that's basically what Indira Gandhi started, and which means that every time
#
you have a banking crisis in India, in the US, when people say banking crisis, it's a bank failing,
#
right? A bank becoming bankrupt, insolvent, the bank ends, like the hundreds of bank failures
#
happen in the US and everywhere else. In India, whenever there is a banking crisis,
#
the banks don't fail, they don't shut down. It automatically morphs into a fiscal crisis
#
because it's the government owning the banks, the government has to put its money to save the bank,
#
and that has been happening for years and years and years, right? As recent as the last 10 years,
#
which we'll talk about at length, that the banking system has become so inefficient
#
because of this government ownership, they don't operate like the financial intermediaries they're
#
supposed to do. So all of that gets started with Indira Gandhi. As a result of which the RBI,
#
as the agent of the government, basically tells the bank how much you're going to lend,
#
to who are you going to lend, at what rate, at what duration, the 200 interest rates that I
#
talked about, right? So banks essentially become an extended arm of the government, right? They
#
become a tool in facilitating central planning. That's what happens. Of course, it doesn't stop
#
there, right? Why just banks? Why not insurance? Why not mutual funds? Everything. Basically,
#
at one point of time, by 1970s, the government owns and controls the entire financial sector.
#
That's how pervasive state control becomes, right? So you have an economy where heavy industries,
#
airports, railways, aviation, power, telecom, banks, insurance, mutual funds, everything is
#
in government ownership, right? So that's just, it just goes to the next level.
#
What else does she do? Of course, she turns even more inward, right? Nehru started import
#
controls, import licenses. In Indira Gandhi's time, the average import tariff was anywhere between
#
50% to 150%. And in some cases, it was more than 300%. It's just absolutely insane, right?
#
There is no way that the private sector, or forget private sector, even the public sector
#
enterprises would be able to import at that high cost. Basically, she just shut off the economy
#
even more, right? Autarky at its completion. Then the other thing that she does is, of course,
#
this whole MSP and APC on all of these things happened during Indira Gandhi's time. She also
#
sets up the Food Corporation of India, right? Maybe again, benefit of hindsight, maybe at that
#
point of time, it made sense because FCI is procuring grains from farmers and at MSP and
#
distributing through the ration shops, et cetera, PDS system. But today,
#
FCI is an extremely heavily subsidized organization using essentially taxpayers' money,
#
right? And what is the logic of a food corporation of India functioning in today's Indian economy
#
is just beyond me, right? Once again, a vestige of the central planning era that we are tolerating
#
now. The other thing that she does, of course, the craziness simply doesn't end, which is tax rates,
#
right? And we know this. At some point of time, she increased the top income tax rate to 93.7%.
#
I think 97 or something.
#
And then that was not the end of it. Then she took it to 97%, right? I mean, it's basically,
#
why would you earn income? Why would you make the effort of getting a job if 97 rupees out of the
#
100 rupees that you're earning is being taken away by the government, right? And let's say you are
#
getting the three rupees or whatever, five rupees, you're consuming two, you're saving three.
#
That saving is also going to the government because the government owes the banking system.
#
So the financial repression that started during that point of time, and I'll tell you another
#
fact, not only was the government owning the banking sector and not only was the tax rate so
#
high, because of this deficit financing, which of course continued during that time, RBI is printing
#
bonds to itself. Over and above that, there is something called the statutory liquidity ratio,
#
which is the percentage of bank deposits that banks will invest in government bonds.
#
This is the banks directly financing the government, right?
#
That point of time, the SLR was 40%, right? So 40%, 40 rupees of every 100 rupees deposit
#
that a bank got, basically the bank was giving to the government. So imagine the sources of money
#
the government is expropriating from the households through taxation, through deposit
#
mobilization in a publicly owned banking sector, and of course to this SLR thing, right? Which is
#
the direct financing. So it was just absolutely crazy. And then how will we stop just here?
#
We have covered taxation and import licensing and permit Raj. Oh, in permit Raj, she comes up with
#
the MRTP, right? I shouldn't always keep saying she, the government, right? So the government comes
#
up with MRTP, the Monopolies Restrictive and Trade Practices Act. What does it do? Now on paper,
#
it sounds maybe great, right? You want to, it's a market failure. You want to control monopolies,
#
which is fine. But what the MRTP did was it imposed a lot of restrictions, really prohibitive
#
restrictions on businesses of a certain size, which said that if these large businesses wanted
#
to do any merger, any expansion, any operation, they had to get more licenses and permits over
#
and above what the permit Raj said, which means no business had any incentive of growing in size,
#
right? Why would you want to expand and grow in size when you are then limited by the MRTP?
#
Forget about monopoly. You simply just would not expand, which means not create jobs, et cetera,
#
et cetera. So that was the unseen effect. And lastly, Farah, right? Really, really draconian,
#
which again was supposed to be temporary, continued. What did Indira Gandhi do?
#
Two amendments, 1960s and 1970s. And again, Bhargavi talks really nicely about it in her
#
article. We should link from the show notes. There was one amendment of Farah in 1960s,
#
where the government said, I'm going to bring in criminal prosecution as a part of Farah,
#
that if you hold foreign exchange beyond a certain threshold that is specified by the RBI,
#
you will be arrested for two years and without any warrant, right? That was the first criminalization
#
clause of Farah. Of course, they didn't stop there, right? In 1970s, they increased the
#
imprisonment term from two years to seven years, and they completely bent against the cardinal
#
principle of innocent until proven guilty. They just turned it around, said, if you are caught
#
under Farah, then you are assumed to be guilty unless you prove that you are innocent, right?
#
The proof of burden that you are innocent falls on the victim, which is just completely crazy,
#
right? But that's Farah of 1970s. And ironically, we'll talk about this even after liberalization.
#
For the longest of time, we did not remove this criminal prosecution thing. Then we did at some
#
point. Farah got converted into FEMA. We got rid of this whole criminal prosecution thing.
#
And the worst thing, in 2015, we brought it back. 2015, FEMA was amended to bring back criminal
#
prosecution, which means as of now, if you get caught under FEMA, which is the post-liberalization
#
cousin of Farah, then you will be criminally prosecuted. And once again, the burden of proof
#
of proving innocence falls on you. So it's just insane that this is an act which was supposed to
#
be a temporary provision for five years. Today continues, and there is this criminal prosecution
#
element attached to it, right? So that's why I said, I think 66 to 77 was this 10-year period,
#
which set us back by multiple decades. Central panning of Nehru maybe made sense given the
#
flavor of the day. Those 10 years simply don't make sense, right? And the opportunities that
#
were lost, the cost that we are paying as a result of that, I think is enormous. And I think that
#
counterfactual is the most important counterfactual, that if that government, if Indira Gandhi's
#
government didn't do all of these things the way they did, if they learned the lessons from some
#
of these Southeast Asian countries, then where would we have been today? I think it sort of
#
destroyed any chance of India becoming a rich nation in the next 40, 50 years. Because after
#
that, everything that we did was basically undoing all of this. Forget about doing new
#
structural reforms. We spent a whole lot of 10 years, most 1991, undoing all of these draconian
#
laws, right? So that's why I think that becomes the watershed moment for me. I mean, it's just
#
really, really sets us back several decades. Over to you. So a bunch of things to double
#
click on, both in terms of principles and context. You know, you mentioned the peak tax rate of 97%.
#
That sounds so crazy that anyone who is listening to this would agree with me that in that context,
#
taxation is equal to theft, right? I want to take it a little bit further. I want to say that, look,
#
we've normalized the coercion that taxes imply. But let's put it like this. If you are paying 30%
#
tax, and I think almost everyone, even if you don't pay income tax, you actually pay a ton of
#
taxes and indirect taxes. Every time you buy salt, you're paying taxes. But if you do both,
#
then 30% is a low ball figure. But let's say if you pay 30% of your income in taxes, if you pay
#
that effectively, let's say if you pay one third of your income in taxes, that basically means
#
that January to April every year you work for the government. You are essentially a slave.
#
Taxation is part-time slavery. Period. That is what it is. You know, the proportion that you
#
pay in taxes, that is a proportion to which you are a slave of the state. Now, I am not saying
#
that there should be no zero taxes, no state. I mean, it's a great liberal paradox for our
#
rights to have any meaning. We need those rights to be protected. We need the state to protect
#
those rights. So we give away whatever bits of the rights we need for the state to exist
#
to protect the rest of our rights. That's a great liberal paradox. I think one central principle
#
here simply has to be that you acknowledge this violence, you acknowledge this coercion,
#
that it is at the threat of abduction by the state that you are actually parting with some
#
of your money. You know, it is in a sense, it is a legalized hafta. That you acknowledge
#
that all action by the state involves coercion, that as I said in a headline of a piece I wrote
#
for the Times of India, every act of government is an act of violence. Now, the great liberal
#
paradox means that we do need a state and some of this violence, we have no choice but to accept it.
#
But we should always debate about, you know, when this violence is being inflicted and why.
#
Is it justified? I think the central, the core point of disagreement between all political
#
philosophies is this one thing. When is state violence justified? That is the only thing.
#
You know, so a libertarian or a classical liberal like me might say that, oh, night watchman's
#
raid, do the basic thing. Somebody else might say, no, no, positive externalities,
#
make infrastructure, make roads. Another person may say national pride matters and
#
we have to have a space program and we have to invest in things for national pride.
#
Somebody else may say we need a statue of so-and-so, etc., etc. And without passing judgment on any one
#
of those beliefs, I think all of them, all of those arguments, which is the stuff of politics
#
and which is the stuff of healthy, rational discourse in a society, all of it has to first
#
acknowledge the fact that there is violence and then keeping that into account, then you have to
#
find justifications for it. Now, before I come to Indira, I'll go back to Mao for a moment.
#
So on November 20th, 2016, shortly after demonetization, I wrote a column for the
#
Times of India with the headline, Narendra Modi takes a great leap backwards, right? Punning on
#
Mao's great leap forwards. And I began it by talking about 1958, where in 1958, and this is
#
a classic central planning madness, that Chairman Mao decided that all sparrows over China should be
#
killed, right? And the reason for this was that farmers were suffering because sparrows were eating
#
their grain seeds. So Mao said, okay, simple problem, you know, let's solve it with state action.
#
All sparrows must be killed. And thus began what is called the Great Sparrow Campaign, right? This
#
is not fiction. This shit really happened. And what happened was that a huge amount of sparrows
#
were wiped out. And everything went haywire because the ecosystem got moved. Sparrows ate
#
locusts, right? So now the locusts proliferated madly, and they destroyed all of China's crops.
#
And this was one of the key proximate causes of the famine, the hunger, the starvation. More than 45
#
million people died because this mad fool of a central planner said, kill the sparrows, right?
#
And this to me is a metaphor for central planning itself. A society is as complex as an ecosystem.
#
You know, to imagine that you can control any part of it is essentially the same vanity or the same
#
fatal conceit, as Hayek would put it, as imagining that killing sparrows will, you know, solve the
#
problems of farmers. So just a tremendous cautionary tale in there. Now it is almost as if Indira is
#
looking at Mao and saying that yes, it should be like that. Because that's really the direction
#
that she moves in. Now a couple of things to note. One is that she didn't actually, at any point in
#
her life, show any signs of having true beliefs about anything. The move leftward that she made
#
was a political move. That within the Congress, she was fighting with this group of politicians,
#
including Morarji, Desai and all, who were broadly, I think, in direction of more markets. And to
#
distinguish herself from them, she therefore took this move leftward and allied with the far left
#
of the party and the party split and etc etc. So all of this shit comes from there. Now people
#
today look back at Indira and they talk about the emergency. The emergency is horrendous. I have
#
spoken about it in episodes of The Scene and the Unseen and everything is everything willing from
#
that. Absolutely horrendous. The entire opposition locked up in jail. The deaths suffering, it is
#
crazy. But to me, her economic policies were actually worse. Her economic policies were crimes
#
on humanity because they kept millions of people in poverty for decades longer than would otherwise
#
have been the case. And they're absolutely crazy. And this is unseen and people don't get this,
#
but all of the laws that you named, for example, and we could easily dig deep and talk about each
#
of them for an hour or two because the consequences are so massive and they hurt private enterprise
#
and therefore impeded jobs and therefore kept the poor poor for ages and ages and ages. And
#
another part of that puzzle was actually labor laws. That you would imagine that at that time
#
with India's advantage being cheap labor, that we could have become a manufacturing superpower
#
as China went on to become. But we did not because of the crazy draconian labor laws that existed
#
from before that and then whatever Indira also brought into being. And the whole ostensible
#
intention, the stated purpose was we will help workers. But actually you harmed workers because
#
you didn't allow enterprises to grow beyond a certain point and therefore you affected not
#
just the number of jobs, but also the quality of jobs. And again, such a misnomer, you would
#
imagine labor laws would protect labor, but they ended up having the opposite impact. Do you have
#
thoughts on the labor laws as well? So we can talk about it when we talk about the current time as
#
well. And I think, and because this has come up many times, that one of the reasons why India
#
doesn't have a vibrant manufacturing sector is because the labor laws were never reformed. The
#
labor laws were of course a vestige of the central planning period. And I completely agree with you.
#
I think, and I mentioned this earlier as well, at no point of time, I think the state, the government,
#
whatever you want to call it, realized that our biggest asset, our biggest comparative advantage
#
is the people, right? People are brains, not stomachs. Exactly, exactly, right? I mean,
#
we are a labor abundant country. That's our resource. We were always a capital scarce,
#
poor country, right? So heavy industries and all of these things beyond a point just doesn't work
#
because you are not really taking advantage of the biggest resource, which is the people,
#
which is what China did and for building a large manufacturing sector. And I agree with you that
#
not only did we not take advantage of this huge resource, we sort of constrained and shackled it
#
even more by very draconian labor laws, which says that, and the thinking is that we are protecting
#
the workers, right? We are protecting the laborers. And today we are in a situation
#
where they need jobs, right? They are really crying out for jobs, but all we are saying,
#
oh, no, no, but we want to protect you, right? We don't want you to be exploited by these crazy
#
capitalists. We are going to give you all this sheltering, but in the process, you're actually
#
hurting them so much more by not giving them the livelihood, the incomes, the jobs, the wages that
#
they want. So clearly that kind of a labor law does not work. You want to free the labor to work
#
wherever they want. You want the demand supply mechanism of the market to work. You want the
#
wages to clear the market. And yes, of course, there are market failures. I'm not saying private
#
sector is all good either. And at that point of time, as a regulator, as a state, you do step in
#
to ensure that there should be proper working conditions, et cetera, et cetera. But beyond
#
that, the laborers have to sell the labor, that is the main commodity, and the private sector has
#
to buy that labor at a certain equilibrium price. And that's how the economy should move forward
#
instead of the state saying, but we are going to protect you. And if there's an enterprise which
#
employs more than 100 workers, then you have to be subjected to all of these restrictions.
#
Then of course, every enterprise will say, I would much rather stay small and not employ. And what
#
is increasingly happening now, I'm going to employ contractual workers, daily laborers,
#
contractual workers, which have no protection in any case. They don't get any kind of benefit,
#
gratuity, all of those things. So they're even more vulnerable. So you're actually creating a
#
system where you're perpetuating this contractual labor, which defeats the purpose that you
#
originally had with the labor laws, which is protecting the workers. So clearly this whole
#
system does not work out at all. And of course, I know that this has been repeated ad nauseam by
#
several experts, economists, et cetera, that it's hard to do labor law reforms. It's a state subject
#
and all of the consensus building has to happen. I think even before reforming, there has to be a
#
lot of thinking that what exactly is the objective of having such a law, right? Why do you need such
#
a law, first of all? And what is the objective of the overall system where you want to create
#
jobs? The biggest crisis that we have in Indian economy today is jobs. That's just one word,
#
right? We have a jobs crisis. And the irony, I love this, it's that we have a demographic
#
dividend, right? We love saying those two words. What is a demographic dividend, by the way?
#
A demographic dividend is that you have several decades when your workforce is growing at a faster
#
rate than the population. It's an absolutely magical thing because the birth rates are falling.
#
The workforce is growing at a faster rate than the population, which means you are in this
#
really magical period when if you create enough jobs, you can grow. That's it, right? It's like
#
stripping aside all the other frills. You have this massive resource of workforce, which is young.
#
The median age of the Indian workforce is 28 years, which is lower than many, many other countries.
#
All you have to do is basically give them jobs and the economy grows, as simple as that, right?
#
That is basically what we have not been able to do in 70 years, right?
#
Now, the reason this is remarkable for India is because all the other countries that we talk
#
about, China, South Korea, Japan, US, Europe, they're all aging. These are all countries which
#
are done with the demographic dividend. They're all aging. They are not going to be able to
#
enjoy this magical thing that we are enjoying. We are in this unique position
#
to get benefit from this dividend, but we're not taking the benefit.
#
Why is this a crisis? This is a long-winded answer to what you asked. This is a crisis
#
because the demographic dividend is not permanent, right? At some point of time,
#
this will start getting reversed. I think there are studies, and I think Vivek called
#
quotes that in one of his articles, there's a consultant firm which did a study that I think
#
by 2040s or 2045 or something, the demographic dividend starts getting reversed, which basically
#
means that's an irreversible process. Once the population starts aging, once the population
#
growth rate increases beyond the workforce growth rate, you are done, right? You don't have this
#
dividend anymore, and then you have to worry about many other problems, which is providing pension,
#
social security. It's an aging population. You don't have enough workers, right? Forget about
#
jobs. You simply don't have enough workers, which is the problem that Japan is facing today, right?
#
That's a very, very serious problem to face for which you need massive government fiscal resources.
#
We are not there. Instead of having labor laws and saying that we are going to protect in a very
#
socialistic way, it's time to start thinking about this real crisis that is looming large,
#
that is staring at us, because once we lose grip of this demographic process,
#
no matter what we do, we'll simply not be able to grow at a high rate. That's how bad the problem
#
is. That's why that perspective is important, that do we really focus on protecting the labor
#
and basically destroying all chances of the enterprises expanding and the workers getting
#
jobs? Or do we focus on this crisis, which is very important to solve, because that's basically what
#
we need to grow? Otherwise, we'll simply not be able to get onto that bandwagon.
#
Yeah, I'd say ostensibly protecting the labor. Labor laws actually hurt labor, and I want to
#
quickly illustrate what I mean by that with a couple of concrete examples. One example is
#
simply minimum wages, right? You imagine the minimum wage is a great thing because you're
#
guaranteeing a certain, you know, an income with which even the poorest of the poor can live with
#
such dignity, surely they are worth that much and etc, etc. Now, what a minimum wage typically does
#
is that everybody whose labor would have gotten a price less than the minimum wage is effectively
#
out of a job. A classic example of that is just in garment manufacturing in West Bengal and
#
Bangladesh. In West Bengal, the minimum wage is something like 17 bucks an hour or whatever,
#
and in Bangladesh it is 12 bucks. They also have one, but it's lower. Now, what that 17 rupees
#
target does in India is that if you would have gotten 15 rupees for your labor, if that is what
#
it is worth at that moment in time, you don't get 15, you get zero. You get put out of a job by the
#
law and you get absolutely nothing, and that's a worse outcome than, you know, getting 15 bucks
#
would have been. Now, typically what would have happened is if your labor is worth 15 and you get
#
15, then economic growth is happening. Both you and the factory are benefiting in a double thank
#
you kind of moment. The factory goes or business grows, you also get savings, and then eventually
#
all of that growth leads to a higher equilibrium where you get 20 rupees, 25 rupees, you get more
#
anyway. That is a journey economies make. Instead, what is happening is that now the Bangladesh
#
companies are growing because they can afford to hire workers and, you know, so that is another
#
board that India missed. And people will think, no, no, minimum wage and we have to protect the
#
worker. You are hurting the worker. You know, there's a great video by Milton Friedman, which
#
I'll link from the show notes in this. Another example of labor laws hurting is that there will
#
be these ridiculous labor laws. Like if you have more than 20 employees, you have to put this in
#
place, X, Y, Z in place, which are all costs on the company and which are often, you know, things
#
that you might want in a utopian situation. But so what therefore the company when it reaches
#
the 20th employee employing the 21st is too freaking expensive. So one, they'll go for contract labor
#
and two, you never manage to scale, which is why one of India's great tragedy is that you have
#
too many SME small and medium enterprises which have never become big, which have never managed
#
to scale because of this. Where is our Walmart? Where is our Nvidia? Where is our Amazon? I mean,
#
you have fancy startups doing well, but the real counterfactual is that 20, 30 years ago,
#
you could have giant companies achieving scale. What happens when they achieve scale? You have
#
economic growth. You have more jobs again. And for a worker who is saying, no, I need a living
#
wage of 17 rupees or I want these employment benefits, you know, for them, they say, there's
#
a good law in place. So what if I'm unemployed right now? But the law is there. But the truth is,
#
if that damn law wasn't there, you would have a far better life than you can imagine. And this is
#
very difficult to see and to sort of get across. Yeah, absolutely agree. And since you mentioned
#
this excellent point about MSMEs, right? And this also goes back to what Mohit Satyanand found that
#
informal sector is shrinking. We perhaps don't realize that the MSME sector, the informal sector
#
along with MSMEs today employ more than 80% of the workforce in India, right? That's how big and
#
that's how important they are. We have created that informal sector, right? The informal sector
#
didn't just happen because they just wanted to be informal and really small. Through all of these
#
distortionary laws, we have perpetuated the informal sector, which will forever remain small
#
because exactly as you said, the cost for them to expand is significantly prohibitive, right?
#
So we have this problem at hand and we honestly don't know how to solve it because it's just
#
getting worse by the day. Because when we do something like a demonetization, the informal
#
sector gets hurt even more, right? So that is this whole thing that we have created.
#
The other thing I wanted to say, going back to the taxation point, I find taxation fascinating
#
because I think it's the first concept of economics, so to speak, that started getting
#
applied from the times of empires, et cetera, even before GDP, my favorite subject, started
#
getting measured, output started getting measured. Because the whole idea was there is a contract
#
between the state and the citizens, right? You give me money through taxes, I'm going to keep
#
you safe, right? That's the original thing that I'm going to give you this defense, internal,
#
external security, and in return, you pay me taxes. That was the original contract. Of course,
#
now in the modern day, the state provides public goods and you pay taxes. But what has happened is
#
it has been taken to the next level, but the state just continues to expropriate in the name
#
of taxation, but the provision of either security or public goods, everything is inferior. But because
#
the state has monopoly on violence, I can't say that, oh, but I'm not happy with the state of roads,
#
I'll stop paying taxes. I have every right to say that. That's the contract, right? I pay you taxes,
#
you provide me with public goods, but the state has monopoly on violence, so therefore, I cannot
#
say that. So there's this huge asymmetry which has gotten built in. And the irony is a lot of
#
the economists will now say that, oh, but you have to increase the tax rates in order to improve tax
#
revenues. And that is just so mind boggling, right? I mean, the moment you increase tax rates,
#
which is exactly what Indira Gandhi example shows, there is tax evasion, because people don't want
#
to part with the income, the hard earned money and give it to the government willy nilly, right?
#
You increase the tax rates, people will evade taxes, the underground economy will happen,
#
and it will obviously distort your incentive to work to begin with. So it just doesn't help that
#
you keep on increasing tax rate and tax revenue will increase. That's not the magic solution.
#
In fact, there are ample studies which show that if you reduce the tax rates and you increase,
#
essentially end up broadening the tax base, you reduce the load on the system,
#
and that's how tax revenue increases. It's completely the other way around.
#
But that whole thinking in the taxation in the fiscal community, to a large extent,
#
is really, really distorted. So I wanted to mention that. The other thing I wanted to say was,
#
at some point, you talked about poverty alleviation, right? And millions are being
#
lifted out of poverty. It really strikes me that after these decades of central planning and the
#
state-led model of development that they were doing, the overarching objective that Nehru
#
started off with was poverty alleviation. And that is exactly what did not happen.
#
I think that's the biggest failure of that model, that you actually perpetuated poverty,
#
you kept millions of people in poverty for decades when they could have been lifted out of it by
#
doing a course correction. And of course, the whole thing gets delayed. So this is not just
#
talking about high economic ideals and principles. This is about the lives of poor people,
#
them getting affected because of the policies that the government took. And that's the real
#
cost that the economy is paying. So moving on a little bit to what were some of these consequences,
#
and some of these, I think, by now are becoming obvious, that when you have such draconian system,
#
what can happen? The usual stuff by now of shortages, inflation, et cetera. The other
#
thing, of course, that started happening was corruption, right? When you have this system,
#
comprehensive system of permits and controls and licenses, when you can't get things done the
#
direct way, the right way, you will find a way around it, which is exactly what the businessmen
#
started doing. So this whole permit charge essentially created this unholy nexus between
#
the businessmen, the politicians, the bureaucrats, where for every permit, every license was procured
#
using corrupt means. And that's sort of the seeds of corruption getting sown, which became
#
such a big thing in recent times. There's a reason why corruption became so big.
#
Of course, there can be an argument that not all corruption may be bad, because in a country like
#
India, land precious also has these rules versus deals, et cetera. But fundamentally, I think the
#
fact that every license had to be procured using bribes was definitely not the most efficient way
#
of going about it. The other thing that happens, of course, is we have talked about the businessmen
#
being completely stifled because of the license charge. Consumers, we don't talk about that enough
#
during central planning model, because it's hapless guys. Consumers were really, really,
#
they got a really raw deal. You have shortages. Not only are you waiting for years to get anything
#
from cars to scooters to anything, but you also have no access to varieties. Today, something that
#
we take it for granted. We walk into a grocery store, you walk into a mall, there are varieties
#
of everything that is available. That was not the thing back then in 70s and 80s, and we grew up
#
in that world as well. You had one kind of butter, one kind of milk, which was all adulterated and
#
diluted. And the other thing that happened was the proverbial ration card. I remember seeing
#
these ration cards that my mom used to use and go stand in the queue in front of ration shops. Why?
#
Because the government has allocated the provision of food grains and fuel and kerosene, et cetera,
#
that you as a household would have to stand in the line for hours and using the ration card,
#
get it from the PDS ration shops. It is just a mind boggling and inefficient system. You can't
#
just walk into the store and buy the produce, buy the rice, buy the grocery that you need. You need
#
the ration card to get it at the subsidized rate. The one thing that it does is you are obviously
#
shafted because you don't have access to variety. You are subjected to this humiliation of standing
#
in the line and getting really bad quality commodities. On the other hand, of course,
#
there is a market and we talked about it earlier. The market price is at all times high because
#
demand is exceeding the supply. Of course, the incentives of the ration shop owner is exactly
#
what. I am going to keep curtailing the supplies that I'm giving to this ration card holders.
#
Instead, I'm going to take advantage of the high market price and I'm going to sell it to some guy
#
in the black market to make some profit on the side. Again, this is the classic scene unseen.
#
On one hand, the government thinks that I am allocating at a subsidized price and helping
#
consumers, but on the other hand, you're actually encouraging the coming up of this underground
#
economy. Again, a very distorted system even from the consumer's perspective.
#
The last thing that I want to say is that when you are stifling the private sector with so much of
#
imports and permits and protection, et cetera, yes, the private sector may like it because you're
#
protected against foreign competition, you're sheltered, but fundamentally what is happening
#
is there is no spirit of innovation. Going back to the my ambassador example, there is no spirit
#
of creativity. There is no spirit of entrepreneurship. You have no incentive to innovate.
#
You have no incentive to expand because everything is just so costly for you in terms of time and
#
resources. You're creating a system which is grossly inefficient where shortages are absolutely
#
entrenched. I'll give you a really funny example. In 1991, and this I read about in this fantastic
#
book called Commanding Heights, which I'll send you the link to. In 1991, there's a public sector
#
unit called Hindustan Fertilizer Corporation, and it is supposed to produce fertilizers.
#
It has 1,200 workers who are clocking in every day. You have to sign your name in the register
#
and all of that. They're clocking in every week. It turns out that Hindustan Fertilizer Corporation
#
has been in business for about eight, nine years or so, but it is yet to produce any unit of
#
fertilizer. Why is that? The equipment, the machinery was bought by bureaucrats because
#
it's a public sector unit. They procured it from Germany, from Italy, from London, all over the
#
places because they got it from wherever it was cheap because you're optimizing on the scarce
#
resources. They bought it from wherever it was cheap, but it turns out when they all bought it
#
together, the machines didn't fit together. Everybody just pretended for eight, nine years
#
that the plant is operational, and they all got paid because these are government employees.
#
12,000 people clocking in.
#
Yeah, but not a single unit of fertilizer had been manufactured. You're just pretending that it
#
is operational simply because you have basically vested production to the bureaucrats. You have no
#
idea how to run business. This is a completely hilarious example of how things can go wrong
#
if you let the state do production. Essentially, what ended up happening is that by 70s and 80s,
#
you have created a system where there is inefficiency. There is shortage. The consumers
#
don't really get what they want. The state is deciding what you should get at what price.
#
The financial sector is completely stifled. That's the thing that you've created in 30 years with
#
all these lofty ideals of central planning and state-led growth.
#
I want to double-click on three things and then come back with a question for you.
#
The first of the things I want to double-click on is really the effect that power has. It is
#
entirely predictable that as the state grows more powerful, you will have more corruption.
#
What is corruption? Corruption is the state having discretion. The more discretion it has,
#
the more scope there is for corruption, and power always corrupts.
#
That is necessarily going to be the case. I used to get very
#
amused when this Anna Hazare movement was going on, anti-corruption and all that,
#
that yes, you should be anti-corruption, but your solution is completely wrong.
#
Your solution is you have another government body as an oversight body, which is also not
#
accountable and all of that. That isn't going to help anything. That's only going to make the
#
problem worse. That's one way to think about the problem of corruption.
#
The second thing that you pointed out is that inevitably also then what happens is when the
#
state is telling you, you can't do 50 things, all of those, whichever are victimless crimes,
#
eventually go into the underground. Now, the way that it works, for example,
#
Bruce Yandel, who's a regulatory economist, has this great phrase,
#
Baptists and bootleggers. The idea is that the Baptists will say,
#
drinking is evil, don't drink, so drinking will get banned, there'll be prohibition,
#
and then the bootleggers will come up. His point was that they are basically hand in hand,
#
and even if they're not literally colluding, they are effectively hand in hand,
#
which is why the fatal flaw in Shah Rukh Khan's film, Raees,
#
was that he plays a bootlegger in that, and then when there is a politician who is making
#
speeches for prohibition who comes to that area, he wants to disrupt him and stop that guy.
#
And I'm like, no, in the real world, that guy is your best friend. You are literally funding that
#
guy. That's how he's getting elected. You want leaders like that. My third point is that
#
inevitably what we don't realize is that, you spoke of the hapless consumers.
#
My sense is, and I will be bold enough and vain enough to call it Verma's Law,
#
and Verma's Law is that most interventions in free markets amount to a redistribution of wealth
#
from the poor to the rich. Not from the rich to the poor, from the poor to the rich.
#
For example, take tariffs. Let us say that Rajeshwari is a domestic consumer who makes
#
widgets for 10 rupees. Now, international widgets are much better. I can get great
#
international widgets for 8 rupees, or I can get much better widgets for the same 10 rupees.
#
However, Rajeshwari bribes the state, and the state puts an import tariff of 10 further rupees
#
to 100 percent. And therefore, that means that I can no longer get foreign widgets, and I have to
#
buy Rajeshwari's widgets at 10 rupees. Now, what happened here? What happened here is that there
#
was a redistribution of 2 rupees from me, which I would otherwise have saved, which goes into
#
Rajeshwari's pockets. In public choice theory, there is a phrase, diffuse cost concentrated
#
benefits. So now there are millions of people like me who've lost 2 rupees each, but we don't
#
even know it, so we can't even argue. Whereas that one interest group, which is Rajeshwari,
#
is getting all these 2 rupees from everybody else, and it is in her interest to have the tariffs.
#
So whenever you have interventions in free markets like this, it is actually redistributing wealth
#
from the poor to the rich, because it is the poor consumers at large who lose out, and specific
#
interest groups which win. And most people don't realize this. And isn't this something we should
#
outrage about? Forget about whether you're for or against redistribution from rich to poor. This is
#
literally poor to rich, and that is what statism does, and that is what interfering with markets
#
does. Now, my question for you is based on a hypothesis which Kumar Anand and I were planning
#
to write a paper on once. We never did. Maybe we will one day. And it was based around, it was
#
sparked off by the question about why we have such a rent-seeking mentality as a people.
#
I think Jagdish Bhagwati once made the observation that China is profit-seeking,
#
India is rent-seeking. Now, I don't know enough about China to pontificate on that,
#
but in India, there has certainly, through the decades, been the mindset,
#
ki business karenge toh kisi ko exploit karna hai. You know, you're always looking to kind of take
#
advantage in some way. It is a very zero-sum mentality which doesn't correlate with the nature
#
of the world, and maybe in urban metros and all that, with new startups and all that. In certain
#
circles, it may not be like that, but trust me, it is like that in most of India, the default
#
mentality that the only way I can get ahead is by stepping on someone else. And Kumar and I had
#
the theory that, listen, this is not something inherent in Indian culture or something like that.
#
This is an exact consequence of the institutions we have and the institutional setups we have,
#
that if you are in a society where the state is all-powerful, where the only way for you to
#
get ahead is either to be an agent of the state or to collude with the state to take advantage of
#
others, then inevitably, it will lead to this kind of zero-sum rent-seeking mentality. And
#
therefore, we underestimate the effect to which cultures can be shaped by institutional designs
#
and by the design of the state. So, you know, so what is your...
#
I completely agree with you, right? So, for example, let me give you some illustrations,
#
right? Which helps exactly based on what we're talking about. Imagine you're in a situation
#
where you're constantly being told the resources are scarce, right? That it's a zero-sum game,
#
natural resource, economic resource, financial capital, everything is scarce because we have
#
basically autarky economy, we've closed off the economy to the rest of the world.
#
And then the state is saying, okay, so there is this hundred rupees of resources,
#
I am going to decide the allocation of that depending upon who I think deserves it,
#
who is producing the goods that the economy needs, and I will be the final, the central
#
planner who does all the allocation. Now, there are all these 50 industrialist businessmen,
#
whatever, suddenly there is this competition, right? Which need not be, it is artificially
#
created. Because if you just opened up the economy, then you have the whole world from
#
where you could just import resources, et cetera. But because you've closed that opportunity,
#
yes, of course, it's a poor country, there are limited finite resources. And now you're creating
#
this competition amongst these 50 industrialists who are saying, oh, but if you carry favor with
#
me, if you send enough of your people to the corridors of Delhi, I might give you the license.
#
And if you don't, then you have to wait in the line. So automatically, I think that creates
#
that rent-taking mentality that I have to step on somebody's head in order to get ahead, right?
#
That's the artificial scarcity and the competition that gets created. Likewise,
#
imagine the financial sector, right? The bank is going to give credit only to the person that the
#
RBI tells the bank to. So I have every incentive to lobby with the government, to lobby with the
#
RBI, et cetera, saying that, oh, but I deserve the credit more than the next person. Again,
#
rent-taking mentality. So at every point of time that the state is deciding the allocation and
#
calling these resources scarce, of course, there's going to be rent-taking mentality, right? Because
#
we all want to get ahead in the sense that they want to produce, they want to make profits,
#
they want to earn money. But it's not a market system where, again, going back to what we were
#
saying, there are resources that you have access to, there's a price mechanism, there's a signal,
#
you respond to the signal and you do what you do, right? That's not what's happening.
#
Here, the state is allocating and deciding and distributing every damn thing. So, of course,
#
as the private sector is completely subjugated to the state, what other option do you have other
#
than nurture a rent-seeking mentality? And it gets entrenched because the system has been perpetuated
#
because even if it did liberalization, that system hasn't gone away. Even today, for example,
#
it's a PLI scheme. The bureaucrats will decide that these are these 12 industries to which we
#
are going to give these subsidies because we think these industries are the ones that deserve,
#
based on some criteria that is completely opaque to everybody else. Which means all the other guys
#
are thinking, when will my turn come? Does it mean that that guy lobbied more than I did? Should I
#
pay more visits like Narayan Murthy to Delhi? And all this guessing game starts, the rent-seeking
#
mentality, I want to get ahead of the others, right? Once again, the state doing an allocation.
#
So, I completely agree if the institutions are designed in such a way that there is one big guy
#
at the top and you're creating a pyramidal structure and then there's a hierarchy and I'm
#
doing all the allocation and distribution, the rent-seeking mentality is absolutely inevitable.
#
So, I think one thing I wanted to mention, once again, I don't know how many people realize it
#
and going back to the era that we were talking about is we talk a lot about emergency. It's like
#
this dark period in history that is an embarrassment for democracy, the black patch
#
of democratic period. But there's a lot of economic reasons behind that emergency,
#
right? It's not just Indira Gandhi feeling insecure about losing power. It is not just
#
Muradji Desai and JP mounting a campaign. There were a lot of fundamental economic reasons for it.
#
For example, again, going to the specifics. Before you lay out the reasons, I should point
#
out just in case listeners get confused that when you say there are reasons for it,
#
you are not justifying it, you are explaining it. The emergency was horrible. Nothing like that
#
should have happened. Absolutely. I mean, there is just no way that I would ever say that it was
#
justified. I'm saying that to understand why emergency happened. Indira's mindset, the state
#
of the nation. Exactly. Explaining why Indira Gandhi did what she did. Now, right before
#
emergency happened, the economy basically just falls off a cliff, right? During this early 70s,
#
we have this again, foreign exchange crisis. Inflation was basically around 20%. If you think
#
of inflation as the worst tax on the poor, this was the period of the worst tax on the poor with
#
20% inflation. And agriculture was suffering because as I said, exactly what was happening
#
during Nehru's time, because of industrial output production, the demand for agri products was
#
going up, but we didn't really have enough supply. So food shortages were happening.
#
After the Bangladesh war of 1971, which we won, but the cost of the Bangladesh war was quite high
#
and there were lacks of refugees coming into India, which further aggravated the food shortages.
#
Eventually, there were food riots in India. It was that bad. And then on top of that,
#
this was a very volatile period because the Bretton Woods system collapses. For those of
#
you who do not know, the Bretton Woods system was a system of fixed exchange rate,
#
and that basically collapses in 1970s. And that is a very turbulent period for foreign exchange.
#
Also, what happens is in around 1970 to 73, oil prices shoot up because there are tensions in
#
West Asia. This is something that causes very high oil prices all over the world. India being
#
an importer of oil obviously gets impacted through high import cost. So all of these factors
#
become extremely important because this also showed that the government was doing gross
#
mismanagement of the economy. People rioting on the streets because of food shortages was
#
extreme. Unemployment was extremely high. And the mismanagement of the economy became so bad that
#
this is basically what was used by JP and Moraji Desai to a large extent to say that if you get
#
rid of Indira Gandhi, that's your deliverance against unemployment, food shortages, inflation,
#
et cetera, which of course resonated with all the people, with the common people, because they were
#
really suffering from the mismanagement of the government. So that's why I said that one way to
#
understand why emergency happened, because it was Indira Gandhi's escape from this gross
#
mismanagement of the economy. It was almost like, I'm going to distract attention and I'm going to
#
start focusing on this crazy stuff called emergency and put all my opposition, enemies, everybody
#
behind the bars. And you basically just get distracted from the severe economic problems
#
that's happening. So I thought it's important to lay it down there because emergency was not
#
happening in vacuum vis-a-vis what was happening in the rest of the economy. Now, unless you have
#
anything further to add on this point. Nothing substantive, but just the observation that is
#
interesting how there can often be this vicious cycle between the loss of economic freedoms and
#
the loss of political freedoms. That once you lose economic freedoms, a country kind of gets in a
#
worse and worse state. And often one way of dealing with this is then by reducing the power of the
#
people, which is basically repression. So economic unfreedoms and political unfreedoms often
#
go together and the opposite is also true. Absolutely. And now once we have discussed
#
about Indira Gandhi's government, 66 to 77, I want to once again look at what was happening in China.
#
And this is the most critical period of comparison, right? China, after these crazy experiments by
#
Chairman Mao, basically experiences the Chinese economic miracle, exact opposite from the trough
#
to the peak. And the man who made it happen was Deng Xiaoping, right? I don't want to go too much
#
into the historical context and the details of it, but Deng becomes the Chinese Premier in 1978.
#
And this is a time when all these other Southeast Asian economies are doing spectacularly well,
#
right? Singapore, for example, Deng visits Singapore and finds that most of the people
#
who are working in Singapore are all Chinese. And he says, well, China is so much larger than
#
Singapore. Why are we not doing what Singapore is doing? So he basically said that I want to build
#
thousand Singapore's in China. That's the vision, right? And interestingly, I want to draw the
#
parallel with our 1991 reforms. And I may be wrong here. I'm going out on a limb, but in my mind,
#
when I analyze history, in 1991, we did reforms and we'll talk about what was happening in India
#
post 1977 as well. Predominantly, the reforms were triggered by a crisis, right? Of course,
#
there was a consensus building and all of that was happening, but the trigger was the balance of
#
payment crisis, right? And this is something that Josh Feldman, our common friend, who I deeply
#
respect for his understanding of the Indian economy. Exactly. And he has this very interesting point
#
that in India, it has always been the case that we care more about stability than growth, right?
#
So when the BOP crisis happened, the immediate urgency of the hour was to restore stability
#
and building on all the consensus that had been forming from eighties onwards,
#
we did the reforms because we wanted to resolve the crisis. We wanted to restore stability.
#
And of course, after that, the momentum of the reforms started slowing down, right?
#
Contrast to China, the main problem, of course, that China had was the famine of Chairman Mao,
#
but Deng Xiaoping's reforms of China, but not necessarily triggered by a large economic crisis,
#
right? They happened because he had the vision of facilitating growth and alleviating poverty for
#
millions of Chinese, of creating a Singapore, of creating this growth miracle in China, right?
#
And as a result, the reforms were not just for two years or three years. They continued for a long
#
period of time. And the reforms were not just about removing the distortions and undoing what
#
had been done earlier. Over and above that, he did structural reforms, which is what we did not.
#
What we call structural reforms, of course, they changed the structure of some sectors,
#
but they were essentially undoing the mistakes and misadventures of the past.
#
So that's what Deng does differently in my reading of it, right? And as I said,
#
I could very well be wrong because this is just a hypothesis. Now, what does he do?
#
What he does is he basically starts, interestingly, in the political realm,
#
he retains communism, right? It's a deeply communist country after all. But in the economic
#
domain, he brings what is called market socialism, right? And they call it communism with Chinese
#
characteristics because there was this market aspect of it, right? Which was very, very,
#
again, puzzling. It's almost like parliamentary democracy with central planning, right? It's
#
the opposite of it. It's authoritarian government doing market kind of reforms.
#
Except it's largely rhetorical because socialism means that the state owns all public resources.
#
So obviously, he's using those words so that linguistically, rhetorically, it is acceptable
#
to people out there. But essentially, it is not that at all, obviously.
#
Yeah, agreed. So the reforms that he brought about essentially was that he started loosening
#
state control and regulation over the private sector to a large extent. He started opening up
#
to foreign trade massively. He created these special economic zones, right? Which are
#
essentially zones from where you can import free of import duty. And your trading partners can
#
also import from it at a lower cost, which basically became a big ingredient of the China
#
success story. And over and above opening up to trade and reducing state control over
#
private means of production, he also started attracting foreign direct investment, right?
#
So over a period of time, China got millions and millions of dollars of FDI, which is basically
#
all these MNCs setting up shop in China to use China as their manufacturing base, which became
#
the spectacular story. And in addition to that, Deng did two things. One was reform of the
#
agricultural sector, right? The whole collectivization of farming that Mao had started,
#
he reverses this, he restores private ownership of agricultural land, and he puts in a lot of
#
initiatives and innovations to improve productivity of the agricultural sector.
#
Now, what that does is on one hand, as agriculture employs a lot of people, as you start improving
#
farm incomes, their demand for manufacturing goods is increasing, right? So that automatically
#
creates a homegrown demand for manufacturing over and above the export demand that's coming
#
from the global market. Secondly, what it does is as agricultural productivity is improving,
#
people are moving out of agriculture, right? You just don't need as many people anymore.
#
And then people are finding jobs in this manufacturing sector, which is coming up,
#
which is exactly the transition that should happen in a growing economy.
#
So that happened from 1978 onwards. And the second thing he did was he did education reforms,
#
right? Of course, in the socialist way, the primary education, et cetera, et cetera,
#
but he started that. And what that did was it created this large workforce, cheap labor,
#
of course, because it's a poor developing country at still that point of time, but large workforce,
#
which had basic education. So they could actually, they could go to the factory,
#
do all the jobs that Adam Smith had envisioned, right? All the division of labor of thousands of
#
people sitting in the factory floor doing the work that they are doing. But he created that
#
education and enabled them to move from agriculture to the urban areas, to the SEZs, to the manufacturing
#
centers. And the reason I'm harping on this is because these are exactly the two things
#
that we did not, right? So there were the structural reforms that he does over and above
#
the opening up of the economy. And of course, as a result of that, what happens is that
#
between 1978 and 1993, China's average GDP growth rate is close to 9%.
#
In comparison, India's growth rate is exactly half, four and a half percent or so, right? So
#
that's how much of a lead China got over and above us, despite the fact that we started off
#
exactly the same level for centuries, not just decades, right? And that's why I find the story
#
fascinating how the journey of two countries can become so different, not withstanding all of their
#
other political differences, et cetera. And then of course, China just takes off on this epic
#
transformation path, right? I mean, at no point in the last time India's per capita GDP was higher
#
than China was mid 1980s. And that was the last time we were ahead of them. And then of course,
#
they just take off on a whole different plane altogether. And we sort of bumble about, and yeah,
#
we do have a boom phase too, but we are never able to catch up to China's level, right? So I thought
#
that point was very interesting that in 1978, what was happening in India, I'll come to that
#
unless you have something to add, but we were basically suffering from the hangover of this
#
massively centrally planned, closed, autarkic state. And all around us, there are these East
#
Asian, Southeast Asian countries, which are taking off one after the other, just zooming past us,
#
right? Irrespective of whether it's South Korea with a small domestic market or is China with a
#
large domestic market, right? They adopt this common model of export-led growth. They do all
#
the reforms. Almost all of them do this under state-led model of development, right? In none
#
of these countries, we get the Western capitalism of the US. These are all the state-led model.
#
They all started with central planning, but they just take off at a whole different trajectory.
#
We are bumbling about suffering from the hangover of what we had started. So that's why, again,
#
I just find it so fascinating that, of course, it is true that from 1980s onward, our discourse
#
also starts changing, but it's never at that level at which some of these Asian countries
#
are able to do. So you know what sort of strikes me about China and this is, so I thrown up this
#
sort of hypothetical question to a few of my friends in the past. I don't know if I've ever
#
asked you this, but let me ask you this right now and let's see what answer you come up with.
#
Which person has done the most good for humanity in the last 50 years?
#
Wow, that's a tough one. I would say given the millions of people who were lifted out of poverty
#
in China, just by sheer strength of number, I would say Deng Xiaoping.
#
Yeah, that's absolutely my answer. I asked our friend Ruben Ibrahim this. This was Ruben's answer.
#
It is an obvious answer. Hundreds of millions of people out of poverty.
#
Ajay Shah has an argument with this where he says, no, no, no, Deng led to Xi. You can't give him
#
any credit. I don't buy that argument at all because that's like saying 91 led to Modi or
#
whatever. All that a leader does is A, in the short term, that man lifted millions,
#
hundreds of millions out of poverty. That's a huge humanitarian good. And two, even in the long run,
#
he increased the probability of China going in a better direction. It's not his fault if Xi came
#
along. The counterfactual could be far worse. Now, what I find remarkable about Deng and
#
so it's, you know, in the context of everything that he did is the lack of hubris. We've often
#
heard that phrase power corrupts power, absolute power corrupts absolutely. He had absolute power
#
within China, and yet he had sort of the foresight to give up a lot of it. You know,
#
late 1970s, it was a household responsibility system, which was basically you're decollectivizing
#
agriculture, you're turning that around, you're giving autonomy and property back to the farmers.
#
You know, the open door policy, which allowed trade and investment to come in, you know,
#
the dual track pricing system, again, a very clever way of sort of making the transition where
#
you're saying that, okay, there'll be state controlled prices and market prices at the same
#
time, let's see what works better. And eventually, you know, the transition happens. But what really
#
impresses me is the whole funda of special economic zones in places like Shenzhen, Yuhai,
#
Shantou, Xiamen, if I'm pronouncing them correctly, if I'm not, please forgive me,
#
Chinese listeners, deep respect for Deng and for everything you guys achieved. And the key
#
principle here is, again, that instead of thinking in a top down way, as men of power will do,
#
he's actually thinking in a very different bottoms up way and saying, let's set up SEZs,
#
and then let's do AB tests, let's try different policies, let them compete with each other,
#
let's see what works where best practices will emerge from the bottom up from these places,
#
rather than are giving dictates from the top down. And in a sense, it is one Jogaru way of
#
achieving the benefits of proper federalism or decentralization. Like the whole idea of a federal
#
structure in India is to centralize, but ideally, the India I'd like to see is a little bit more
#
like the US where the states are far more power. So effectively, the states are competing for labor,
#
the states are competing for capital, and those incentives are great. In India, too much power is
#
top down, too little of the taxes actually find their way to the states. And therefore,
#
those incentives aren't in play for the states to be able to compete with each other. And even if
#
they wanted to compete on many dimensions, they cannot because they're not trade subjects. So
#
Deng sort of achieves this in a way by saying that we want bottom up innovation, let's start
#
these special economic zones, let them run under different laws, let's do AB testing, let's try out
#
different baskets of laws, let's get foreign investment, let's do all of these things.
#
Let's see what works and then he goes with that. And plus, as I mentioned earlier in the episode,
#
a lot of the local decision making, not just in economic terms, but just in general governance
#
terms, is incredibly decentralized. So yeah, one party, one state and all of that. But in terms of
#
how that machine works, he's decentralized it. And my sort of cynical way of thinking about this,
#
again, is that I feel like he's an anomaly, he's an outlier, that the system is designed in such
#
a way that it's like the great man theory of history. You know, China was lucky to have Deng,
#
but Xi is what you would typically kind of expect, you know. And what happened in India
#
till 1991 is what you would expect with the centralized design of the state. Then we had
#
the lucky accident of the balance of payments crisis and another bunch of tremendous outliers,
#
the great reformers like Manmohan and Montek, who from the late 1970s onwards were planning
#
for the reforms, which eventually, you know, when it came, everything was ready. So shall
#
we talk about that period? Or what do you want to respond to? Just a few snippets, because you
#
mentioned the special economic zone. So did you know that during Indira Gandhi's time, in fact,
#
the first special economic zone was set up in India. And this was SIPs in Andheri, Bombay. And
#
this was the start of the IT export sector, which basically started with TCS getting set up in Bombay
#
in the 1960s. And SIPs became the first special economic zone from where electronics and IT export
#
started. So I just wanted to add that snippet. But basically, we don't really have special economic
#
zones the way China has. I mean, SIPs is a very, very small area, because of course, it's just IT
#
exports. And my larger point is that if you have a special economic zone, and you say that if we
#
liberalize the laws here, we have a different set of laws, they will work better, this region will
#
grow. Then for me, that is a logic to extend those laws everywhere. To me, all of India should be a
#
special economic zone. And that's kind of what Deng did, that he extrapolated from the good that
#
was happening in those special economic zones, and then they just spread everywhere. And yeah.
#
Absolutely. So I think that special economic zone is almost like an experiment, what we call the
#
sandbox in regulation, etc. You get this constricted finite area, you do all the experiments,
#
and you see basically what's working, what's not, and then you take it up to the larger
#
economy. In India, for example, we have gift city, where there's a lot of experimentation
#
underway in terms of financial deregulation, etc. Of course, many things have gone wrong,
#
we don't have to talk about it now. But we have tried in our own small ways, but of course,
#
never ever at the level at which China did. And coming to Deng, I'm a big fan, right? I
#
completely don't agree with what Ajay Shah said, but we don't have to talk about that.
#
I think he was exactly as you said, he was an outlier, right? He was an outlier. How did
#
Mao's China, I mean, he was a part of Mao's party, of course. How did that produce a person like Deng
#
is like, it's a complete mystery to me. And what he did was, of course, at that time, as I keep
#
saying that there were these Southeast Asian Tigers, China was not the first country to show
#
the powers of globalization. All of these other countries were already doing it. But what is
#
unusual about Deng and China is that it still is a vast country, right? And to use globalization,
#
to use the power of exports and market, etc., to essentially give wealth, to essentially give
#
richness, so to speak, to this vast population in that shorter period of time, in literally
#
just 30 years, is an unusual thing that has not happened in history, right? Which is what sets
#
China and Deng apart from every other economic success story that has happened. Of course,
#
there are problems, right? I mean, China has endless problems today, the economy is falling
#
apart. All the problems of taking fast decisions and all of this are becoming very apparent now.
#
But would we rather have a China without Deng's reforms? Absolutely no, right? And also what they
#
did was, they showed the power of globalization, right? I mean, where did this whole consensus of
#
the 19, late 70s and 80s starting to change in India? Where did that come from? It didn't come
#
out of thin air. It came because all the people like Manmohan and Montaig and all the others and
#
Rakesh Mohan, they were looking out at the world, right? They were trying to learn lessons, basically
#
what hadn't been done till then. They were looking at China, they were looking at South Korea, and
#
they were getting inspired and influenced, which is why there is a positive externality from China's
#
growth story to India that we fail to recognize. In fact, Narsimha Rao, the father of reform, so
#
to speak, was deeply inspired by Deng. He never got to meet Deng because, of course, when Rajiv
#
Gandhi visited, he was not taken with him, but he was deeply inspired and influenced by Deng
#
Xiaoping. And in fact, Narsimha Rao is termed as the Deng of India, right? So there is this parallel
#
and which I find is absolutely fascinating. Coming to the late 1970s, as China was taking off on this
#
path, what was happening in India? There was gradually a change of discourse, right? That was
#
the first time we started seeing that there was some intention of course correction. Why was this
#
happening? Essentially, it was led by a group of people. For example, I think you and Ajay talk
#
about this in one of your episodes, which is where I learned this as well, that there's Morarji Desai,
#
there's H.M. Patel, there's D.T. Lakrawala. All these people come from Bombay to Delhi.
#
They are not inspired by the Delhi politics of central planning. They have seen Bombay
#
businessmen up close, and they take that sentiment with them to Delhi, and that influences the change
#
of discourse. There's Manmohan Singh who writes his PhD thesis in mid-1960s, basically questioning
#
export pessimism. I mentioned earlier, he was the first one to point out that Nehru's five-year
#
plans never had any export strategy, right? Then there's Monte Carlo Walia. He's written about this
#
in his book backstage as well. Fantastic read. He comes back from the U.S. and he starts working
#
eventually for Rajiv Gandhi. Then there's Rakesh Mohan. There's a report on de-licensing, which
#
actually starts getting written then. It's not sudden. It's basically happening over a gradual
#
period of time. There's a change in discourse that is starting to take place. There's Jagdish
#
Bhagwati and T. N. Srinivasan. Again, T. N. Srinivasan deeply respect Bhagwati as well.
#
They start writing papers about the problems of the central planning, problems of this
#
state socialism, and why we need to start opening up and loosening up more.
#
What happens during this time, right? This is post-emergency, 1977, Indira Gandhi loses elections,
#
Janata Party comes to power, and this ragtag basically government, which is basically put
#
together a ragtag group of political parties. This is when the discourse is changing, but
#
towards the end of it, this is also when the economy suffers several shocks. We once again,
#
because fundamentally nothing much is changing in the policies, just the discourse that's changing.
#
By the time Indira Gandhi gets re-elected in 1980, basically she gets re-elected on the back
#
of economic discontent again. There's inflation, there's rampant unemployment shortages, foreign
#
exchange crisis. All of these things keep getting repeated. Interestingly, when Indira Gandhi gets
#
re-elected in 1980, this is sort of a blessing of history, so to speak, that she could have again
#
gone back to her 1966 self, right? She could have again gone draconian and deeply socialist and
#
central planner, which she did not, right? Luckily for us, she actually started softening the tone
#
of central planning. She started loosening some of the regulations on the private sector. She
#
started talking about addressing the sickness, the inefficiencies of the public sector enterprises.
#
She starts gradually opening up to FDI. All of these actually start happening. In fact,
#
interestingly, in 1982, there's a document called Operation Forward, which she prepares
#
basically to put together a blueprint of how we can come out of... So that's remarkable, right?
#
I mean, I think there is this quote, and I remember you or Ajay, somebody mentioning that
#
it was Sanjay Gandhi's mother who could have done the emergency, and it was Nehru's daughter who
#
could have called the elections again. And maybe it was Nehru's daughter again who realized that
#
this system is really not working along with all the other change in discourse. And she does put
#
together this Operation Forward document of 1982, which is remarkable for somebody who did all these
#
draconian laws. So there was that moment when that mindset change happens. Maybe a hypothetical
#
question about Nehru gets answered by his daughter that maybe she is beginning to change her mind at
#
this time. It's possible. And of course, we wouldn't know what would have happened if Indira
#
Gandhi lived longer, because of course, the unfortunate assassination happens. In 1984,
#
Rajiv Gandhi becomes the prime minister, right? Now, Rajiv Gandhi is the first prime minister
#
who has ever had a job outside of politics. He was a pilot, right? And he, of course, was much
#
more exposed to the real world, so to speak, than his mother or his grandfather. And he is,
#
in some sense, a reformist prime minister, right? He uses computers. He wants to import computers.
#
He sees the private sector is all shackled up. He wants to open it up. So he's not able to go
#
full hog on it, because of course, there were a lot of pushbacks and criticisms, because the system
#
has deeply entrenched central planning mindset. But it does start the ball rolling in multiple
#
ways. For example, Montec working for Rajiv and all of that. So little by little incremental
#
liberalization, incremental deregulation starts happening from the mid-1980s onwards. And this is
#
what gets reflected about GDP growth as well. So I didn't talk about the GDP growth numbers.
#
So we said that in 50s and 60s, by the time Nehru passed away, the growth rate was about 4.3%,
#
which was great compared to the pre-colonial growth rate, sorry, a pre-independence growth rate.
#
Then in 1960s and 70s, the GDP growth rate was less than 4%, right? 60s, 70s, together,
#
it was about 3.9% or so or even lower. This was called the Hindu rate of growth, right?
#
There was something wrong about being Hindu that the growth rate was just so abysmally low.
#
But then in 1980s, because of this gradual incremental liberalization that happens,
#
of course, the energy of the private sector starts getting released. That's the beauty of
#
if you remove the shackles and the controls, the private sector responds, and that shows up in
#
growth. It's almost like a direct causality. The growth rate is 5.6%. The highest growth rate in
#
the post-independence era till then, there was an economic boom, right? So this is basically what's
#
happening in the 70s and 80s. And we can take a break here, unless you have something to add
#
before we go to the reforms period. Yeah, let's take a break. But before the break, I'm sort of,
#
you mentioned incremental change. And I think a younger me would often get impatient at the
#
pace of change in the world, which is a good thing. Young people should be impatient and
#
full of fire. But what I have realized over time is that change will naturally take a lot of time
#
because time passes fast and the state moves slowly. And a classic illustration of this is
#
something that happened in the late 1980s when, and I've got a great episode with Montek Singh
#
and the episode you were referring to is called the reformers. It's one of the everything is
#
everything episode. So that sums up this entire period. There's an anecdote that Montek mentions
#
that he was chatting in the late 1980s when he was in Rajiv Gandhi's government with the principal
#
secretary B.G. Deshmukh. And at one point B.G. Deshmukh, they were having tea together and B.G.
#
Deshmukh lifts a cup of tea to his mouth and Montek does the same thing. And at that moment,
#
and this whole visual scene, I'm just painting myself, but over the rim of the teacup as he's
#
holding it in front of his face, B.G. Deshmukh says to Montek, Montek, Delhi is such a city where
#
cups change, but not spoons. Right. And that kind of tells you about the entrenched system,
#
the deep state, the way politics works and why change can often proceed at a glacial pace. And
#
it's a good time to take a break because I think with the arrival of Manmohan and Montek into our
#
narrative, India got a break and so are we. And before we take a break, I just want to add one
#
last thing. And after this, we'll just directly dive into the 1991 reforms is that if you have
#
to summarize, right, since we have covered 40 years, right, what strikes me is that when you
#
continued this particular model of growth for 40 years, and of course, then you liberalized and
#
you thought, fine, that's done and we've moved on to the new paradigm. It's not that straightforward
#
because what you did was you have deeply entrenched a socialist mindset. And that's
#
something that we suffer from, that we pay a price of even today. So the reforms on the surface, yes,
#
they unwound, undead, all of that. But fundamentally today, there is still a deep suspicion of private
#
sector, of foreign investment, of exports. So at every step of the way, right, if we have to sign
#
free trade agreements, if we have to come up with financial derivatives in the financial sector for
#
offering hedging options, if we have to privatize the banking sector, anything that we have to do,
#
right, if you have to open up to more FDI, if you have to get more capital investment from abroad,
#
every step of the way, even though we liberalized post 1991, because of this 40 years of deeply
#
entrenched socialist status mindset, we are simply not able to break free of that. And then it's
#
just a matter of luck which government comes to power. If one government is a little bit more
#
status than the others, we just keep going back, regressing. If one government a little bit more
#
forward, we move forward a little bit, but we are still very status, right? So the socialist mindset
#
that no, the free markets are not a good thing, right? And we have replaced the state in the
#
post 1991 world with a whole bunch of regulators, right? And the regulators will now clamp down on
#
the private sector, on the financial markets and say, I'm going to ban this. I'm going to ban that.
#
I will not let the product develop. I will not let this market develop. That still continues.
#
So it's something we should not think that just because we did reforms in 1991,
#
there was a complete intercept shift. There was a paradigm shift and oh, that was a whole new world.
#
That is not the case, right? We built it over this base. And I don't think that will ever go away,
#
because it is just very, very deeply cemented in the psyche of policy makers. And it helps, right?
#
I mean, fundamentally, the default option is state is good, markets are bad. And it just feeds
#
into that psyche in some sense, where some of us keep saying, no, but there is a middle area. Let's
#
think about that. But I think we'll always be the minority. And you know, I can't help but double
#
click. Since you mentioned the word socialist and socialism so many times, there's another episode
#
of Everything is Everything titled Beware of these Luxury Beliefs. Now, what is a luxury belief?
#
Luxury belief is a term coined by Rob Henderson. And basically, a luxury belief, the way I
#
interpret it is that it is a belief that is easy for people in air conditioned rooms to hold,
#
because they don't face the consequences of that. And they usually harm the poor. And the classic
#
example of a luxury belief is socialism. People use the term socialism as if it is a good thing.
#
Many people in some woolly sense think, oh, socialism must mean what is good for society.
#
But that is no more true than nationalism being what is good for the nation. Right? Socialism
#
essentially means statism. The state controls the means of production. In a purist sense,
#
it owns all the property. But you know, even in the regular everyday colloquial sense,
#
the state controls society rather than the other way around. It is deeply toxic. It is dangerous.
#
It involves coercion. It involves the mass scale suppression of individual freedom and consent.
#
And it has been disastrous all through the 20th century. And yet, it irritates the hell out of me
#
that when people wave the preamble about, which they should, I believe they should wave Ambedkar's
#
preamble about, because it doesn't have the word socialist in it. You know, Indira Gandhi,
#
after doing all the things that she did, naturally amended the preamble and put the
#
word socialist in there. And to me, that is a problem. I want you to wave the preamble.
#
I want you to wave Ambedkar's preamble. And I understand that many people prefer to wave
#
Indira's preamble because she also added the word secular, which is an important word.
#
But let's go back to Ambedkar himself, that these two words actually came up for discussion.
#
Right? It was proposed in Ambedkar's time that let's have socialist and secular in the preamble.
#
And he said, no need. He said, no need to put secular because it is already
#
embedded in every law of our constitution. We don't need to virtue signal and say it.
#
Not his words, but his argument. And for socialist, he said, even though he was proposing
#
socialism as the system that the government adopt at that time, before he changed his mind in the
#
fifties, his thing was that this should be a matter of politics. Let this be decided
#
in the political space and not otherwise. Right? And therefore he didn't want that word in there.
#
And I object to that word. People use that word socialism as if it is something harmless. It is
#
toxic. It is dangerous. It hurt the poor of India for decades. It is a terrible, terrible word.
#
And one upshot of this was that, you know, the swatantra party of which I think SP Raju was the
#
last sort of main office bearer. He fought a legal battle for years and years because what Indira
#
also did was she made it a law that if you were a party contesting the elections, you had to
#
plead allegiance to socialism. Now, this was only for the sake of name, but on principle, he said,
#
I will not do that. And I admire that principle, but a good time to take a break. But carry on.
#
Just one last point is that I completely agree with you. Right? I think if there was any word
#
of amending the constitution, we should do it for the right reason, which is to get the socialist
#
word out of it. Because I agree what it does is any government that comes to power almost, I think,
#
feels obliged that we have to abide by the socialist word that's written there because in
#
the most important document of the country and then just everything goes wrong after that. Right?
#
And that's why I said that that's the mindset that we have. So anytime we try to reform anything,
#
and I've been in a limited way involved in, let's say, the bankruptcy reform process, et cetera,
#
but anything that we do, there's always this constant fight, constant struggle. I'm not saying
#
the discourse should not be there. I'm not saying that we should blindly accept. Absolutely not.
#
Let there be debate, let there be discourse. But let's not come into the debate with this
#
preconceived notion that we are socialist, that the state is going to be all good. That's the
#
problem. That's the damage. Right? And on the specific, since I love specific details,
#
ultimately, after the 40 years, where do we stand in terms of the broad achievements?
#
Nehru wanted to industrialize an agrarian economy. Was he able to do that? Did Indira Gandhi manage
#
to do that? Absolutely no. Even today, the agricultural sector employs the maximum
#
percentage of the workforce in the country. Right? Even today. The second thing, the idea was,
#
remember what I started off with, that use heavy industries and capital accumulation in order to
#
win this battle against poverty. What happened to poverty in 1991? Millions were still living
#
in extreme poverty. Right? The whole poverty alleviation thing in 40 years was a complete
#
failure. Did not work. Third thing, Nehru wanted to achieve was self-sufficiency. Right? That's why
#
we will not depend on imports, et cetera, et cetera. Did you achieve self-sufficiency? Absolutely not.
#
At every step of the way, as I kept saying, there were foreign exchange crises. You're begging the
#
IMF. You're getting foreign aid for money, for bailout. How is that a self-sufficient economy?
#
You're getting food aid. Right? That's how dependent you are. So none of the economic
#
objectives could be achieved either. So that basically summarizes this whole 40 years of what
#
did you really land up with? And then of course, now we can talk about the 1991 after the break.
#
You know, at this level, we'll never take a break if we go on and on like this, but I can't
#
resist making two points, which is just to double score what you said about agriculture. It is not
#
just that it employs more people than any other sector in the country, but it employs between 50
#
to 60%. You know, 60% is a figure bandied out. Maybe it's 50%. In Western countries, it is around
#
5%. I think in the US, it's about 5% to 7%. Throughout the West, it is like that because
#
the journey that happens is that agricultural productivity goes up and people move from
#
agriculture to labor-intensive manufacturing and from there, higher up the value chain, services,
#
et cetera, et cetera. And that never happened in India because of our great leaders. The other
#
point about self-sufficiency is I want to draw a metaphor with an individual. Supposing I say,
#
I want to be self-sufficient. So I will not work for anyone outside. So no exports, basically. I
#
will not work for anyone outside. I will stay at home all day and in my little garden patch,
#
I will grow my own food throughout the year. What will happen is I will always be dirt poor. I will
#
often have to beg for food and I will get none of the value that comes from being interconnected
#
with the beautiful world that is outside. Why do we create these barriers and these boundaries
#
and all of that? But yeah, break. Yes. This is when we are finally actually taking a break.
#
You managed to control yourself. No more double-clicking.
#
Long before I was a podcaster, I was a writer. In fact, chances are that many of you first
#
heard of me because of my blog, India Uncut, which was active between 2003 and 2009 and became
#
somewhat popular at the time. I love the freedom the form gave me and I feel I was shaped by it
#
in many ways. I exercise my writing muscle every day and was forced to think about many different
#
things because I wrote about many different things. Well, that phase in my life ended for
#
various reasons and now it is time to revive it. Only now I'm doing it through a newsletter.
#
I have started the India Uncut newsletter at indiancut.substract.com where I will write
#
regularly about whatever catches my fancy. I'll write about some of the themes I cover in this
#
podcast and about much else. So please do head on over to indiancut.substract.com and subscribe.
#
It is free. Once you sign up, each new installment that I write will land up in your email inbox.
#
You don't need to go anywhere. So subscribe now for free. The India Uncut newsletter at
#
indiancut.substract.com. Thank you. Welcome back to The Scene and the Unseen. This is going to be
#
a long episode, which is a good thing because you've got to do justice to something like the
#
Indian economy and we are aiming for this to be like a comprehensive one-stop episode on the
#
subject. You know, Rajeshwari, what inspires me about the 91 reforms and something I didn't realize
#
is that they started long before that, right? Like my impression used to be that, hey, we had
#
a balance of payments crisis. We were forced into the reforms, but the reformer's heart really
#
wasn't in it. And eventually after the first cycle of low-hanging fruit, there weren't enough
#
reforms and the socialist mindset remains. Now some of that is true. The socialist mindset remains.
#
Many reforms are left. But what I hadn't realized and what took me time to realize is that there
#
was a community of people who were true believers in the power of freedom and the importance of
#
growth. And these true believers were at work in a sense from the 1960s when Manmohan wrote his PhD
#
and pointed out that, you know, exports led growth was important. And then, you know, I have this
#
great episode with Montaigne and his autobiography is also great where he talks about how Manmohan
#
asked him to come back to India. And then he says, yeah, okay, I'll come back to India.
#
And he comes back and then there's a community of people like that within the state or associated
#
organs of the state who, even though the climate is not with them yet, you know, because chamchas
#
are taking time to change, as it were, are still working away silently, doing their dharma, doing
#
the research, writing the papers. Montaigne in 1990 wrote this famous M document laying out what
#
reforms there should be. And eventually the time comes and the reforms happen. And there is this
#
whole community of people who are just doing this because they believe it is the right thing. And
#
this, by the way, includes not just some of the men we've mentioned in the episode so far, but
#
also outstanding women like Padma Desai, you know, Jagdish Bhagwati's better half, and many would say
#
better half actually, you know, just a remarkable economist like Ishar Jaja Alivalya,
#
another, and whose memoir, and both their memoirs are just remarkable books.
#
So truly formidable people. And I did an episode of Everything is Everything called The Reformers in
#
which I sort of looked at that longer arc and sort of made the prayer that let us not forget these
#
people. And I've also, I have an episode on the 91 reforms, Shruti Rajgopalan's 1991 project at
#
the Mercator Center is outstanding. It's a public service and important work of documenting that
#
period. So, you know, we should also look at that. So, but what I would like to do is I'd like to go
#
into much more detail with you again in the same way as you sort of broke down what Nehru did and
#
why in the same way as you broke down what Indira did and what the effects were. Take me through the
#
91 reforms. Absolutely. And I really want to thank you for mentioning Padma Desai and Ishar
#
because oftentimes the contributions of female economists get ignored. And there are many more
#
and I think if I remember correctly, the 1991 project at the Mercator Center has pieces on them
#
as well, the Women Economists of the period. Exactly, exactly. So I'm really glad that you
#
mentioned that. And I completely agree with you that it is true that I think Montek himself said
#
that Manmohan Singh and Rao did not waste the crisis, but it was not just Manmohan Singh and
#
Narsimha Rao, it was of course a whole battalion of people. And if they hadn't started thinking,
#
talking, writing, discussing amongst themselves from the 1980s as it were, probably when the
#
crisis happened, we would have still had some reforms because IMF wanted us to do reforms,
#
but we probably wouldn't have gone beyond that. And what happened in India was we went way beyond
#
what the IMF wanted us to do, which I think was predominantly because there was this fantastic
#
group of reformers and intellectual thinkers who had come together. And this was the great accident
#
of that time that it happened and there was the document, there were all the thought process and
#
everything that was ready by the time the crisis happened. So it was almost like an opportune
#
moment as if the crisis was waiting to happen just when this discourse was changing. So what
#
exactly happens in 1991? So by 1990, the economy is in a bit of a precarious situation. Fiscal
#
deficit is upwards of 8% of GDP just of the central government, which is pretty massive.
#
Of course, why? Because the government has just been spending on heavy industrialization and
#
central planning. Overall, with public sector enterprises together, it was well above 10% of
#
GDP. Inflation was again in double digits, the same problem of a shortage economy. Income tax
#
rates were around 50%. That's how prohibitive the taxation regime had become. Import duties averaged
#
above 80%. Excise duties were as high as 125%. So really, really prohibitively restrictive economy.
#
Now, around this time, the first thing, external shock wise, what happens is that in 1989 is the
#
fall of the Berlin Wall and the collapse of the Soviet Union. Why is that relevant for the Indian
#
economy? Of course, because our entire model of central planning was based on the Soviet Union
#
model. And with the fall of the Berlin Wall, essentially that fundamentally shakes this
#
conviction in the state-led model of central planning. I think that was a very, very important
#
event, which must have subconsciously impacted all the policymakers, thinkers of that time.
#
The second thing, of course, that happens, which is basically the main trigger, is that in 1990s,
#
Iraq invades Kuwait. Why is that relevant for India? Because India is a major importer of oil.
#
This is a crisis that was brewing in Middle East, which is a major producer of oil. Basically,
#
that means that oil prices shot up. Our import bill goes out of back. And remember what I've
#
been always repeating, because we never really exported. We were always in a foreign exchange
#
crisis mode. And this is when the crisis gets really bad, because our foreign exchange reserves
#
go down to about $1 billion. To put it in retrospect, the current foreign exchange reserves
#
of the RBI are upwards of $600 billion. But back then, we just had $1 billion. And it was not even
#
enough to pay for two weeks worth of imports, which basically means that the country was on the
#
brink of bankruptcy. Not only did we have enough money to pay for imports, we couldn't repay foreign
#
loans that we had taken as well. And this was the classic recipe of a balance of payments crisis.
#
Balance of payments basically means that you can't make your current account payments, import
#
payments. And when that happens, what do you do? You go to IMF for a bailout. Now, IMF was basically
#
an organization that was created in order to solve many of such problems. And they, of course, come
#
to a rescue. There's this, of course, very interesting story of Chidambaram flying out
#
to Washington DC with gold from RBI stock and sells gold, about 20 tons of gold in exchange for
#
a little bit more than $200 million to temporarily tide over the crisis. And this is humiliating,
#
right? You're essentially selling gold to get loan. And there's no way that any policymaker,
#
any government would feel good about it. So that's what we do. And of course, IMF attaches
#
conditions. And these conditions are called Washington Consensus. It's a 10-point document,
#
which the IMF had come up with. Now, one thing that's important to mention here is that it's
#
not just India that was on the recipient end of Washington Consensus. Throughout 1980s,
#
a lot of emerging market economies in Latin America had been experiencing economic crisis.
#
And the recipe was exactly the same, right? Import substitution, export pessimism,
#
not enough foreign exchange to pay for imports, you have a BOP crisis, you run to the IMF.
#
So the IMF thought that I need to devise, we basically need to devise a 10-point document,
#
which can be peddled to all these countries in lieu of the bailout that we are doing.
#
So that is the Washington Consensus, which was given to India as well.
#
Now, the question is often asked that I think Montek also refers to this in his book, that
#
did the reforms happen entirely because the IMF wanted us to do so? I think that was definitely
#
a very important part, because of course, without that, we wouldn't get the bailout package,
#
the money. But it was also the fact, as I said earlier, that our reformers went beyond what the
#
IMF wanted us to do. And that's the beauty of the intellectual thinking of that point of time,
#
that we didn't just stop at the Washington Consensus. So what exactly happened with the
#
reforms? Of course, we know what happens politically, this is a very, very volatile
#
period of time, right? Ironically, this is not a politically stable time with a political party
#
with absolute majority, far from it, right? This is after the assassination of Rajiv Gandhi,
#
when government after government is just toppling down, and Narsimha Rao gets appointed literally
#
as the Prime Minister. And the whole impression was that this was a caretaker government, which
#
was not going to last. Low and behold, of course, he went on to become the most important person in
#
India's political history, post-independence. And he appoints Manmohan Singh as the Finance Minister,
#
absolutely dream team, right? It was always a function of the people,
#
Monte Carlo Walia, Chidambaram, N. Verma, all of them coming together, right? That was just
#
another spectacular accident of history. Now, in terms of the reform packages, of course,
#
there was a crisis at hand, right? July 1991, Manmohan Singh presents what is called the Dream
#
Budget, which is where all the reforms had to be outlined. Essentially, the need of the hour was
#
to resolve the crisis, right? Of course, this is underlying thought that we need to unshackle the
#
Indian economy and bring out the private sector, the free market, et cetera. But predominantly,
#
the force, the trigger was solving the crisis. And it's important to keep that in mind. And
#
I'll explain why. The 1991 reforms had two main components. One was the whole fiscal deficit
#
reduction, inflation reduction, macro stability that IMF wanted. The second was the more important
#
one, which is the structural reforms, as they called back then, which is basically the part
#
of the reform package that signaled the paradigm shift in economic policy. And this is the part
#
that shifted the focus from subjugation of the private sector and this whole state-led model
#
to gradually freeing up the private sector and the state starting to take a backseat, right?
#
That's the main part of the structural reforms. And there was an explicit recognition that this
#
whole system of central planning had basically been in place for too long, right? There was
#
this recognition. And the whole excessive protection through tariffs and import controls
#
was simply not working. What were some of the important components of the July 1991 Dream
#
Budget? Because that is the most important document. The first one, of course, was that
#
industrial licensing was abolished, except for a few industries where licensing was still retained
#
for strategic reasons, environmental reasons, and to some extent, they wanted to reserve it for
#
the small and medium enterprises, which basically meant that no businessman from here on needed to
#
seek permission from the government to do any aspect of the economic activity that he or she
#
wanted to do. Secondly, if you remember, I had said that this industrial policy resolution had
#
this Schedule A of industries, which was reserved for the public sector. That was drastically reduced
#
and I think it was just down to eight from 18, right? So it's only eight industries where public
#
sectors still operating. Some of them are still continuing, but there was a drastic reduction in
#
public sector ownership. Third, very importantly, the MRTP Act, right? Very prohibitive act of 1969.
#
That eventually was replaced by the Competition Commission Act, but the MRTP Act at that point
#
of time was basically the provisions were relaxed to a large extent. Fourth was FDI.
#
This is the part about, the first few parts is about deregulating and unshackling the private
#
sector. This part is about opening up the economy to foreign investment and exports, et cetera. So
#
FDI, remember I'd said that during Indira Gandhi's second term, they had started allowing a little
#
bit of FDI, but now FDI was allowed from 40% to 51% of equity. And that is significant because
#
with 51% essentially you gain control rights over the company. So that was important. And
#
this foreign investment promotion board gets set up with the explicit objective of pursuing FDI,
#
right? The sudden shift of realizing that, oh, we need FDI because we just can't use our domestic
#
private sector because they're A, not competitive and efficient. And we suddenly, we need to open
#
it up to competition in order to encourage innovation. Then there were a few parts which
#
were not immediately done in the budget, but it was announced. And this shows the foresight
#
of the reformers. One was tax reform, both for direct and indirect taxes. The announcement was
#
that the committee would be set up under Chellaya and this committee would recommend tax, widespread
#
tax reforms. And the remarkable thing was the actual tax reform ended up being more than what
#
the committee had recommended, right? Typically what happens is committees would recommend and
#
ultimately in the policy debate and policy negotiation, the actual implementation will
#
be less than what is recommended. This was the other way around. They went beyond what the
#
committee recommended. Taxation system was streamlined, tax rates were brought down,
#
corporate tax was reduced from 50% to 35%, which was great. The whole income tax prohibitive rates,
#
we started with this current slabs of 10%, 20%, 30%, all of that happened. And it was also
#
announced that financial sector reforms, particularly in the banking sector, which was
#
under this government ownership, would take place under Narsimham committee. And I'll talk a little
#
bit about that. So what it means is with all of these, this list of items, as you can see that
#
there are this attack on this control of the private sector that is getting loosened, opening
#
up the economy, a lot of import tariffs, tariffs were reduced, import licensing was removed, right?
#
So it steadily opened up to foreign trade, FDI, all the things that should have happened earlier
#
now finally start happening, which is great, of course. Yet at the same time, the few things
#
that were not in the budget, which took a little bit longer because of political negotiations and
#
other technical details, which is that the currency, which was still pegged, right? The currency was
#
devalued because IMF didn't want a fixed exchange rate in place. And eventually we moved to a market
#
determined exchange rate. Now, of course, I can do a full episode on this. While we moved to market
#
determined exchange rate, it's really not the case even now. As recent as 2022, the rupee basically
#
got pegged to the dollar, right? So we actually haven't made a whole lot of progress in that,
#
but that's for a different time. Maybe also liberalization of foreign investment in stock
#
market and bond market. That happened a little bit later, not in the dream budget. This whole
#
FEDRA, which I keep talking about, this transformation of FEDRA to FEMA, that also happened outside of the
#
budget. But by and large, the budget basically set out the roadmap of which direction the economy
#
was moving in. And essentially what happens is the remarkable thing is just in two years,
#
you're removing, you're abolishing controls on the private sector, right? The import licensing
#
system gets dismantled. Many items such as capital goes, raw materials, et cetera, can be freely
#
imported. And this combination of de-licensing, liberalization of trade and rupee depreciation,
#
the rupee devaluation, this by itself provides a massive boost to the private sector because
#
that's basically all that was needed, right? And the private sector starts expanding capacity
#
because there is this newfound exuberance and energy and there's a lot of capacity expansion
#
that they start doing, which eventually hits a bit of a roadblock. I'll talk about that,
#
but that happens. Very quickly, before I hand over to you, what did the reforms not include,
#
right? And it's important to understand that as well. There was no mention of privatization
#
in the reforms, right? And for a reason, right? There was already a lot of opposition from the
#
left, as we can imagine, right? You're coming out from this deep socialist mindset to do all of this
#
breakthrough reforms. So privatization was not mentioned. Interestingly, the first time
#
privatization gets mentioned in a union budget, it is 2020 when Finance Minister Nirmala Sitharaman
#
in the wake of COVID talks about privatization. The second thing is consumer goods were not
#
liberalized. Import of consumer goods was not liberalized. All again, still capital goods and
#
raw materials. Consumer goods that we are used to, not until 2000s that happens. The other thing,
#
interestingly, this is again, it shows the political compulsions in a democracy.
#
Chidambaram as the Commerce Minister was responsible for lowering import duties and he
#
brought down import duties to some extent, but he did mention that there's a lot of work that
#
still needs to be done to lower import duties to the level of these station countries. And the
#
hope was that subsequent governments will take it forward. That did not happen, right? That's one
#
continuity that did not work either through Vajpayee government or UPA government or even today,
#
which means even as of now, our import duties are much higher than many of the Southeast Asian
#
countries. And that is what is hurting us even today. So it's important to mention that.
#
The other thing that did not happen, which was mentioned in the budget was reform of the public
#
sector. So while the public sector was removed from largely from that schedule, but the whole,
#
it was announced in the budget that loss making enterprises will be shut down and there'll be
#
restructuring of the public sector. Of course, because of labor unions, that did not happen,
#
right? So all of these show that the political compulsions in a messy democracy don't let you
#
do reforms that we are Deng Xiaoping can do in China. And this is where the divergence becomes
#
so important. And lastly, and I know you'll agree with this, that in some sense, again,
#
maybe in benefit of hindsight, we can say this, but in some sense, we did the easy reforms,
#
right? We did the product market reforms by undoing some of these laws and draconian
#
regulations. We could not touch the difficult factor market reforms. And this is something
#
that I think hurts us even today and will continue to hurt us. So we didn't do labor
#
market reforms, we didn't do land market reforms. Even in the financial sector, the equity market
#
reforms were remarkable, but we didn't do debt market, even banking sector. So factor market
#
reforms, I think is something that because of political compulsions, we could not touch.
#
And we of course, did not do anything about agriculture, right? I mean, we talked about
#
this. It's literally the biggest private sector, the biggest employer. So we liberalize the private
#
sector and deregulate it, but we don't do anything to agriculture in contrast to what Deng does in
#
China. So I'll stop here and I'll hand over to you and then I'm happy to go on further.
#
Yeah, on this last point, I agree entirely. I think circa 2003 or 2004, I in fact,
#
wrote a piece for the Wall Street Journal about how, you know, the thing with the 91 reforms is
#
they were great, but they were incomplete. And it was exactly these things, factor markets,
#
agriculture, we've known it all along. They went for the low hanging fruit. And as you said,
#
in the earlier part of our conversation, a lot of the low hanging fruit was simply undoing the
#
damage that Indira did, right? And that, you know, leads me to think about the counterfactuals,
#
that you saw this massive growth in the 1990s with hundreds of millions of out of poverty,
#
simply by undoing something. What if what was undone had never been put in place to begin with?
#
A lot of the growth would have happened much sooner. So that is sort of one of the great
#
tragedies. And when you speak about the impact on the private sector, I'm reminded of something
#
Naushad Forbes wrote in his book, and he also did an episode with me, and where at one point,
#
he's talking about the impact of that budget speech by Manmohan Singh. And he says, quote,
#
that budget speech had so great an impact on my brother Farhad and me that within two weeks,
#
the senior management of our company, Forbes Marshall, had completed a detailed analysis.
#
We presented a full product portfolio and asked what we would still make competitively if it could
#
be imported free of duty and assuming, of course, that we could import any raw materials or components
#
free of duty. We identified half of our manufactured product ranges uncompetitive in the scenario and
#
took two calls. First, that investment in R&D would be quadrupled and work only on developing
#
products that we could sell internationally. No more import substitution projects from then on,
#
which used to be the bulk of what R&D did. Second, that we would enter international markets in a
#
big way. In 91, less than 1% of our turnover came from exports. We set a goal of 10% in five years,
#
which we met in six, and then set a goal of 20%, which took us another 10 years. Stop quoting.
#
Today, they are at about 25%. Again, underscoring the importance of exports that if you compete in
#
the international market, automatically, you become a high-class company with best practices
#
and can compete in the domestic market. Also, that instead of demonizing the private sector,
#
we should realize that all economic growth will come from the private sector. All your jobs will
#
come from the private sector. That is the secret of human prosperity. What are markets? Markets
#
are a mechanism by which people in society fulfill each other's needs to mutual benefit.
#
It is mind-blowing. What a mechanism. Instead of demonizing it, we should encourage it,
#
which is exactly what happened then. You also spoke of getting foreign investment in,
#
and this reminds me of something from Montek's autobiography, where he talks about how
#
Akio Morita of Sony was getting on a call with Narasimha Rao. Montek told Narasimha Rao that,
#
listen, why don't you invite him to set up a Sony manufacturing unit? If Morita said that I want
#
100% foreign equity, Narasimha Rao could agree to make an exception. So, Rao just listened and
#
pouted in his traditional way. Though, I should really not even bring that pout up because the
#
two people I know who have a resting pout face are Narasimha Rao and me. So, if I am randomly
#
sitting doing nothing, people will always ask me, why are you looking so sad? What happened? Did
#
you meet a socialist? Did you just equate yourself to Narasimha Rao? Only in this one superficial
#
aspect. He was a man of deep learning, knew many languages, so cannot compare in any other dimension
#
whatsoever. So, the meeting with Morita happened, and in Montek's words, at the meeting with Morita,
#
the PM was at his disarming best after the usual pleasantries he leaned across and said, Mr. Morita,
#
every Indian I know wants a Sony TV but you don't have a factory in India. Don't you think you're
#
missing out on a huge demand? And Morita was taken aback at Rao's directness and as predicted,
#
brought up 100% FDI. Rao then smiled and said, I suggest you apply, we will see what we can do.
#
I don't have a Sony TV, I have a Sony camera which is awesome, but regardless, you sort of
#
get the drift. And the benefits of this are mind-blowing. I mentioned earlier how our
#
friend Nitin Pai spoke about how with every 1% rise in GDP, 2 million people came out of poverty
#
and Shruti wrote in a piece in the 91 project which we'll link from here, quote, since 1991,
#
the union government revenue has increased 25 times and state government revenue has increased
#
28 times in nominal terms and about 4 times in real terms. Embracing markets allowed the
#
Indian government to increase its welfare spending. So, even if at this moment you're saying,
#
how are you going to get the money to ramp it up? Only growth will give you that.
#
So, before we move on, these are pretty much the only points I want to make.
#
I think Shruti should have been in the team of Narsimha Rao to convince the left opposition just
#
using this argument and that would have worked like a charm. And on that note, I want to emphasize
#
here what a remarkable person Narsimha Rao was. I mean, we talked about Deng, but I think if there
#
was one person I would say from the Indian context which made the most difference, I would say that
#
was Narsimha Rao. He was not meant to be, at that point of time, he was not supposed to become
#
the prime minister. It was almost like an accident because of Rajiv Gandhi's assassination and the
#
political turmoil that followed. He almost comes back from retirement and takes over the government
#
and then he puts together this remarkable team of people. And the most important thing that
#
we don't realize is building a political consensus at that point of time in the early 1990s to push
#
through reforms of this magnitude. We have been talking about how draconian and how comprehensive
#
and how pervasive this whole central planning model was. And then you have a very strong left
#
party in the opposition to build consensus in that kind of parliament. It's not like today where
#
one party has an absolute majority and you don't have to do consensus building. That, I think,
#
was remarkable. And I think we can't even give him enough credit over and over again for this.
#
Vinay Sitapati, of course, has this remarkable book, A Half-Lion, which I think everybody should
#
read to get an understanding of how this whole process went about. So I think it's important
#
for us to appreciate that. Yes, of course, there was the group of people, the intellectual thinkers,
#
we made it happen. But it was Narsimha Rao who brought all of this together, who built the
#
consensus and who pushed it forward. The second thing I want to mention is this is a bit of a
#
personal anecdote. When I was growing up and when I realized that I wanted to study economics
#
and I remember that I was in Delhi school. And of course, Delhi school at that point of time was
#
full of these Bengali students, Bengali professors, et cetera. And the general impression,
#
of course, of Bengal is this left oriented. The moment you study economics in Bengal,
#
it's almost default that you're leftist and you're a development economist. And I was this one
#
student, one person who was saying, but I want to study macroeconomics. I want to study finance,
#
which is a bad word. Finance is all about speculation and profit and arbitrage.
#
And I remember there was a discussion in Delhi school that why do you want to go down this route?
#
Why do you want to do a PhD in macro finance, et cetera? And I remember telling them that I
#
grew up in Calcutta. If there was a shortage economy in the country, Calcutta was the epitome
#
of it because we are the communist heartland. And when I grew up in that environment and then I saw
#
the globalization happen, the way it changed lives around me, the way it changed my life,
#
the way it impacted my family's life, right? It was just spectacular. It was stunning, right?
#
I mean, overnight we went from, we had one landline connection where just placing a call
#
to anybody was extremely difficult. We had one black and white Bharat TV where transmission
#
would often come or not come on Doordarshan channel. We had an ambassador because my father,
#
I think, was given the car by his office, Public Sector Bank. But it's like that's all. And then
#
we're essentially because fee bill prices were expensive. We had to ration every time who's
#
using the car. Everything felt like a shortage, except I didn't realize it was a shortage because
#
that was the norm for me. And then suddenly you move, do this paradigm shift when the city,
#
everything starts changing. The marketplaces, gradually malls are coming up. You get varieties,
#
you get options, you get choices. And it was such an eye-opener for me. And I remember writing in
#
my PhD application when I had to write a statement of purpose, I wrote exactly the story of India's
#
transition, that I want to study the power of the market, the power of globalization, the power of
#
trade, and how that impacts the whole macroeconomic story of a country, because to me it was just
#
absolutely stunning, right? So I think even with our personal lives, and you also, I'm guessing,
#
would agree with this, that what we witnessed was absolutely transformational, right? And I think
#
it's important to recognize that since then we haven't really felt that way, right? I mean,
#
yes, the economy has, there is some period of boom, of course, which I missed. You may have lived
#
through it. But since then, it's basically been this slow burn process, these gradual stops and
#
starts. Maybe that's how it is in a messy democracy. I don't know. But that feeling of exuberance,
#
that feeling of optimism, of energy, of anything is possible. I haven't felt that since then,
#
anything you would want to add to that? No, I completely agree with you. And in fact,
#
leaving the exuberance aside, I think being extremely elite, both of us, we could have
#
sensed the exuberance at a point, but even when the exuberance wasn't there in the economy,
#
we had good lives. But the figures that you quoted, 79% of families, you spoke about what
#
they're going through. And I think demonetization and the botched implementation of GST just wreaked
#
havoc on the informal sector and on the poor of India. And I don't think that you and I can
#
adequately appreciate that from our purchase, even if we intellectually understand that.
#
And here I want to talk about both Deng and Narsimha Rao, that in a certain sense, they weren't
#
elites. Like if you look at Deng's history during the Cultural Revolution, he and his family were
#
actually imprisoned, were actually targeted by the Red Guards. Deng's elder son, Deng Pufang,
#
was actually imprisoned by the Red Guards. He was tortured. And he either jumped out or was thrown
#
out of the window of a four-story building in 1968 and was a paraplegic for the rest of his life.
#
And in October, 69, Deng was sent to this factory in a rural province and told to work there. And
#
he spent four years there. And in a spare time, he would simply write. Right. And here's the thing
#
that you have a combination of seeing life from the bottom up, seeing the tough side of it. You're
#
not one of the elites all along. And at the same time, you have that tendency to introspect,
#
which is what I get from that sense that all his spare time, he would just sit and write.
#
Similarly, in Vinay's wonderful book on Narsimha Rao, and we have a wonderful episode on that,
#
which is actually, I think, one of my top 10 episodes in terms of downloads.
#
You know, he writes at one point about Narsimha Rao, who was born in 1921 in Wangara, which is a
#
small village. And he writes, quote, living on the edge of five linguistic cultures, villagers,
#
here spoke Telugu, Hindi, Marathi, Kannada, and even some Oriya. And in this land of the Nizam,
#
the language of power was Urdu, while the language of Kotli life was Persian. Narsimha Rao would go
#
on to speak 10 languages. Stop code. And not just these 10 languages that he would speak.
#
Later in the early 80s, he was bored in Delhi. He taught himself Spanish, you know, and when
#
computers came, he taught himself three computer languages, something like that. It is just
#
ridiculous, the man. And yet people in Delhi apparently look down on him. You know, the English
#
speaking elites, Rajiv Gandhi and his buddies, they would kind of make fun of him because for
#
them he was, you know, at the surface level, he's a vernacular hickster, but a man of remarkable
#
intellect. And this is a complete aside. But one thing that really makes me mad is how the
#
Congress Party treated him after Sonia Gandhi took over the party. There is a story in the early
#
80s after he dies, you know, when he writes in his book on the night of his death, quote,
#
That night, television channel showed visuals of the half-burned body, skull still visible,
#
lying abandoned, stray dogs were pulling at the funeral pyre. He wasn't allowed a straight
#
funeral in Delhi by, you know, the incredibly petty Congress Party. So this was happening in
#
Andhra Pradesh itself as it then was. And so a great tragedy that we don't kind of recognize
#
what an extraordinary man that he was. And the reason I just thought of this, the reason I
#
thought of Deng and Narsimha Rao and their backgrounds is that they weren't elites.
#
Too often we get, you know, elites in air conditioned rooms barking out luxury beliefs
#
that actually harm the poor. And that is sort of dangerous, you know, and I think
#
at one level, I want to defend the elites. One of the things that populism gets wrong
#
is its anti-elite rhetoric. And again, there's an episode on everything is everything on populism.
#
This is a common factor to all populist leaders. The anti-elite rhetoric is harmful because you
#
cut off expertise and you cut off embedded knowledge and all of that. But at the same
#
time, I totally get the, you know, the rants at the Lutyens elite. They are a problem,
#
they have let us down. And it is a different matter that the leaders who emerged from the
#
bottom up, as we have seen, may also be, you know, equally vile. But, you know, the point is that
#
it actually pays. I think it is no coincidence that reformers like Deng and Narsimha Rao came
#
from the ground. They got it fundamentally. They saw something that you cannot see from
#
the corridors of power. I completely agree. And I think, you know, to some extent, Amit is exactly,
#
as we said, Deng was an outlier. I think Narsimha Rao was an outlier as well, right? I mean,
#
he was constantly being put down by the Congress party, right? He was denied positions. He was
#
denied importance. He was not considered one of their own. He couldn't even meet Deng when
#
Rajiv Gandhi went to China. I mean, there was a constant pushback against everything that he
#
wanted to do, that he was saying. So, you know, if you put yourself almost in his shoes,
#
right, in 1990, and then he comes back as Prime Minister, and then he's given this
#
massive responsibility, you are almost battered by this constant thing that has happened within
#
the party. And now the same party wants you to be the Prime Minister, and then you have to do all
#
the reforms. The mindset that he has, the thinking, the broadness of it, and the intellectual element
#
of it, I think is just remarkable. And he just sets everything aside. He said, oh, this is the
#
thing that I have to do. And he puts all the people together, and the rest is history. I think he's
#
just truly an outlier. And it just really, really saddens me. And I completely agree with you with
#
the way when he passed away, the way he was treated. It's just absolutely embarrassing and
#
shameful the way that happened. The one thing I wanted to mention is that I agree with you about
#
the elite point. And I don't know whether this will come across as an anti-elite. And I don't
#
want to say this in that spirit. But when you do education reform, when you do health reform,
#
when you do agricultural reform in a poor country, what you're essentially doing is you're
#
empowering the masses. You're empowering the masses, and you're equipping them to look for
#
jobs, to work for themselves, and to build a decent livelihood. When you don't do that,
#
essentially, I think what we did in India for those 40 years is we did not do that.
#
What we did instead was we built and concentrated and solidified a group of elites who were
#
basically caught up in their own ivory towers and echo chambers, and who basically went on
#
doing whatever they thought was right for the masses. And I think to a large extent,
#
what happened in 2014 was a huge pushback against that. I'm not saying right or wrong,
#
but I'm just analyzing history as it were. And I think that is exactly what we got wrong,
#
that we didn't think of empowering the masses. We didn't think of bringing them up to the level
#
where they can start looking for jobs and fending for themselves. We're always either giving them
#
well-fares and supporting them. And in the process, we are creating, of course, these arrogant
#
elites, if I can say that. And of course, at some point of time, there'll be a pushback, right?
#
Particularly in a democracy, when there is a way to show that to your votes, that's bound to happen.
#
And of course, there's social media, there's democratization of discourse and all of that.
#
So I think it's very important what you said, that it is true that Narsimha Rao,
#
he was not one of the elites. He understood the struggles of the common man. And he was erudite
#
enough, he was scholarly enough to also think introspect and think about the world and make
#
sense of it, and which is what made him the way he was. So I think it's extremely important and
#
relevant what you said. Anything you want to add? Not really, except the elite attitude. I
#
totally agree about the 2014 analysis. Look, everyone knows I'm anti-Modi. There are many,
#
many criticisms I make about Modi. In that column I mentioned on Mao, I compared him to Mao, which
#
is the worst thing I can say about anyone. Demonetization was as bad as any of Indira
#
Gandhi's policies. To me, the worst prime ministers we've had are Indira and Modi, right?
#
But having said that, you have to criticize him on substance. Whereas a lot of the criticisms
#
that went his way were not like that. In fact, he got a boost when Manishankar Aiyar called him a
#
chaiwala, so to say, which is such a classless thing to say. A few years back, I remember there
#
was someone on Twitter who posted a picture of Modi at a state reception somewhere with the
#
cutlery all laid out in front of him and asked the snarky question of does he even know how to use
#
spoons? It's just horrible. This is a problem. This is a problem. How can you not have the basic
#
self-awareness to realize that... Or just decency. Or just decency to realize that...
#
And this is, of course, our Twitter discourse. There are legitimate reasons to go after the man.
#
In 2019, I remember writing this piece in the Congress where I pointed out that Sonia Gandhi
#
was standing from Rai Bireli, if I remember, and her opponent in the constituency was an ex-Congress
#
person, used to be with the Congress. Priyanka Gandhi made this very snarky remark of, oh,
#
he used to come and touch our feet and now he's standing against us, we'll teach him a lesson.
#
And shit like this just totally reveals that essential kind of feudal attitude, that kind of
#
feudalism. And speaking of, it is also the current Gandhis who repudiated, who have often
#
underplayed the role of Narasimha Rao in the 91 reforms and have said great things about Indira.
#
And at one point, every time Sanjay Gandhi would have his birth, death anniversary or birth
#
anniversary, the whole Congress party, the entire machinery would put out tweets celebrating him.
#
And I'm like, are you crazy? Sanjay is a man that you should try to forget as a blot on the past,
#
an evil, vile sociopath. And Narasimha Rao is a man you should celebrate, one of India's finest
#
prime minister, frankly, if you just look at actions and consequences. So that is my little
#
rant there. I mean, I understand that default anti-elitist attitude also can be a huge problem
#
because it can also mitigate against expertise. Something like demonetization would never have
#
happened if Modi had good advisors and he listened to them. Neither of those was the case. So I think
#
that you also have to have an appreciation of expertise and the embedded knowledge that has
#
come down through the generations and you've got to understand that and appreciate that.
#
But at the same time, I think India's elites and the Latvian's elites deserve all the contempt
#
that is heaped on them. And I say this in a sense as we are also elites. We are English speaking,
#
city bred people. You are even foreign educated. I'm not, you're more elite than I am.
#
Oh boy, now I feel really bad. No, I agree with you. I don't want to go too much into the politics,
#
but it's also true that politicians are human beings too. They are individuals too, right?
#
And they all have shortcomings. They all have strengths, right? And we shouldn't get so personal
#
about, and when I say we, I mean the greater all of us, right? We shouldn't get personal about,
#
oh, he's a bad person. Oh, he's a good person. But at some level, I think we should analyze,
#
evaluate, critically talk about the part about them that we can observe, which is the policies,
#
which are the decisions, the reforms, et cetera. Beyond that, we really have no right to talk about
#
a person, a character, whatever it is, right? So that's one thing. Secondly, I think India is,
#
it was at a juncture that it needs a dosage of both, right? I think we have had an elite rule
#
for too long a period of time and we have suffered from it massively. And I think we needed in some
#
sense to 2014, right? So almost tell us that, yeah, you cannot have one extreme of anything
#
for too long, right? There has to be, the pendulum has to swing somewhere from one extreme to the
#
other and settle down in the middle. Maybe we haven't yet found the middle, but it's
#
important, right? And for the longest of time, it had gone to one end and we could all see that
#
what are the problems with that. And also the last thing I want to mention is that I think any leader
#
or any political person is also a big function of the circumstances, right? I mean, we talked about
#
Nehru and the compulsions of then, Indira Gandhi, her compulsions, et cetera. Everybody is a product
#
of the circumstances, of the periods, of the electoral compulsions. So that is also some
#
humility that we need to bring to the discourse instead of having this very angry judgmental
#
viewpoint, which I've seen a lot over the last few years, which doesn't do anybody any good,
#
right? You lose your neutral objective ability to assess, which is I think all social scientists
#
should have, and we have lost that. And that is a big damage that we do to the discourse and we end
#
up polarizing it for no reason. And all we need to do is objectively assess reforms and policies the
#
way, for example, we're discussing now, irrespective of, yes, it was just a function
#
of the person who was in power, but there are circumstances, there are people, there's a group
#
of people surrounding, all of that is also very important, right? So moving on a little bit about,
#
again, going back to the way the reforms were happening, one thing that was the case was that
#
implementation was slow, right? Although there were many big bang, a stroke of the pen changes,
#
particularly for the de-licensing, implementation was rather slow. De-licensing was the only big
#
bang reform that was done by and large. It was a very gradualist approach. And Montek mentions
#
this in this book that Rakesh Mohan put together about analyzing the reforms. He says that this
#
whole gradualism was a deliberate choice to give people to adapt to all these changes and gradually
#
keep on building consensus. It was a decision voluntarily and consciously taken, but at the
#
same time, there should have been some kind of a timeline that was specified that such and such
#
reforms would be done by this time period so that there is a little bit certainty given to the private
#
sector. Otherwise, imagine you're a business person, you're witnessing these massive changes
#
unfolding, but you really don't know, given the slow pace of reforms, when this will fructify and
#
when this will come to fruition, and you're constantly guessing, and then you basically are
#
handicapped to take your investment decisions. And that's what Montek says, that there should
#
have been a timeline that should have specified to give that kind of a direction that was not done.
#
And when I read that, I started thinking that maybe that's something that happens in general
#
in Indian democracy, that at some level, the state perhaps cannot appreciate what the private
#
sector, what the market really needs. The fact that they need certainty, the fact that they need
#
a stability, the fact that they need to be told that, okay, if this change is happening,
#
then either there is a sunset clause or there is a finite period. It's not always easy to stick
#
to that because governments change, compulsions can change, but at least you set out a direction
#
to let the private sector build that into their calculations. And then extrapolating from that,
#
the whole understanding that what we needed to do was not just undo the mistakes of the past,
#
but also to reforming agriculture, coming back to that, that couldn't be done,
#
but also to start building a manufacturing industry. To the extent the state could
#
provide the boost needed for the private sector to start getting into manufacturing,
#
what was needed for that to be done? Maybe yes, it's a messy democracy, things take time,
#
but starting the discourse on land reforms, labor reforms, financial sector reforms,
#
not just the banking sector, but was it really necessary to continue with the government
#
ownership of banks at that point of time? Was it really necessary to not look at how the
#
debt market would evolve? I admit it's difficult. In a democracy with so much of opposition,
#
it is difficult, but was there even an agreement, was there a consensus, was there a discussion that
#
what does the private sector need in order to start building a manufacturing industry?
#
So that I think is something that continues even today when we keep on taking policies,
#
we keep on making policy changes, but in a very ad hoc and discretionary manner without
#
much thought about how this might affect the private sector and creating this environment
#
of uncertainty where the business manager is going to withdraw and say, I can't invest because
#
I don't know what's going to happen tomorrow. And we can talk about it more when we come to
#
the current period. The few other things I want to mention is there were some banking sector reforms
#
that were undertaken under Narsimham Committees 1 and 2, spectacular committee reports, Narsimham
#
Committee 1 report, which basically said that banking regulation needs to become more streamlined.
#
So all this NPA crisis that we had in recent times, this was the time when Narsimham Committee
#
said that there is something about called prudential regulations. Banks have to do
#
income recognition, asset classification, what is a bad asset, et cetera. All of that got streamlined.
#
That was a very important reform. The second thing was, remember, deficit financing that I
#
was saying, that the RBI was essentially printing notes and issuing bills to itself in the name of
#
the government. That started getting phased out, which was very important. There was a recognition
#
that if we are moving to modernize the economy and open up and deregulate, then we also need a
#
modern financial system. There was a little bit of recognition of that. And you cannot have a
#
system where the central bank is constantly financing the fiscal deficit of the government
#
because then that's moral hazard. The government will keep on spending more simply because the
#
central bank can print notes. So that system was gradually phased out. And eventually, during
#
Vajpayee's time, we had the FRBM Act, the Fiscal Responsibility and Budget Management Act, which
#
said that deficit has to be brought down to 3% of GDP. The RBI can no longer participate in the
#
primary auction of government securities. And this was also the time when a government bond market
#
started getting developed, which was extremely important because unless you have a government
#
bond market, you can't have a corporate bond market. Basically, it's all connected. And bond
#
market plays a very important role in financing private sector investment. So all of these things
#
started happening then, which were very good. And since then, of course, any movement on this aspect
#
has happened in stops and starts. That's the whole gradualist process of our democracy, which I keep
#
complaining about. But as I said, maybe that's the only way to go about it. The last thing that I'll
#
say in the reform list is equity market reforms, right? Again, financial sector. I think the one,
#
other than the whole delicensing and opening up to trade and investment, et cetera, the one
#
spectacular piece of reform was the equity market reform, right? And I don't think this gets discussed
#
enough. Of course, there were institution building. SEBI came up in 1992. The National Stock Exchange
#
in the same year. Nifty was established, was launched in 1996. And since then, the equity
#
market reforms were so comprehensive. I think the only part of the financial sector where the reforms
#
were comprehensive, right? It touched every points of the market. And what it did was, of course,
#
there was a lot of opposition because the typical opposition was that SEBI is permitting
#
free pricing of initial public offerings, IPOs. That is a bad thing because the private sector
#
will exploit the gullible public. It's a typical argument. So not withstanding all of that opposition,
#
all of the criticism, now we know in hindsight that this freedom allowed the capital markets to
#
soar, right? I mean, today, we are in a situation where the equity market volume, right? The total
#
size is $5 trillion, right? And the number of retail subscribers is 90 crore. So it has come
#
such a long distance from literally, before that, it was basically selling physical shares through
#
Bombay Stock Exchange. But from early 1990s, the long distance that we have come in equity market
#
reforms, and the reason it's important, not because there are retail subscribers, et cetera,
#
but also because this is the market where companies are raising capital from, right?
#
Remember the controller of capital issues that Nehru had set up, which was deciding the price at
#
which capital would be raised. From there, we have come to a situation where it's $5 trillion worth
#
of size. And it's massive because when you have the startups listing in the market and raising
#
at capital at any price, whatever, that's basically the actual operation of the market.
#
I think the one place where we see free markets operating as best as possible in a country like
#
India is the equity market. So I wanted to mention that. And before I go to what happens from 1995
#
onwards, over to you. Yeah, that equity market story is phenomenally inspiring because a lot
#
of people will disregard the equity markets and say, oh, it's a casino or, oh, it's not related
#
to the real economy and all of that. And that is just rubbish. That is where the energy of the
#
economy comes from. That is what funds the real economy. It's a mind blowing success story.
#
I have two questions for you, which are broader questions, which apply to the period after this
#
also. So it just applies to the whole post-91 period. And the first of those questions is about
#
tying in the design of the reforms with the implementation of the reforms, right?
#
Like a common criticism or a common thing people will say is that, oh, we made a good law, but it
#
was implemented badly or, oh, we put a good reform out there, but you know, the state got in the way
#
and it's not working out and et cetera, et cetera. And my thinking is that at the moment of sitting
#
and drafting the reform, you have to take into account what is the state capacity, what are the
#
bottlenecks you're going to face, what is the likelihood of implementation, et cetera, et cetera.
#
And I would imagine that the institutional knowledge of how to do that is something which
#
would actually have begun in 91. You might do a lot of thinking about the matter from 77 onwards
#
or 60s onwards, but you are actually that messy business of reforming and engaging with the state
#
and being senior enough within the state to move the levers of power is something that essentially
#
peeps would have had to learn on the job. And by the time you got into the policy making circles
#
much later and all of that, some of it would have become a body of knowledge and you would have
#
learned what to do, what not to do, what mistakes to avoid, et cetera, et cetera.
#
So tell me a little bit about this process of change. It is all very easy to say that we will
#
reform, but it is not enough then for a good secretary and a good minister to get together
#
and give orders and say, do this. You know, that is the very start of the process. And in fact,
#
the very start of the process should happen before that when you are taking into account what is
#
likely to happen within the bureaucracy, within the political economy after that. So tell me
#
a little bit about your learnings. I think it's an excellent question, Amit. And
#
I'll give you one example from recent times and then I'll go to the 1991 period. When I was a part
#
of the BLRC, the Bankruptcy Legislative Reforms Committee, and we basically came up with IBC
#
and by we, I mean, of course, there was a great team of young people with a lot of research,
#
a lot of consultative process, all of that happened, right? I mean, stakeholders,
#
consultation, conferences, meetings, papers, articles, all of that. And this is, this is 2016,
#
right? I mean, by then we have definitely better state capacity than in 1991, better institutions,
#
quote unquote, I'm doing quotes with my hand from 1991. Even then, when IBC was implemented,
#
it became a law in May 2016, gets implemented in December 2016. It encountered so many problems,
#
right? I mean, today, anybody that you talk to will say, IBC is not working. It's a failed law.
#
There are so many problems with it. There is so much of delays, there's so much of litigation.
#
And the reason is because exactly as you said, state capacity, right? Even today, right? So IBC
#
was a law that it was not just you pass a law and that's it, it's done. It touches a large number
#
of stakeholders, right? Creditors and lawyers, of course, and the firms which have taken the debt
#
and the judges and all of that. It required different institutions, for example, tribunals,
#
information utilities, where credit information would be stored, insolvency professionals were
#
dealing with, and all of that, right? Now, to envisage when you're doing the reform,
#
when you're writing the law, to envisage that all of these will fall in place one after the other
#
in a nice sequential manner, of course, that's not going to happen, right? State capacity is weak,
#
institutions are weak. The judicial system has its own problems. The whole professional system
#
of insolvency professionals and other set of problems. And of course, this new law,
#
this new reform is going to run into issues. And the way I look at it now is that for a country
#
like India, where remember what I said from the very beginning, post-independence, we never really
#
paid a lot of attention in building institutions, in building state capacity, right? I think until
#
recently, probably, we didn't even understand what is meant by institution building and state
#
capacity. The whole Douglas North idea that institutions are an important ingredient of
#
economic growth, I don't think that is very widely understood, right? So in that kind of a
#
country, when you're trying to do reform, at some level, you have to be prepared for a very, very
#
long process of finally seeing results that you're expecting. If you get impatient and you think,
#
oh, reforms are done, now in two, three years, I'll start seeing results and everything,
#
growth investment will happen. I think that's extremely naive. That's not going to happen this
#
way, right? It's probably going to take anything from 10, 15, whatever number of years. And during
#
that entire time, it will be messy, right? I mean, there will be amendments to the law,
#
institutions may come up, there'll be failures and drawbacks, and we'll keep learning and we'll
#
keep tweaking on the margins. And that's probably the messy, complicated reform process that can
#
happen in a country like India. That's been my learning from the experience I've had.
#
And now going back to the 1990s, and of course, my experience is extremely limited, right? And
#
you've talked to many people who are significantly more experienced than me in this. Now, when we go
#
back to the 1990s, I think this is why one of the reasons why implementation was also slow, right?
#
There is one reform where it's literally stroke of the pen, which is delicensing, that was easiest
#
to do because it did not need state capacity or institution. You just basically struck off
#
industries from a list, that's it. But everything else, right? I mean, opening up to foreign
#
investment, exports, et cetera, all of that encounters state capacity and institution,
#
which are not there at that point of time, at least not to the extent that is needed.
#
So of course, implementation will be slow, getting results from all of that is going to be slow.
#
And maybe that's why from 1993 to 2003, our GDP growth rate was only 6%, right? It was not the 9%
#
growth rate that China was experiencing because it's a very slow, messy process in our country.
#
And by the time we started maybe seeing lagged effect of the reforms, it's post 2004. Again,
#
causality is difficult to draw, but one can speculate that that is basically what happened.
#
And these are massive, gigantic watershed reforms, right? They had effect more than 10 years later.
#
So when we do a single thing like a GST or inflation targeting or IBC,
#
it's going to take a very long time given this whole fractured implementation that it goes through.
#
So that would be my long-winded answer to your question.
#
Well, it's a great answer. And it also, you know, the difficulty of establishing causality in the
#
long times frames also brings to mind a great metaphor, which Shruti first told me about,
#
I think she might have cited Don Boudreau as being where she got it from, I forget exactly.
#
But the metaphor was about social science and establishing causality, where she said that,
#
look, if you want to find out whether dropping a coin in a body of water displaces some water
#
and changes the level, it's very easy to do it in a lab because in a lab you have a beaker,
#
you put water, you measure the water precisely, you gradually dip the coin and you measure it
#
again. But imagine doing it in a crowded 100 meter by 100 meter swimming pool where there
#
are 100 people inside flashing around and there is heavy rain and there is a storm and there are
#
mad winds and then you're dropping a coin and you're trying to figure out, did something happen?
#
And basically you will see what you want to see, which is why social science is so incredibly
#
muddy, which is why what you really need is data that goes over decades, that goes over geography,
#
that goes over countries, et cetera, et cetera, the kind of remarkable work that Landpichet does,
#
for example. So dear listeners, please read all the papers of his that I link there in education.
#
So all of it gets really hard to sort of establish.
#
I want to add here, Amit, is that because basically what you're talking about, we are
#
discussing macroeconomics, right? It's all interconnected, a whole general equilibrium
#
framework. This is a framework where you can't do an RCT, right? You can't have a clean treatment
#
and control group and you give a certain treatment of a reform to one group and then you have this
#
exactly identical control group that is not being given the reform and are able to evaluate the
#
result of it. And then you say, oh, ah, this works, right? We don't have the luxury, right?
#
We have to experiment real time in a country where a reform touches everybody, right? And then you
#
see in some cases it's working, some cases it's not, because there are so many stakeholders,
#
right? And there are incentives. These are real people whose incentives are being affected,
#
whose behavior is being affected. And you'll never be able to appease all different groups
#
of stakeholders, right? And we saw that with IBC, right? If you create a law that is more
#
friendly towards creditors, the banks, the bond market, et cetera, the promoters, the firms may
#
not like it. If you create something that is friendly to the promoters, the judges may have
#
problems because then there are labor law, labor, et cetera, effect, et cetera, et cetera. So it's
#
extremely amazing. I completely agree with Shruti that when you're dealing with real life people in
#
a setting of a country where you can't do this clean experimentation like RCT, et cetera, and
#
where everybody's incentives become a big problem and everybody's getting affected in a differential
#
manner, it is very, very difficult to expect that I'm going to design this perfect reform
#
that is going to yield exactly this result within this particular point of time.
#
And that is why I think we need to have as thinkers or analysts or commentators,
#
some kind of a humility and patience to say, do not write off things just right off the bat, right?
#
Oh, this reform got done, but there are no results. That means it's a bad thing. We should not do
#
that because that's why I said at the beginning as well that what is important to get that 5% GDP
#
growth rate for the next 50 years. And in the process, of course, some reforms will work,
#
some will not work, institutions will fail. That's a very, very long journey in the arc of history
#
because we are a democracy, right? In authoritarian country, things may work very differently.
#
Given the reality of our polity, given the very diverse country that we have, I think that's
#
the understanding and perspective we should have when we talk about reforms.
#
So now moving on a little bit about what happened post-1990 to 93. The balance of
#
payment crisis, which was the trigger for the reforms, pretty much gets resolved by 93, right?
#
And from then on, the momentum of reforms slows down because as I told you, the main reason,
#
one of the biggest motivation was solving the crisis and restoring stability. And as the momentum
#
slows down, we also start getting hit by several shocks, which starts affecting the way the private
#
sector is investing and the economy is growing. For example, 1997 is the East Asian currency
#
crisis, right? Which spills over to some extent. The Reserve Bank of India has to
#
increase interest rate, which of course hurts investment. That happens. 1998 is the nuclear
#
tests, right? And what that does is it attracts sanctions, which is not good for us because we
#
have just opened up to investment and trade from foreign sectors. 1999 is the Kargil war, right?
#
Again, a period of great turbulence and instability. Then from, I don't know how many people know this
#
and I'll talk about it in a little bit detail. From 1999 to 2002, we had our first NPA crisis
#
in the banking sector. Again, something that would discourage investment. Then 2001 is the 9-11 attacks.
#
Of course, it spills over all over the world. 2000, 2001 is the dot-com bubble burst. Of course,
#
we get affected because we have the IT sector that's coming up. We have this series of shocks
#
from 1997 onwards, over and above the fact that we are basically doing this transformative change
#
to the economy, right? It is a very unstable period. If the growth rate was 6% and not higher,
#
there's a legitimate reason why. It's not that the reforms were not delivering. It's because
#
the economy was basically being battered from multiple sides. I want to talk a little bit
#
about this NPA crisis because we only mostly talk about this NPA crisis of the last 10 years
#
until 2019. This first NPA crisis of 1999 in the banking sector, curiously enough, the reason it
#
happened was, remember I told you that the Nersimham committee came up with banking regulation
#
related changes. For the first time, Indian banks, also by the way, this was also the time when
#
licenses were given to the private sector to set up banks. The banking sector started coming
#
into competition and foreign banks were there as well. For the first time, banks were basically
#
told by regulation that if a loan is not being repaid, you call it a non-performing asset. You
#
have to set aside capital to provide for it. All of these things get streamlined, right?
#
Simultaneously, you are doing all these changes to unshackle the private sector,
#
so the private sector starts expanding capacity because it's just newfound lease of life.
#
The combination of that and then all these shocks mean that many of the businesses in the private
#
sector are not able to repay the loans. Previously, this would not be called NPAs because
#
there was no such regulation at all, but now these start getting recognized as NPAs. The net result
#
by, I think, 2000-2001, the total non-performing asset, which is basically bad loans in the banking
#
sector, is 18% of total loans, which is very, very high. The curious thing is, it was a crisis,
#
there is no doubt about it, but the interesting thing is, at that point of time, unlike the recent
#
episode, the government didn't have to do a huge amount of recapitalization, and it was not a
#
pelemil disaster. Why? Because from 2000-2003 onwards, the Indian economy starts booming.
#
This was the spectacular phase of economic boom that we have never witnessed since then.
#
The banking sector essentially grows out of the NPA crisis. You basically have NPA divided by
#
total loans. Total loans starts growing because the economy is booming, so the ratio starts falling.
#
It was this curious artifact that the economy starts booming, the banking sector simply grows
#
out of it, and we didn't really feel the crisis the way we felt the recent NPA crisis, which means
#
that there is one way that you solve a banking sector if the economy starts booming. You don't
#
always have to convert it into a fiscal crisis. Before I talk about the boom, I want to say that
#
that first, that 10-year period was also very interesting because you're doing all of these
#
changes, and underlying all of these changes, it's not like politically, it is a very stable time.
#
Politically, it is a very, very turbulent time. Despite all of that, we continue to have these
#
reforms, we continue to have all of this. I think it was a very remarkable period, maybe because of
#
the whole team of people which were there in the government, the bureaucrats, etc. Before I go on
#
to post 2004, I'll hand it over to you. There's a broader question that I alluded to earlier,
#
and this is a good time to ask that, which is about the impetus for the reforms and the impetus
#
for the reform mindset that exists in the minds of a few people. Your initial proximate impetus
#
in 1991 is, of course, the balance of payments crisis and the IMF setting conditions and blah,
#
blah, blah, and that happens. But as we've discussed, that there is a community of reformers
#
within the bureaucracy from the 70s, from before that. In fact, if you look at Manmohan and Montaig
#
chatting together in Washington, DC in the 1960s, it's a community that gradually forms itself.
#
And I'm interested in two things. One is I'm interested in this community of reforms within
#
the reformers within the state, because my central question for them is, what is motivating them?
#
If you look at public choice theory, the incentives of a bureaucrat is always to multiply
#
subordinates and increase budgets. What is motivating these guys to reduce the power of
#
the state from which they derive their standing? And were they outliers? And we were just lucky to
#
have sort of a clustering effect of outliers for a long period, because I would imagine that the
#
design of the state mitigates against such bureaucrats coming up in the first place.
#
And my second related question is about the politicians, right? Again, public choice theory
#
would tell us that a politician's eyes are on the next election. As you correctly pointed out,
#
election cycles in India are not five years. They're very short because you have state elections
#
all the time. With short time horizons, you're always going to go for immediate, attributable,
#
short term, welfare is measures, giving bags of rice, farm loan waivers, etc, etc, necessary as
#
it might be as anesthetic in certain cases, but you won't do the deep lying stuff. However,
#
what we have for a period that is much longer than these 10 years, I think it goes on till 2010s,
#
2011s, is that you have a community of politicians across parties who are committed to reform,
#
who are keeping the process going, you know, Manmohan comes and goes, and you know, then
#
Vajpayee comes, you have Dewey Gowda and Chandrasekhar, then you have Vajpayee back.
#
Now, I mentioned Narasimha Rao as an outlanding Prime Minister, second one I would mention is
#
Atal Bihari Vajpayee. Absolutely outstanding in terms of the reforms that he did, in terms of the
#
humility that he showed. I've had many episodes with like Ajay Shah in my 8 hour episode with
#
KP Krishnan, and you get a sense of this and outlining politicians all around them. If Manmohan
#
at Chidambaram, then Vajpayee had, you know, Jaswant Singh, Yashwant Sinha, Arun Shourie,
#
just fine minds, great reformers, you have them talking to each other, you know, in a sense,
#
something like the NPS coming into being is like a conversation between Vajpayee and Manmohan Singh,
#
you know, something like much later on in time, something like inflation targeting getting past
#
is like a conversation between Chidambaram and Manmohan on one hand and Jaitley on the other
#
hand, where, you know, Jaitley told KP Krishnan that I don't need to read this document in too
#
much detail because this country's finest legal and economic minds have approved it by which he
#
mentioned Chidambaram and Manmohan. So you have this sort of deeper commitment among these
#
politicians. Not all of these politicians are deeply educated. I think hardly any of them
#
went to foreign universities and got degrees. They're not supposed to know this shit. The
#
domain that they're masters of is how to get votes. Economic reforms has nothing to do with that
#
in the short term, given election windows and election cycles and all of that. And yet they
#
continue. And now, of course, that has completely vanished. You know, I am told that in the second
#
rung of both the main parties, there are people and all of that, but the top rung is completely
#
far apart from that. So, you know, the question that I have about both the bureaucrats and the
#
politicians is what is the impetus that on the one hand, you and I would both agree that the design
#
of the system is paramount. You want a system designed so well that the worst person in charge
#
will produce good outcomes and vice versa. Right. And at the same time, you are actually having these
#
individuals who, in a sense, are bucking the system and are doing things in spite of it because
#
they seem to be motivated by some higher purpose, which is okay for one or two people.
#
But it is this whole congregation and this whole community of people. What's going on?
#
I wish I had an answer to that, Amit, and I don't. Right. And I would love to and I couldn't see. I
#
mean, the listeners can't see, but I was smiling all throughout when you were saying this because
#
it gives me goosebumps. Right. Even think about what happened. And I think it's remarkable that
#
the political stability was actually not there. Like watch pay comes and goes, governments coming
#
and going. There's hardly a government which is finishing five terms. And yet this remarkable
#
continuity of reforms happens across years, across political parties, across bureaucrats.
#
I don't know what happened. I think it was just a miraculous luck that we had of this fantastic
#
group of people coming together who all fought alike. And maybe the pettiness of politics was
#
significantly less. Maybe the leaders were so influential, like a watch pay or et cetera,
#
were able to bring people together. And also the people were there at that point of time in exactly
#
the right ministries and all. And maybe the intellectual discourse was much more free,
#
was much more open. Right. There were more ideas floating around. There was more discussion and
#
debates happening in conferences and seminars. I don't think it was just the people who are there
#
in the government. I think there were also people who were writing, debating, talking about it,
#
analyzing the reforms. That was a very, very free environment of intellectual discourse,
#
which must have helped enormously. That has gone to a large extent now, right, in recent times.
#
So I think we got really, really lucky with this whole bunch of fantastic people, starting from
#
the Manmohan Singhs and Montakes of the world to the Arun Sharis and Yashwant Sinas of the world.
#
Irrespective of which party they belong to. And I think that if the counterfactual, if these people
#
were not there, then we probably would not have happened. Right. I mean, the continuity of the
#
reforms, we never went back on any of the changes. The direction just happened in one way. I don't
#
think it would have happened the way it did. So I think we got enormously lucky. And I think we now
#
realize how lucky we got now, particularly when we see what is happening. And that's why we got
#
the whole economic boom that we did, because none of the policies was reversed. There was no going
#
back. There was a continuity. And in fact, Vajpayee does this whole slew of second generation reforms,
#
right? He did not have, right? He could have said, oh, that was Congress government. I don't want to
#
really, whatever is happening, let it be. I don't want to add to it. I'll just do my thing. Right?
#
No, that's not what he did. He started a second generation reforms, which was exactly in the same
#
spirit that Narsimha Rao had started in 1991. That's just brilliant. That's amazing. I mean,
#
Vajpayee, he's called the bisma pitamaha of politics. I think Manmohan Singh called him that.
#
That's basically who he was, right? A statesman, a thinker, again, a scholarly person.
#
And his reforms were actually deep structural reforms. And to some extent, I feel that it was
#
unfortunate that he himself could not reap the benefits of the reforms. And there was a lagged
#
effect where the growth started happening post Vajpayee's time. And this is probably why people
#
think that reforms don't get you reelected. But be that as it may, he did it. He did all these
#
reforms. For example, if I can talk a little bit about that, he brought about this golden
#
period of privatization, right? Remember, privatization was not mentioned in the dream
#
budget, but Vajpayee did that. And they would call it strategic sales. And he started selling off
#
public sector units to the private sector, which was remarkable back in the day, right? Imagine the
#
whole history that we have said, where the public sector was occupying the commanding heights.
#
And from there, you're selling off public sector enterprises to the private. For example,
#
Balko was the first one. Arun Shourie was the disinvestment minister. And Balko, it started
#
with that. And then even Maruti Udyog, they reduced their stakes. And eventually it was given over to
#
Suzuki. And there were many other such public sector enterprises that were privatized,
#
which was fantastic. And mind you, this was not done because there was financial distress.
#
It's not like the government needed the money, and that's why they did it. It was because it was
#
realized that you need to unlock the value that is getting lost in all these inefficient public
#
sector enterprises. So that's why it was done. Then you had the very ambitious road project that
#
he started, which was the golden quadrilateral project. It was, I believe, the longest road
#
project in India at that point of time, which is phenomenal. I mean, the recognition that you need
#
to build infrastructure if you want to get the real benefit from the 1991 reforms that were done.
#
So these are roads that you're building from north to south, connecting the fourth metropolitan
#
cities. Along with that, he also... And there's a research paper, I believe, by Ejas, Ghani and
#
others, which I can send you, which found that as a result of the golden quadrilateral project,
#
that provided major boost to manufacturing within 10 kilometers of the roads that were built. Now,
#
that's real impact that you're creating that are getting to see from the reforms right then and
#
there. Then he also does the Pradhan Mantri Gramin Sarak Yojana, which is basically building
#
all-weather road connectivity to villages. Again, that's phenomenal. He's not just thinking about
#
connecting the urban centers, but also the hinterland, the villages, because it's all
#
interconnected. The third thing he does, and that's something that we are all beneficiaries of,
#
is the telecom reforms. Today we take it for granted that, oh, but mobile phones are going
#
to be so affordable. We don't even think of how much we are getting charged when we make calls.
#
It's practically free. But that's basically what he laid out the foundations of. He started a
#
telecom policy, which basically without going into the technical details, he moved from this
#
fixed charge fee to the revenue sharing arrangement, which gave a lot of incentive to business
#
operators to come in. Over a period of time, if you remember when we got the first mobile phones,
#
placing a call was so expensive. The mobile handsets were so expensive.
#
From then on, gradually the whole revolution that has happened, I think telecom has been one
#
of the major success stories which plays such an important role today in everything, financial
#
inclusion and digital services, what have you. But he's the one who started that.
#
Then, of course, the GST. We all know the GST was done during the Modi government in 2017,
#
but the foundation of it was laid out during the Vajpayee government. He set up a committee
#
under the Bengal finance minister, Asim Dasgupta, and there were ex-RBI governors, IG Patel,
#
Bimal Jalan, Sri Ranga Rajan, were all members of the committee against all odds, great thinkers.
#
They started thinking of having this combined goods and services tax structure. That's when
#
the whole discussion started. Again, I was talking of reform. It took that many years.
#
He couldn't do it then because there was no political consensus. Even he couldn't do it.
#
It took that many years for an absolute majority government to push it through.
#
It's going to probably take double that time for us to actually start realizing the benefits of
#
it because, of course, the implementation, all the problems have happened with GST. But it's
#
interesting that that's the whole arc of history for one single reform in a country like India.
#
I think the vision that Vajpayee had to even think about it at that point of time in the early 2000s
#
that there's going to be a combined goods and services tax structure. Mind you, coming from
#
this situation where the tax system was completely messed up, forget about the direct taxes, even
#
indirect taxes, plethora of indirect taxes all over the place. Then you have this vision that,
#
no, I want to combine all of it and have this single tax structure. I think it was a visionary.
#
It was just absolutely phenomenal. He had the people to form that committee to come up with
#
all the recommendations, to do all the research work, the background work, et cetera. Then,
#
in line with the whole opening up the economy to FDI, et cetera, he opened up the insurance sector.
#
The insurance sector until then was entirely owned by the government. He opened it up to
#
private sector participation, which was fantastic and which was continued. In fact, that was a
#
continuity the Modi government did. It also opened it up to FDI and Modi government continued that
#
as well. Of course, something that our common friend Ajay Shah has worked on, I believe,
#
is pension reforms, the whole utter pension yojana. Now, all of these things, these are deep
#
structural reforms. These are not all about unwinding the mistakes. The golden quadrilateral
#
project, the privatization, maybe to some extent, but the telecom policy. These are deep structural
#
reforms which really start unlocking the potential of the private sector. That is why I feel that
#
the combination of these second generation reforms along with what Narsimha Rao did
#
is what gave us the boom. It was not just the 1991 reforms. If Vajpayee hadn't done all of
#
these reforms, I think the story would have been much more different. That's why his role,
#
I don't know to what extent it gets appreciated in the reform story. We always give a lot of credit
#
to the Narsimha Rao team as we should, but I think the second generation reforms matter
#
disproportionately as well. Then, when you combine all of these together, we, of course,
#
get the spectacular boom that I can keep talking about, but again, if you have anything to add.
#
Before we go in for a break, just a couple of points. One of them is that at the start of this
#
episode, I spoke about how you can never talk of something like a mandate. Elections are deeply
#
complex, hundreds of millions of people voting for different reasons. I feel that about 2004.
#
One, I think Vajpayee got unlucky because all these great reforms, they had a lag and
#
they actually started playing out properly later in the decade and really worked out something that
#
both Manmohan and Chidambaram would acknowledge. That took time, but equally, the impression,
#
the simplistic impression that, hey, reforms don't get you votes, et cetera, et cetera,
#
is not necessarily true. It's so multifactorial. The monsoons may have played a part.
#
So many different things happened that we should not rush to judgment.
#
Speaking of rushing to judgment, my second point here is about Narsimha Rao and Vajpayee.
#
Often, people will say of Narsimha Rao that, oh, he was home minister during the 1984 riots.
#
People will say of Vajpayee that, oh, Hindutva and this and that, et cetera, et cetera.
#
I just want to say that people contain multitudes. As far as Narsimha Rao being home minister during
#
1984 is concerned, it's fairly well documented that there was a phone call and he was told by
#
the PMO that, just stay out of this. Vinay writes about it in his book and we discuss it in the
#
episode. The whole deal is that regardless of what you feel about some of their actions,
#
as prime ministers, you have to evaluate them on what they did. My whole point is both those
#
guys are dead. Passing judgment is pointless. I am not having to decide on should I have
#
dinner with them or should I be civil to him. They are gone. The only thing that is useful to us
#
is to look at their actions and evaluate their actions so that we can condemn and avoid the bad
#
things they did and we can learn from and emulate and celebrate the good things that they did.
#
It is in that context that I say that, oh my God, they were outstanding prime ministers with
#
outstanding teams. That's the note on which I'd like to go in for the break. Or do you have
#
something to add? Just one thing I wanted to add. I think it's in the spirit of this episode as well
#
about learning lessons. I completely agree with you that instead of sitting in judgment about the
#
other things that may or may not have happened, whatever it is, it's much more important for us
#
to understand what are the real good things they did. What are the real substantial reforms and
#
changes they brought about without which the Indian economy could have been in a very different
#
place today and then learn lessons from it. For example, building political consensus
#
for both Narsimha Rao, for both Vajpayee. These were coalition governments. Let's not forget it.
#
Most of the substantial reforms got done in coalition governments. That's not trivial.
#
Yes, maybe there's an advantage because you get more ideas and there's more discussion. There's
#
more brainstorming happening. Fine. But there's also a lot of political opposition. You have to
#
make the allies go with you. You have to talk to the opposition. That's definitely something
#
extremely important that people perhaps don't appreciate as much. The other thing is that,
#
yes, doing reforms is difficult in a messy democracy like India, but you start somewhere.
#
You don't just do welfare schemes and packages. You do policies. You change policies. You take
#
reforms because there is a vision that is we have to take the country forward. There's China,
#
which is just going gung-ho. Southeast Asian countries going gung-ho. We want to grow as well.
#
We have to lift millions from poverty, which is what the reforms did. It lifted millions from
#
poverty. Exactly. Irrespective of this whole inequality debate or whatever it is, would you
#
rather have a country where the reforms did not happen? Absolutely no. I think it's important to
#
evaluate these people on the basis of all these substantial changes that they brought about and
#
learn the lessons so that now when we stand in 2024, we can get an inkling of what can we do,
#
what should we do going forward? And I think we can take a break on that note.
#
Yeah, it almost sounded like you were ending the episode now that we stand in 2024 and etc.
#
But no, we're not ending it. We've barely reached halfway. I don't know. So we'll come back after
#
the break. Hey, the music started and this sounds like a commercial, but it isn't. It's a plea from
#
me to check out my latest labor of love, a YouTube show I am co-hosting with my good friend, the
#
brilliant Ajay Shah. We've called it Everything is Everything. Every week we'll speak for about an
#
hour on things we care about, from the profound to the profane, from the exalted to the everyday.
#
We range widely across subjects and we bring multiple frames with which we try to understand
#
the world. Please join us on our journey and please support us by subscribing to our YouTube
#
channel at youtube.com slash Amit Verma, A-M-I-T-V-A-R-M-A. The show is called Everything is Everything.
#
Please do check it out. Welcome back to The Scene and The Unseen. I'm still with Rajeshwari
#
and we have reached 2004 in India's economic journey. And what's that sound? Did you hear that
#
sound? No, I was just... You didn't hear that sound? It was a boom. I think it came from 2004.
#
Let's talk about the boom years, 2004 onwards. Get me started. And I want to add before I go to
#
the boom that, you know, when Amit says that we are still talking here, while we started by saying
#
my name is now officially a South Indian name, a Tamil name, but I think at this point I'm just
#
the blue-blooded Bengali who just loves to do Adda for hours and hours, which is basically what
#
this is about. So moving on to the boom, the only real proper long boom that we have had in the post
#
1991 period. So what happened from 2004 onwards, right? We had all the second generation reforms
#
that we were talking about initiated by Prime Minister Vajpayee, who doesn't get reelected.
#
And then UPA1 forms the government and Prime Minister is Manmohan Singh, of course, with all
#
the knowledge as finance minister of all the 1991 reforms and all that experience and institutional
#
memory, et cetera. And the reforms continue in the light of this whole continuity of reforms.
#
It happens, for example, allowing FDI in civil aviation, in broadcasting and multi-brand retail.
#
So there's a lot of opening up to FDI that is happening, which is great because India,
#
of course, at that point of time needed not only domestic investment, but also foreign investment.
#
Now, 2004 to 2008 is the spectacular period, actually 2009, when the economy was growing on
#
average at eight, nine percent. Every successive year was above upwards of seven percent growth
#
rate, which is spectacular. And what were the catalysts, right? What were the triggers?
#
One, of course, was this lagged effect of reforms, which started from 1991 continues with Vajpayee,
#
et cetera, even during UPA1. So of course, the reforms are unleashing the potential of the
#
private sector, which had been locked for decades. And that's definitely something that is helping.
#
The other thing, which also is important to realize at this point of time, that
#
this was a time of very favorable global environment. Globally, all countries were
#
growing. All emerging markets were benefiting from it, not just India. China, of course,
#
was growing at nine, ten percent. Globally, what was the scenario? Inflation was low.
#
Interest rates were low. And the reason this is important for India is when interest rates in the
#
developed markets, particularly in the U.S., when interest rates are low and inflation is low,
#
what happens is that the cost of borrowing of foreign investors go down. And all these foreign
#
investors who are therefore borrowing for cheap are looking for destinations where they can invest
#
and get high returns. And this is where India comes in, because this is this new giant emerging
#
economy that has just recently opened up with endless investment opportunities. The financial
#
markets are developing. The private sector is opening up. FDI is opening up. So the foreign
#
investors basically gush in, right? And there's a huge amount of foreign investment inflows
#
that the Indian economy witnesses. I think by 2007-8, it was about roughly thirty billion
#
dollars of FDI, thirty billion dollars of foreign investment in the stock market and bond market,
#
which is massive. I mean, when the reforms were just starting in the 1990s, it was barely one or
#
two billion. So it's a very, very big leap that happens. Let me ask you to quickly demystify this
#
for my listeners. So I'll kind of paraphrase what's going on and you tell me if I'm right and add to
#
it that what's basically happening is you have extremely low interest rates set by the US Fed.
#
Alan Greenspan in charge and low interest rates was kind of a pet thing of his, which he championed.
#
And what that did was it effectively increased the money supply and put a lot of what you would call
#
easy money out there. And where would this easy money go? Beyond the point, it will come into
#
the developing markets. And a lot of it is coming to India. So it doesn't necessarily mean that
#
India is suddenly more attractive as a destination. It is that there is this easy money sloshing
#
around. Where the hell will it go? And it'll eventually come to India. And when the easy money
#
stops, it'll eventually make its way out of India also. And this, by the way, also explains why in
#
the last few years, even though our economy was doing badly, the stock market was booming. And
#
people will ask, why is that? Why the disconnect between the stock market and the real economy?
#
And it's because a lot of it is easy money coming from investors abroad and completely unrelated to
#
what is also happening in our economy. And this also, in a sense, and tell me what you
#
feel about this, leads to the one kind of inequality that I do think is a problem,
#
which is that there's what is known as a Cantillon effect, where when the money supply goes up in
#
this way, the early sort of surge of new money really goes to elites at the top who will then
#
put it in stock markets and stock markets will boom, who will put it in land and real estate
#
will boom and etc. And that is why, you know, and there's a lag of inflation and inflation hitting
#
the common person. Inflation, obviously, is what will happen when the money supply goes up,
#
the supply and demand. And but ultimately, the poor suffer because of disproportionate amount of
#
that zero money has gone to the elites on top. And that is why you will see that inflation first in
#
the stock market as it were, and it'll only come down to fruits and vegetables much later.
#
So unrelated point, but something you broadly agree with?
#
So a few points where it's not a disagreement, but let me just clarify a little bit more.
#
One is that the one way of looking at it is easy money is but I think,
#
more technically, it's as if you're an investor, you're borrowing money from somewhere and you
#
want to invest somewhere else, right? And you always want to arbitrage the returns differential
#
between the low cost borrowing and high return investment. That is exactly what was happening
#
when the interest rates in the US were low, and the interest rates in India is always high,
#
because India, by virtue of being a developing economy with high inflation,
#
interest rates by default are always higher, right? So there is this returns differential,
#
which is extremely attractive for investors are looking for high investment opportunities.
#
But at the same time, what was happening at that point of time is that the growth prospects of
#
India was spectacular, right? This is an economy that is on the cusp of a boom. And I wouldn't
#
agree that the stock market is completely unrelated. I think what happens is when the
#
investors are investing in the stock market, they are taking a bet on the future growth prospects,
#
right? They're expecting that the economy is going to be booming and that and hence the
#
asset prices will go up. My unrelated comment was a comment on recent events where the economy has
#
not been doing so well and the stock market has and it's not necessarily something I'm saying,
#
but the perception that people have that, oh, what's going on this completely unrelated.
#
Yeah, so I'll come to that, right? So the general concept is that when you're investing in the
#
financial market, you're expecting, you're taking a bet that this economy is going to grow, there's
#
a massive growth prospect, then that is going to increase the asset valuations and as asset prices
#
go up, you make more returns on your investment and that's how you benefit, right? That's the
#
calculation that happens and which is what was going on in 2004 starting as well. And I want to
#
just clarify another thing is that we shouldn't think of it as easy money coming in and then easy
#
money leaving, because I'll tell you why. Then that feeds into this sort of quote unquote paranoia
#
that policy makers have that there are these volatile hot money flows that are coming in
#
and when they leave, it's all a hell of a disaster. Therefore, we should put capital controls and not
#
let all this foreign money coming in, which is very harmful for us because we need foreign
#
capital because our investment needs are massive. We don't save enough, so we need foreign capital
#
as well, right? So we have to be a little bit circumspect about this whole money coming in
#
and money leaving. This is basically about when you open up to globalization, when you get
#
financially integrated with the rest of the world, there are points of time when the economy
#
looks like an attractive investment destination and the global situation is also conducive
#
because there is easy money or whatever low cost borrowing available and investors will come in
#
and invest your economy and in the process, there are benefits to be had. It's not like they are the
#
only ones who are reaping benefits out of it. There are benefits to be had for the companies
#
which are raising capital in the stock market from the companies who are raising capital in
#
the bond market. All of that is there, right? Because as I said, in India, we barely save
#
30% of the GDP, right? Which is not nearly enough to finance all our investment requirements.
#
So that balance, I think, is very important to understand here. Yes, there will be a volatility
#
when the easy money leaves as well, but that is why you need to build a resilient financial system
#
as opposed to saying, oh, we'll ban everything and shut down everything simply because we want a safe
#
system. And there is this constant trade-off between that stability and growth. Remember,
#
Josh also talks about Josh Feldman. So if you're constantly going after stability,
#
then at some point you'll start compromising growth. And that's the trade-off, that balance
#
that is very tricky to strike. Coming to the current period when you said that the stock
#
market is rallying, even if the real economy is not doing very well, I think what happens there is
#
even if the real economy by and large was not doing particularly well post-COVID,
#
and we'll talk about it at length, there was this K-shaped recovery, right? The large formal
#
enterprises were doing extremely well after COVID because they were able to gain market share
#
at the expense of the smaller guys, right? And because they were doing so well,
#
and they are the ones who are listed in the stock market, the investors, both domestic and foreign,
#
were basically investing in these stocks, right? So there's one part of the economy that was doing
#
very well. And to that extent, that part of the real economy was not disconnected from the stock
#
market. But because of this K-shape, yes, there was this broader part which got totally disconnected.
#
Like a Jekyll and Hyde organized this organized kind of thing.
#
Absolutely, exactly. So going back to 2004, you have this global environment which is extremely
#
conducive. There's huge capital inflows coming into India as an emerging market, massive. I
#
think at some point of time, it even became 7% of GDP or something, which was pretty damn big.
#
And when these foreign investors are investing and the whole mood is one of exuberance, of course,
#
there is a huge amount of domestic investment happening as well. Because what we have seen is
#
there's privatization that Prime Minister Vajpayee started, which means a lot of the
#
private sector is now interested in investing in some of these industries. There's a general
#
whole license Raj going away, meaning private sector can actually participate in the production
#
process in a very big way. So a huge amount of increase in domestic investment is also happening.
#
Simultaneously, there is a massive requirement for infrastructure, right? And the reason I'm
#
bringing the infrastructure point is because it is intricately connected to what happens going
#
forward, right? Now, to take a step back, when you need infrastructure investment, and of course,
#
the financing has to happen, for the longest of time in India, we had these institutions called
#
Development Finance Institutions, right? DFIs. And this was pre-1990s construct, right? And the
#
DFIs, I don't want to go too much into technical details. I have articles on it that we can link.
#
But the DFIs were basically giving loans to infrastructure projects. But when the economy
#
started liberalizing, the DFIs became unviable, and they basically shut down. That role of financing
#
in projects then got passed on to the public sector banks. And remember, after nationalization,
#
of course, 90% of the banking was in government ownership. Even by mid 2000s, it had decreased a
#
bit because private banks had come up, but still giant bulk of the banking sector was still in
#
government ownership. So these public sector banks then start doing infrastructure financing.
#
And what was the problem in that? And what are these infrastructure projects? So back then,
#
there was this model called the PPP model, like Public-Private Partnership. And the idea is that
#
the government is going to procure land, get all the clearance and permits, et cetera. And the
#
private sector will come with the capital, will come with the expertise and technology. And then
#
they will start benefiting from the tolls, et cetera, that they collect, and they'll maintain.
#
That's pretty much roughly the model. So the PPP model was very much in place at that point
#
of time because a lot of infrastructure was needed. And the financing was being provided
#
by these PSU banks. Now, the problem with that is infrastructure financing is extremely complicated.
#
These are long gestation projects which can take anything upwards of 20, 30 years,
#
during which time governments may change, policy risks, environmental risks, et cetera.
#
You need a different kind of expertise to evaluate these projects and give out loans.
#
If at all this should be done by a banking sector. And the public sector banks did not
#
have that expertise. But be it because of political pressure, be it because of the
#
circumstances, the DFIs had died. They are the ones who got caught into this infra lending.
#
And that was a problem. And we'll come to that eventually. So this is basically what is happening
#
at that point of time. There's a massive investment boom, both domestic and foreign.
#
Bank credit is growing at a remarkable pace. Roughly, if I remember correctly, 30 to 35%
#
was the year-on-year growth in bank credit, in non-food bank credit, which is just fantastic.
#
And alongside with the increase in bank credit and increase in investment,
#
the general what we call the macro indicators, just macro stability indicators. For example,
#
fiscal deficit. Chidambaram was the finance minister. And in a fantastic way, he actually
#
brought down fiscal deficit at that point of time, which was also because when the economy is booming,
#
there's a lot of tax revenues. And automatically, the fiscal deficit comes down. And the government
#
also was not doing a large amount of spending at that point of time, which would put the fiscal
#
deficit out of the boundaries. So that was happening. And we were exporting, right? Because
#
finally, all those shackles are gone. You can start exporting. So we just went all out. And
#
exports at that point of time was 25% of GDP. Pretty, pretty massive. And this is goods export,
#
right? And of course, service exports, right? Because this is also the time when the IT service,
#
IT sector starts exporting IT services. And the whole outsourcing boom takes off.
#
I remember myself when I graduated from Delhi School, I got employed in American Express,
#
which was a credit, which is still a credit card company. And this was 2004, 2005, right?
#
Back then, the euphoria and the whole mood of the outsourcing industry was so amazing
#
that Amex basically rolled out the red carpet for us, right? I remember even as new management
#
trainee joinees, we were flown out to New York to meet the CEO, the global CEO of the company.
#
And we stayed in a five-star hotel in Manhattan. It was just the next level, right? And we were
#
real young graduates, fresh out of grad school. And we had stars in our eyes, right? And this was
#
not just one company. Every company was doing that, right? So this was the boom. We could feel it.
#
And alongside that, what was going on is that the firms in India, right? Not just the infrastructure
#
firms, in general, non-financial firms, the companies, they are borrowing left, right, and
#
center, right? The banks are happily giving credit because the whole economy is booming.
#
The firms are borrowing. Why? Because they are placing this bet on the Indian economy, right?
#
The Indian economy has arrived. The boom has started. It's going to last for a very long time.
#
The economy will continue to grow at 89%. And who wouldn't want to invest, right? Who wouldn't
#
want to borrow? So this is the mood at that point of time of this recently opened up economy.
#
And this is classic, what we call in economics, debt-fuelled boom, right? You borrow, you invest,
#
and you're creating a boom, right? It's a credit-fuelled, debt-fuelled boom.
#
And one interesting I want to mention here is, for the first time in post-independence India,
#
we started having what the Western economies will call business cycles, right? The whole upswing
#
and downswing, the whole graph that goes up and down because until 1990s, we did not have a modern
#
economy. Markets were not functioning. There was no business cycle. Any growth cycle were basically
#
just dominated by monsoon shocks or oil price shocks, right? For the first time, I remember,
#
I know folks at NIPFP have done a great job in working on business cycles. The first recession
#
we had was 1999 to 2002, which is when the bank NPA crisis happened. And then we have this massive
#
boom from 2004 to 2009, right? So the whole capitalistic system, the market, all of those
#
signs are getting visible. You're getting a nice business cycle boom. There's this whole exuberance.
#
So that's the mood of the era at that point of time. There were, of course, some mistakes that
#
happened. And now, of course, we call it mistakes. But back then, I guess, when you think the economy
#
is going to continue to grow at 7%, 8%, you don't think of it as mistakes. One is that when the banks
#
are lending in this, and then you basically just think of it as irrational exuberance, right? When
#
the banks are lending left, right and center, willy-nilly, of course, a lot of things are
#
slipping through the cracks, right? I mean, how much attention are you paying to the credit
#
worthiness of the borrowers? You are just lending to anybody and everybody because, hey, the economy
#
is doing so great. It's like the rising tide lifts all boats, right? That's the mood. And of course,
#
it's highly possible that many projects that got funding at that point of time
#
were not as solid as every other project, right? So all of these things happened.
#
The second thing was, and this is a little bit on monetary policy side, right? Inflation was
#
relatively low. It came down roughly less than 5%, which was great. But with all these capital
#
inflows coming in, so what happens, to put in very simplistic terms, when you have these foreign
#
investment flows coming in, the rupee of the value of the currency starts appreciating,
#
because there's a very strong demand for the rupee. Now, if you just stop there, it's fine.
#
But the Reserve Bank of India, now, remember I said that we moved to market-determined exchange
#
rate system? It wasn't really market-determined because from 2004 onwards, the Reserve Bank of
#
India starts intervening very actively in the foreign exchange market to stabilize the value
#
of the rupee, because an appreciation is bad for exports, right? It makes exports costly,
#
and therefore, you don't want to affect that. So with that objective, that whole intervention
#
started. Now, the reason that is problematic, and there are multiple reasons, one thing is that
#
exchange rate is a price. And we have been talking about price so much in this episode.
#
And we agree that price should be determined by the forces of demand and supply in the market.
#
So if you are going to be deregulating the price of everything else, you need to be doing that to
#
exchange rate as well, simply because exchange rate also acts as a shock absorber. So when the
#
economy is growing at such a high rate, there is also a risk of overheating, because then inflation
#
starts increasing, so much of demand. And that's when exchange rate can play the role of the shock
#
absorber, because exactly as it's appreciating, exports start getting dampened, and slowly demand
#
comes down. But if you start intervening, that entire role of shock absorber just gets disrupted.
#
So that became very distortionary. And secondly, when you're intervening in the FX market,
#
essentially what you're doing is you're buying for an exchange, and you're selling rupees.
#
Because the demand for rupee is very high, you want to counter that. So you're supplying rupees,
#
right? But as you're supplying rupees, you're increasing money supply, which means inflationary.
#
So as it is the economy is booming, there is an inbuilt inflationary pressure that's growing.
#
On top of that, the central bank is adding to the money supply. So of course, inflation is going to
#
increase. So when we talk about inflation picking up in the 2011-12 period, I don't think many
#
people understand that the seeds of that were sown in this pre-2008 period, when there was a
#
lot of injection of money supply that was happening in the quest to stabilize the exchange rate.
#
So that's the unintended consequences of a policy, which I consider was a mistake.
#
And of course, there can be multiple views of that. But end of the day, as I said, if you think of
#
it as a price, and if you want the exchange rate to play the role of a shock absorber,
#
then that intervention becomes distortionary. And the other thing I want to mention here,
#
and then I'll pass it over to you, is that while this boom was happening and there was this lot of
#
euphoria, animal spirits, as Keynes called it, I think at some level, excesses were getting built
#
in. And there was a certain amount of complacency that must have set in by then, that this is how
#
it's just going to be. And in a country where institutions are weak, when the state capacity
#
is weak, and all of that became very apparent right after that, that when suddenly the going
#
doesn't remain so good anymore, and it's like when the tide recedes, everybody's swimming,
#
you know who's swimming naked, right? So I think that's basically what ended up eventually
#
happening, that there were a lot of excesses getting built in. There was a lot of complacency
#
that had set in. And we didn't have the institutional capacity or the state capacity to handle
#
the consequences of what went wrong after that. So I'll stop here and hand over to you.
#
So earlier we spoke about how even though the generation of reformers were planning their
#
reforms for decades earlier, they had to learn on the fly how to do reforms within the state
#
from 1991 onwards. And here also, I think there is a kind of learning on the fly happening,
#
because this is now in the 2000s, the first time that India is part of a global economy.
#
You know, the business cycle comes in, there is all this inflow of foreign capital, it also leaves
#
you exposed to the world market where shocks elsewhere carry far louder reverberations in
#
India than they do. So one, what was this learning process kind of like? Because at one level,
#
it's easy to again look back in hindsight and say, oh, these mistakes were made. But as we did in
#
the case of Nehru in the 50s, for example, you know, it's easy to sit here and do that now. But
#
in that moment, I'm guessing it would have been very hard. And secondly, tell me then about the
#
2008 financial crisis and how that affected India, because I have heard detailed stories about it,
#
including on, you know, episodes and I did on everything else, everything with Ajay and
#
some seen unseen episodes as well, about how well it was handled, you know, by Chidambaram
#
in the finance ministry, and all his army of people. So take me a bit through that period,
#
and what was really going on? And how did we handle that part of it?
#
So to answer your first question, once you move to this paradigm that the private sector has a
#
significantly greater role to play in the economic activity of the country, you automatically will be
#
subjecting the system to these upswings and downswings, right? That's why I said that we
#
had business cycle swings only post 1991. We didn't have them for the first 40 years.
#
And this is because actions of the private sector, which start having this great influence,
#
are obviously determined by where the returns are high, where is it worth taking a risk?
#
And of course, as I said, that's why there is a whole body of work on this credit-fuelled boom
#
all over the world, right? In every capitalist market system. And it's not something that,
#
yeah, you can't say that this was a mistake. I agree. Because at that point of time,
#
when the going is good, you basically want to make the most of it. And that's what the banks,
#
that's what the businesses, everybody was doing. And this is this classic symptom. And just because
#
this happened, at the same time, you cannot say, oh, but this is a bad system, right? It's too
#
volatile. It's subjecting the system to too much of upswings and downswings. And hence, let's just
#
crack down, shut down private sector, shut down markets. That shouldn't happen either.
#
So this is sort of the trade-off, that if you want to benefit from the market system,
#
and if you want to get high growth from investment, which of course cannot happen without credit,
#
et cetera, then there is this flip side, that yes, there will be times when there will be boom,
#
and there will be times when there will be recession, which is where we have
#
policies to deal with the recession. But in the process, there is also this constant,
#
this growth that is happening. Yes, there are fluctuations, but over and above,
#
mostly overall, you get this growth steadily over a period of time. And that's basically how the
#
system is designed. One thing that happens is when you know that the system is vulnerable to the
#
upswing and downswing kind of a thing, there are policies and measures that can be built in
#
to guard the system a little bit against such volatility. For example, what we call counter
#
cyclical measures, right? If cycle is increasing, you have in some built-in counter cyclical measures
#
to sort of dampen it a bit. That's why I said exchange rates role as a shock absorber is a
#
very important factor there. And there are many such actual measures by government or the central
#
bank that can also be taken. So yeah, it's not a mistake per se, but it's basically the nature of
#
the beast. On the second thing about the 2008 crisis, so this is what's happening in the
#
Indian economy. Generally, globally, emerging markets are growing, everybody is doing pretty
#
well. And then of course, it's a parallel disaster, right? All hell breaks loose in 2008. Of course,
#
it's been building up in the US for a long time with low interest rates, et cetera. In 2008,
#
I don't want to go too much into the details of the global financial crisis, but Lehman Brothers,
#
a very big investment bank in the US collapses. And this is a subprime mortgage crisis. Basically,
#
it's a housing market crash that happens, stock market crash that happens. And then this basically
#
morphs into global financial crisis, because of course, if US has a meltdown, everybody else
#
is going to get affected, right? So that happened. In India, ESP handled it very well, but also it's
#
worth noting that India was quite integrated into the global economy by then, by virtue of having
#
opened up. But we were not very exposed to the crisis itself, because the kind of issues and
#
the kind of markets that had caused the crisis in the US, we simply didn't have them, right?
#
We are still a nascent emerging economy that is finding its feet around private sector and free
#
markets, et cetera. There are a lot of restrictions on the financial innovations that we can do,
#
on how much integration we have done with the rest of the global economy. So by virtue of that,
#
of course, some people would say we had a safe system, and hence we did not get affected by the
#
crisis. Yes, definitely. But that should also not be used as a logic to always prefer safety over
#
taking risk, right? And unless you take some risks, you're not going to be able to grow.
#
So that debate is also there. So I don't want to go too much into it. But the fact that because
#
we didn't have all of those markets and products, innovations, et cetera, we were not that exposed
#
to the global financial crisis. Our exposure was to the extent that there was a general risk
#
aversion. The financial sector globally just became risk averse. Foreign investors became risk
#
averse. So to tell you exactly how it unfolded, that when a crisis happens, which originates in
#
the US, ironically, foreign investors all take their money from all other countries and go back
#
to the US, right? As counterintuitive as it may sound, this is basically called flight to safety.
#
Because the US economy, despite the fact that it is the one undergoing the crisis,
#
the US government bonds are considered to be the safest assets in the world,
#
simply because they have the credibility they will never default. So whenever there is a crisis,
#
there's this huge risk aversion where investors don't want to stay invested anywhere else,
#
definitely not in the risky emerging markets, and they all want to go back to the US,
#
which is basically what happened. And because we were receiving a lot of foreign investment,
#
that outflow became costly for us, right? So the lot of foreign capital outflow that happened,
#
the rupee starts depreciating, and I'll talk a little bit later on about the replications of
#
that. But in the immediate aftermath of the collapse of Lehman Brothers, I think there were
#
few weeks or so when one particular bank, ICICI Bank, got quite a bit affected. Because ICICI Bank,
#
I think, had some foreign subsidiary, etc., through which there was a little bit of exposure
#
to Lehman and all. And there was actually a bit of a bank run on ICICI. The depositors started
#
taking their money out and started investing in SBI, because SBI is, of course, the government-owned
#
bank, right? So that happened, but of course, the government stepped in and sort of guaranteed all
#
deposits of ICICI Bank, and the crisis was averted. And then also what happened was there was a
#
sudden risk aversion in the interbank market in India, interest rates shoot up, etc. But that,
#
again, lasts for a very short period of time. But by and large, the government and RBI handled it
#
quite well. And if you want to add anything, right after that, we had the terrorist attack as well.
#
I think that was more damaging for us than the fall of the Lehman Brothers. And then I can talk
#
about how the whole thing played out post-2008. Yeah. But before I get to the terrorist attacks,
#
one little bit of trivia, which is like it should be a dramatic scene from a film,
#
that imagine a basement, right? It's completely dark. Then one by one, the lights are switched off,
#
and sweepers troop in, and they sweep the place clean, and they leave. And you have a time-lapse
#
video, and chairs are being put. And eventually you see that there are chairs, and there's a stage,
#
and the stage is well-lit. And there are four sofas on the chair or whatever, and people start
#
coming in, and they go, and they sit. And some people are hanging around, and et cetera, et cetera.
#
And then four obviously important people, VVIP people, come in, and they walk up to the stage.
#
And what you have there is a panel discussion that is happening in Delhi at a basement,
#
where our friend Ajay Shah is moderating. And the three people on stage are KP Krishnan,
#
SD Bhave, and Subharao, right? And then what happens as the event begins is that a driver
#
kind of person sneaks into the basement, and he goes up to KP Krishnan and whispers in his ear,
#
and KP Krishnan leaves the stage immediately. And then another driver kind of person, see my
#
elite snobbish Latian's language driver kind of person, another driver kind of person enters and
#
goes to Mr. Bhave, and Mr. Bhave leaves. And a third driver kind of person to compound my sins of
#
language goes to Mr. Subharao, and Subharao leaves. And Mr. Shah is now moderating a panel with only
#
himself, which is perhaps how he likes it, who knows. And what had happened is that Chidambaram,
#
at that point in time, something had happened, maybe Lehman or whatever, and he wanted to speak
#
to these three people immediately, because they are the three most consequential people for him.
#
And there's no cell phone signal in the basement. So he gets his person to call their drivers,
#
and then the drivers go and get them. And it's just such a great sort of dramatic story.
#
But the financial crisis is not the only consequential event of that time.
#
Oddly, what you wouldn't expect to impact financial policy and so on and so forth
#
happens around the same time, which is in 2008, there are the terrorist attacks in Mumbai.
#
And this sets off a series of events. The attacks happen, and our home minister at that time is
#
Shivraj Patil, who is unable to deal with what's going on. It is completely beyond his pay grade.
#
And Manmohan soon sees that, and he decides that, look, this is the crisis for this moment. And he
#
was right. Of course it was. And I need my best man in that job. And his best man was Chidambaram.
#
So Chidambaram gets shifted from the finance ministry to the home ministry. Now, at this point,
#
you might expect that Manmohan will step in himself and take over finance until Chidambaram
#
can come back. But he has some health issues and indeed has to be operated soon after this.
#
So what happens is that Sonia Gandhi now intervenes and says Pranab Da, your favorite. Pranab Mukherjee
#
is going to be in the finance ministry. Now, it so happens that Pranab Mukherjee is an extremely
#
old school, left-wing, statist economist, very much of the Indira Gandhi school of thought,
#
and almost an anomaly in this age of great reformers like Manmohan and Chidambaram.
#
But he takes over the finance ministry and a combination of Manmohan's health issues,
#
which make sure that only Manmohan can, he can't take over finance, he can't take that back.
#
And Sonia Gandhi's backing of Pranab Mukherjee mean that Pranab remains the finance minister.
#
And he is a disaster as finance minister. There's a great book by Pooja Mehra called
#
The Lost Decade. I had an episode with Pooja also, which elaborates on this. And I've spoken on this
#
subject in many of my economics episodes after that. But everything gradually starts going to
#
hell. You know, the NPAs start getting out of whack. People talk about the phone-alone scandals
#
of the time. And obviously the public sector banks, to go back to that theme of nationalization of
#
banks, the public sector banks are more NPAs because there are more political pressures on
#
them and the good incentives of making sound decisions, balancing risk and reward, doing
#
due diligence. Those aren't there. That goes out of whack. There is especially the retrospective
#
taxation scandal that happens under Pranab Mukherjee, which perhaps you'll elaborate upon,
#
but I think it's just completely disastrous because if there's one thing that investors,
#
foreigners otherwise want, it is predictability. That if something is the law today, it will be
#
the law tomorrow. You don't want somebody to retrospectively say that, no, no, no, five years
#
back we should have had a tax, but anyway, we'll tax you for that now. You can't have that kind
#
of BS going on. And, you know, investors start losing faith and essentially the way the narrative
#
goes is things start going to hell. 2011, you know, the sort of the boom ends in a sense,
#
which is why when Pooja wrote her book in 2021, she called it the lost decade, 2011 to 2021.
#
And eventually the realization sinks in that we can't allow this to go on. It's gone on too far.
#
Pranab is just completely taking us backwards. So circa 2013, 2014, it's kind of decided that
#
kick him upstairs and he's made the precedent and Chidambaram comes back. And now for a few months
#
there is hope because Chidambaram does some great work. Things like inflation targeting is prepared.
#
They're passed on to Jaitley. Jaitley does some great work. It's almost like a continuity there.
#
What we spoke about with affection earlier that, you know, they might be from different parties,
#
but they're united by their desire for good policy, you know, based on rigorous due diligence,
#
expert advice, et cetera, et cetera. But 2016, all of that kind of changes, you know, Jaitley
#
no longer has the same control within the finance ministry. And then unfortunately he starts
#
declining and eventually passes away and politics takes over. And we can speak about that period at
#
length, but this is essentially the summary of what the bloody terrorist attacks did, you know,
#
that and you could say that everything that came after sort of has been influenced by that,
#
including the very fact that the 2014 elections went the way that they did, you know, everything
#
kind of flows from that in a very accidental manner. And I'm reminded of, you know, Keshava
#
Guha wrote this great piece where he again considered accidents of history in politics
#
with regard to politician deaths. And he was musing that if Pramod Mahajan wasn't, you know,
#
shot dead by his brother, which direction does the BJP go in? Because he is very much a Vajpayee
#
kind of person, a successor to Vajpayee and doesn't like Modi very much and no way he's
#
going to let him come up. But no, Pramod Mahajan is gone. Within the Congress, you have all the
#
tall second rung leaders die after that. You have Madhavrao Shinde are dying, Jeetendra Prasad dying,
#
Rajesh Pilot dying. That entire second rung is kind of wiped out where Sharad Pawar has just left the
#
party and gone. And that leaves the party devoid of leadership and ripe for feudal capture, which
#
is kind of what happened. So, you know, and sometimes I think back to these accidents and
#
I say that no, man, in hindsight, it appears that whatever happened was inevitable. But I think back
#
to these accidents of history and the counterfactuals just stand up and strike me in the face and say
#
that, you know, no, nothing is inevitable. One atom goes one way instead of the other way and
#
the universe could be different. So I agree. And to add two points to what you said, one is that
#
when the UPA to government comes to power, right, this is 2008, nine, and this is the whole team of
#
Manmohan Singh and Chidambaram, etc. I think there was a lot of expectation that once again, you know,
#
the reforms are going to happen, this is going to be great, because it's the dream team, right,
#
Manmohan Singh and Chidambaram, what can go wrong? And then exactly, as you said, almost everything
#
went wrong, right. And, of course, there are a lot of macroeconomic factors, etc. But there are also
#
these massive accidents of history, who would have thunk, right? I mean, Pranabdha becoming
#
finance minister, etc. And the other thing I want to mention is that although it is-
#
Is it true, can I ask you, can I interrupt and ask you a question?
#
Is it true that Pranabdha used to use the phrase, bishabish?
#
Yes, I'm almost afraid to say the actual word of it, because being a bong, I'm afraid I might
#
actually say what he used to say.
#
Now you've got to say, now you've got to say what he meant to say when he said bishabish.
#
Moving on, moving on from there.
#
So, to more serious stuff, I think I also want to say that, going back to my point about
#
institutions, right? If it was a country with strong institutions, then the individual would
#
not matter so disproportionately, right? If we had built that kind of an institution in whatever
#
ministry or whichever organization, right?
#
Even a political party.
#
Exactly. Then who's leaving, who's coming, who's going, all of that will be relatively
#
inconsequential and then there will be a continuity of process of policies of reforms,
#
right? And the fact that he was able to do the damage that he did, I think was largely
#
a function of the fact that it is a weak state capacity, weak institution story, right?
#
And I think that's something worth keeping in mind.
#
And that's something that we need to keep working on, right? That at some point of time,
#
the individuals should matter less. Of course, they will not completely become irrelevant.
#
There's always a preference, a character, personality, and all of these choices.
#
But at a broader level, the institutions should become more important.
#
Now, what happens then, and the interesting thing is, for the first time you get this boom
#
from 2004 to 2009, and then literally everything goes wrong, right? I mean,
#
if I were a businessman standing in 2006, 2007, it would be impossible to imagine that the world
#
would go so badly south. And despite being insulated from the shocks of the global financial
#
crisis to a large extent, the kind of things that went wrong domestically, of course, there was the
#
spillover effect that exports started declining because global economy started slowing down.
#
That was bad for us. Of course, it is true that the exchange rates started depreciating,
#
which means that all these companies who had borrowed in dollars now are experiencing very
#
high debt burden because they have to earn a lot in rupees. But having said that, domestically,
#
all these accidents, this whole Pranam Mukherjee and Vodafone taxation, basically the government
#
of India had lost a capital gains arbitration suit against Vodafone in Supreme Court, and the
#
matter should have just ended there. But Pranam Mukherjee brought in a legal provision to overturn
#
the Supreme Court verdict, and then retrospectively slapped the tax on Vodafone. It was an international
#
embarrassment. For a country which is opening up to FDI and foreign investment, that is just
#
not something that you do. And I think it significantly affected our image for a very,
#
very long period of time. Simultaneously, we have a lot of homegrown problems. As if
#
this whole external shock was not bad enough, we also have this whole 2G scam, the whole 2G
#
spectrum allocation scam, which got really blown up by media, by everybody that this is a massive
#
corruption scandal. Then, of course, the coal gate, the coal allocation. One after the other,
#
there are all these policies being taken, the corruption scams that are coming up.
#
Essentially, what this is doing is, and I think Pooja describes this very nicely in her book as
#
well, this basically means that the bureaucrats are just withdrawing. They don't want to push
#
files. Nothing is moving. There's a complete policy stagnation, because who would want to move files
#
in this kind of an environment? And the reason this became extremely damaging is because think
#
of all these businesses who had taken loans in the boom period. You have taken infrastructure loans,
#
particularly in metals, in steel, in power, in all of these heavy industries, because you want
#
to build infrastructure there. And all of these things require permissions and clearances from
#
the government, without which you simply cannot undertake these investments. Now, you have taken
#
the loans, you're quite indebted, and you're waiting for the government to give you the
#
clearances, but suddenly the government goes into this policy paralysis mode because of all these
#
scams, et cetera, other issues, and your files are not moving. You're basically screwed. You have
#
to constantly keep making interest payments on the loan that you've taken from the banks, but your
#
project is not really even taking off because you haven't gotten the clearances. You can't even start
#
it. So that became a serious replication of the events of this point of time. So over and above
#
these global events that were happening, fundamentally, I think what became a much
#
more longer lasting damage for us was basically this, that because of this policy paralysis,
#
because of all the other issues, the whole business community, the firms who had taken the loans,
#
they simply couldn't move forward, a large chunk of them. And I'll come to why this became even
#
more damaging. The other thing that was happening around this point of time was inflation. So during
#
the boom period, the economy was overheating, and I talked a little bit about RBI's, money supply
#
expansion as well. And then food prices go up. We got unlucky with monsoon shocks. At some point
#
when the global economy starts recovering from the crisis, commodity prices go up, all of these
#
shocks. Inflation goes up beyond 15%. It's extremely high. For the first time since 1991,
#
inflation is again back to double digits. And of course, RBI has to tighten the monetary policy.
#
The other thing that Pranam Mukhaj did was he started giving a lot of fiscal stimulus,
#
fiscal packages in response to the global financial crisis. He increased the outlay for NREGA,
#
farm loan waivers. Now, some of this was in response to global financial crisis,
#
but a lot of it was also because of pre-election stuff. So the farm loan waiver, the NREGA,
#
all of these things was done then. Post-GFC, he starts cutting taxes. So huge amount of money
#
is flowing into the economy because of the fiscal stimulus that he designed.
#
So this is like the worst thing that can happen. You have inflation inbuilt pressure building up,
#
food shocks, oil price shocks, and then fiscal stimulus. Of course, inflation becomes 15% and
#
higher. What does RBI of course have to do? There was a bit of a delayed response, but RBI starts
#
increasing interest rate. So now again, back to the businesses who had taken loans. On one hand,
#
let's say if you had taken dollar loans, rupees depreciating, you're screwed because your debt
#
burden goes up. Second point, policy paralysis, files are not moving, your project is not taking
#
off. Third point, as if this was not enough, with the RBI increasing interest rate, your interest
#
payment goes up. So this is really the worst of all worlds that could have happened after this
#
phenomenal boom period. And this is when the whole NPA crisis starts germinating. This whole
#
huge infrastructure projects, infra loans, gradually they start going bad, meaning that
#
the firms are just not able to repay the payments. And at that point of time, you may ask that why
#
didn't we see a big NPA crisis in 2013-14? Because we didn't. Most of us were not even aware
#
that there was an NPA problem. And the reason we didn't is because there was a lot of hiding of
#
the bad news that was going on. Once again, a classic weak institution problem. Although the
#
banking regulation was such that the banks had to declare them as NPA, but most of these banks
#
where the NPAs were going to show up were public sector banks. And if they start declaring NPAs,
#
essentially the government has to give capital. Fiscal deficit is already high because of the
#
fiscal stimulus. The government is in no position to capitalize these banks. So what happens is
#
the news get hidden. And how do they get hidden? RBI offers a lot of what we call restructuring
#
schemes. In layman's parlance, what it means is banks are offering multiple terms. You extend
#
the loan repayment period. You maybe reduce the interest rate a little bit. You offer fresh loans
#
to help you repay interest on the existing loan. It's called evergreening of loans.
#
Exactly. Evergreening is happening through a lot of restructuring schemes. And we call it the
#
alphabet soup of schemes. Many, many schemes were floated by the RBI. And this was called the
#
helpline for the banks to tide them over. But hey, what exactly are you tiding over? The hole
#
is just getting bigger. If the firm that has taken the loan is not able to repay the loan,
#
simply providing a helpline is not going to work because at some point of time, the guy has to
#
repay. All that you're doing is you're just kicking the can down the road. Maybe the expectation was
#
that our economy will start booming again. And like that last NPA crisis, the banks will grow
#
out of the problem. But that was a very, very risky bet to take at that point of time. Some people
#
would say, hey, but the RBI was busy dealing with the inflation crisis. Yes, sure, absolutely
#
possible. So there were multiple pulls and push factors. On one hand, the government was in no
#
position to recapitalize these banks. RBI is dealing with an inflation crisis at hand. And maybe
#
they thought this is not the right time to declare the NPA. But the problem is,
#
when this kind of an issue is getting built into the system and you're pushing it down the road,
#
when it blows up, it's going to be a real bad shock for the system. And you're almost betting
#
that it will not blow up because the economy will start growing again. But the probability is also
#
there that the economy doesn't grow as rapidly. And then it will blow up, which is exactly what
#
happened. And we'll come to that. But to finish up that period running up till 2014,
#
the other last thing that happened is the taper tantrum shock. What's the taper tantrum?
#
Right after this Lehman Brothers collapses, the US Fed announces huge easy money policy,
#
what we call quantitative easing. And all that money, of course, flows into the emerging markets.
#
At some point in 2013, during this time, the Fed governor in the US was Ben Bernanke.
#
He says that the Fed is going to stop this process of easy money. He just says that one sentence.
#
And such is the nature of the global financial markets, that just that one sentence that the
#
easy money flow can stop sends shockwaves across foreign investors. And they all start pulling out
#
from their investment in emerging economies. And what that means for India is, India was
#
particularly vulnerable because you have this high fiscal deficit because of fiscal stimulus,
#
your exports have fallen, so your current account deficit is very high, your inflation is high.
#
In this very fragile macro situation, of course, foreign investors will pull more money out of
#
such a risky economy. So that came to be called as the taper tantrum. It was a tantrum thrown by
#
emerging economies. There was a group of fragile five. India was one of them. So the rupee starts
#
depreciating very sharply. As investors pull money out, there's a sharp depreciation that happens.
#
The RBI, as I said, this holds stabilizing exchange rate. In order to stabilize the exchange rate,
#
the RBI does intervention. It basically throws everything at the problem. It increases interest
#
rate even more because if you increase interest rate, the hope is investors will start coming in
#
again. And you're increasing interest rate at a time and growth is slowing down. It's really bad.
#
And it started imposing capital controls. So none of that is a good policy. Exchange rate
#
is a price. You let it absorb the shock. And in fact, if you had allowed the exchange rate
#
to depreciate, that would have helped the exporters. But we did not. And the bottom line is,
#
again, back to these businesses who were so leveraged, so indebted, this is like another
#
shock. Interest rate again starts increasing because of this taper tantrum problem.
#
So by the time we are going into the 2014 election, the state of the economy is really,
#
really bad. The entire euphoria, exuberance of boom is completely gone. You have a very unstable
#
macroeconomy. And this is the worst of the recession that you could have had. And there is
#
this ticking time bomb. All these businesses in these heavy industries, in infrastructure,
#
large firms, which are exposed to loans, which they're not able to repay. And this bad news is
#
not even coming up to the surface. You can't even solve it because it's all hidden underneath. It's
#
almost like a volcano which is just waiting to burst. And this is the situation in which we run
#
into the elections. And I'm thinking that what happened in that boom period of 2004 to 2008 and
#
what happened in this period you just described is actually the same thing. It is a perfect storm
#
of events. Only in one case, it is a perfect storm of events that sets off a virtuous cycle
#
and everybody is acting rationally. You know, Chuck Prince, who used to head Citibank, once said
#
in the 80s when he was asked about, you know, before 2008, that why did you join in the exuberance
#
and all of that? He said, when the music's playing, you have to dance. So it's exactly that,
#
it is rational behavior and you're responding to a lucky confluence of circumstances. And in that
#
moment, you cannot imagine what will come next. And what comes next is a perfect storm in the
#
opposite direction. With India, it combines with the terrorist attacks and Pranabda and Bishabish
#
and all that. And you have that complete madness. And again, everybody is acting rationally,
#
that there is so much hoo-ha about corruption that now reforms become impossible. There is
#
policy paralysis because no bureaucrat is going to do anything because they'll tell him that,
#
hey, you took a bribe. I think one gentleman, I forget his name, known by everyone to be honest
#
and incorruptible, actually went to jail in one of these scams. And he refused to appeal because
#
he said, I know I'm innocent and I don't give a shit and whatever, you know, a very principled
#
man. And that's a cautionary tale for everybody else and that you can't do anything. Inaction is
#
forced. And even that is a rational response. And even what happens with, you know, the
#
evergreening of loans, the government helpline, as it were, et cetera, et cetera, all the
#
jugaru stuff that is happening from regulators in the state. All of those are also rational
#
reactions. And what you need is really some adults in the room to sit back and say that, look, we
#
didn't build the institutions. If we had good institutions, if we had safeguards, if we had
#
checks and balances, if we were more like the mature economies we aspire to being like, then
#
this shit would not have happened. So let me add one point. And you're absolutely right. For
#
example, you know, let's say the banks declared NPA. But mind you, at that point of time, we didn't
#
really have a bankruptcy law, right? So how would you resolve all these bankrupt companies,
#
which are just defaulting one after the other? You can't. There is no bankruptcy law. There is
#
something called a Sarfasi Act, which applies mostly to banks. But beyond that, we don't have
#
a comprehensive bankruptcy law that covers all creditors and debtors. So that's an institutional
#
problem. You haven't, you've opened up the private sector and they are behaving like the capitalist
#
system that they're supposed to do, except there is no way for them to exit. So they've entered,
#
but they can't exit if they fail, right? And what happened was, as I said, it's a classic upswing
#
and downswing in a capitalistic economy. There's nothing unusual about it. Yes, the causes we can
#
debate to the end of time, but this happens in most economies which are open to the markets,
#
etc. Except here, we have done some reforms, but not all of them. And hence we are sort of stuck.
#
So ideally, then, so it's like you have opened up the banking to private sector, but you also
#
have this 70% of banks in government ownership, right? They are the ones who have all the NPA,
#
but the government doesn't have the money, so it cannot capitalize. So let's not disclose the
#
NPA, right? Even if we disclose the NPA, there's no bankruptcy law. How will these firms exit?
#
So all of these incomplete reforms that never happened till that point of time
#
were probably one of the main reasons why this just got more and more compounded, because
#
we just did not have the institutions to deal with it. As opposed to, for example, if you had
#
a system where banking sector was entirely privately owned, the private banks would not
#
become under the pressure of the phone alone kind of a thing, right? They would basically say,
#
we can't lend to the infrastructure industry simply because A, either this doesn't make any
#
economic or financial sense, or even if they did, maybe they would be a little bit more
#
motivated by business commercial objectives, as opposed to the political compulsion.
#
Or maybe even assuming that they still went out on a limb and credit growth still increased,
#
infra lending still happened, then this whole idea of government having to recapitalize them
#
would not be an issue, because these banks would be able to raise money from the stock market,
#
like every other company. And if you had a bankruptcy law, then the firms could have
#
been taken to that law and NPS could have been announced, right? And even going one step further,
#
if you had a corporate bond market, a debt market, then banks wouldn't even be lending
#
to the infra, they would be basically raising money in the debt market. Now, these are all
#
wishful thinking, right? I mean, of course, this is wishful thinking, because we are talking about
#
an economy that just started opening up and privatizing, liberalizing, deregulating a couple
#
of decades ago. So we can't expect that all of these things would also have happened by then.
#
But I think that's the way to think about it, that we did some reforms, which exposed the system
#
to the vagaries of the capitalistic system. But because we didn't go the whole hog,
#
all of these problems got compounded. And you know, my mind goes back to Russia here as well,
#
that when the Soviet Union collapsed and Russia opened up, initially, there were all these hopes
#
that, oh, there's going to be a great flourishing of the market system and blah, blah, blah.
#
And that went to hell. And looking back, you can see that the reason it went to hell is that just
#
opening up markets is not enough. You have to have that superstructure of the rule of law of
#
institutions. You can't build a building without scaffolding and a foundation. You need those
#
things and those simply weren't there. So on the one hand, you can say that, okay, the lesson here
#
is that when we think about markets, the state's job is not just to get out of the way, which of
#
course it should, but also to build that foundation of the rule of law, to build the scaffolding of
#
institutions. So you're building solid structures, which can withstand winds and hurricanes and all
#
of that, et cetera, et cetera. I hope I'm not taking the metaphor too far, but the danger there
#
is, and now yesterday I recorded with Bhargavi Zaveri, our friend who is an expert in regulatory
#
institutions and agencies. And that episode will release a couple of weeks after this. So dear
#
listeners, please excuse. But one of the points she made was that in India, the journey was that
#
we opened up the markets and straight away we started without even understanding what the
#
requirement of the market will be. We started putting regulatory agencies in place because,
#
hey, that's what the state knows to do. And even that doesn't work. Even there, there is this
#
function because there is just not enough thought and you can't create regulation also from this
#
engineering mindset. You have to actually see what happens in the real world and then cater for that.
#
It's again, river and stones. A few points there, Amit. One is that, yes, I agree. If you open up
#
the markets, open up the private sector and without the requisite institutions in place,
#
of course, there are significant risks. But at the same time, knowing the way the policymakers
#
think, keep in mind, we have that whole socialist mindset coming in. This should also not be used
#
as an excuse to say, oh, it's too risky, it's too dangerous. Let's just shut down. Absolutely.
#
I know there are many, many such instances that the first reaction of policymakers is
#
impose a ban, shut down a market, shut down a product, kill that product. And that's really
#
wrong because it's like you're taking one step forward and three steps backward.
#
It's baby meat bath water.
#
Exactly. We shouldn't also think that just because it is making the system so volatile,
#
we should just shut everything down and be stable and safe. It's like, of course,
#
my favorite analogy is that if I have a car, of course, I will never face an accident if I
#
never take the car out of the garage. But just for the fear of the accident, will I just keep
#
the car always in the garage? Then what's the point of having a car? It's exactly that. Yes,
#
you have to open up the system and there will be risks that you face and you build institutions
#
and keep on improving the resilience of the system, but doesn't mean that you shut out
#
to all innovations and all creativity because then you're back to the central planning model
#
and you don't want to go back there. The second point I want to say that
#
institution building is extremely crucial, but at the same time, you can wait to build
#
institutions and then do the opening up. It's not a linearity that works in the real world because
#
building institution is a very, very long process. It's a trial and error. It's a long process.
#
And we have discussed this. So it has to happen simultaneously. Many are a country of 1.4 billion
#
people. At some level, you don't have the luxury to say that, oh, I'm just going to first build
#
institutions, then open up, then grow, but you're dealing with poverty. You're dealing with
#
the whole idea of improving per capita GDP. That luxury of time is simply not there.
#
So that is something that we always have to live with the trade-off. Yes, there will be some periods
#
when it will get volatile, things will get risky, but you learn the lessons from it and you keep on
#
building the institutions. For example, the bankruptcy law came about. Gradually, this
#
government is talking about privatization of banks. I don't know to what extent it'll happen,
#
but at least the discourse has started. So I think that's the process that you watch the problems
#
and you can't withdraw and say, oh, but this is bad. Let's shut down. Nor can you say,
#
let's wait to build the institution, build the rule of law, and only then we will make progress
#
on the reforms. And the third thing I want to say on the point you said about regulators.
#
I think I disagree to some extent. Of course, I don't know exactly what you and Bhargavi discussed,
#
but one thing is that when you are opening up the markets, when you are opening up the private
#
sector, there is such a thing, and we know in public choice theory, there is such a thing as
#
market failure. Private sector is of course not perfect. I mean, there are many, many things that
#
go wrong in the operation of the private sector and there are classic market failures. There's
#
the externality problem, there's asymmetric information, and there's monopoly. And when
#
you have these market failures, it is not in the incentive of the private sector to solve the
#
problems on its own. It simply won't. And that's when you need the state to step in. And the way
#
the state can step in, because the economy is becoming big, it's becoming pretty large,
#
one centralized government cannot really control all of these things. You need regulators to do all
#
of the addressing of market failure. So I don't quite agree that you open up the private sector
#
and then you do trial and error to see what kind of regulator will work because you need both of
#
them together. Bhargavi wasn't making a normative point. It was like a descriptive sense of what
#
kind of happened in India where she looked at the history of regulatory agencies around the world
#
and how they evolved over time in response to growing needs and how in India we tried to kind
#
of supercharge that process. So a couple of things, Ajay and I have a couple of episodes
#
on everything is everything on number one, you know, when should the state act, what it should
#
take into account, I'll link them from the show notes. Market failure again is another term which
#
people misunderstand. They think market failure is when the market doesn't give me what I want.
#
No, that is not a market failure. It's a specific term that means specific things.
#
Markets fail very rarely. Governments fail all the time. Government failure is ubiquitous.
#
That is a big lesson of public choice theory. But when there is genuine market failure,
#
that's when you need the state to step in. And we've laid it out in great detail in that
#
everything is everything episode exactly what there are. Now I have another question here for
#
you. I would imagine that the way institution building would work and adapting to a new world
#
would work is that you design a framework as you go along. And you also sort of adapt to changing
#
circumstances and you keep modifying your institutions. And all of this knowledge that
#
you're getting all of this learning, this becomes institutional knowledge, this becomes institutional
#
memory. It is embedded somewhere, which means that mistakes of the past are not repeated ever.
#
Right. And I want to ask about whether that is happening and where that is happening,
#
whether that is happening is the reason I asked that is because a lot of the reactions of the
#
state in many of these situations is so reactive, so knee-jerk, almost so jugaru, like, you know,
#
the bank helplines, for example, quote unquote, that one wonders if you are just going from crisis
#
to crisis reacting with each one in a piecemeal way, or is there somewhere an evolving rulebook
#
and evolving set of best practices, which, you know, you can look back on and learn from your
#
predecessors. And the reason I ask where is this institutional knowledge encoded is, is it encoded
#
somewhere within the state where ideally it should be? Or is there a knowledge community where it is
#
encoded? Because when I see what Ajay and Susan are doing at XKDR, for example, I imagine that there
#
is an encoding of that kind of institutional knowledge and memory there, which is being
#
passed on to future policy people. So is it happening there? Is it happening in the state?
#
Do we learn from our mistakes? What's your sense of this?
#
I think it's a great question. And I don't think it's happening at the level of the state, right?
#
I think at the level of the state, it's exactly pretty much the way you described it. It's more
#
reactive, right? You're basically fighting crisis to crisis. If it's not a crisis per se,
#
you're essentially plugging one hole and then running off to plug the next hole.
#
What's happening, I think there is this institutional knowledge in the knowledge community.
#
And that's where all of this is coming together. Because there are people in the knowledge
#
community who have seen these institutions come up, who basically have access to data,
#
access to evidence, which they can use to monitor how these institutions are performing,
#
be it regulators, be it judiciary, be it whatever, criminal justice system.
#
And then there is this lot of research, lot of analysis, constant discussion that is happening
#
to evaluate whether it's going in the right direction, what's going wrong, et cetera.
#
And I think that's fine. I think the knowledge community has to perform this role. The state
#
doesn't always have the time and the bandwidth to do something like that. And that's okay.
#
I think the problem is there has to be a constant feedback mechanism from the knowledge community
#
to the policymakers, right? So that the policymakers don't get blindsided that,
#
blindsided that, oh, I've done a reform, it's working well. Let's just get some political
#
win out of it. And we forget about it. And it takes a life of its own. Unless that feedback
#
mechanism is there from the knowledge community to the policymakers, there will never be this
#
flow of information that, hey, this is not working and that needs to be fixed.
#
And I think somewhere down the line, that feedback mechanism has broken down.
#
So that is why what's happening now is, yes, some reforms are happening, some institutions
#
are getting built. And even if the knowledge community is doing the monitoring and the
#
evaluation, the two are not talking to each other. And that becomes the risky part, right?
#
That's the danger. Because then it's just orthogonality, right? Like two parallel
#
railway lines walking together. And the knowledge community can see that this is really not working,
#
but nobody in the policy world is interested to hear, right? I think that's the risk.
#
Is it a risk that is looming larger and larger? Because one sense that I get from within the
#
knowledge community is the status top listening. While if I look in the past, the knowledge
#
community is embedded in the state, weaving in and out of it, almost like a deep state kind of thing.
#
Ajay worked as part of the state between 2003 and 2017. So he straddled the Vajpayee regime,
#
the two Manmohan governments, all the way up to the Modi government. And you had an entire community
#
of people who knew each other, who were talking to each other, who were debating, who were often
#
disagreeing. But there is a dialogue and a discourse happening, a shared knowledge, a mutual respect.
#
And a lot of those people are out in the dark today, as we know. And there is a sense that
#
this government doesn't listen to experts anymore. Or if it does,
#
it listens to quote unquote, those useful idiots who will tell them what they want to hear. And I
#
use that phrase very deliberately. So what's your sense? No, I agree with you. I think when I said
#
that the feedback from the knowledge community to the policymakers, that's exactly what I was
#
thinking. That not just that particular group that you referred to, I think there are many,
#
many such groups, think tanks, what you want to call them, that they were a part of the
#
policymaking process. They would get feedback from the policymakers, they would have access
#
to the discussions. And there will be this constant dialogue, constant conversation that
#
happens where both the parties are learning from it. And that's a fantastic way to move forward.
#
And once you discontinue that, once you're basically just listening to those who are
#
saying all good things about what is happening, then you end up building an echo chamber. And
#
you sort of lose a sense of reality. You just don't know what is working, what is not. You just
#
keep thinking that everything is going great and nothing needs to be fixed. There's no reform that
#
needs to be taken because it's like if it ain't broke, don't fix it. I think that's the danger.
#
And I will agree with you. I think we are sort of in that world where A, there is a little bit of
#
a denial that there are problems which need to be fixed. And B, even if there are people,
#
there are knowledge communities across the country who are thinking about how to fix some of the
#
problems, what to do, what reforms, what analysis, they're not plugged into the policymaking community
#
at all. So that connection, I think, has totally fallen apart. And one can only hope that over a
#
period of time, it will happen again. I mean, the two things will come together again.
#
What do you mean, one can only hope? Explain that. One must act, Rajeshwari. One must act.
#
I live in hope. I live in hope that whatever we are saying, discussing, writing at some point of
#
time will start mattering again. I live and act. So now we have basically come to 2014,
#
and this is the last phase of those four phases that we started off with. Now, 2014 to current
#
period is since we are talking government to government, of course, that's one continuous
#
government, so to speak. I want to first say that since we're talking about the economic issues and
#
the details of it, in the spirit of reforms, you're basically inheriting an economy which is
#
really fragile. The growth is slowing down and all of these things are going wrong.
#
There are some things which were done, which were quite positive in terms of the reform
#
initiatives during this period. And I want to highlight that because I think the general sense
#
of some of the people is that nothing really good happened from 2014. I think that's absolutely
#
not right. A few things. The first thing would be inflation targeting. This was extremely important
#
because as I was saying that around 2010-11, the inflation rate in India just shot up.
#
And at that point of time, RBI did not really have a monetary policy whose well-defined objective
#
was inflation control. Of course, like any other central bank, the RBI was increasing the interest
#
rate to deal with inflation, but it was not coded in the RBI Act. Interestingly, to give you a
#
trivia, the RBI Act of 1930s, the preamble of the RBI Act says that the RBI was set up as a temporary
#
provision because this was the need of the hour. This is a volatile period, the world wars, etc.
#
And the preamble of RBI Act had not been changed until 2016, which means from the legal perspective,
#
there was no well-defined objective that was spelled out in the act, but that changed in 2016.
#
Now, what happened was in 2014, there was a committee report that was submitted by Ujjit Patel.
#
Then Raghuram Rajan becomes RBI governor, and he was the governor in 2014 as well.
#
And in 2015, an agreement gets signed between RBI and the Ministry of Finance,
#
which formalizes inflation targeting. And in 2016, Arun Jaitley as the finance minister,
#
in the budget speech, announces that the RBI Act will be amended. And for the first time,
#
the preamble gets changed. And that line gets added that the objective of monetary policy is
#
price stability, keeping an eye on growth. And it was a phenomenal reform because
#
for the first time, the objective gets clearly defined. There's an accountability associated
#
with conducting monetary policy. The central bank is held accountable for maintaining inflation at
#
a certain level, which was 4% of consumer price index with a 2% band on both sides.
#
And what it also did was it brought transparency to the conduct of monetary policy. Until then,
#
monetary policy was a very esoteric stabilization policy, so to speak, that
#
people wouldn't really understand what exactly is going on. But with inflation targeting,
#
there's a lot of transparency that is introduced because now, as you know,
#
there are the fixed times, the six times a year when monetary policy meetings are being held.
#
There's a press conference. Everybody can listen to it. There are statements being released,
#
which are nice, short, and crisp. So there's a lot of transparency of communication of conduct,
#
which helps analysts, commentators, experts to hold the central bank accountable in case the
#
target is not being achieved. I think that was great. The other thing that happened also with
#
inflation targeting is that until then, the governor of the central bank was taking a decision
#
on the monetary policy. With inflation targeting, a committee was set up, a monetary policy committee,
#
with six people, three of whom are academicians from outside RBI. And what that does is it brings
#
in diversity of opinion. Of course, many are always better than one. So there's debate,
#
there's discussion, and people are privy to it. All the minutes are released. We know what they're
#
discussing. Of course, there's a long way to go. There's many, many more improvements that can be
#
done, but at least a start has been made. So I think that's a very good reform that was done
#
post 2014. The second thing, of course, is IBC. I mean, I think it's just a phenomenal reform that
#
was brought about, notwithstanding everything that has happened since then, which is basically
#
the working of the law has been seriously affected by institutional weakness.
#
IBC insolvency and bankruptcy code for my listeners, not international burger council or something like
#
that. Okay, yes. Insolvency and bankruptcy code of 2016. It's a very comprehensive bankruptcy law
#
and does something very interesting, which is that if a firm has defaulted on loans,
#
and it goes into the bankruptcy law, basically the law is used against the firm, then the firm loses,
#
the promoter loses possession of the firm. And the bank, the creditors take over and everything.
#
And that was the first time this kind of a provision was brought into the overarching
#
bankruptcy framework. IBC was done in 2016. The problem that happened was that the way the
#
bankruptcy law was designed was it required many other things to work. This is the classic
#
institution story, right? Tribunals, information utilities, which are basically credit agencies
#
that would store a lot of information. Those things weren't in place, of course, by the time
#
IBC was implemented, everything was envisaged together. That plus the fact that there are issues
#
with the way the court system works, issues with the way the entire community, the vested interests,
#
the multiple stakeholders, the IBC has basically taken a life of its own. It has been amended way
#
too many times at this point. I don't even know what the law really looks like from what we had
#
recommended. But having said that, I think it is still a great reform because what's happening now
#
is this threat that if you're a promoter who has defaulted on the loan, and if IBC gets used against
#
you, you lose control of the company. That has started working as a threat. So IBC itself may
#
have problems, but the credible threat that IBC may be used against you is basically working so
#
that firms and banks can do out of court negotiations and things are getting settled. So I think that's
#
a great outcome in some sense. And as I said, at some point of time, in a country like India,
#
all these reforms will take a very, very long time to actually reach the shape and form that was
#
probably envisaged and to have those outcomes. And maybe in the process, it will undergo many,
#
many changes as IBC is doing. So that was one reform. The third that I want to mention is,
#
and they're both negatives and positives, of course, like with anything, is the goods and
#
services tax, which was conceptualized during Prime Minister Vajpayee's time. It was actually
#
implemented by the NDA II government. And the GST, of course, is in and of itself, it's a great
#
reform. Before that, there were almost as many as 15 indirect taxes. All of that get rolled into one
#
tax. Yes, not one tax. We had slabs and all of that for slab rates, et cetera. But I think in
#
terms of interstate trade, bringing all of that together, integrating the interstate trade of the
#
country and giving a boost to the manufacturing sector, it's a very good step in the right
#
direction. Yes, the implementation of GST was not as expected. It was not really a single tax. It
#
was multiple tax and all of that. But once again, I will say that these things take time. You learn
#
from the mistakes. You start tweaking on the margins. And I think that's a time-consuming
#
process that needs to happen. But at least we made the start. I think GST, in and of itself,
#
the idea is great. So that's third. And these are three really big reforms, by the way. You get
#
inflation targeting in 2016. You get IBC in 2016. You get GST in 2017. The fourth thing that I want
#
to say that worked really well during this period, the reason I'm listing these things is because
#
there are many things that went wrong during this period. Some of these are just the workings,
#
legacies of the 2008 to 2014 period. Some of these were policy mistakes. But it's important
#
to also understand some of the things that went right or that were done right. So these three are
#
ones. Then the fourth one is coming to the COVID period. When the COVID-19 pandemic hits India
#
and, of course, all over the world, the most natural reaction of governments across the world,
#
particularly in the developed economies, was to announce massive fiscal stimulus.
#
And there was a lot of demand from economists here as well that the government of India needs
#
to spend a whole lot of money to give a fiscal stimulus package because this is a once-in-a-century
#
crisis. Now, at that time in 2020, the fiscal deficit of the central government was already
#
very high. And had the government announced very large fiscal stimulus, it's not that the government
#
didn't do fiscal support at all. It did announce fiscal support in terms of direct cash transfers
#
and other support packages, et cetera. But it was nowhere close to the magnitude of fiscal stimulus
#
that was announced in the developed economies. Had the government followed that path, I think
#
it would have been a disaster because the fiscal deficit would have already shot up to 9% for the
#
central government alone. It would have become so high that for a country like India, to finance
#
that kind of a fiscal deficit, the amount of borrowing that the government would have had to
#
do would be extremely damaging for both growth as well as macro stability. So I would definitely
#
give a lot of credit to the government for not following that route and being relatively
#
fiscally conservative, which is why today our fiscal deficit is down to, this year I think it's
#
going to be 5% or so. I thought that that's a great thing. The other thing that I want to mention,
#
are the farm bills. I think you and I will both agree that the spirit, the design, the principle
#
of the farm bills were exactly what was needed. We haven't been able to do it for all these years.
#
And finally, they were able to come up with the right kind of design. But of course, the way it
#
was done, the way it was implemented without enough consultation, discussion, et cetera,
#
that definitely didn't work out. But the way it was designed, that is exactly what should have
#
been done. So I think that's definitely one positive. So I think all of these things,
#
and it's probably going to take quite some time for the economy to realize the benefits of many
#
of these things that were done. Some of these we're already realizing because of fiscal
#
consolidation, et cetera. So that's why I wanted to talk about this before going to the biggest
#
problem of this period, which is the balance sheet crisis. I think the one episode that
#
really affected growth, and we are still suffering from the repercussions of that, was this giant
#
balance sheet crisis that was brewing as a ticking time bomb, as we were discussing,
#
and basically blows up during this period. Over to you.
#
That's a brilliant summary. And I appreciate that you went through the positive policies of this
#
period first, because one litmus test I have for independent thinking is that if someone
#
says they oppose this government, I will ask them, tell me about the good things it's done.
#
And if they say they support this government, I'll say, tell me about the bad things they've
#
done. And if they can, that's good, because you're keeping that balanced view, because
#
no government is all bad or all good. And if you can't, then it's tribal thinking. I mean,
#
it just basically is that. So I'm really glad that you kind of mentioned these. I'll quickly
#
summarize my big issues with the government, because I agree with you about all of these
#
policies, except I would demer a bit on GST. The GST is conceptually incredible, but a policy is
#
ultimately the whole package of not just its conceptualization, but also its design and its
#
implementation. And the design and implementation with disastrous. I did, you know, back in the days
#
when the scene and the unseen are daily short episodes, I did an episode on GST with Devang
#
Sudutta before GST was implemented. And he predicted a bunch of things that would happen
#
because it was designed badly, and all of them happened. So in that sense, it was a mess. I know
#
for a fact from my friends who are small businessmen, medium businessmen, that it really hurt them.
#
Even for me, compliance is a mess. Every month I've got to, not that I'm earning anything,
#
but every month I've got to find invoices, figure out. It's just a pain in the ass. Why do you make
#
people do this? But leaving that aside, I broadly agree. I have a question for you, Amit, at this
#
point. Given that the implementation went haywire and there are too many complications built into
#
it, are you hopeful that over a period of time, things will get ironed out and the GST will start
#
working the way we expect it to? Yes and no, more no. Yes, because there is a knowledge community
#
which is pushing and it's there in the discourse. We know what's wrong with it. We know what should
#
be done. But no, because once we have announced it and it is there, the people who are benefiting
#
from it will never let their advantages go. Because earlier you could have said we will
#
just have one rate and there were arguments against that also. There were different kinds of
#
service tax and whatever and one rate is unfair. But now that you have multiple rates, if you
#
start changing it, they'll start kicking and shouting and it gets very hard to do. Exactly
#
what happened with the farm laws in a sense. One thing that I often think about reform is that
#
take any sector. Right now you are in a particular equilibrium, right? All sensible people and all
#
parties may agree that you should be in another equilibrium entirely. Even if there is consensus
#
on that, there is now a huge transaction cost from moving from one equilibrium to another,
#
a lot of which is political, because all the beneficiaries of the current system will kick
#
and scream and fight and all the beneficiaries of the future system will either not know that
#
they would be beneficiaries because they can't imagine it or they would not be incentivized
#
enough to actually protest, which I think is kind of what happened with the farm laws. And with the
#
farm laws like Ajay and I have a great episode called the tragedy of the farm bills. And the
#
truth there is you're absolutely right, they messed up on the politics completely in trying to
#
bludgeon it through parliament and etc. Whereas you could have taken a much more
#
consultative and gradual approach and gotten there in a better way. So for once,
#
they got it the other way around. Normally, the BJP is very good at handling the politics
#
and they completely mess up the economics. And in this case, it was the exact opposite
#
and it went to hell. Now, before we get to the balance sheet crisis, I'll quickly
#
talk about the things that I keep ranting about. One of them, of course, is demonetization.
#
I had a bunch of pieces on it in the sense that it was like a dialogue between me and
#
Modiji. That's what I feel, because Modiji would say this is why I did it. And I would publish a
#
piece in Times of India or any of the places I used to write for and demolish that completely.
#
My piece comparing him to Mao was then retweeted by Rahul Gandhi and Kejriwal and all of these
#
people seldom have all of them been united on one thing as much as that piece of mine.
#
And then as and I'll link that from the show notes. And so I have a whole thread,
#
I have many episodes on it. Without getting into this, why it was nonsense and all the specific
#
reasons given by the Prime Minister were not valid to use a euphemism. My biggest objection to it is
#
that it was the largest assault on property rights in human history. That is, it was in that sense
#
that it was a leaf out of the left-wing Maoist book, rather than anything that the right-wing
#
would do. They call him right-wing in a social sense. In economics, he is extremely left-wing
#
and statist, right? Burkian conservatives and Hayekian libertarians would be aghast at
#
demonetization. It was an assault on property rights. It was absolutely terrible. And the other
#
part that I really hated about demon is that you had all these useful idiots. Now let me talk
#
about that phrase useful idiots. It's a proper noun. It's a phrase used by Lenin for people who
#
would come up and support a regime because they want a position in it and not out of conviction.
#
And you and I both know, we will not take any names on the show, but everybody knows them,
#
that there were a bunch of people who perhaps were understandable reasons that, oh, we'll be done with
#
the socialism of the past and we'll have markets. And by the way, for all the rhetoric around Modi,
#
completely far from free markets, as statist as his predecessors, as central planning as Nehru,
#
as authoritarian as Indira, so basically combines the qualities of his favorite politicians.
#
And so entirely in that spirit, so there were a lot of sort of people, including some people
#
I used to admire, who actually went in and went all out for the regime, but they weren't doing so
#
on the basis of principles. They were doing so on the basis of tribalism and perhaps they
#
stayed on that line out of inertia or out of ego, I don't know what, but they continued supporting
#
demon. In fact, they were at, you know, at one point circular was sent out to all these house
#
idiots who were told that, okay, you know, support demon. Many of them didn't actually support demon.
#
They thought it was bat shit crazy, but they came out in public in any case and debased themselves
#
are making ridiculous arguments about it. And the worst possible argument was about costs and
#
benefits, you know, where they would try to sound nuanced and they would say that look,
#
there are costs and benefits. We don't know yet. Let's wait and watch. And to me, that was
#
entirely immoral. Like at that time, in an op-ed I wrote for the magazine I used to edit,
#
Prakati, I pointed out that any economist to support demonetization is either a bad economist
#
or a bad human being. And in many cases, both, right? In most, so it was in that sense, it was
#
pretty shocking. And for me, it is almost a litmus test now, that when I look at public
#
intellectuals, were you still, you know, did you support demon? Did you speak out in favor of it?
#
If you did, I cannot take you seriously. And there are many people who changed their mind about Modi
#
at around that time. And, you know, more credit to them for that. People have a right to change
#
their minds as well. And again, I won't take names. So demon in that sense was a complete
#
disaster. And it stands on par with Indira Gandhi's worst policies, you know, I called them crimes on
#
humanity earlier. Demon was exactly that. I thought the COVID lockdown was, you know, at the time,
#
I thought a lockdown was justified because you had the fog of war, you had the healthcare systems in
#
Spain and Italy falling apart completely. India's healthcare system anyway was a joke and at over
#
capacity. I kind of understood it. But the way that it was done, the draconian, unfeeling way,
#
the plight of migrant labor, all of that shit that happened, and then the work that went into
#
actually hiding the data of not allowing the actual death toll to be out there. I thought it
#
was horrendous and unforgivable and so on. And in a piecemeal way, the mindset of the government
#
over the last 10 years has been incredibly statist. You had the same kind of bad economics.
#
Every once in a while, price control will come. Every once in a while, if the price of onions
#
goes up, they'll ban export of onions. All these completely ad hoc policies without any economic
#
logic are constantly carried out almost on a daily basis. Bizarre things happen. Like at the
#
time of the farm bills, I think they banned onion exports. How can you do both? It is not coherent.
#
You know, it means that there are no principles. It's still ad hoc. You happen to want to do
#
something good, but it is still in an ad hoc way. And that is kind of something I lament. So that is
#
my overall lament, you know, the arrogance of our current finance minister during her press
#
conferences. A lot of the economic policy today is just so dumb. I mean, I don't have,
#
you know, we've been recording for what, six, seven hours now, and I'm running out of
#
coherence and adjectives. So I'll hand over to you. So tell me more about what you feel is the
#
biggest problem with this administration. So let's neutralize Amit's anger a little bit,
#
because I can see him getting really angry at this point. So going back to the balance sheet
#
crisis that I was talking about, I think one of the biggest problems of this period was there was
#
this three-way balance sheet crisis that broke out. One was the balance sheet problem in the
#
banking sector. The second is the balance sheet problem in the businesses who had basically
#
borrowed from the banks, the non-financial firms. And the third was the balance sheet problem in the
#
NBFCs, the non-banking financial companies. So what happens from 2014 onwards is that,
#
as I was saying earlier, that a lot of this bad news was hidden. It was like kicking the can down
#
the road. But by 2014, it was becoming pretty clear that you can't keep this news hidden for
#
too long, because it was too large a problem, and something has to be done about it, right?
#
And maybe also, I'm not privy to this, but it's possible that the whole work on the bankruptcy
#
law had started. So maybe the understanding was that the IBC is around the corner, and then we
#
would actually have a mechanism to solve the bad loan problem. So whatever it may be, in 2015,
#
the RBI governor, Raghuram Rajan, announces the Asset Quality Review, the AQR, which essentially
#
forces all these banks to come clean. You reveal all the non-performing assets on your balance sheet
#
and show what the extent of the bad news is. And then the helpline is dead.
#
Exactly. And this was, as I said, the volcano. That's the bursting of the volcano. And
#
ultimately, what the data showed was by 2018, March, if I remember correctly,
#
the total extent of the NPA was around 12% of the total loans of the banking sector.
#
And for public sector banks alone, it was close to 16% of their total loans, which are very,
#
very high numbers, right? I think overall, it was around 13 lakh crore of NPA in the system,
#
which is massive, right? So all of this bad news now starts pouring out, the ginny's out of the
#
bottle. And of course, you have to resolve the problem, right? You know the extent of the problem,
#
then what do you do to address it? Multiple steps were taken, right? One, of course,
#
is recapitalization of the banking sector. Because as I said, 60, 70% of the banks were still owned
#
by the government. The government had to inject capital. End of the day, I think the government
#
ended up putting in about 4 lakh crore of money, taxpayers' money, to bail out these banks. Pretty
#
damaging, right? But then it had to be done, because you have to basically save these banks,
#
you can't let them die. These are all owned by the government, and that's the whole vestige
#
of the central planning era. The second thing that was done was a slew of corrective measures
#
taken by the central bank and the government. This was the prompt corrective action framework,
#
where basically 11 out of 21 public sector banks were put in this framework. These were the weakest
#
banks with the highest extent of NPAs, and they were told that you can't give any more loans,
#
you have to basically shut down the books, till the problem gets resolved. You get capital,
#
you fill up the hole, and till you get to that level of becoming healthy again, you can't lend.
#
Then a lot of penalizing actions were brought against bank officers. For example, we have the
#
Prevention of Corruption Act. The bank officials were brought under the Prevention of Corruption
#
Act by a Supreme Court ruling in 2016, because they are all public servants, which essentially
#
implied that all NPA decisions came under the scanner. This was extremely fearful, right?
#
These NPA decisions, these lending decisions were taken during the boom period. Maybe some of them
#
were taken after 2008-9. All of these decisions could now be opened up to investigations.
#
Imagine the kind of incentives that you're creating by doing this. Of course, what happens
#
is the banking sector just withdraws. There is an enormous amount of risk aversion. Nobody is
#
lending. The bank credit growth, again, if I remember correctly, by 2017-18, start of 18,
#
is down to 5%. Now remember, the peak of bank credit growth was 35% year on year. It comes down
#
to 5%. That's very, very damaging for the economy, because the banking sector is the most important
#
financial intermediary in the Indian economy. If the bank credit growth falls to 5%,
#
nobody basically is getting credit. It's a heart-sending blood to the rest of the body.
#
Absolutely, right? It just stops functioning. Simultaneously, what happens is the private
#
sector stops investing, right? Because, of course, this whole bursting of the volcano,
#
much of the private sector, the large firms, are victims of this. Culprit, victim, whichever way
#
you want to look at it. But bottom line, they are also struggling because they have not been
#
able to repay the debt. Now, they're all will-beaten to the bankruptcy law that was implemented in
#
2016. But basically, investment starts slowing down. The data shows from roughly 2011-12 onwards.
#
It doesn't recover after that. There's a period of investment decline, and then it's complete
#
stagnation of private sector investment for a very, very long period of time, right? Again,
#
extremely damaging for the economy. You have this twin shock of bank credit growth slowing
#
down drastically and private sector investment becoming completely stagnant. Simultaneously,
#
what is happening is that as the banking sector started withdrawing from lending to industry,
#
the non-banking finance companies started lending because they basically saw that this is an
#
opportunity. Not only were they lending to whichever industry would borrow, but they were
#
also lending to consumers. This continues till about 2018. But in 2018, there was a big NBFC
#
called ILNFS, Infrastructure Lending and Financial Services. That defaults on its payment.
#
The whole cycle of this default and NBFC sector going into crisis, that starts at that point
#
of time, September 2018. The NBFC sector going into crisis was almost like the last straw
#
because already the banking sector is struggling. The private sector has withdrawn from investing.
#
The NBFCs were lending to consumers as well. That goes into this shock kind of a thing.
#
The banks were told at that point of time by RBI to give some lifeline loans to NBFCs so that it
#
doesn't completely fall apart. That happens a little bit. But by 2019, essentially what it means
#
the economy has just completely fallen off the cliff. GDP growth rate, irrespective of how it's
#
measured, was less than 4%. It's really, really bad. This was also the time when consumption
#
for the first time, I think in 60 years, was growing in single digits. Unemployment shot up.
#
As I said already, investment was completely sluggish. Exports had started slowing down as
#
well. By 2019, the economy was in the worst possible shape that it could be in a very,
#
very long time. It had been struggling from 2011 onwards. By 2019, all of that culminates
#
into very bad macro numbers. Now, I want to mention one thing here,
#
and I don't want to go into demon and all of that you've covered in all your rant,
#
but I want to mention one thing that in 2015, a new GDP series is released.
#
And this was the time when the entire methodology and input data for computing GDP underwent a
#
wholesale change. And what that did was it started showing that the economy post 2013-14 was growing
#
at a very rapid pace. We have had discussions. I've done a lot of work on this. I know people
#
have done a lot of research on this. There were many measurement problems with the new series of
#
the GDP. And apart from the statistical problems of it, of course, the reason it was damaging
#
is because it gives a false sense of complacency. If the data shows that the economy is growing at
#
7%, 8%, as policymakers, you would think that everything is going fine. Nothing really needs
#
to be addressed. And I think that lulls the policymaker into this state to think nothing
#
has to be fixed. So that definitely, I think, happened to some extent. And it's important to
#
point that out because while the balance sheet crisis was brewing, maybe the growth rate was
#
not as high as the official data showed. And if the growth was correctly measured, maybe some
#
steps could have been taken, but by 2019, it was already too late. So this is the state of affairs
#
going from 2014 to 2019. Now, essentially, this is what happens from 2014 to 2019. So we have had
#
that boom of 2004 to 2009. And then since then, basically, everything starts slowing down,
#
one shock after the other, both external and domestic. And then by 2019, it all culminates
#
into an economy that is really, really struggling. So I've had an episode on NBFCs in the Hori past,
#
very small episode, but I've had episodes that have addressed some of this banking crisis with
#
both Josh Feldman and Harsh Vardhan. So I'll link those from the show notes. Plus, importantly,
#
at the end of 2019, I had an episode with Vivek called The Indian Economy in 2019. And the reason
#
I'm pointing that out is to underscore your point that the economy was doing pretty badly then.
#
Now there is some kind of narrative that, oh, COVID happened, what could we do? This happened,
#
that happened. No. I have regularly, routinely done episodes in the years before that, the last
#
of them in December 2019, talking exactly specifically about that and breaking that down
#
on the state that we were in and why we were in a bad state. So we were in a bad state. And
#
regardless, of course, welfarism, Zindabad, the elections happened, and et cetera, et cetera.
#
But still a lot to cover, because you will realize that we haven't even reached the present time yet.
#
And after we reach the present time, we have to talk about the present time in some detail.
#
So before that, I think both of us need some reinforcement. So let's take another quick
#
commercial break. Have you always wanted to be a writer but never quite gotten down to it? Well,
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In the course itself, through four webinars spread over four weekends, I share all I know
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#
That's IndiaUncut.com slash Clear Writing. Being a good writer doesn't require God-given talent,
#
just a willingness to work hard and a clear idea of what you need to do to refine your skills.
#
Rajeshwari messaged me and she said, you know, we were very tired that day. We'd already spoken
#
for seven hours. There's a lot more, I have to say. Can we re-record just at last section? And I
#
said, sure, fine. Let's do it because hey, I'm a sucker for punishment. But speaking of punishment,
#
last night, in two days, I passed in. And last night, Rajeshwari actually spent a fair bit of
#
time in an emergency room. What happened, boss? Yes, it was a really bizarre incident. I finished
#
my dinner and then suddenly I started getting hives and rashes all over, which definitely did
#
not feel like mosquito bites. And I took an anti-allergic medicine and I messaged a family
#
doctor and she said, just immediately rush to the ER because this could become something really
#
fatal because your body could be shut down because your body is reacting to some kind of
#
allergen that you can't figure out, of course. So lo and behold, I find myself in ER where they
#
give me an IV drip and inject multiple drugs, three drugs to be very specific, including a
#
steroid. And I completely conk off. I think for the next one hour I was gone. And then I wake up
#
and everything is like the hives and the rashes, they've all disappeared. And I feel as if nothing
#
had ever happened before. But the result of that was I was really drugged up on anti-allergic,
#
steroid, all of those medicines, including today morning. So let me tell you, when I was going to
#
the hospital and then the whole IV drip happened and I'm coming back, I actually started thinking
#
that it's almost like in 1991, the Indian economy bent into ER, right? Because it was getting
#
allergic to this 40 years of command and control system that was in place. And then it was given
#
in IV, literally in IV, right? Like a massive big bang stroke of the pen. It has to happen right
#
now, otherwise it will be fatal. So three drugs were given, the de-licensing, removing public
#
sector control on some industries and trade liberalization. And then of course, for a few
#
years, it went into this the way I got conked off because it takes time. So that's why we get a
#
growth rate of only 6% in the next 10 years. But then when I wake up from that conked off state and
#
I have this new lease of life, that's the boom of 2003 to 2008 when the Indian economy just goes
#
literally like all new energy is being unleashed and new dynamism is being infused.
#
And with that energy, I have basically come today, Amit. So this is my post-drug, post-coma boom
#
phase when I'm raring to go. But then mind you, the Indian economy started sliding back
#
in 2011 onwards, right? From 2011 onwards. And from then, it has been a long story of slowdown
#
and everything that went wrong. So we have to finish the recording before I hit my 2011 mark.
#
And that's the thing that was going on in my mind. I thought, yes, this is there's a reason why things
#
happen in life. You know, the metaphor was awesome till 2008. But now I don't like it so much because
#
I want you to continue to be healthy and, you know, not be full of all kinds of different
#
malices, as it were, is malices.
#
No, but what I meant is, my boom of 2003 to 2008 like the Indian economy is going to be for the
#
time when I'm recording with you. So this is the boom period. Now after the 2011 thing happens,
#
then I might just lose that energy and enthu that this whole boom phase has triggered in me.
#
And then exogenous shocks, etc. Who knows what happens. So I'm saying that there is this massively
#
nice finite period of finishing this recording and talking about the last phase of this historic
#
I'm feeling alarmed now. Let's not digress too much. Let's not take it too slow. So, you know,
#
gentle listeners, when Rajeshwari told me this, as she came in, I made the very insensitive quip
#
that but though I thought before making it that this is a person who will get dark humor, so it's
#
okay. So I made the insensitive quip that had something happened to you, this would have been
#
a super successful episode because just imagine you speak about the economy for eight hours,
#
and then you conk off. What can be a better marketing success?
#
Yeah, the reason I'm not taking any offense to what Amit said is because I'm drugged on both
#
caffeine and anti-allergic. So those are their thing doing different things to my mind right
#
now. So let's let's carry on.
#
Good Lord, it's like monetary policy be fiscal policy.
#
Everything just just firing from all guns.
#
Firing from all guns. So okay, so here we are, we've reached 2019, which is relatively
#
recent. And we've been speaking for the last almost seven hours about the economy so far.
#
As we go ahead, would you like to, you know, kind of sum up where we've arrived at 2019?
#
So I would like to do a sum up. The reason is because I think 2019 was a very important year,
#
especially since we are looking at a long arc of economic history of India.
#
And also because, you know, if I sum up, it also gives an opportunity to understand
#
why 2011 was the end point of the third phase. And then what exactly happened since then,
#
which makes 2019 such a critical year. So as we were discussing for the last several hours,
#
that we did the first generation massive reforms in 1991, followed by second
#
generation reforms under Prime Minister Vajpayee, to essentially free the private sector from the
#
inefficient extractive command and control statelet system that had gotten entrenched
#
in the economy. And when the reforms started, a few things happened, right? A few million Indians
#
got lifted out of poverty, something that had not happened under the central planning system.
#
The economy gets a new lease of life. We got some semblance of the markets operating on their own
#
in multiple areas. And the reason I say some semblance is because that's a long, long way
#
to go for us. India gets integrated into the global economy, which was a massive source of demand for
#
our producers. As a result, demand surged, both domestic and external demand. Investment and
#
production increased manifold. There's an unleashing happens of creativity, innovation,
#
and entrepreneurial energy, which is absolutely fantastic. Consumers started benefiting from a
#
wide variety of goods and services. You and I have been direct beneficiaries of that switch
#
from the 1980s to the 1990s and 2000s. And we witnessed a major economic boom,
#
which was our third phase, from roughly 2003 to 2008, let's even say 2011.
#
Now, as I mentioned earlier, that as a result of these reforms, we got a business cycle swing
#
for the first time, like any modern capitalist economy, because we were reaping the fruits of
#
freedom. Then, however, from 2011 onwards, especially the business cycle turned. The
#
economic growth began slowing down, both because of external shocks like the global financial crisis
#
and the taper tantrum shock of 2013. Also because of India's own structural economic issues, for
#
example, government ownership of the banking sector, which worsened the NPA crisis that started,
#
and domestic policy misadventures like demonetization, GST, implementation, etc.
#
Unfortunately, as economists or statisticians, we cannot continue the business cycle measurement
#
beyond 2013, because as we know, the GDP series changed from then onwards, and we almost got a
#
completely new GDP series. Usually, what happened was there was a base year change in 2011-12.
#
Usually, when base year changes happen, nothing fundamentally changes in the method and the input
#
data that is used, but that happened in this new GDP series, so then we can't continue the business
#
cycle measurement. This is therefore when people started looking at a lot at high-frequency
#
indicators. Also because of internet and computer accessibility had improved, but because the
#
credibility in the official data got affected, economists and other experts, everybody started
#
looking at a whole bunch of high-frequency indicators. The high-frequency indicators
#
clearly conveyed that the economy had started sliding downwards from 2011 onwards.
#
Now, this continues till 2019. We get this period of almost 10 years of growth slowing down and
#
things just not working well. That is why the most critical year in this post-reform period journey,
#
I think, is 2019, because all the economic problems that had started, maybe even from
#
during the boom period because it was a debt-fuelled boom where businesses were borrowing a lot,
#
all the economic problems culminated in 2019. All the data that we were looking at in 2019
#
looked really scary. Also because post-2019, we get COVID, so that's a whole different set
#
of problems altogether. There's no counterfactual what would have happened if COVID didn't hit us.
#
Maybe the economy would have gotten worse in any case because the way it was in 2019.
#
So, we discussed a little bit in the last segment as well what happened in 2019 very quickly.
#
I need to give a little bit of numbers here just to show how stark the problem was.
#
Private sector consumption, which is basically what people like you and I would consume,
#
which constitutes more than 50% of GDP, is the biggest component of demand in GDP.
#
Typically, in private sector consumption in India had been growing in double digits.
#
For example, in 2011-12, it was growing at roughly 17%. In 2019, that growth rate fell
#
to single digits for the first time in decades to roughly 7%. Now, an interesting point here is,
#
again, related to data, almost every five years, a household consumption expenditure
#
survey is being conducted. In 2017-18 was the last survey, pre-COVID survey that was conducted,
#
and the report, the results were published in November 2019.
#
The numbers somehow got leaked, and we all came to know that consumption growth had declined to
#
the single digit number. Now, why do I say leaked? Ideally, this should have been a part of the
#
official data collection process, but no. Because the growth number of private consumption appeared
#
inconvenient, the report was withdrawn. I think it's for the first time in India's official
#
statistical history, particularly in the post-reform period, when an official statistical
#
report released by the National Statistical Office had to be withdrawn because the government,
#
the political establishment of the time, did not find it very convenient right before the elections.
#
Now, you can imagine what it does to the credibility of official data,
#
especially in a period when already so many questions are being raised about the GDP data,
#
which is the most important macro indicator. I just wanted to put this there, and we can
#
discuss it later. Now, consumption was in this situation, and I'll briefly why consumption
#
became the growth slowdown to such an extent. Private sector investment, which is one of the
#
most important components of demand in terms of boosting growth. In the boom period of 2004 to
#
2011, private investment was roughly 36% of GDP. By 2019, it had come down to 28% of GDP. It's a
#
pretty big collapse because investment started declining from 2011 when we look at the CMI,
#
Capex data. There was a little bit of a blip in 2014 when the new government got elected. There
#
was an optimism that things will start changing, but post-demon, it started declining again,
#
and by 2019, it was stagnant, which is really bad for an economy, which is trying to grow at a high
#
rate. Unemployment reached four decades high. Now, unemployment measurement in India is another
#
massive problem. We are always under-reporting unemployment. For example, the official unemployment
#
percentage was 7%, but there is no way India has only 7% unemployment. It's much higher than that.
#
So, when we look at the CMI data, it showed that in the age group of 25 to 29 years,
#
unemployment in 2019 was 40%. It was that stuff. Just think about it. For every 100 workers in the
#
25 to 29-year age group, which is the prime age group, 40 workers did not have a job. It was
#
unemployed. What happened to exports? Because the two biggest drivers of growth are investment and
#
export. Exports in the boom period, again, was about 25% of GDP. By 2019, it fell to less than
#
20% of GDP. Now, a lot of explanation was given at the time that global economy is slowing down,
#
the whole remnants of GFC are continuing, and hence, we just couldn't do much. It was outside
#
our control. Now, the point remains, and I think Vivek Kaul mentioned this in an article.
#
At that point of time, Shankaracharya had written a post which basically talked about the comparison
#
of different countries in Asia, their growth rates of exports. Vietnam's export in that period,
#
2018-19, was growing at more than 100%. Bangladesh's export was growing at roughly
#
around 60%. Even China, which already had a very high base effect, their goods exports were growing
#
at 30%. Our exports were growing at 8%. Clearly, global economic slowdown was not the reason why
#
our exports were growing at 8%. We simply did not have a competitive tradables sector. All of that
#
became extremely evident by 2019. The funny thing is, when so many indicators, some of these
#
are actually even official data, I haven't even quoted the high-frequency data collected by other
#
departments, when it became so apparent that the economy is doing badly. In fact, even by the
#
incorrectly measured official GDP data, the growth was less than 3.9% in 2019. 3.9% growth rate is
#
something we had last seen in the 60s and 70s. That was the Hindu rate of growth. That tells you
#
how bad the situation had become. There was a complete denial of the policymakers. There was
#
no acknowledgement of the problem whatsoever. Forget about trying to solve it. It became almost
#
like an intellectual debate between experts, depending upon which side they were on. The
#
debate became so polarized that some people were looking at these data and saying, guys, things
#
are really not looking well. The others who want to carry favors with the policymakers started
#
saying, no, no, but everything is fine. There's no problem in the economy. For the first time,
#
I remember thinking that even in 2011 to 2013, when things got bad under UPA2, there wasn't this
#
kind of a polarization. Everybody said things were bad, but now suddenly we don't even know what to
#
conclude about the Indian economy. Forget about coming up with solutions. How did things get so
#
bad? Very quickly, just for the purpose of recap for the listeners, we just talked about
#
the balance sheet crisis in the banking and the corporate sector. Why did that become so serious
#
that that became one of the reasons why the economy growth slowed down to such an extent?
#
In a capitalist economy, which is what we were trying to build post-reforms,
#
the process of obtaining credit, then investing and producing is at the heart of producing GDP.
#
That's the whole reason you want the private sector to be unshackled. In that process,
#
credit acts like an oxygen to the economy. You cut off that supply of oxygen, there is no way
#
that the body is going to function. It's exactly what happened. When the banking sector went into
#
this crisis and the corporate sector withdrew because they were so heavily indebted, they
#
couldn't undertake any investment. They could barely refinance their own loans because banks
#
after the Raghuram Rajan's AQR were simply not willing to lend to industry anymore.
#
The supply of credit in the economy completely choked. There was neither a supply from the
#
banking sector nor a demand because these businesses were not investing. They were just
#
focused on clearing up their balance sheets. Throughout this period, we have discussed this
#
before, there was a time when the banks were diverting credit from the so-called healthier
#
businesses to the stressed businesses, what is called zombie lending. Banks are actually
#
giving money to the zombie firms because banks can't reveal NP on the balance sheet and they
#
somehow have to keep these guys on, since I've just come back from the hospital, in an ICU mode,
#
just keep them alive on a ventilator. You can't let them die because then I won't be answerable
#
for the debt and I have no capital to provide for. I'm owned by the government. The government
#
will not give me money. It's a complete disaster. The reason I say this is important is
#
that typically when you have a business cycle downswing in a developed market,
#
it doesn't last for this long because they have institutional structures to deal with the business
#
cycle downturn. That when firms are going bankrupt, they have a bankruptcy system and there's a
#
creative destruction process that the bad firms will go and the good firms will come in their place
#
and the resources will get shifted from unproductive use to productive use.
#
What happened in India is even though we opened up the private sector and we tried to give them
#
greater freedom to operate, we did not have all the supporting institutional mechanisms needed.
#
So we did not have a bankruptcy law. We had an overwhelming presence of government in the banking
#
sector, which of course led to the entire infra lending by banks and then prolonged NPA crisis.
#
We did not have a functional corporate bond market because ideally infrastructure financing
#
that happened in the boom period by the public sector banks should have been done by a bond
#
market because you don't want to take so much of risk on an institutional balance sheet. You
#
want to leave it to the market, but we did not have a bond market. So it's like we started the
#
process, but we had such a short period of time that all these institutional supporting structures
#
had still not come up, but the business cycle boom had started. So then suddenly when things
#
got bad, we had nothing really to use. So we're dealing with the public sector banks and then
#
RBI is giving restructuring and it's just a disaster. So as a result, what happened was
#
this balance sheet crisis got prolonged for almost 10 years. The first restructuring scheme by RBI
#
was given in 2009. So nine to 19, a good 10-year period when the two biggest components of the
#
private sector, the banking sector and the corporate India, basically just choked off
#
and then credit started declining. So it's not surprising that by 2019 things got so bad.
#
And of course, then what happens, forget about the policy missteps, demand and GST over and above
#
this. Then as the banking sector is struggling with the crisis, you get this non-banking sector
#
crisis of 2018. And then after 20, and by the way, the NBFCs in India, they also do a lot of
#
lending to consumers and small enterprises or medium, for example, truck financing,
#
gold loans, et cetera. So they start getting choked off because of the default of this one
#
NBFC. Many of the NBFCs lost access to the debt market, today's capital. So they became
#
fund crunched. So they couldn't lend to the real economy. So by 2019, you have a banking sector,
#
which is extremely discovers and impaired. They don't want to lend. Credit growth from
#
banking is down to 6% from the high of 30% of the boom period. The NBFCs are not lending because
#
they are barely struggling to survive. The bond market is struggling because it is risk aversion
#
from the NBFC crisis. And in 2018, as if it was not enough, we had even more financial sector
#
stress because of the S bank problem, Franklin Templeton mutual fund failed. So finance,
#
which is basically the lifeline of a modern capitalist economy, this was a financial crisis.
#
We can't call it a financial crisis because according to the developed market literature,
#
a bank has to fail. But in India, banks don't fail because we have public sector banks. They
#
are not allowed to fail. They are kept on life support using taxpayers' money for as long as
#
needed. So it was for all practical purposes, a financial crisis of a capitalist economy. We
#
just didn't want to treat it like that and resolve it accordingly. And of course, just as we did not
#
have a bankruptcy law for these businesses, we did not also have a resolution mechanism for failed
#
banks or failed NBFCs. I remember there was a point when I think IBC was tweaked to use it for
#
an NBFC resolution. It doesn't make sense. You need a separate bill, a separate law to do resolution
#
of financial firms, which we did not have. So the way I look at it, this became a case of
#
what happens when reforms are done under duress because we had to resolve a crisis in 1991.
#
And once the crisis goes out of our hand, as in the crisis gets resolved, not only does the
#
momentum slow down, there is no comprehensive thinking on what all is needed to let the markets
#
operate. And I've mentioned this earlier as well. So then everything moves on the slow burner. And
#
of course, the problems will start brewing because you have opened up one part of the economy,
#
which will behave in a capitalistic sense, but the supporting structures are not there.
#
So when I think about it, it was almost inevitable. The way the reforms were done,
#
this would have happened. The second thing is the lesson that I can think of is this is what
#
happens when you try to liberalize or deregulate or privatize a deeply and fundamentally socialist
#
system that is not used to dealing with the operation of the free market mechanism.
#
And hence, there's a lot of pushback from multiple stakeholders, from bank deposit holders,
#
from government, from workers. For example, if a firm has defaulted on its loan and is bankrupt,
#
you want to liquidate the firm, just shut down the firm, which is what happens in developed
#
countries. But here there is this whole socialist mindset about the bechara workers, this labor
#
union, what will happen to all of them. And it becomes, it gets dragged on for years and years
#
and years. And finally, the third lesson that I'll draw is, I think in India what happens,
#
and maybe it happens in other countries, but I've not studied them that well, reforms happen
#
when we face a major crisis. Major reforms happen when we face a big crisis. For example,
#
the IBC happened because there was a Vijay Mallya. There was Kingfisher, he became the poster child,
#
and because we were dealing with an NPA crisis, the bankruptcy reform happened. Inflation targeting
#
law happened because we had an inflation crisis from 2009 to 2011. I don't think IT would have
#
happened if it didn't have the inflation crisis. Because the NPA crisis happened, now the government
#
is talking about privatizing banks. You can sort of use it as a hook to push a major reform.
#
So I think in general in India, major reforms, when there are multiple stakeholders, happen when
#
there is a crisis. But by and large, what we do is incremental steps, moving forward in a slow and
#
bumbling manner, doing welfare subsidies, et cetera. There are some exceptions like GST and
#
farm bill, but other than that, I think without a crisis, it becomes very difficult to get reform
#
done. So that's how I would summarize where we were by 2019. And of course, not to forget,
#
while the large formal sector was struggling from the financial system crisis, you had
#
demonetization, which destroyed the vast informal sector. And I think in India,
#
we never really appreciate how important the informal sector is. We are just so obsessed in
#
formalizing it. But before that, we don't realize is that the informal sector, along with agriculture,
#
employs more than 85% of India's labor force. Now, let's just take a second to digest this.
#
85% of India's labor force is employed in the informal sector and agri-sector, the two sectors
#
which are grossly neglected. So when you do a demon, you're perhaps not even thinking how this
#
is going to affect informal sector. And there is no data because informal sector doesn't get
#
monitored, the data doesn't get collected. Only sporadically some survey will happen.
#
So the informal sector gets killed by demonetization because the way their business
#
works is entirely cash-based. So when you take away their cash, there is no way that they're
#
going to survive. And then demonetization in 2016, followed by GST in 2017. So two consecutive
#
shocks in just a matter of two years, and GST had said earlier, was theoretically a very good idea
#
and we should keep working towards improving it. But at the time, the way it was implemented,
#
and you have also talked about it, was absolutely detrimental to the informal sector and the MSMEs.
#
So somehow the policymaking, I don't know what the policymakers were thinking at the time,
#
when you have this ticking time bomb in the form of an NPA crisis, which is the largest
#
financial intermediary in the country, is choking. You have the NBFC, the entire financial sector is
#
basically just gone, right? It's just really struggling. And then on top of that, you're
#
doing demon, you're doing GST. And frankly, when IBC was at that time a negative shock,
#
because all these firms which have never faced a bankruptcy framework, they're sitting with so
#
much of debt that they have to get rid of. And now you're being told that there is this bankruptcy
#
law, and if you go to the court, you lose control of your business. That's how we designed the law.
#
And we hadn't anticipated that when IBC will be implemented, the Reserve Bank of India will say
#
that the 14 largest NPA cases will be pushed to the IBC. So IBC gets implemented in December 2016.
#
By April 2017, RBI comes up with an ordinance, the government comes up with an ordinance
#
instructing the RBI. The 14 largest cases we... Now at that time, imagine this is a completely new
#
law. Most of the stakeholders don't even understand the implications of it. IBC needed many different
#
institutions, right? Information utility, insolvency profession, those are not even being set up.
#
And then you say, no, but this is the crisis. We are going to push the biggest cases,
#
right? Bhushan Steel se leke everything to IBC. Of course, IBC crumbled. It was not even prepared
#
to take the pressure. It's like a hospital is barely getting built. There is no ICU and ventilator,
#
and you send all the critical patients and tell the hospital, please deal with it. I just keep
#
coming back to hospital examples. Of course, the hospital is going to earn a very bad name for it.
#
It doesn't even have the equipment to treat those critical patients. So anyhow, I think the
#
combination of the fact that reforms were incomplete, we didn't have the institutional
#
structures. We kept on taking policy misstep after misstep because we didn't even realize
#
what the system is going through. All of that culminates in the series of numbers that start
#
coming out one after the other in 2019, right? So by 2019, the economy is second time in ER.
#
It needs life support, right? And then when I talk about the next step, I'll tell you why,
#
in some sense, it will sound really perverse, but COVID almost acted like a distraction
#
because, I mean, imagine from growing at 6%, 8%, 9%, forget post-2013, I don't know at what
#
rate the economy was growing, but you're down by all indicators in a really bad state in life
#
support, basically. You needed to be in a ventilator. So I'll stop there.
#
So that's a great narrative. And I want to double click on a couple of things. And there are two
#
big questions that I want to lead to. And one point that I want to make is about the informal
#
sector, about how such a large part of the country works. And often what we find in the
#
popular discourse is people will talk about the informal sector as if it is something bad.
#
People will say, oh, we need to formalize, we need to get them in the formal sector,
#
almost as if they are criminals operating outside the law and et cetera, et cetera.
#
And my point is no. Look, the point is that markets exist as a mechanism for people in
#
society to help make each other better off, to serve each other to mutual benefit. And
#
when the state gets in the way, which the Indian state did with this monopoly of socialist controls,
#
so many of which still exist, then people are forced to sort of go outside the ambit of the law
#
because it is no longer possible to stay within them. And that's where the informal sector comes
#
from. The informal sector is still doing something virtuous. People are serving each other. It is
#
still a site of virtue. You're forced to be outside the law. So to wait, to quote unquote,
#
get rid of the informal sector is not by killing it completely because then you're killing all the
#
enterprise and the trade and the good that comes out of it, but by changing your laws and by
#
changing your structures so that none of it is illegal in the first place. That's a critical
#
point. Now I'll come back to what you said about, you know, you can't just shift from a socialist
#
system to free markets immediately without institutions. And that is dead right. That is
#
something that many people get wrong. That's the reason Russia kind of failed. In fact,
#
they didn't have those institutions. They didn't have the rule of law. So after the collapse of
#
the Soviet Union, it simply didn't work out. And we need to do that. But our argument is not that
#
you do not make the shift. You have to make the shift. Making some of the shift in 1991 got
#
hundreds of millions of people out of poverty. It's a moral good. It is our moral imperative
#
to solve poverty. The only way to do that is through market and growth. We have the entire
#
history of the 20th century as testimony to that. So the transition has to be made. And here,
#
the key question is, how does that transition get made? Because every time you shift from one
#
equilibrium to another, there are transaction costs, there is friction, you know, agriculture
#
being a classic case in point that you can talk about, you know, sort of that APMCs are bad,
#
let's abolish them, and etc, etc, everything that we discussed earlier. But the point is that the
#
transition carries pain, that the people who are beneficiaries at this moment in time will
#
inevitably fight back, that people who would be beneficiaries if the reforms were implemented,
#
simply do not know that, you know, you can't imagine that you don't have those frameworks
#
to think about that. So how does one think about a framework? Because if I look at, you know, all
#
the changes that have been happening, all the post-91 institutional building almost feels,
#
you know, either haddock or ad hoc or reactive, as if something happened, and then you react to it,
#
and you say, oh, we've got to do this. Or it is, you know, even if you're putting institutions in
#
place in advance, you're not really thinking them through properly. It is like, we've got to design
#
a SEBI, let's design a SEBI, without the thought going into it. So is there a way past it or until
#
we make the transition, are we condemned to bumbling our way through? Because you cannot,
#
of course, let the perfect be the enemy of the good. And there is no question that more markets
#
are good. You know, so how do you think about these transitions and the process of building
#
institutions? Great points and great questions. I mean, I completely agree that we can't wait to
#
have all the institutions ready and then say that, okay, now we are going to do reforms, right? It's
#
not a controlled lab experiment. It's a messy country. It's a democracy. There are lives and
#
fates and fortunes of 1.4 billion people that are at stake. So it's an extremely complicated,
#
I mean, it's much easier for us to sit in a room and pontificate on some of these issues. But
#
if I think either of us were given the chance to do any of these changes in real time, I think
#
there would be extreme difficulties and complications that we would face.
#
Of course, I completely agree. And I just started saying earlier as well that many good things
#
happened when we started doing the reforms. And this was a much needed transition that was
#
pending for a long time. I think what needs to happen is, and I agree with your last point,
#
that the transition from this state-led socialist model to now trying to move towards a more
#
capitalist market-driven production system is extremely hard and complicated. I don't think any
#
economy, particularly democracy, I keep harping on that point because it's much more difficult
#
in a democracy, has done this without undergoing all the opportunity costs and trade-offs that we
#
have been facing over the last 30 years. I think it's important to understand that when you do the
#
transition, the state withdrawal needs much more careful political handling, particularly when
#
powerful interest groups will be hurt by the reform. And the classic example that comes to
#
my mind is the Farm Bill versus the 1991 reform. When you have the 1991 reform, there were
#
businesses and private sector who wanted the liberalization, who wanted the deregulation.
#
They wanted to be unshackled. So there was a massive push or consensus from their side
#
because they were going to be the ones to be most affected. So there was an alignment of interest
#
of the most dominant interest group along with what the state was trying to do. When the Farm
#
Bill was being introduced, it was exactly the opposite. The dominant interest group who was
#
going to be affected by the reforms were not aligned with what the state was trying to do.
#
Forget about the state trying to do consultation and build consensus. I think fundamentally it
#
would have been difficult nonetheless because the interest of this group was so different from
#
what they didn't want liberalization of the agricultural markets. They didn't want the MSP
#
to be removed. They didn't want the APMC middlemen to be removed. These things had gotten
#
entrenched in their operating system and certain sections, particularly of the agricultural
#
community had gotten used to it. So then no matter what you try to do, there was going to be an
#
extremely high friction process and that probably would take a significantly longer time where you
#
have to have the political will, the political skill, most importantly, and enormous amount of
#
patience to see it through. It's much, much harder. So I think we also don't have the luxury
#
to cherry pick reforms, but this is one framework that I used to think about it, that okay, what
#
happens when you introduce some reforms like liberalization and if despite being in a coalition
#
minority government, you're able to push it through, but then despite being an absolute
#
majority government, you're not able to do something like a Farm Bill. So maybe that's
#
one framework to think about it. And I think Atul Kohli has a book on Indian development called
#
The Political Economy of Reforms in the 1980s. And if I remember correctly said that the quiet
#
reformist mindset of the bureaucracy and the intellectual thinkers of 1980s was also supported
#
as I was saying, by the new wave of entrepreneurs who wanted the economy to open up. So when that
#
alignment happens, I think it becomes much easier. For example, when the stakeholders are not that
#
visible, for example, in inflation targeting, who are the stakeholders? There isn't any such
#
strong interest group. So it's relatively easier to do a reform because it's much more esoteric,
#
et cetera. When an IBC happens, it's significantly harder because there are so many stakeholders
#
involved and it may be in the bank's interest to do it, but may not be in the promoter's interest
#
to do it. And then you have to constantly keep balancing, which is why IBC is struggling much
#
more than a deregulation or an inflation targeting. So it's like a meta discussion,
#
almost like a different episode where you, what reforms are easier to implement depending upon
#
the institutional structure, the stage of the development, the deep socialist mindset,
#
all these factors, some reforms may be easier to implement and facilitate the transition from
#
a stateless system to a market oriented system. Some reforms are going to intrinsically face
#
a lot more opposition. Let me give you another example. When IBC was, and I keep coming to IBC
#
because I've seen the process firsthand, when IBC was implemented, there was an enormous urgency
#
because of the NPA crisis, but it still started operating. The bill became a law, there were
#
standing committee discussions, which by the way were absolutely fantastic quality, and it became
#
a law, it got enacted and the process started. Today we have a bankruptcy law, broken or otherwise
#
it is still functioning better than having nothing at all. In parallel, another bill was introduced,
#
which was called the FRDI bill, the financial resolution and deposit insurance bill in 2017.
#
It was tabled in the parliament and this bill was exclusively meant to come up with a resolution
#
mechanism for financial firms because these are two sides of the same coin. If you're resolving
#
the business as non-financial firms, you also need to be able to resolve the failed banks,
#
NBFC, et cetera. But this one faced such enormous opposition from political parties,
#
from depositors, because it was put out in the media that if you're a depositor and the bank
#
fails, you lose all your money. Now suddenly millions of depositors are affected by this.
#
Even if you say fine, the government will guarantee two lakhs of depositors,
#
but that may still send shockwaves amongst the entire electorate saying, no, this doesn't sound
#
good. They are taking away our money. So we'll not just put our money in the banking system.
#
Tremendous opposition from the largest interest group and the bill was withdrawn. It didn't become
#
a law, even though we needed it. Today, let's say the government is talking about bank privatization.
#
How will you privatize banks without having a resolution mechanism for failed banks? You
#
can't again do a botched up thing of merging banks and letting the banks continue in an insolvent
#
state. So I think these are some of the examples which probably help create a framework that
#
it's not like you're going to be only designing reforms that are again easy to push through,
#
but the kind of preparation, the kind of consultation, the kind of dialogue, political
#
skill that is required to do some of these reforms are very, very different from when the interest of
#
the dominant group are aligned with the state. So that would be one way that I think about it.
#
The third thing I want to mention is it's true that you can't wait for institutions to come up
#
and then do reforms. Absolutely. It's not a linear process like that. It's a messy,
#
what we call a general equilibrium process in economics where everything will move at the same
#
time. But I think the lesson also to learn is when as a policymaker, you can see, and they have
#
access to much more data than you and I can ever have. When you are seeing that things are really
#
going badly in the economy and many things have to be done as a banded solution because you don't
#
have the institutions. You have to offer restructuring lifelines to the banks because
#
government doesn't have the money to provide capital because RBI is dealing with an inflation
#
crisis. It doesn't have the bandwidth. So when you know all of this, that's perhaps not a good
#
time to do a demonetization. That's a different debate. The demonetization is the worst possible
#
thing to do, but that's not a time to perhaps implement GST the way you did. Now, of course,
#
it's easy for me to say maybe the government is thinking, I'm going to pack in whatever I do in
#
the five years that I have, but that's the dilemma. That's the trade-off again, that when the system is
#
already struggling in a crisis, it's like saying the US is in a global financial crisis, right?
#
It's a parallel disaster. And now suddenly the US government decides that I'm going to bring a new
#
monetary policy regime, right? Or I'm going to do some currency kind of reform, or I'm going to
#
change the taxation structure. No, they don't do that. Of course, they are at a different paradigm.
#
They may have the luxury to wait, and they've already done some of these. But it's a little
#
bit of a more pragmatic approach to thinking let's try to solve the problem at hand and not make a
#
bad situation worse, right? It's a financial sector crisis. It's pretty damn big. Don't start
#
reforming tax structure, dealing with corruption, all of these things all at the same time. Then
#
things are bound to go really bad, which is exactly what we saw, right? Yeah, I think that's
#
pretty much what I had in mind to say about in answer to your process, in your questions.
#
Yeah, that's well put. I mean, it is a messy process. When we first discover these ideas,
#
we think that, oh, these are magic bullets. This is how the world is. It is complicated in a
#
political sense in terms of where the incentives are, short-termism, et cetera. It is complicated
#
when it comes to the state doing it. It is complicated when you think about the interest
#
groups that are there. And I think what makes it further complicated is when you speak about
#
the coherence of a particular strategy, that if you're going through a particular kind of pressure
#
on the system, then don't do DEMON. Don't do GST then. But as far as DEMON is concerned,
#
I would say that you can't expect coherence like that because DEMON will just... No policymaker
#
would have supported it. No economist supported it. It was just one random, quote-unquote,
#
masterstroke by this politician in charge who did not bother to consult enough people or listen to
#
them and just carried it through. There is no logic or rationale there.
#
Speaking of incredible disaster, that kind of brings me to my next question where we were
#
speaking about the informal sector and how there is so little data. And I'll go back to Mohit's
#
column, and I'll quote something that he said from there where he looked at the findings of
#
the ESU study. And from there, Mohit did his back of the envelope calculations that what is
#
the impact of this on our overall numbers. And his point was that according to these numbers,
#
annual GDP growth rate would be marked down from 4.97% to 2.35% over this period. And the size of
#
the economy needs to be adjusted downwards by 16%. And that brings me to a question that... And
#
obviously, these figures are going to be sort of challenged by people and etc. And that brings me
#
to the question that when we are in such a data environment where we are not getting reliable data
#
at all, how do we even know what the problem is? The rationale for the GDP in the first place was
#
exactly this, that in 1920, the war is over and Keynes writes this important document called
#
the economic consequences of the peace. And Keynes' whole point is that, look, you've had
#
your meetings where you said, okay, Germany has to give reparations, you've come to a figure.
#
How have you come to this figure? How do you know it is possible for Germany to pay? Right? And now,
#
as we know, with hindsight, what happened is that the figure was so crazy that Germany had no option
#
but to print large amounts of money to pay those reparations that led to hyperinflation within
#
Germany so that, you know, on Friday, if a loaf of bread is 10 rupees, it is a thousand rupees on
#
Monday. It was as crazy as that, that hyperinflation, you know, devastated the society and sent shock
#
waves that resulted in Hitler and the Nazi party and the Second World War and everything bad that
#
happened. So, Keynes, this fundamental point was that something like that would never have happened
#
if you, you know, had a way to measure the economy. The GDP, of course, is an incredibly flawed
#
measure. We have discussed that in a full episode, but the bottom line is that it is a measure. At
#
least you have some freaking idea. Well, my question to you is that we have no idea right now
#
what is the state of the country. 80% of the country, 80% of our workers are in the informal
#
sector. We have no idea what has happened there. All data has now become part of narrative battles.
#
They will be contested. Somebody will say, economy is doing great. We are Vishwaguru. Look at this
#
number. Somebody else will say, oh no, no, we are going to hell. Look at this number. How do we make
#
sense of this? So as an economist and an analyst, what do you think about data and at a personal
#
level, what are the kind of proxies that you find useful in trying to understand what's going on?
#
Absolutely, Amit. I think what has happened from 2013-14 onwards is that in general,
#
policymaking has become extremely challenging, not just because of the structural complexities
#
of the economy, but because exactly as you pointed out that the access to reliable, credible data,
#
which will convey a consistent story that is consistent with many other indicators,
#
official data that will pass what we call the smell test, that whatever story it is conveying
#
is more or less in line with a whole bunch of high-frequency indicators. That access has
#
completely broken down. Now, basically, it's a function of the fact that the statistical
#
system decided there are many reasons I don't want to go into it, international benchmarking
#
and all of that, that we had to reform the way GDP is calculated. But the problem is when you
#
have a GDP series that suddenly showed that from 2013-14 onwards, the economy starts booming. When
#
I say booming, it's growing at 7%, 8%, which is not consistent with many indicators. And more
#
importantly, there is a saying that usually in countries, we know our history. That's like a
#
fixed thing. And what we try to change your plan for is the future. Post-2013, India became a
#
country when even the history was unknown, because we changed our own history by changing the data.
#
So the new GDP series basically said that the boom of 2003-2008 was not as spectacular as the
#
old GDP series had gone. So suddenly, we are confused to forget about what is happening now,
#
what was happening then. So changing history also, that again raises questions of credibility.
#
Now, on the informal sector point that you said, very roughly and in a way simplistically,
#
we can measure the formal sector using now in the new system, the financial returns filed by
#
companies. The informal sector, because it is by and large informal by definition, the way it is
#
done is there is a survey of informal enterprises that is done every five years or so. And that
#
gives us a rough idea of how big the informal sector is and the rate at which it's growing.
#
And then we incorporate it together to come up with that idea of the total state of the economy.
#
Now, since it's done once in five years, for the rest of the time, the assumption is that
#
we assume that the informal and the formal sector are growing at the same rate. So we impute the
#
formal sector growth rate on the informal sector. And that's how we go. And actually, it's fine,
#
it's fair, because you can't keep doing the survey, we have resource constraints, etc. every year.
#
Now, until 2016, this was okay, because by and large, what happens is, see, these two sectors are
#
intricately connected to each other. The other mistake we make is we think that the informal
#
sector is like a complete unknown part of the economy, which is totally decoupled from the
#
formal sector. That is absolutely not true. They are very strongly connected. And if the formal
#
sector is doing well, it's going to pull up the informal sector, right? Because it's going to
#
create jobs and supply chains, etc. from the informal sector. Now, till 2016, this kind of
#
a parallel process was working well. But then as both we have been discussing, what happened was,
#
there was a massive divergence, because the informal sector started facing shocks
#
disproportionately in a way the formal sector did not. A demonetization impacted informal sector
#
much, much more than the formal sector. A GST implementation, same thing. And eventually,
#
COVID pandemic, same thing. So, suddenly, within a span of five years, you have these
#
series of shocks, which the informal sector is getting very badly affected by. The formal sector
#
after that NPA crisis, which also affected the very large businesses in infraspecialty or real
#
estate. After that, the formal sector sort of recovered. In fact, COVID, the biggest firms of
#
the country started booming. They were doing very well. So, when you have this divergence,
#
and you're still in a GDP national account system, where you're using the formal sector
#
growth rate and imputing, of course, you're overestimating GDP growth rate, right? It's
#
like a common sense thing without having deep statistical knowledge. And it's not something that
#
the policymakers and the statisticians are not aware of. But there's no allowance made to say
#
that, no, this is not the correct way. Maybe it will take us a long time to correct this whole
#
process, but at least have the acknowledgement that there are some caveats to this growth rate.
#
But there is no such honesty or confession, so to speak, that a GDP growth rate of 8% is not that
#
the entire economy is growing at 8%. There are a lot of this arithmetic jugglery happening,
#
which is hiding some of the very bad news. The other thing I want to mention is, see,
#
the looking at high frequency indicator, I want to clarify one thing, is not something that we are
#
doing only because the official data has lost credibility, right? This is something that is
#
done in every economy around the world, from developed countries to emerging countries.
#
The reason is because with the advent of the internet and the computers,
#
everybody now has access to a plethora of data sources, right? From economists to statisticians,
#
policymakers, students, everybody. And it's good because you do get to understand the details of
#
different parts of the economy that a single GDP number is bound to ignore. Like all the nuances
#
of a complicated economy like India, one GDP number cannot capture. So it's a good thing that
#
we have a whole bunch of high frequency indicators to look at. But it's a good thing, especially when
#
I said earlier, when the two things move in tandem, that when I see broadly, let's say,
#
I create some kind of an index using 20 high frequency indicators, and broadly the index
#
moves in the same direction as the official GDP data. Then I get confidence that I am also
#
looking at the right indicators and the official data is also correct. That broke down from 2013
#
onwards. I think Arvind Subramaniam has a very good paper on this. And the first one, and of course,
#
he got heavily criticized and many other polarized environment, right? Many other narratives came out
#
to dispute what he said. But by and large, what he said was correct, that when you take this whole
#
high frequency, bunch of high frequency indicators, which are not coming from a different country or
#
planet Mars, these are all representing different parts of the Indian economy only. When you put
#
all of them together, you are getting a very different picture from what the official GDP data
#
is conveying. So something is wrong somewhere. Now, so many indicators can't go wrong, right?
#
So for example, what indicators do we look at? First of all, we look a lot at micro-level data.
#
How are the firms doing? Non-financial firms. Non-financial firms are the ones who produce GDP.
#
Formal sector is what we have access to. Listed companies, unlisted companies,
#
their revenue grow, their profit grow, their sales growth, that's one. We look at the banking
#
sector because that, as I said, is the lifeline, right? Is the credit growth strong enough? Now,
#
in a system where majority of the commercial non-government credit comes from the banking sector,
#
if the credit growth is down to 6% by 2019, how can you say the economy is growing at 7%? Who's
#
financing that growth? We don't have a bond market. The stock market doesn't finance growth. It's just
#
people exchanging shares from one person to the other, right? So that's one, banking sector. Then
#
there is a lot of households data that CMI has started doing. You look at the household balance
#
sheet, household expenditure, income, et cetera. That is also not conveying a strong story. Then
#
you look at some indicators that, in fact, some ministries and departments of the government are
#
releasing, which is, let's say, or even other private organizations, for example, automobile
#
sales, two-wheeler sales, which is a very important proxy for the informal sector. Most people in the
#
informal sector would buy two-wheelers, right? So two-wheeler sales, four-wheeler, automobile,
#
railway freight, right? If the economy is really doing well, there will be a lot of freight movement,
#
cargo movement through planes, et cetera, airline passengers. How many people are traveling if the
#
economy is truly booming? Electricity consumption, construction, industry in general, cement,
#
all of that, right? So FMCG product sale, because informal sector, again, will use products like
#
soaps, shampoos, toothpaste, biscuits, are the sales of these things going up over a period of
#
time. So we have a whole bunch of these indicators to look at to get a sense of which way the economy
#
is moving. All of these started showing that from 2013 onwards and 2011 onwards, in fact,
#
things were really going bad and they got worse by 2019. So when you have that kind of a divergence,
#
obviously, by now, what has happened is every analyst, every economist will look at
#
the high-frequency indicators. They are not just looking at the GDP data. Even if people
#
who don't want to directly question the GDP data for whatever reason,
#
but they are also looking at high-frequency indicators to get a sense of the economy.
#
So as I said, one is the availability of these indicators is good. And second,
#
there is always that nagging feeling that you can't really trust an 8%. Something is off somewhere.
#
So that's basically where we are now. Now, your question on how should policy be made?
#
I wish I had a good answer to that. I don't know. I'm not an expert on this. But
#
I think when you are in a system where there is this divergence, it is, first of all, extremely
#
important to prioritize a reform of the national statistical system. Many of us started creating
#
noise and raising questions about the national accounts change of 2013-14, when the new data
#
was released in Jan 2015. But since then, National Statistical Organization has never engaged.
#
Recent times, things have changed a bit. But the initial years, there was a lot of resistance,
#
not enough engagement with the knowledge community. That's not a good way to go about it.
#
Everybody, at the end of the day, wants the economy to do well. There are no split interests
#
in that. So why would you become so defensive? And why would you not come out in the open as the
#
true experts? You are the only ones who actually have access to all the data. To release a proper
#
document that this is what was done. These could be some of the things where areas where
#
improvement need to be made. This is what we are working on. That instills confidence that, fine,
#
building computing GDP of a country like India is a massively complicated process. It's the largest
#
statistical exercise in the world, so to speak. So yes, many things can go wrong because you're
#
instituting a new system in keeping with international standards. All of that is fine.
#
But come out in the open with a proper document, with a white paper, engage with the knowledge
#
community, do conferences and consultations, and let that be a process. And simultaneously,
#
I think what should have happened is they should not have discontinued the old GDP data.
#
When you are doing a fundamental change in the measurement process, have a testing period that
#
let's release both the series at the same time, see if they are going in the similar direction.
#
Because ultimately, it can't be that the two will completely diverge. No matter what you're
#
using as an input data, it's the same economy. But the fact that they discontinued it and forced
#
all of us to start accepting this new data without the validation, without the tests required,
#
was the other problem. They've continued for a good number of years, X years or whatever,
#
and then said, no, there is confidence that the new series is also similar.
#
Some tweaks need to be made. So then that, I think, would have been the way to go about it.
#
Policymakers should have had the sense and honesty to say that, let's look at a whole
#
bunch of high-frequency indicators that economists and experts are looking at,
#
and let's continue this old series, and then take policy accordingly. What would have happened then
#
is they would have understood the economy is not doing as well as they thought. There was a massive
#
amount of complacency that set in that an economy growing after demonetization, the GDP growth rate
#
was more than 7%. Yes, it takes time for all of that to show up in the system. But seriously,
#
I think if they had followed that kind of an approach, and with the complacency hadn't set
#
in that the economy is actually not doing as well as they think, then maybe many steps could have
#
been taken differently. That's the counterfactual. So that would be my long-winded answer to your
#
question. So what I just want to say is that I want to fantasize that we go with your suggestion,
#
and there were actually two GDP series' numbers being released at the same time,
#
and they go in wildly different directions. One says 2%, the other says 9%, then the 2%
#
goes to minus 2%, the 9% goes to 15%. Opposition will use one GDP series, the government will use
#
another GDP series, and basically that's exactly what's happening now. You don't have two series,
#
but people use whatever numbers they want. What I want to underscore is that, you know,
#
what we earlier said about growth being critical across all indicators, about per capita GDP being
#
the one common factor. Yes, that is true, but yes, it is also a problem when the GDP isn't
#
measured properly. So we are not repudiating that earlier point that growth matters and growth,
#
you know, helps across all human welfare indicators. It is that we need to measure it.
#
The other point I want to make is that, you know, 20 years ago, my instinctive response to some of
#
this would have been to say that you know what is good for growth, you should do it anyway. Why
#
does it matter what the numbers are? You know, why do you need to specifically know what the
#
numbers are? You know what helps growth and what doesn't. Now, that would be extremely simplistic
#
because the point is that the government has a bandwidth only to do a few things, to focus on a
#
few areas, to, you know, carry out reforms in certain areas, and you need to know where the
#
crisis is. Like earlier in this episode, you spoke about the NPA crisis, and for a long time, there
#
was an NPA crisis which we did not know was there. You know, it was a big elephant in the room, they
#
kept evergreening the damn thing. Basically, to take that metaphor too far, there was a carcass
#
of an elephant and these guys were pumping it with steroids and giving it electric shocks so
#
it would twitch, but the damn thing was pretty much dead, right? And had we known much earlier,
#
then policymakers could have gotten together and done something on an emergency basis and not
#
allowed things to get to the point where they got by 2019. So that is the importance of data,
#
that it is useful to know, and especially in a democracy, for God's sake,
#
the people need to know how the government is performing. One way of knowing is you just look
#
at your own life and you say, am I better now than I was four years ago? But critically,
#
you know, to have a sense of how well the government has done, where are you going to
#
get that from? You're going to get that from the data. And I know that, you know, one has to look
#
at many proxies, different economists figure out different, you know, ways of looking at the data.
#
CMI does an incredible job as well. So it is not just that we are reliant on the state,
#
but, you know, there are many more sophisticated ways of looking at it. Yeah. So moving on from
#
data, you know, you've got us very cogently and worryingly, though I don't blame you for worryingly
#
because that is, you know, the respective successive governments screwed up, but you've
#
got us to 2019 and things are pretty bad. And then COVID comes. It's like, so tell me about that and
#
the impact that had on the economy. But very quickly, since, you know, we are at one and a
#
half bongs doing an adder, argumentative Indians in bongs, so to speak. So very quickly on your
#
points, I think if it had it been the case in my hypothetical scenario, when we had two GDP series
#
and opposition is saying, oh, but this she's showing, so showing minus two, this is showing
#
plus four. I think that exactly is the sign that something is wrong with the new series. And that
#
is your smell test that okay, let's go back to the whiteboard and do it. Because I can't think of
#
any other way how this could have been done, because every which way you're trying to do
#
such a major change to GDP measurement. And then you don't give people the option of also looking
#
at what the old series was saying this bound to be criticisms, because everybody will question
#
because we don't have access to all the information that the NSO has. Right. The second
#
point I want to make is in terms of why do we need data when we know already that what is going to
#
give us growth? Think of a business, right? A business needs to see or tell the shareholders
#
or in the annual reports, is it earning profit? Or is it incurring losses? Quarter after quarter
#
after quarter, right? For a capitalist world, for the businesses, that is the most important
#
mark of the profit. If they don't have data on the profit and the losses, how do they know what part
#
of the production process or whatever it is they need to tweak and change? So it's exactly the same
#
at a much, much more complicated level. No, no, I understand. One, I agree with you. Like I said,
#
that's a simplistic view. But the reason there are differences that a business owns itself and
#
it is responsible to the shareholders. The state doesn't own the people, the state doesn't own
#
our wealth. I mean, they behave as if they do, but they don't in an ideal, because that whole thing
#
that let us have data, let us measure, let us do things to the economy comes from a central planning
#
engineering mindset. You know, in a utopian world where there is freedom, the state that does just
#
the rule of law and looks after the institutions and that state, you don't need to know how well
#
we are doing is none of your freaking business, right? That's an excellent point, Amit, because
#
the way as exactly as you say, the way the whole concept of GDP measurement officially came about
#
was in a world where the state's importance suddenly skyrocketed because of the Great
#
Depression and the Second World War. Till then, the markets were free. There was no proper GDP data
#
that everybody knew of. And suddenly, when Simon Kuznets is working in NBR, the Great Depression
#
is happening in the US, the Second World War breaks out in the continent. And then suddenly,
#
there is a requirement to understand how much output you're producing, because how do you make
#
the reparation payments? And then of course, this whole idea that if the government spends in a war
#
effort, then GDP will automatically go up. So the role of the government and the state in this
#
underlying official data measurement is undeniably massive. And that is the system that we have
#
inherited from the West. And that is what it's at some point... We've done a full episode on this.
#
Exactly. So we'll all link to that. Okay. So coming back to the COVID point. So what I was
#
saying earlier before we got into this discussion was that we end to 2019 with this massive balance
#
sheet problem. Now, COVID in a very perverse way, it almost provided an escape route, a distraction
#
from trying to solve all of these structural problems, because then everybody got preoccupied
#
with dealing with problems of a whole different nature altogether. And in a way, it helped resolve
#
the balance sheet mess to a large extent. And what do I mean by that? For the banks,
#
they were essentially not lending to industry. Credit to industry completely collapsed after
#
the NPA crisis. What happened in 2020 was there was a Supreme Court order that for one year,
#
because this was such a big shock, no NPA will be declared and the IBC would be suspended for that
#
one year, which basically meant that the bank sort of got like a breathing space, because this was
#
an unusual period. So the borrowers got a breathing space, the lenders got a breathing space, and
#
there were no new accretion to the NPA problem, so to speak. And then after 2021, when the economy
#
started recovering, then the bank started lending a lot to the retail sector, consumers, and bank
#
credit growth increased manifold. So in some sense, the banks again grew out of that NPA crisis.
#
So there was, to some extent, write-offs that happened because bank recapitalization happened,
#
IBC took care of one small part of the problem, and the rest of it, the banks just grew out of it.
#
So COVID provided that breathing space, so to speak, for the banking sector.
#
For the large businesses, COVID was again perversely almost like a boon,
#
because they were able to cut costs. Everybody was working from home. They were able to increase
#
their market share at the expense of the large informal sector and MSMEs, who did not have the
#
wherewithal to deal with a crisis like COVID. As it is, they were struggling after the shocks of
#
demand, et cetera. And now with COVID, they basically just withdrew into a shell kind of
#
a thing, right? And for large businesses, this was a boon. Imagine Britannia and Palaji
#
manufacturing FMCG products versus all the small guys doing it. I mean, what chances do you stand?
#
And what we saw at the end of 2020 that the profitability of these large businesses went
#
up significantly. Their revenues were, and they basically started sitting on a stockpile of cash
#
because there was no investment happening. There was no demand. So no investment was happening.
#
They're sitting on a stockpile of cash, which also helped to a large extent to cleanse their balance
#
sheet of all the financial stress. So out of 2020 and 2021, both the banking sector and the
#
private corporate sector came out of it with very strong and healthy balance sheets. So COVID
#
provided that breathing space for this part of the formal economy. Of course, what happened in COVID,
#
unfortunately, for the other part of the economy is that when that drastic lockdown was announced
#
on March 24th, you know, there are two dates I can't get out of my mind. One is 24th, March 2020,
#
and one is 8th, November 2016, right? Four hours of notice. One is you cancel 86% of currency and
#
here you announce a nationwide shutdown in just four hours of notice. I remember my mother at
#
that point was staying with me. She had just come down from Calcutta thinking that she'll just stay
#
for 10 days and leave. She ended up staying with me for the next one year because everything just
#
went completely because for the next two, three months, four months, in fact, there was no question
#
of going back to Calcutta. And after that, all of us got sufficiently scared to think that you
#
should not go back. But it essentially shows the kind of decision making disruption that happens
#
that she came for just 10 days and then couldn't leave because of four hours of notice, right?
#
A Bengali mom and daughter together. My God, such a scope for drama.
#
Bengali mother, daughter, and the next generation, right? So it was just at a different level of
#
chaos. But it brought economic activity to a grinding halt, service sector particularly.
#
I remember the roads of Bombay. All of us know all this story, right? I mean, we have not seen
#
such things ever in our lifetimes. I did some 13, 14 episodes post-COVID on different aspects of it.
#
So I'll link them from the show notes. And I remember that I think that was for the first,
#
I mean, we live in a country where there are a lot of disparities across income levels,
#
no doubt about that. But remember, that was the first time we almost started feeling guilty
#
or ashamed because here I was, I could actually live a comfortable life. I had access to Amazon.
#
I could order everything online. I could talk to my friends on Zoom. I could get all the work done.
#
But then there is a major part of the economy with this millions of migrant workers, about 40,
#
45 million migrant workers who are doing this unprecedented reverse migration from the urban
#
locations to the villages because they have lost their jobs overnight in four hours. They have lost
#
their source of livelihood and income. They have nowhere to go because there is no urban social
#
support system. So the only place they can go back is to agriculture, is to the farmland to get
#
any chance at all of feeding themselves. And the way they went back, we all remember that glaring
#
vision, the pictures of they're walking for hundreds of kilometers by feet and everything.
#
It was just a humanitarian crisis. Forget about the economic implications of it. So many people
#
just died on the way because the conditions were so bad. And this is during a pandemic.
#
When all of us are locked up in rooms because we don't want to be infected by the virus,
#
here are these people who just have a different birth lottery. They are just out in the open
#
walking for hundreds of kilometers with women and children just because they need food to eat.
#
I want to make two points here because this is deeply painful. One is that you have to realize
#
that 80% of the country is basically poor enough to be equal to sub-Saharan Africa. I had done an
#
episode with Sajid Bhai. He had written a legendary essay on this. India A, India B, India C. Or was
#
it India I, India II, India III, whatever. But India III, which is 80% of the country,
#
is sub-Saharan Africa. And then there is another 10%, which is essentially a middle class and which
#
is not us, which is our domestic help, which is our drivers, which is a panwala. They are the actual
#
middle class of the country, if you think about it. And then there is a 10% on top. And on part of
#
that 10% is the total elites, which are possibly 40, 50 lakh people, which include you and me.
#
And which probably include most of the people listening to this at this point in time,
#
at least when the show is released. And therefore, the plight of the migrant laborers and what's
#
happening out there kind of gets unnoticed. And policymakers come from the same elite class as we
#
do. And the other point I want to make is that for us, if we get a monetary shock, like if we lose
#
our job or whatever, shit happens, but we can survive. It's not such a big deal. For the poor,
#
I think the term your economists use for it is welfare shock. That you might have moved out of
#
poverty, but you're one shock away, which could be a medical incident or one arm has to be amputated
#
because there is gangrene and you're back in poverty instantly because that is how precarious
#
it is. So I have no trouble believing that not only was the informal sector obviously devastated
#
because of the lack of cashflow and et cetera, et cetera, but that many people would have slipped
#
back into poverty because this was such a big shock. Absolutely. In fact, the CMI at that point
#
of time, I remember released a report that more than a hundred million jobs were lost in rural
#
and urban areas because of this migrant crisis and just four hour notice of a lockdown. I mean,
#
imagine a country that is fundamentally poor where creating jobs itself has been a problem for the
#
longest of time. There is a loss of a hundred million jobs. I mean, I just get so riled up
#
and upset when I even think about it. I told you that was the first time in my life I remember
#
feeling ashamed and it's like I almost helpless that, okay, this is my life. This is my birth
#
lottery, but look at what is going on on the other side of the country. So anyhow, that's why I can't
#
in my mind distinguish between what was a worse shock. Was it demon or was it the lockdown? I mean,
#
it's just to me, I think they were just equally bad. And I almost felt like after the migrant crisis,
#
maybe the policymakers for the first time may have realized that the informal sector is this big.
#
I don't even think there was a realization exactly as you said that there is such a vast informal
#
sector and finally everybody could see them, the invisibles, right? We don't see them. They're
#
finally out on the road when everybody else is in the comfort of their houses. They are the ones
#
finally out on the road and we can see them. And that was the first thing that came to my mind that
#
they probably don't realize when they announce a lockdown. But that's not the thing. We can't see
#
them. We can't see them because we've locked up in our air-conditioned houses and we are chilling.
#
So it's a classic sort of scene in the unseen situation.
#
So what happened, of course, is that as a result of this huge shock, the economy contracted. Again,
#
we don't really know by how much, but there was a massive contraction. And finally, by 2021,
#
I'm just skipping all the details because we don't want to keep talking for hours and hours now.
#
Now, by 2021, the economy started recovering. Now, one small thing I want to say here is that
#
I said that the large businesses were doing very well, right? In fact, in 2021, around the summer
#
of 2021, India actually had a boom in goods exports after a very, very long time. And the reason was
#
because the developed countries were coming out of lockdown. They had recovered by then and they
#
had this massive demand for goods. China was in a lockdown. So that ironically created this space
#
for us when we capitalized and our exports, goods exports, just went through the roof.
#
And the large businesses benefited massively from this. It was another reason why they started
#
doing so well after COVID. So anyhow, so the recovery happens in 2021. And it's a very uneven
#
heterogeneous recovery that came to be called the K-shaped recovery, which is obvious by now from
#
what we have been discussing that the large businesses were in the upper leg of the K and
#
all this informal sector MSMEs were in the lower leg and they haven't really recovered from then
#
since then on. Now, moving on to 2022, just as the economy is recovering from this huge shock.
#
And remember, as we were discussing, even before COVID, the economy was in a precarious situation.
#
So all of that compounded, we're trying to recover. Then we get hit by multiple headwinds.
#
Russia's invasion of Ukraine, which was very bad for everybody because economically it created
#
supply shortages. So it further compounded the supply constraints that COVID had created.
#
And that led to inflation. Something that was not foreseen was going to happen.
#
That happened worldwide. So the developed world, US, UK, et cetera, who had not experienced
#
inflation in 40 years, started having inflation to the order of eight, nine percent. And you have
#
to imagine that it's not just their problem because now we are also in a globally integrated
#
landscape. For India, it became a problem because our policymakers have never encountered a situation
#
where developed countries will face inflation and their central banks will start raising interest
#
rate because what happens is suddenly their interest rates are higher than ours. So all the
#
foreign capital just flew out of our financial markets back to the US, which is bad for us
#
because suddenly there is this instability that gets caused. And because in our case, we always
#
try to stabilize the exchange rate. We don't like a volatile currency we have discussed before.
#
The RBI started defending the exchange rate. So from 2022, we basically had a pegged exchange
#
rate, which has its own problems. I'll talk about it later. But India also couldn't escape
#
the inflation problem. We also had an inflation thing. But the reason I want to mention this
#
specifically is because unlike 2011-12 when inflation became 15 percent, this time around
#
it didn't cross 7 percent also because by now we had the institution of inflation targeting.
#
So it was almost the first test of inflation targeting. And the RBI did act, although with
#
a delay there was an monetary policy tightening that happened. And barring food prices, more or
#
less inflation has come down now. So that's how that institution of inflation targeting worked
#
at that point of time. And to basically sum up exactly what was happening and then I'll talk
#
about where we are now. On the fiscal side, what the government started doing was from 2020 onwards,
#
the government started doing a lot of investment in infrastructure, what we call capital expenditure,
#
to prop up demand because when nobody else is spending in this kind of a lockdown situation,
#
the government started doing CAPEX. It has continued even today, which in my mind is a
#
bit of a contradiction because if the official GDP number shows the economy is growing at 7-8 percent,
#
why does the government need to spend? And I'll talk about it later, but government spending in
#
a Keynesian world is a fiscal stimulus, which you give when the economy is not doing well.
#
If the economy is growing at 7-8 percent, why do you need the government to keep on spending on
#
infrastructure? So that is something that again doesn't square. Maybe as I said, the economy is
#
actually not doing as well as the official number is showing. I think everyone's drunk,
#
they're cool head except them themselves. Pretty much exactly. So let me quickly say,
#
four or five points about where we are now. I think that's sort of after this long discussion
#
of history. It's important to understand where do we stand now. One is this K-shape recovery.
#
Now, what turned out from anecdotal evidence and from a lot of data put out by other analysts,
#
et cetera, that this K-shape thing was not just a feature of the recovery,
#
it has now become a characteristic feature of the economy itself. And what do I mean by that?
#
There's an emergence of a new India and an old India. The old India essentially is the India
#
that we knew before COVID, which is basically middle and rural India. The traditional manufacturing,
#
MSMEs, agriculture, even parts of the formal economy that are not connected to the US,
#
for example. That's old India. Then post COVID, there is a new India that has emerged,
#
which is intricately connected to the US labor market. And this part is pushing and boosting
#
service sector exports. So what's happening here is much of the new economy employees
#
work in what is called global capability centers. These are GCCs. That is a very
#
recent phenomenon that has become a big deal in India. And this part of the economy is booming.
#
What are these GCCs? These are essentially, I think of it as outsourcing 2.0. The first
#
outsourcing happens in early 2000s, primarily in the IT financial services. But now because
#
there is a first of all, a whole work from home medium that has been popularized and become so
#
prevalent after COVID. And also because as a result of work from home or other reasons,
#
these big MNCs in the West have discovered that instead of sending a consulting or an HR or a
#
legal job to Boston sitting in San Francisco, I can just send it to Bangalore or Bombay.
#
So in a number of sectors, not just software at financial and not just in an online mode.
#
So this pharma, energy, healthcare, automotive, semiconductor, AI, ML, all over the place.
#
Many functions, for example, IT, R&D, in a big way, HR, all of these are getting performed in
#
these global capability centers in India. For example, JP Morgan has set up a giant office,
#
Mackenzie has bought a lot of space in Goregaon. So NASSCOM released a report in April of this
#
year. And I'm just going to quote from that report. India has firmly established itself as
#
the go-to destination for these global capability centers, attracting an increasing number of global
#
companies seeking to leverage the country's unparalleled advantages. Now, these advantages
#
are, of course, in the highly skilled portion of the workforce. You have English-speaking,
#
digitally skilled workers with an aptitude for innovation and new technology. So R&D,
#
they call it ER&D. R&D has become a very important component. All our engineering,
#
technological skills are getting used, which I think is fantastic because these are becoming
#
sort of the nerve centers of global businesses. So many MNCs are deeply building roots in India.
#
And the reason I find it interesting is at a time when we are struggling to do manufacturing exports,
#
because that is where there's a lot of interface with the state, right? But there is this part of
#
the economy where service sectors have taken, exports have taken off because the interface
#
with the state is much, much less. So that is almost like the organic market system working,
#
win-win situation. MNCs figure out, oh, this is a country which has a lot of skilled workers.
#
Skilled workers say, I can just export my services. So why not? Whereas in the manufacturing sector,
#
there's infra, land, labor, import tariff, all of these complications, and that's languishing,
#
right? So again, very interesting thing of how markets versus state can operate. In fact,
#
today, India houses half of the GCCs in the entire world. To give you a number,
#
the annual export earnings last year was $60 billion, adding to 1% of GDP. By 2030,
#
it is predicted to be 2% of GDP. And that's not trivial, right? It's a relatively small part of
#
the economy. Roughly, I think this is 15% of the economy, which is growing at 13%, 14% rate
#
in nominal terms. So there is this new economy. And also what is happening is these are the people
#
in India who are buying the SUVs, luxury goods, going to a GEO, whatever mall that has come up
#
in BKC, luxury imported items. And their linkage to the old economy, one is construction, very
#
luxury residential real estate getting constructed. So construction sector is growing at 10%.
#
That's a nice linkage. Second thing is hospitality industry, hotels, restaurants, all of that is
#
getting a boost. So this is an interesting part of the economy that has emerged out of COVID.
#
But then there is the old India, which is 85% almost, right? They are probably growing at,
#
I don't know, 4%. So this kind of a divergence can never be captured by that one GDP number,
#
the nuances. And the old India is where the main demand problem is, because of everything that we
#
have discussed, right? This whole informal sector is struggling. Agriculture, for example, last year
#
grew at less than 1%. And agri informal together is more than 85% of labor force. So that's a
#
massive demand problem in old India. But there is this new India, which is doing spectacularly well.
#
Now two things can happen. Either this new India gradually starts to become bigger over time.
#
I still don't see a situation where it will be able to pull up the old India because the
#
latter is so much bigger. Or we keep continuing in this divergence path, which is a little bit
#
worrisome, because unless there is demand coming from this old economy, the manufacturing sector
#
cannot receive a boost, because ultimately businesses will invest if there is demand.
#
And the biggest demand creation can happen from this old India. So this is the interesting thing
#
that has happened after COVID. The other thing is trade. Now, it seems that now we are slowly and
#
steadily regressing back to a protectionist trade environment, right? The government started the
#
PLI production linked incentives scheme in 2020 to give incentive for investment and production.
#
But at the same time, they're encouraging import substitution, like
#
investige of the 60s and 70s. So to give you a number between 91 and 2014,
#
our average tariff, MFN tariff, declined from 125% because this was the command control economy,
#
to 13%. Right? Since 2014, import tariffs have been increased on more than 3,000 items,
#
both finished goods and raw materials. As a result, on average, the tariff has gone up from 13%
#
to 18%. So today, India has the highest import tariffs in Asia. And Asia is a continent where
#
all of these countries like Vietnam, Bangladesh, Philippines, Thailand are again booming through
#
exports because they have lowered their tariff. So it's completely counterintuitive what we are
#
doing. Almost 70% of our imports are affected by this protectionist regime. And again, to go back
#
to what we were saying Amit earlier, the largest increase in import tariffs happened in 2018.
#
Now think of that period. So many shocks, struggling economy, MSMEs benefit a lot from exports.
#
You can't export today without importing. And then you slap import tariffs. Why would you do that?
#
Right? I mean, I guess we know why we do that. But I'm just saying that how it became that much worse.
#
And let me give you an interesting line Andy Mukherjee wrote in one of his articles that,
#
India's trade policy is working great... for Vietnam. Right? Because what is happening is,
#
to explain in simple terms, under PLI, the firms in this chosen industry are given some financial
#
incentive, 4% to 6% of the value of production. But they're also facing import tariffs. Now in
#
today's world of global value chain, you can't produce anything without also importing. And
#
sometimes importing from multiple countries. Right? Now, the government is also pushing for data,
#
input localization that you source domestically. Now, many of the inputs may not be cost effective
#
in India. They may be cost effective somewhere else. That is why you want to have access to a
#
global market for importing as well. So on one hand, you're pushing these guys to do input
#
localization. And on the other hand, you're making import expensive by slapping tariffs on it.
#
There's a study which shows, and Andy Mukherjee in fact quotes it, is that making mobile phones
#
in India comes with a cost disadvantage of roughly 4%. So think of what is happening.
#
On one hand, the state is first making the system uncompetitive by using import tariffs,
#
and then providing incentive to encourage them to produce here.
#
It's just almost netting it out. Right? There is no additional benefit that is really happening.
#
So that is why he said that it's good for Vietnam because Vietnam has almost zero import tariff on
#
many items, which means Vietnam producers, whoever is producing in Vietnam, MNCs,
#
etc. are able to import free of tariff. And they're able to do trade with a large number of
#
their leading trading partners with whom they have signed free trade agreements.
#
Whereas in India, our businesses, be it MNC or local, they are importing at a higher cost
#
because of tariff. And we don't even have FTAs with our biggest trading partners. So we are
#
making the already uncompetitive system, which is uncompetitive because of land, labor problems,
#
even more uncompetitive, which in my mind is just bonkers, frankly speaking. Right?
#
And then another thing, when you know that there is a great opportunity when
#
companies are moving out from China and looking for options, why would you try to almost peg the
#
exchange rate to the dollar when a depreciating exchange rate, a weaker exchange rate is good
#
for your exports. So you want to be in cashing on this opportunity that is lying out there,
#
the other countries are in your own continent are taking advantage of,
#
you are just making the system more and more uncompetitive. Right? So it's like you've gone
#
way off the path that we embarked on in 1991. That's the way I see it. If you want to add
#
something, I'll just double click on a few things. And one is as far as tariffs are concerned, it is
#
particularly bonkers. I wasn't realized that it's actually become worse since 2014,
#
but it's particularly bonkers because it harms us in two ways. One is it harms every consumer,
#
like tariffs, as I keep saying, and I'll link my piece, a great redistribution from the show notes
#
era redistribution of wealth from poor to the rich, the consumers at large are essentially having
#
whatever they would have saved on whatever product it is redistributed to the small business from the
#
look to the local businesses which benefit from it, which are powerful interest groups. So that is
#
one thing. But the other thing is they even hurt exports, because a lot of inputs for things that
#
you're manufacturing and that you're going to export, those inputs become more expensive,
#
and therefore you become uncompetitive, and therefore you can't export so much.
#
So even your exports get hurt. What happens when your exports get hurt is that actually exporting
#
is amazing, not just because not just for the exporters, but for the entire economy, because
#
the people who are exporting have to compete in the global marketplace. So their standards and
#
practices just reach a whole new level to be competitive, they have to excel, and because
#
they're also in the domestic market, the domestic competitors also have to excel. So it takes
#
everybody's standard up, it helps the consumers, it is a virtuous cycle. And instead of that,
#
we are now in a vicious cycle where our local guys don't have to compete, in some cases they
#
cannot compete because they might be exporters, but now our import tariffs are screwing them over,
#
and the consumers get hurt, and this vicious cycle just kind of continues endlessly.
#
Absolutely. And in fact, to add to that number, I was talking about free trade agreements,
#
between 2004 and 2014, India signed 14 FTAs, none from then on till 2022. And then from 2022
#
onwards, we have signed with UAE and Australia, not with the leading big trading partners like
#
US, UK, European Union. So we're also losing out on that risk, which is very important in
#
today's competitive world, because everybody is vying to get a share of that good trade that
#
China is ceding space in. So the second or three points I briefly want to mention, and
#
it requires a separate episode perhaps as elaboration, is this madness over the exchange
#
rate, where is the rupee, the rupee is falling, and all of this, this is fucking hysterical.
#
What is, you know, when you look at the rupee vis-a-vis the dollar, what is determining the
#
number? It is supply and demand. How much do people want the rupee? And if the rupee is high,
#
there will be winners and losers in terms of exporters and importers, and equally,
#
and that will flip if the rupee is low. And the point is, a number means nothing. It is not a
#
source of national pride. It doesn't impact anything. Ideally, if you're letting a free
#
market operate, you let the free market operate in this way also. Now, one can bring in complicated
#
rationales, you know, you've got to control it to this or you've got to peg it to that.
#
And I don't want to go into those arguments. But the point is that every time you interfere
#
with the free market, bad things happen. And leaving everything aside, this fact that Twitter
#
may, for the last 10, 15 years, it's become a battle, that first, you know, when the UPA
#
was in power, the opposition was screaming that, oh, the rupee has gone to 60. Now these buggers
#
are in power and the opposition are screaming, oh, the rupee has gone to 84. It doesn't freaking
#
matter. It didn't matter then. It doesn't matter now. Now, of course, the people are screaming
#
to point out the hypocrisy of these guys that you were shouting when it's 60 and now it's 84
#
and you're chilling. But leave the hypocrisy aside. It's a useless number. It doesn't matter,
#
you know, just as trade deficits. And I will rant. Why not? You know, people keep complaining about
#
trade deficits. We have this trade deficit with China. You know, Tim Harford wrote this great
#
piece in 2005 called My Trade Deficit with My Babysitter. And this could be true for all our
#
domestic helps as well. You know, I have a trade deficit with my domestic help. She comes over,
#
she does the house cleaning and whatever else, I pay her. She never pays me. Always I am paying
#
her. I have a trade deficit with her. Is it a problem? Of course, it isn't a freaking problem.
#
We are doing it to mutual benefit. You know, similarly, if somebody pays me money for a
#
service I provide and I never pay them anything, it's a trade deficit. What freaking difference
#
does it make? It's a double thank you moment. You know, and when India, India and China don't
#
trade with each other, period. Individuals in India trade with individuals in China or companies
#
from both countries trade with each other. They do it to mutual benefit. You know, which direction
#
this, you know, so if you want to worry about a deficit, worry about the fiscal deficit. If you
#
want to worry about a deficit, worry about the cognitive deficit in all our policymakers and
#
economists. Do not worry about a trade deficit. Sorry for the rant. And to go on to the third
#
point, which kind of really sort of saddens me and I'm trying to come to terms with it is I loved
#
your phrasing of how just as we talk of a K-shaped recovery, we should talk of a K-shaped economy,
#
right? And that takes me from what is like a temporary thing, a recovery is happening to
#
something that might be more permanent and it worries the shit out of me. Now the K-shaped
#
recovery, of course, is happening. Like you said, big businesses are gaining market share at the top
#
end. On the bottom end, informal sector is losing that same market share. You have your,
#
you know, goods exports bouncing for a while and you have services exports, which, you know,
#
the whole GCC phenomenon and which is turning parts of India into the first world. And you have
#
another part which is, you know, going in the opposite direction. And as we discussed, there
#
isn't even enough data. And, you know, one metaphor I like to bring up for this is there's a book by
#
China Meville called The City in the City. And the China Meville book is basically about
#
one city, but it's two cities, but in the same geographical space, they literally overlap.
#
And people from one city, even though, you know, if you are from one city and I'm from another,
#
I literally can't see you even if you're next to me. You know, each city exists only for itself.
#
And the premise of the novel is that a detective finds a body in one city from another city and
#
he has to go over to solve the crime and whatever, leaving data site. But it's a great
#
metaphor for the seen and the unseen and how we live. You know, when I'm at a traffic signal
#
and I'm irritatingly waiting for the red light to turn to green, the, you know, the beggars of the
#
traffic signal are unseen to me. They are in one city, I'm in the other city. And I worry about
#
this K-shaped recovery that we could be formalizing it. And the point about the K-shaped recovery is
#
precisely the point that you made that we've had the boom in services exports in GCCs. Why?
#
Because the state never got in the way. It happened at night as it were. So much of it happened
#
after 91, the state didn't regulate it. And so that is a good K where the state is out of the way
#
and the bad K where the state is still in the way and et cetera, et cetera. So some people would
#
look at these two different Indias and they would say that, oh, the state needs to intervene. We
#
must do something for the poor. And my point is a problem is that the state intervened, that we need
#
them out of, out of the way. And I think that's an essential part of the diagnosis. Absolutely.
#
I think Gurcharan Das said in his book, India Unbound, that India works at night when the state
#
is sleeping, right? Which is exactly what is going on. The reason the whole GCC boom and the
#
service sector exports of $15 billion a month, all of these spectacular things is happening
#
is because the interface with the state, with the bureaucrats is minimal there compared to
#
manufacturing. The couple of points, I mean, I'm glad you brought the point of exchange rate.
#
Without belaboring too much on it, I know every time I think of the exchange rate and exactly as
#
we said, political parties agnostic of who's running the government is shouting that, oh, no,
#
no, control the rupee. Don't let it depreciate. Don't let it depreciate. I'm almost reminded of
#
they are trying to control the, like parents trying to control the behavior of an errant teenager
#
who will just do whatever he or she wants to do. And the parents can continue to be in this
#
disillusionment that we can control the behavior no matter what. And it never really happens,
#
right? That is exactly the rupee dollar exchange rate. We have tried from time immemorial post 1991
#
to control the value. It has gone from less than 45 to now more than 80. And in the process,
#
we have had a lot of distortions because of our attempt to constantly trying to control it. And
#
of course, we have failed at it, right? Because nobody knows what is the correct value of the
#
rupee. It is something that the market has to decide. And exactly as you said, end of the day,
#
it is a price. Just as we can't control and shouldn't control and we deregulated the price
#
of cement and steel, exactly like that, the price of the rupee cannot be controlled.
#
There is, and you know, we have this aspiration of becoming a developed economy. There is no
#
developed economy in the world which controls the price of the exchange rate or price of their own
#
currency. None. So, you know, it's not even consistent with the aspiration that you are
#
peddling to everybody else. But still, there is this innate almost obsession that whenever
#
there is fluctuation, just put everything, like douse the fire, somehow or the other,
#
control the rupee. It doesn't work at all. And you are harming different sectors of your own
#
economy. When the rupee is depreciating and not letting it happen, exporters are getting hurt.
#
When the rupee is... So, it's almost like the thinking is over. The rupee is weakening.
#
The exporters may benefit, but what about the firms who have borrowed in dollars? Their debt
#
is going up. See, if that lobby is stronger, I'm just going to control that to give them some kind
#
of a hedge through my intervention. But then when the rupee is appreciating, the exporters are getting
#
harmed because their exports are becoming more expensive. So, then I'm going to satisfy that
#
lobby. It just cannot work that way. You're just trying to douse whatever fire is coming up,
#
depending upon the interest groups, but in the process, creating enormous distortions in the
#
economy, right? I love the teenager comparison because, you know, there is a phrase, mature
#
democracy. And I was thinking at one point of write something at some length, maybe a long essay
#
about how India is a juvenile democracy. And now to the juvenile democracy, you've added the
#
teenager rupee and everything kind of falls into place. Absolutely. And I mean, I would love to...
#
Now you have to write this piece. I would love to read it. The last point on this, you know, the city
#
and the city, I completely agree that there is this old and new and I worry because I really hope
#
that this doesn't get perpetuated because if the new economy is getting overrepresented in the
#
official GDP data, then that's what we'll keep on seeing. And of course, the informal sector doesn't
#
get represented. It's a real worry. But I think, you know, when you said that there's a dead body
#
and the detective comes and then discovers this other city, the macro metaphor of that is basically
#
that the private sector is not investing. And everybody from all ministers, our finance minister
#
keep on saying, this is the dead body. This is the dead body because there is no demand.
#
The old India, where your 80% of the labor force is supposed to be creating demand for your
#
manufacturing goods. They are languishing. There is no demand. So why will the private sector
#
invest? The basic thing, right? Investment happens when there is demand. If there is no demand,
#
investment will not happen. So that's the dead body that our detective ministers need to figure
#
out and understand if there is this old India, which is not growing at your eight, nine percent.
#
So I think it's, I'm going to read that book now, but I think that that parallel is absolutely
#
fascinating. And the other point I want to say, Amit, is that this whole, this elephant in the
#
room that's currently in the Indian economy, that why is the private sector not investing?
#
I mean, some people will say no, no, but they are investing. It's not happening the way it should
#
happen in the sense there is no massive surge. There's no boom in private sector investment.
#
It's just not there. A little bit of pick up that has happened. And this is despite the government
#
throwing everything at it in their mind, right? Making India PLI, protecting the domestic sector.
#
The government is spending in infrastructure that is supposed to crowd in. It's still not
#
happening to that extent. And one other reason is, see, there is the domestic demand problem.
#
Now, even if now, let's say the domestic old economy has lost its dynamism,
#
and it may take a long time to figure out what to do. There is this large global market out there,
#
right? The per capita GDP of the US is at a different level compared to our per capita GDP.
#
There is demand. China is receding from the space in many labor intensive industries like
#
apparel, gems, jewelry, whatever, toys, et cetera, et cetera. There is a huge opportunity for us
#
to take advantage of this massive demand that lies out there in the global economy,
#
so we don't have to be constrained by the lack of domestic demand in India.
#
But now, because of the protectionism, et cetera, we are not even able to take advantage of that.
#
So how will private investment increase in this kind of an environment, right?
#
So there are a lot of fundamental things going wrong. And there is no country in the post-Second
#
World War history which has been able to sustain a 7% growth rate without increasing private
#
investment and exports. I mean, you look at the data from any which angle, it's just not there.
#
Unless, of course, we have this unique country who has figured out a whole different way of
#
doing it, which I don't think we have, but it's not there. The third thing I want to mention,
#
right? One is new and old. One was the protectionism. Third is,
#
perversely what is happening is that the government is spending on capital expenditure,
#
right? This has two implications. One is, as I said, the government spending is justified when
#
the economy is not doing well, which is a classic engine fiscal stimulus. And as we have discussed
#
in our GDP episode is when the government spends, automatically GDP will go up, right? It is the one
#
component of demand in GDP which is not in the free market. It is not decided by the organic
#
forces of demand and supply. The government is literally controlling it. So government spends,
#
GDP goes up. It's almost automatic. Let me quickly double click on that for our listeners.
#
One of the decisions that cousinettes and all had to make when they tried to define what would
#
happen with the GDP was what gets included in GDP. And they decided at that point, because the war
#
was just ending and there was going to be a lot of spending by the government to stimulate the
#
economy, they decided government spending will be included. Now, hypothetically, what this could
#
mean is that a government could get a million people, could pay a million people to dig up a
#
ditch and pay them again to fill it up and do that ad infinitum. And the GDP could just skyrocket
#
like that with government spending alone. And therefore, government spending doesn't necessarily
#
take that into account. It doesn't mean anything. It's not necessarily productive. It is not
#
necessarily wealth or value being created. So just to clarify what you said.
#
Absolutely fantastic point. I mean, Simon cousinettes was so much against including
#
government expenditure in GDP, because it's like tautology, right? You increase government spending,
#
of course, GDP will go up. And the problem there is, if you therefore look at non-government GDP,
#
because that's the GDP that is actually getting produced in the private sector,
#
there the growth rate, if you look at it, is not going to be whatever the official numbers
#
are suggesting, because the private sector is neither investing nor exporting. So that's,
#
I feel in India, we should increasingly start looking at non-government GDP, as opposed to just
#
the official GDP. And the other thing is, what is essentially happening is the private consumption
#
is slowing down. When we look at the data, private consumption growth has slowed down again. So you
#
had that period that by 2019, private consumption was slowing. You get a blip in COVID, because once
#
you remove lockdown, there's a revival of pent up demand. But then by now, again, private consumption
#
has slowed down. So private consumption is slowing down. Private investment has not taken off in a
#
massive surge. Private goods exports are not growing. In fact, last year, goods exports
#
contracted. So the private sector is not spending, and the government is spending. So it's almost
#
totally topsy-turvy that the part of the economy which was given the freedom post reforms to start
#
producing GDP and doing all the economic activity has withdrawn. And the government, which is
#
supposed to do by now everything else, which is provision of public goods, et cetera, et cetera,
#
instead of doing all of that well, is now doing sort of, quote unquote, the work of production.
#
And to give you an example, the infrastructure spending, for example, a high speed bullet train
#
between two cities. How is that the most important infrastructure need right now in India?
#
It's not. So exactly as you said, right? I mean, what is the government spending on is also
#
something in the quality of the expenditure is also important to question.
#
I'll give another spoiler here. Three or four weeks from now, Ajay and I have an episode of
#
Everything is Everything in which we talk about infrastructure exactly. And Ajay's deep point
#
there is that we bought into the dogma that you spend on infrastructure is great period
#
because positive externalities and all that. And yes, that is sound. But what has happened
#
in India is that all the low hanging fruit is done. You made the Mumbai Pune Expressway,
#
great externalities, good for the economy. You built all the airports, you did everything
#
great. But now a lot of the stuff is almost like ticking boxes that, oh, what do we do?
#
The economy is in bad shape. Yes, our numbers are good, but we know the economy is in bad shape.
#
Let's do Keynesianism. Let's spend money. But spending money alone isn't enough. I mean,
#
I have very fundamental disagreements with Keynesianism fundamentally. But even if you
#
agree, it matters where you spend money. As Kelkar and Shah showed in their book in
#
Service of the Republic, every one rupee spend of government has a three rupees cost on the GDP.
#
So you have to have a decent ROI on all the money that you spend. We've entered a cycle of
#
diminishing returns on investment on infrastructure. And it's something we need to reconsider. We can't
#
just take it as an axiom that infrastructure banayenge to there will be a huge benefit to the
#
economy. We can't take it as an axiom that government will spend and will stimulate private
#
spending, not necessarily and not working today. And that's something that we need to think about.
#
Absolutely. And I think a lot more needs to be written and discussed about this thing,
#
the strategy of growth that seems to. Did you just say the strategy of growth?
#
So a lot needs to be discussed and written about this new approach to growth that seems
#
to have emerged, which is that growth is propped up by there's a service sector
#
exports, which is great because that's happening in the new economy, etc. private sector.
#
But then there is also government spending lot on infrastructure. So these two are the
#
ones which are propping up growth, but there are these major elements of goods exports and
#
private investment, which are not really working. And that's what any reform that we need that we
#
do or that we think of need to start targeting. That's the fundamental problem. The fourth and
#
last point I'll make about this where we are now is that pre-COVID, as I said, that there were a
#
balance sheet crisis in banks, businesses, non-financial businesses and NBFCs. Now there
#
is a fourth kind of balance sheet problem, which is in the households. So what do I mean by that?
#
For the last 10 years, we find from the data that households in India are borrowing to consume,
#
banking credit to the retail sector has gone up significantly, just as their share of industrial
#
credit has fallen. So Harsh Vardhan and I have done a lot of work on this and you can link from the
#
show notes. We call this the consumerization of bank credit. So just as during the NPA crisis,
#
particularly private banks, they withdrew from the industrial sector, they started lending a lot to
#
the retail sector. By now, even public sector banks are doing it. And simultaneously, the ease
#
of lending has also gone up with fintech and apps and all of those things. The net result is today
#
what we call the unsecured credit, that is credit which is not backed by a collateral.
#
Unsecured personal credit, think of credit cards, personal loans, etc. Year on year basis,
#
at one point of time, I think in the last year or so, it was growing at 30%. So essentially what
#
means is when households are borrowing to consume, that's definitely not a good thing. So why is this
#
happening? So on one hand, these aspirational Indians, the Indians are always aspirational
#
in terms of their spending habits, etc. They are clearly not earning enough to support their
#
consumption. And all of that boils down to all the problems we have been discussing. In fact,
#
there's an international labor organization study that came out this year, which says that
#
over the decade until 2022, the average monthly real earnings of regular salaried workers
#
declined by 1% each year. And one factor, and I'm quoting from the report, one factor is that many
#
low-skilled regular workers like guards and household help are experiencing stagnation in
#
their earnings as their employers are not increasing their wages proportionately.
#
Another factor is that the growth in the private sector, which is mainly situated in the urban
#
areas, has not translated into higher wages for its workers. So if you combine this decline in real
#
wage with rising inflation, last two, three years inflation has been high, which means their
#
consumption basket has also become costlier, especially for food items. What do you get? You
#
get declining savings, right? You're not earning enough and you have to spend a lot more on
#
consumption because of inflation. So savings are declining. And as this is happening, the households
#
are borrowing to support their aspirational consumption habits. And what we see from the
#
data is that both household gross and net savings are falling. What is net? Net is gross minus
#
whatever debt the households have incurred. And of course, as debt has gone up, net savings have
#
gone down. So essentially what it all means is that today the household balance sheets in India
#
are in deep trouble as a function of falling income. Of course, the jobs situation further
#
aggravates the problem. So falling income, rising inflation, savings are falling, and they are
#
borrowing to consume. Apart from creating the obvious risks that you have this household balance
#
sheets which are highly leveraged. And this also creates risk for the banking sector because if
#
it's an unsecured credit, by the way, also remember we don't have a personal insolvency law,
#
right? Another resolution mechanism that we don't have. So by chance, if there is a household credit
#
bust that happens, which spreads rapidly through the banking sector, we wouldn't have a resolution
#
mechanism to deal with that crisis. And that can become a real bad systemic crisis because not only
#
are banks involved in this, NBFCs, fintechs, everybody's involved. NBFCs are also doing
#
household consumer lending. And the other problem is, which is a more macro question, that if savings
#
are falling, financial savings particularly, and by the way, households we find from the data also
#
investing a lot in gold and real estate because inflation is high. Again, not a very productive
#
use of savings. So if household financial savings are falling, saving is growth capital, right? If
#
savings are falling, that is bound to affect investment. So where would the financing for
#
growth and investment come from if your households are saving less? So only two options. Either you
#
figure out ways of encouraging savings, tax breaks on deposits and stuff like that, or you have to
#
start depending more and more on foreign capital because the pool of foreign capital is infinite.
#
But then again, we are hit by the deeply socialist mindset that foreign investment,
#
we are skeptical about it. India is the only country other than China that has an extensive
#
set of capital controls in place despite starting our liberalization process 35 years earlier, right?
#
So anytime there is a crisis, we'll put up a tantrum, controls on foreign investment.
#
Anytime if we know this is creating volatility, let's prevent their entry, let's prevent their
#
exit. So capital control liberalization is completely at a different mess. But we have
#
this problem, right? Your domestic financial savings are not enough. And India, by the way,
#
is mostly domestically financed. Our government debt is entirely held by domestic citizens because
#
of financial repression. So our banks and RBI and us giving money to the government.
#
The corporate sector's external borrowing is very, very low. And the banking sector is
#
also entirely financed by domestic deposit. So domestic financing is very key for us.
#
So if the domestic financial savings is now falling, and I'm really surprised at how this
#
is not discussed in mainstream more, because this is a real long term problem of how will you keep
#
on financing the 7-8% growth, right? So that is the other thing that I wanted to mention in terms of
#
where we are today, if you have anything to add. One, again, there's another vicious cycle happening
#
here involving savings and investments. That if you don't have enough savings, there's not
#
investment happening. If there's no investment, there's no growth. If there's no growth,
#
there are no incomes. If there are no incomes, there's no savings. So we're kind of stuck in
#
this terrible trap. The other thing that I would, before I come to my follow up question on this
#
particular thing, the other sort of thing I'd quickly like to mention is that what is also
#
becoming common these days are these scams where you download an app, they'll promise you a loan.
#
So you have to download an app for that. You download the app, you take that short term loan,
#
and the app will have access to all the pictures in your phone and your contacts and all of that.
#
And then the interest rates will be crazy and these people will be doing debt recovery even
#
before your debt is due. They'll be calling your parents, your family. They'll be sending
#
all your photos everywhere. They'll be threatening you. And it can get incredibly messy. So if anyone
#
is listening to this, please watch out for this and keep an eye out. And at one level, it is so
#
indicative that there are so many more scams these days. Why are people getting into these scams?
#
Because there are no jobs out there. There are no opportunities. I did an episode on Bihar with
#
Mohit Satyanand and Kumar Anand. And this was a point that came up that there are places in Bihar
#
which are like, you know, you'll have a village or a town which is known for its call centers,
#
which are just scamming people. That's all they are doing. And you think about, and the
#
innovativeness is crazy. Like people in Bihar have stolen a bridge. People in Bihar have stolen a
#
pond, presumably because they needed something to put the bridge over. Literally, I will link
#
these from the show notes. And there has been crazy scam. I wrote a newsletter detailing some
#
of them. I'll link it. And the thing is that at one level, these are kind of funny and worrying
#
and you're saying, oh, crime or iron, et cetera, et cetera. But it is also a pointer to the
#
tremendous ingenuity and the entrepreneurship of our people. And all of this, this energy,
#
this creativity could have found some other outlet instead of seeding fucking bridges.
#
So this is just mind blowing at a different level. I had no idea this is happening.
#
No, no, it is. It's absolutely crazy. But here's my question for you. Harsh also in his wonderful
#
episode with me spoke about this household debt crisis and all that. Give me a quick sense,
#
because when I hear about it, that these are unsecured loans households are taking to finance
#
consumption, then what I kind of worry about is that fuck, I'm thinking something's got to give
#
and a lot of things could give at the same time. So, you know, what is the worry and
#
what can be done? I think the biggest worry is by nature, if these are unsecured, right?
#
Let's say there is the jobs crisis gets worse, incomes start getting affected even more. And
#
then these households who are buying on EMI, who are taking multiple credit cards or rolling over
#
debt without realizing how much interest they're really paying. Suddenly, when their incomes get
#
hit even more and they lose jobs or something happens because the economy is not doing well,
#
then they'll not be able to repay all of this. And when household after household is not able
#
to repay first, and these are unsecured, so banks have no way to seize any collateral to make good
#
on the loan. So suddenly when the banks see that, okay, there is some pocket, let's say in Bihar or
#
Bengal, wherever, that there is a segment of households are not able to repay the debt initial
#
react, because these are also small ticket loans compared to the corporate NPA, whether
#
volume of NPA was huge because the loan ticket size was massive. Here these are small. So
#
initially my guess is the banking sector would start ignoring. I mean, they'll provide with
#
capital, banks are very well capitalized. So initially the problem will not become that large.
#
But the risk is, and this Harsh and I have discussed at length within ourselves, is that
#
a household consumer credit bust can spread like a quick fire in a way that a corporate NPA will
#
not. See, corporate NPA is concentrated within, let's say, these 50 really large businesses,
#
and these whatever banks, and they are trying to solve it out and fight it out. That's basically
#
what's happening. But in a consumer credit sense, if I see that, oh, but you are getting away by not
#
repaying your debt, nobody's coming after you. Why should I therefore try to repay my debt? I will
#
also not repay. Even if I have the wherewithal, I'll say, no, I don't want to repay it. So then
#
what happens like a quick fire, suddenly household after household, individual after individual will
#
say, we are going to default. If this becomes that big. And also, mind you, what I said is that
#
the NBFCs are also intricately connected in it, because the NBFCs have lent a lot to consumers.
#
NBFCs source of money, they don't take deposits, is bank borrowing. They are borrowing from banks.
#
So if suddenly NBFCs face this consumer credit crunch, then banks will say, no, you guys are
#
really vulnerable. We are not going to lend you money anymore. So suddenly NBFCs will also lose
#
access to funding. They'll then hold back lending to consumers. So it can become a systemic risk
#
very fast if it comes to that level. And as I said, we don't have a resolution mechanism.
#
What do we do with, let's say, thousands or lakhs of individuals if they just start defaulting on
#
their loans? There is no recourse mechanism. There's no personal insolvency law. We wouldn't
#
know what to do with it. So that's the risk. It's almost like that unknown that we are hoping it
#
doesn't happen because no, no, how can it get so big? But if it happens, I don't think any of the
#
policymakers understand how to deal with it, which is why the RBI last year got really worried.
#
And what they did was usually the only tool that they have is what we call increase the risk weight
#
on some of these loans. If you increase the risk weight, the bank has to provide more capital.
#
And that sort of holds back the bank to say, no, no, I'm not going to lend so much to retail.
#
So that's what they did, clearly because they are seeing the problem much more than you and I can
#
discuss. They are looking at the data. So they are worried and they have taken the steps,
#
but still the growth rate in unsecured consumer credit is still pretty high.
#
Because I would assume that when that happens, when the risk weight goes up and they have to
#
put up more capital, then the logical thing for the bank is to charge a higher interest rate to
#
the consumer and to pass it on, right? Yeah, but then, I mean, that's the hope,
#
because when they charge a higher interest rate, then consumers will say that, okay,
#
I can't borrow as much because I can't really do this and there'll be less people. That's the hope.
#
You haven't met any consumers, have you? Exactly. So that's the worry, that if this continues like
#
this, and mind you, this is happening at a time when RBI has already increased its own policy rate.
#
So despite the interest rate environment being quite unfavorable, still the households are
#
borrowing. And that shows that if your incomes are not increasing and your consumption basket
#
is becoming expensive and you're looking at social media everywhere and having the aspirations of
#
spending, what do you do? You borrow. You have a fintech app, exactly as you said, is very easy
#
to borrow. I do it. In Amazon, it's insane. I mean, if I try to buy something on Amazon,
#
I actually get the option of doing EMI on anything that I do. Now, any individual can think, oh, but
#
this is so much easier for me. Let me just do an EMI, right? So this is how it's getting perpetuated
#
in an economy where the incomes are not growing and inflation is high. Now, one can only hope and
#
pray at this point of time that it doesn't blow out of proportions, but if it does, then I think
#
we have a serious consumer credit bust around the corner. We have a serious credibility crisis first,
#
because earlier when we began this particular session, I said, this is the last break of the
#
show, but I'm afraid this is not the last break of the show. That was the second last break. We have
#
to take one more break now. And since we are going down this gloomy path, and we'll probably come
#
back on a more positive note after the break, but let me just add that we are facing all these
#
challenges in an extremely adverse global environment, right? Between 91 to 2011, the
#
global environment was very benign. Everybody was growing, the US and US developed country inflation
#
rates were low, interest rates were low. There was a general optimism because giant countries like
#
China and India were opening up huge sources of demand. So the global environment was highly
#
favorable. And this is always a factor because we are more and more integrated into the global
#
landscape. Now it is exactly the opposite. Developed countries have messed up at a whole
#
different level, right? I mean, they actually make some of us look better, by the way.
#
And there is this huge uncertainty coming from wars, Middle East tensions. Globalization is a
#
bad word now. There's US China trade wars. So all these bad things are happening all at the same
#
time as if what was happening in India is not bad enough. So we have to now figure out how to
#
solve these challenges in this adverse global environment, which is not easy for any country,
#
let alone a country where generally institutions are on the weaker side. But I just wanted to add
#
that point to make it finally more gloomy. Yeah, but after the break will be less gloomy.
#
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we've finally sort of reached the current day. I really was excited about this episode because
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#
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#
the kind of policies we've had over the last 75 years. These are the consequences. This is why
#
we are where we are. What I was especially hoping for is that everyone listening to this now,
#
when they hear of an economic policy being announced, they can actually use the framework,
#
their framework, to judge for themselves whether it is good or bad. Too often I think people just
#
respond to policies by either looking at the party in charge that I'm against X's policies by
#
X, therefore I'm against it, or it will be in terms of intent that, oh, this will protect the
#
workers or this will protect domestic business and they'll just stop completely there and go
#
no further into second order and et cetera, et cetera. Hopefully, we don't do that anymore.
#
This course is really too tribalistic. What we wanted to do today was not focus so much on
#
people and parties, but more on ideas and policies and talk about them so that you can evaluate
#
those on their own terms. That was really the purpose. I want to come to you, Rajeshwari,
#
with a question now, which is that whenever a public policy comes out or is announced,
#
what is the framework through which you think about it? What are your heuristics? How do you
#
decide whether it is good or bad? How do your instincts work as well, in a sense?
#
Great question, Amit. Also, I'll add to what you said that I think it's very important to
#
remember that ultimately, ideas build a nation. It's not even the people. It's definitely not the
#
parties or the government. It's ideas. That's what I think, given the current environment,
#
we need to do much, much more of it and not definitely in a polarized fashion, not with some
#
kind of a vested interest in mind, but generally, intellectualize, think, pontificate, discuss,
#
write. We also have that flexibility to admit that some things will get wrong and some things
#
will get right, but unless the discourse keeps on happening and the ideas keep getting exchanged,
#
we are not going to proceed forward no matter how many reforms we talk about, et cetera.
#
In terms of how to evaluate public policy from the limited understanding that I have,
#
I think it's very important to first ask the question, what is the problem that that policy
#
is trying to solve? Is there a well-defined problem statement? Second is whether the problem
#
is important in the sense that what is the scope of the problem? How many people does it touch?
#
For example, Gandhiji, I don't exactly remember the quote. His point was that an economic policy
#
is important only when it helps the poor people. I think his policy was every policy must be judged
#
by its impact on the poorest of the poor, which I agree with. Exactly. I think it's very important
#
to understand is this policy or is this problem an important problem statement enough to tackle
#
at that point of time given that there is time, there's resources, state capacity constraint for
#
a country like India. The third thing I would say is whether this policy that is being thought about
#
or designed has a good chance of solving that problem, of addressing that problem. Is there
#
a match between the problem statement and the public policy design that is being thought about
#
given the available evidence? I think using evidence to do policymaking is extremely important,
#
and my sense is we don't do enough of that in India. And also maybe some amount of analysis
#
of whether the benefits outweigh the cost. We often underplay the importance of cost-benefit
#
analysis. I think it's extremely important to have that process of thinking that do the benefits
#
outweigh the cost and therefore is it worth doing this policy given again all the constraints and
#
other stakeholder interests, et cetera. When I use this kind of a framework to evaluate a policy,
#
what comes to mind is there was a point of time, in fact not so long back in India, where the
#
committee process was very important. For any reform and any policy change that we wanted to do,
#
a committee would be set up under the chairmanship of an eminent thinker. There would be people from
#
experts from the domain with domain knowledge. There would be an extensive consultation process.
#
There would be discussions and writings and conferences, et cetera, over an extended period
#
of time. A lot of feedback and inputs would be sought. And then when you have such multiple
#
views and ideas and debates, then you converge to some kind of an answer, not necessarily
#
specifically to these questions, but many of these points would be addressed by now.
#
And then you release in the public domain and so on and so forth. So I have a deep respect
#
and appreciation for that committee process in a democracy like ours. And I think we need to do a
#
lot more of that. I myself was a part of the Bankruptcy Legislative Reforms Committee and I
#
saw how amazingly it worked over a period of almost a year where there were extensive
#
stakeholder consultations, a lot of research, a lot of debate, a lot of reading, a lot of research.
#
So making a policy or making a reform is not trivial. You can't just do it just waking up
#
in the morning and say, only today we have to do this, that shock and awe factor. A lot of this
#
thinking has to happen in this framework. And that's how I think I would evaluate the policy.
#
And one last point, I think what we talked about before the break is that just as a farm bill is
#
difficult to implement because the strong interest group who's getting affected by it is not aligned
#
with the reform and something like deregulation is relatively easier to pass through because of
#
the alignment. I think that element is also important to have in mind because much of the
#
reforms that we try to do is to move away from the state intervention and state control towards more
#
free market and open economy, which given this 40 years of deeply entrenched socialist mindset
#
can often become very difficult. And I think that once you have that in mind, keeping that knowledge
#
and then discussing the policy, discussing stakeholder consultations becomes even more
#
important. So that's what I think how I would evaluate a policy.
#
I agree with all of these all wise words. I'll double click on a couple of them.
#
One is, you know, when I was a much younger person, I would look at the bureaucracy,
#
I would see, yes, minister, yes, prime minister. And I would think the worst thing in the world is
#
committee. In fact, they used to have a joke that you call one committee meeting to discuss
#
what to discuss in the next committee meeting. Correct. But now I completely get it. Like
#
everything you said about process, that it should be slow, deliberative, and etc. is very wise
#
because sudden changes will not take into account all the different information from all the
#
stakeholders, etc, etc. It is in fact the height of hubris to think that you know enough to come
#
to a quick decision and to implement it. No, you need to listen to a lot of people. The world is
#
deeply complex. That process has to play out. Otherwise you get demonetization. Otherwise,
#
perhaps you get some of Indira's policies like bank nationalization. You actually need people
#
to sit and deliberate upon all of this. You know, over a period of time, one way in which I have
#
begun to think of myself is an appellation I would apply to some of my heroes in the freedom
#
movement like Gokhale Agarkar Ranade. That they had liberal ends and conservative means. That you
#
want to make the world a better place, but you cannot do that by burning it down. You know,
#
you've got to figure out a way to get there. And especially in a democracy that is important. In
#
a democracy, that process where you're speaking to as many people as possible is important.
#
And what it also does is that it builds consensus or a broad agreement. Everybody at the table feels
#
respected and feels valued, which makes it politically easier as well. And this was the
#
great blunder of this current regime when it came to the farm bills. That had they gone through,
#
because essentially in the policy community, there was consensus on the reforms. We've been
#
speaking about them for 20-30 years. Everybody kind of knew this. And you just had to bring
#
everyone to the table. Bring the farmers especially to the table. The different farmers,
#
the ones who opposed it vocally and the ones who supported it in many other parts of the country,
#
not so vocally. So, you know, that process was super important. The other caution I would have
#
is about the term cost-benefit. You know, my good friend Suyesh Rai at the time of demonetization
#
had made an incredible point. He had said that you cannot do a cost-benefit analysis for
#
demonetization because the cost is on one group of people and benefit, if any, is to the other,
#
the perpetrated benefit. So, in a democracy, you also got to think like this. People are not pieces
#
on a chess board. That isko cost de diya to waha pe benefit hua. At some level, you cannot do that.
#
There are also basic moral considerations that come into play. And we should have come into play
#
in the sense of demon. So, I think that's something to keep in mind. And it's merely an addenda of
#
caution to what you said. I agree with what you said that every policy too often what happens is
#
we think of the intention and we think of the seen effect. At this point, I will link Frederick
#
Basia's great essay, That Which Is Seen and That Which Is Not Seen, because of which my podcast
#
is named what it is. I was inspired by him. And, you know, every policy will have a first-order
#
effect which you see and then further effects which cannot be seen. And you have to focus on
#
the scene. You have to look at the costs and not just the assumed benefits. So, I agree with all
#
of that. And to sort of add my little two bits to that on how I look at policy, when I used to
#
edit the policy magazine, Pragati, my thinking was looking at policy was that like first my,
#
you know, decision for the direction of the magazine was we will never talk about people
#
or parties. We will only talk about ideas or policy. And secondly, one way that with the first
#
heuristic applied to a policy is that does it increase freedom? And if it doesn't increase
#
amount of freedom is the same, is it more efficient? And if it was one of these two,
#
that was probably a good thing. And like you said, when you ask what is a problem meant to solve,
#
one fundamental question I would ask is where is the coercion? And in my experience,
#
whenever you answer that question, where is the coercion? You will find the nub of the problem
#
that is generally, you know, where the fault line is. So these are my sort of, you know,
#
thoughts on it. No, no, I agree. I think on the cost benefit analysis, I do agree with you.
#
I think it also relates to something I said earlier, which is that every reform in some
#
sense is very different in flavor and character, right? So while we can apply one broad framework
#
to evaluate policy, at the same time, there is a wide ranging differences across reforms.
#
So for example, when I think of a cost benefit analysis, take a reform like inflation targeting,
#
it's an example of a reform where the cost is extremely small and the benefits are vast,
#
what is the cost of it's basically the central bank shifting the structure of conducting monetary
#
policy. But the benefits are something which are going to touch almost 1.4 billion people,
#
which is massive, right? On the other hand, take something like GST, right, where the cost of
#
implementing and designing a GST, which is not really a single tax on goods and services,
#
versus the benefits, right, the cost is significantly higher than the benefits that
#
are being accrued. So I think that's that's what I had in mind that maybe it gives a little bit
#
of an useful framework to understand that how do you design implementation? What are the different
#
state capacity or institutions that are needed? How heavy a load is it on the state capacity
#
versus the number of people that will benefit from it? The other thing, and I think this did
#
come up in our very long conversation in this episode is what Deng Xiaoping said, right, which
#
is basically cross the river by filling the stones. Ultimately, I think that is an extremely
#
important sentence to keep in mind when designing any public policy and reform to
#
be gradual, slow, deliberative and do consultations, do discussions and not have that shock and off
#
factor, which really does not work. Oh, I'm just thinking maybe Deng was kind of kinky and he got
#
turned on by stones. So he's like crossing the river by feeling the stones, but never mind.
#
To proceed onwards, we have done a long episode on dream reforms, or actually we did it a long
#
time ago. It wasn't so long compared to this, you, me, Vivek and Shruti. And I have completely
#
forgotten what reforms I suggested at that time. I don't know if you remember yours,
#
but given the context now that you've laid out this entire journey and okay, this is where we
#
are and this is how we got here. What are the reforms that you'd love to see?
#
So before I go to the specific reforms, the couple of things I want to mention on a general
#
point. I think that in fact two, three points. One is that there needs to be restoration of
#
increased levels of engagement between the knowledge community, the public policy intellectuals
#
and the policy makers. If you don't have that, then this whole thing that ideas matter is simply
#
not going to work because ideas are going to come at the end of the day from the knowledge community.
#
So we are at the stage where many fundamental structural reforms are pending. If I use that
#
lens of the path we embarked upon in 1991, just to complete that whole package of reforms and the
#
vision that was there in the thinkers minds at that point of time itself is going to take us a
#
very long time because as we were discussing before the break, many, many things are pending
#
which need to be done. So I just don't think of reforms as something that needs to be done to help
#
us move forward. In the Indian context, I think of reforms as something which is required to complete
#
this process of gradually moving away from state intervention towards more free market
#
participation. And the second thing I want to mention is that I feel in the last few years,
#
and this is very important in the context of growth and investment, there has been a worsening
#
in the relationship between the business community and the government with all the
#
investigative agencies and tax rates, et cetera, which is extremely detrimental.
#
So fundamentally, I feel there needs to be checks and balances and accountability on the agencies
#
so that if there is a fear, and this is, of course, all anecdotal evidence amongst fear
#
amongst the investment community, that definitely needs to be addressed because unless that is done,
#
no matter what reforms you implement, the results are not going to be what is being expected.
#
Having said that, the few reforms that I would include, and since we are dreaming,
#
of course, all politics and state capacity constraints aside, the first thing that I
#
would talk about, and this I have realized now since we did our last Dream Reforms episode,
#
how important this one reform is, which is a reform of the agricultural sector.
#
This is one major sector we mentioned earlier, which was not touched by the 1991 reforms. And
#
this is that lesson, remember, I started off saying learning some lessons from China.
#
This is something that China did, and this is the lesson that we need to learn from China,
#
not the other things that they have done wrong. And there's no country in the world which has
#
been able to sustain a high rate of growth of GDP without reforming the agricultural sector.
#
It's like the unseen, in keeping with the name of your show, it's the unseen when the rest of the
#
economy is the scene. And we have talked about reforming every aspect of the economy over the
#
last 30 years, particularly deregulating and opening up private sector. But what I guess
#
we haven't realized is agriculture effectively is the largest private sector, which employs the
#
maximum highest percentage of the workforce. And if you reform agricultural sector, it's not just
#
about improving the livelihoods of the farmers, of course, that is extremely important, but it
#
also creates enormous demand for manufactured goods, which is what we were talking about again
#
before the break. So it's like we are not addressing the problems in that part of the economy and
#
hoping magically somehow the formal manufacturing sector is going to work simply if we fix some laws
#
here and there and that's not going to happen. In agriculture, the distortions and the level
#
of the state control are mind boggling. For example, the farmers, they face controls every
#
step of the way in a way that corporate India today cannot even imagine. If corporate India
#
today is complaining about regulations and state intervention, agriculture is at a whole different
#
level. Farmers, for example, have no control of freedom on buying seeds, on selling their crops,
#
who to sell to, at what price. There are a lot of vestiges of the socialist economy of 60s and 70s,
#
for example, Food Corporation of India, we've discussed this minimum support price, Essential
#
Commodities Act, APMC regulations, the way all of these work now are effectively to the detriment
#
of the farmers, which is what the farm bills to some extent were trying to resolve. For example,
#
the government will announce MSP on almost 20 crops and ultimately end up procuring less than 10,
#
but what it does is it distorts the incentives of the farmer. The farmers will end up producing all
#
20 thinking that they are going to be getting the higher MSP, but then when the government doesn't
#
procure it, the farmers are not able to sell it. So that's a huge wastage of the time, land,
#
all of that resources. And even if they were procuring all 20s, still a massive
#
distortion, which we've discussed earlier in the episode. Exactly. And not only are there state
#
controls in this whole main activity of farming regarding crops and seeds, et cetera, and selling
#
the produce, there's also a huge amount of distortions and this is where it gets connected
#
to land market. In the whole idea of farmers owning land, farmers, for example, they cannot
#
sell agricultural land. I mean, agricultural land can't be bought. There's no transaction,
#
which means the land use policy has to be changed, which is extremely complicated.
#
The farmers can't even hold land beyond a certain ceiling. So they can't exit the whole land. They
#
can't exit being a farmer and they can't grow within the agriculture either because they can't
#
hold land beyond the ceiling, which is again, it's mind-blowingly restrictive. I remember
#
Niti Ayog has a paper on diversification of rural incomes, which shows that non-agricultural activity
#
now forms a very big chunk of rural income. But if you keep the people locked to their land,
#
then this prevents the acceleration of this diversification. There is something that is
#
happening in the economy and you need to be able to facilitate it and encourage it. But the land
#
laws and the land market is so restrictive that that kind of diversification is not going to keep
#
on happening beyond a point of time. And yet we find that when something like a pandemic happens,
#
majority, like this whole bulk what we're talking about of informal sector workers move to the
#
agriculture, the villages, because that's their social support mechanism in absence of something
#
that is being provided by the government in urban areas, which makes it very hard because if you're
#
already feeding five mouths, now you have to feed a sixth mouth, which is not easy for the poor
#
farming community. So ultimately agriculture is bearing a whole brunt of a major shock and
#
agriculture is creating, it's supposed to be creating the demand for manufactured goods.
#
It's supposed to be providing employment to so many workers and it's only less than 15% of GDP,
#
which means agricultural productivity is also abysmally low in India. But somehow,
#
decade after decade after decade, irrespective of which political party is forming the government,
#
all they've essentially done is provide lip service to agricultural reforms because of course,
#
farmers, everybody wants to be seen as doing something for the poor hapless farmer. So we
#
always had sloganeering and schemes. In fact, incidentally, when they came back to power,
#
the coalition government now, the first thing that they signed was, in fact, one of the first steps
#
that was taken was increasing the MSP for PADI. I mean, that was the first policy initiative taken
#
by the government was increasing MSP for PADI. So that just shows that there is an attempt to be
#
seen as doing something, but of course, it's like you've moved so much away from the farm bills that
#
were being tabled. And if you reform agriculture, A, as I keep saying that when incomes of farmers
#
increase, the demand for manufactured goods increases, and B, when we improve agricultural
#
productivity, farmers move away from agriculture. They're able to leave the locked land environment
#
they're caught in, and they're able to find jobs in the manufacturing sector. That is the transition
#
that economist after economist have talked about has not happened in India. And at some point,
#
we need to start figuring out if it doesn't happen, we are in deep trouble.
#
Yeah, so I'd like to sort of double click on some of these. Like firstly, I've done a whole
#
bunch of episodes and written many, many pieces on agriculture, they'll all be linked from the
#
show notes. In fact, the first episode of the scene in the unseen was called entry and exit in
#
agriculture about exactly that, that you can't enter, you can't exit, that you don't allow scale
#
in terms of corporatization. So everybody is forced to stay small, they can't get out the land
#
point is really important because in India, you cannot sell agricultural land for non agricultural
#
purposes. So that typical move that would happen where you sell land and somebody sets up a factory
#
there, and then that generates employment, agricultural productivity is going up on the
#
one hand on the side, and people are agricultural laborers are transitioning to, you know, working
#
in manufacturing and so on. That's a journey most other developed countries have taken,
#
which is why in India, you have 60% of the people in agriculture, whereas in
#
the West, it's five to 7% and so on and linked to great episodes I've had with the farmer leader
#
Gunvand Patil and also Barun Mitra and Kumar Anand. I had also sort of moderated a sort of a
#
discussion through a series of essays on Prakriti, the magazine I used to edit, Kumar in an essay in
#
that had made the same point that, you know, we have freedom in every aspect of our life, I can
#
buy what I want, make what I want, sell what I want. But farmers have this freedom in none of
#
their things, not in input, not in output, absolutely nowhere. We've spoken about the
#
horror of APMCs before. And Nidal Pandey made another great point in an essay she wrote for me
#
where she pointed out that whenever you look at any crisis in India, one layer below that is a
#
crisis of the women. So if you're looking at the crisis of farmers in India, one layer below that
#
is a crisis of women farmers. And, you know, and that often goes unseen in the mainstream discourse
#
and it's important to kind of look at that as well. So yeah, it's a crazy problem. And when people,
#
you know, when people will criticize the liberalization of 91 and say, oh, inequality
#
is like one, we've addressed inequality, poverty thing earlier, but the other aspect of it is that
#
actually, yes, there was one terrible inequality that happened, that for a large section of the
#
population, you give them more freedom, or in the case of people who were in IT, you didn't
#
interfere much because I was in your field. But in agriculture, where more than half the country
#
lives, you gave no freedom at all. And that's, there's a terrible inequality there. They were
#
not allowed to escape their circumstances. Their land is debt capital. Like the whole problem of
#
not being able to sell agricultural land for non-agricultural purposes is that because now
#
there are so few buyers, because only other farmers can buy it, that your price is much lower than it
#
would be. I had an episode on the right to property with Shruti Rajgopal on episode 26, where she
#
pointed out that sometimes a market price of a land could be 40 times as much as what you're
#
allowed to sell it for, right? That is a crazy distortion that can lead to scams. For example,
#
it is alleged that the Robert Vadra scam of more than a decade ago was basically him buying
#
agricultural land and then getting the land use certificate changed to from agricultural use to
#
non-agricultural use, and then selling it on at whatever multiples of that it would be, right?
#
So regardless of whether he was guilty or innocent in that particular thing doesn't really matter,
#
but this kind of thing is common and this kind of scam is impossible if you don't have terrible
#
distortions like this, because what it means is that the farmer's access to credit also goes
#
down massively to farmer credit, because normally you could do that on the basis of the land that
#
you own, but if you reduce its value by 40 times, then it's like debt capital in Hernando de Soto's
#
words. So I feel that this is one terrible crime of 91 that we did not liberalize large parts of
#
the economy, which affect the poor people and this needed to be done. And yeah, I mean,
#
I agree with you entirely, everything you said. And I would like to add one last point,
#
which is that when we get so busy in providing lip service and then we follow up with actions,
#
which are totally consistent with it. For example, on one hand, you say that you want to double
#
farmer income, farm income, and then you ban exports at a time when prices are rising.
#
I mean, it's just, it really, it kills the community, right? I mean, farmers want to take
#
advantage of the price rises by exporting their produce and even not let that happen.
#
And yet you want to double the income.
#
And there's no coherence to this. At the time of the farm bills, the government also,
#
I think, banned onion exports, right? There is no coherence to this. Then it appears that
#
there are no principles involved. There's no deeper understanding.
#
Absolutely. And that's why I said, like, whenever you're looking at a policy,
#
what's the problem that you're trying to solve? And is this policy action going to solve the
#
problem? So oftentimes, whenever food prices will increase and there's inflation, the
#
instinctive reaction is going to be banning exports. And that doesn't help in more than
#
helping it actually starts causing more distortions and really hurts the poor farmers.
#
The second reform that I want to talk about, and once again, this has been talked about
#
innumerable times, but I think it's important that if you're having a list of dream reforms
#
to include this, which is, of course, factor market reforms, right? Again, something that
#
was not touched in the 1991 reform process. One is, of course, what I was just discussing,
#
liberalizing land markets to enable extensive changes in land use and easy transactions.
#
Second, of course, is freeing up the labor markets to reduce cost of formalization.
#
Because increasingly, as we were discussing, there's a shift towards contractual labor,
#
which is economically or socially not optimal. Third is financial market reforms. We made some
#
progress in this in the 1991 process, which is basically doing some banking sector reforms by
#
bringing in prudential regulations. Definitely a whole comprehensive set of equity market reforms
#
we have discussed about it. But many other things are still left to be done. For example,
#
as I was saying, I think one thing which is extremely important in the financial market
#
reform is coming up with a resolution mechanism for failed financial firms, right? You have a
#
bankruptcy reform for the non-financial businesses, but what if the other side,
#
when the banks and NBFCs are giving loans which are not getting repaid, how do you resolve the
#
problem? And now that the government is talking about privatization of banks, I think it's going
#
to be very difficult to have a successful, even if it happens, it's extremely difficult in and of
#
itself. But even if you end up privatizing the full banking sector, you need a resolution mechanism
#
for failed banks. The other thing that I want to talk about is you have to privatize banks. I mean,
#
no matter how difficult it is, how much of resistance comes from different stakeholders,
#
the last 10 years showed that when you have an overwhelming government presence in the banking
#
sector, it just cannot work well, right? So you have to get the state out of the banking sector,
#
and that is of paramount importance. And I'm glad the government is at least talking about it. And
#
one can only hope that it will materialize at some point of time. Anything you want to add?
#
To this particular reform? No, you have more reforms?
#
So carry on. I mean, obviously I completely agree with you.
#
The third one I want to talk about, which is of course related to my pet peeve that I was saying
#
earlier, which is opening up the economy, right? The capital account to goods and services exports
#
to FDI, because there is still a historic opportunity that we have because of the China
#
plus one strategy, right? Yes, it's been five, six years, which is a lot of time in and of itself.
#
And there are a lot of energy of multinational companies who are wanting to move out of China,
#
looking for alternative options, which is where all these Vietnams and
#
Thailands and Philippines and Mexicos of the world have benefited from it.
#
India is a vast country, right? Our biggest resource is labor, right? And it's not expensive
#
labor. And we want to make the shift at some point of time, as I was saying, from agri to
#
manufacturing, we have to create millions of jobs. You can't create millions of jobs in services
#
sector, even if services sector is doing spectacularly well. You don't want to create
#
millions of jobs in agriculture for reasons we just discussed. You want agriculture to be highly
#
productive sector, but you want people to move away from agri towards manufacturing.
#
And this is an opportunity where given the domestic demand is low, but even if the domestic
#
demand revives, you still have another massive source of global demand waiting for you and this
#
massive opportunity. The question that I think we should ask at this point of time is, why is
#
India not being able to take advantage of it? It's just, it baffles me when I think about it,
#
that when the opportunity is there, something that we have been lamenting for 20 years,
#
that China took off, we couldn't, we are only stuck in services, now the manufacturing bus is gone.
#
If we keep on saying the manufacturing bus is gone, but the thing is we are taking policies,
#
which are counterintuitive. We are turning more protectionist when increasing tariffs. We're not
#
signing free trade agreements with our leading most important trading partners. We are not rolling
#
out the red carpet for MNCs to do FDI. If you look at FDI data, Amit, it is shocking. Last couple of
#
years, FDI globally has declined predominantly because China, FDI in China declining because
#
MNCs are pulling out of China. But FDI in India particularly is so stark. It has, it just, I mean,
#
declined significantly more than it ever has. Even forgetting last year or last couple of years,
#
over the last 10 years, the FDI to GDP percentage in India is stagnant at 2%,
#
which is just mind boggling again for a country which needs investment. If domestic sector is
#
non-investing, you want the foreign guys, the MNCs to come and invest. Of course, there are common
#
problems across both, policy uncertainty and all of that. But my question is that you have this
#
opportunity. Why would you not take steps to leverage this opportunity? I've heard many of
#
my friends and colleagues give this argument that no, but US is imposing protectionist measures
#
against China and they are providing industrial subsidy. I have two ways to counter that argument.
#
One is that US is at a very high level of per capita GDP. And they are doing very specific
#
things targeted at China. Because there could be a legitimate worry for China dumping
#
goods in the US or legitimate worry that China is developing one particular industry
#
in a way that that is not really helping the US manufacturing industry in electrical vehicles,
#
et cetera. But we are not at that level. Even if there is an evidence that China is dumping in
#
India, if required, maybe just use protectionist measures against that particular sector where
#
there is evidence of China dumping. But you can't use that as an excuse to slap tariffs on more
#
than 3,000 items. You want to be able to grab market share. The global trade in goods exports
#
is more than $30 trillion. India's share is less than 2%. There is huge opportunity for us to even
#
increase from 2% to 5% if you go that itself is a big deal. So that's the vision that you should
#
have. And the second argument I'd have is something that I think most of our mothers tell us that
#
if your friend is jumping off the roof, are you going to follow her? No. Just because some
#
country is doing something doesn't make it a great policy and you don't have to emulate it.
#
So if you want to emulate something at all, understand that exports are a massive way to
#
supplement domestic demand. So I would say agriculture, factor market reforms and
#
opening up the economy. I said trade in goods, particularly FDI and also capital account.
#
We have to understand something that whenever we complain about having a high current account
#
deficit, because our imports are more than exports, having a high current account deficit
#
in and of itself is not a problem. It is a problem when you don't have enough capital flows coming in
#
to finance that deficit. If you open up capital account commensurately, then you will have foreign
#
investment coming in. India is a very attractive investment destination given our growth prospect.
#
But from time to time, we will keep experimenting and imposing capital controls,
#
which doesn't help because it creates policy uncertainty. And that's the last thing that
#
foreign investors would need. So when you've embarked on this path of moving towards market
#
economy, why would you do it in such stops and starts and keep on citing the excuse of volatility
#
and then actually end up causing more distortions in the system? It's like I told you,
#
your option is, okay, you have a car. Would you just rather park it in the garage because you're
#
too scared of having accidents? Then why have the car at all? Let's all go back to where we were in
#
the 70s and 80s and just shut down many of these markets. But that's not what we want to do.
#
So if you want to become a developed economy by such and such here, and that's the aspiration
#
that you're selling, then these are the initiatives that you need to take to be able to reach there.
#
But if there's an inconsistency between the vision and the steps that are being taken,
#
then it's not going to work out, right? I mean, that's the way to think about it.
#
You want to add something to this? Yeah, I think Bengali mothers have some
#
guidebook on what to tell your children and X situation, Y situation, because even my mom
#
used to say, if I would talk about something my friend is doing, she would say, if he jumps off
#
a roof, will you jump off a roof? So this is most familiar. And I completely agree that just because
#
there is right now a wave of populism across the world, and the US also has grown more insular. It
#
did under Trump and perhaps Trump is going to come back and it's going to go down that way.
#
By the way, you mentioned those, some of the arguments against China is even if they have
#
legitimate reasons, none of those reasons are legitimate. There is absolutely no reason to
#
stop trade with others. More trades are more positive, some interactions, they are always,
#
always good. So even if no one was to reciprocate, we should just open up our borders to goods and
#
services, you know, because it will help our people. That is the only thing that matters,
#
you know, the more they have access to global markets, the more we'll be better off. So,
#
you know, I couldn't agree more with that. And my one big reform, I would kind of add to all of
#
this is not something specific, but just a mindset reform that too often in India, like I often say
#
that the biggest religion in India is not Hinduism, it's government, that we have faith in the state
#
that whenever something goes wrong, we think, oh, the state will solve it. Even if the state caused
#
it in the first place, we'll say, yeah, but the state only will solve it. And that default mindset
#
has to change, you know, that whole status, my mindset has to change, we have to, you know,
#
start behaving more like citizens rather than subjects. And when it comes to policy, we have
#
to look at outcomes and not just intentions. Otherwise, we will just get, you know, swept
#
away by whoever fights a better narrative battle. No, I completely agree. And to add to that last
#
point, Amit, that you're making, see, in developed countries, right, the consumers have been
#
interfacing with the market directly for a very long time. So and they're comfortable with the
#
model by now. So as and when there's market failure rises, the state intervenes. By and large,
#
the state lets the market operate, and the private sector develops and flourishes. And of course,
#
the extent of state intervention differs depending upon which political party is in power.
#
But fundamental principles governing the relation between state and market remain unchanged. But in
#
contrast in countries like India, right, especially given what we have been discussing the history of
#
the first 40 years, there's a long history of democracy, but the twist with capitalism
#
is relatively new, right. And and what happened as a result of this first few decades of socialistic
#
economic model, when the state owned, controlled, managed everything, is that decades of that muscle
#
memory about the state being the most important entity in economic affairs, that have arguably
#
gotten entrenched in the mindset in the psyche exactly as you're referring. And that is how the
#
consumers, the normal people, the electorates views have also gotten shaped. And this becomes an
#
an ingredient in the tensions of policymaking in today's India. This creates an inertia against
#
the development of new markets and nurturing of even existing ones, right. So oftentimes we see
#
that if, so for example, in the global financial crisis instance, right, of course, the crisis was
#
absolutely horrible. And I'm not defending whatever led to the crisis in terms of the
#
financial innovations like credit default swap and etc. And of course, we all felt very relatively
#
good about the fact that India was much more untouched by the crisis compared to many developed
#
countries. But having said that, we should not use that as an excuse to say that a financial
#
innovation is bad, right, because it leads to crisis. And therefore, let's ban everything,
#
stop everything, don't let new products develop, new markets develop, because exactly that car
#
example, we want our country to be safe. So this constant tussle between the stability, safety versus
#
growth is something that we'll have to address in our policymaking process. Because what we are
#
always fighting against is this socialist mindset that you mentioned. And that's why I find that
#
post-91, it is true that the state has attempted to move away from several sectors. But the
#
political economy is getting shaped by decades of this statist mindset amongst the populace,
#
which repeatedly proves to be a challenge, even this privatization of banking sector, right.
#
Because you and I both know that there's going to be enormous resistance against it. The economic
#
logic is absolutely sound. Nobody's going to debate that. But there's going to be an enormous
#
resistance against it exactly because of this mindset problem, right. And the decision will
#
always swing in favor of the politicians whose objective function is influenced by what the
#
common man wants. And that is always the trade-off in a democracy like India. So I find that is
#
almost like the larger question that when this is our background, this is our history, and we are
#
a victims of that muscle memory, in that environment, how do impactful reforms take place,
#
which will help build markets and foster capitalism? I think that's, I mean, it's not
#
like I'm looking for an answer. I feel that's the grand question that all of us need to ponder
#
about, that this is sort of like a challenge that the policymaking process in India is confronted
#
with. These would be great words to end on, but we cannot end. There are two more sort of broad
#
questions to go. And my penultimate question, which I'll answer first, and then you can go,
#
I'll very briefly go through my recommendations, is really not the standard question I ask at the
#
end of every show where I ask my guests to recommend books, films, music that they love.
#
But I want to ask you to recommend resources which you feel will be useful for people who've
#
heard this entire episode. Like if you think of this episode and its show notes, which we're
#
going to make pretty exhaustive. If you're going to make it like a one-stop shop to begin understanding
#
and to get a foundation of what the Indian economy is like, what resources would you add to that?
#
I'll give my quick answers. I will, of course, link all episodes of The Scene and the Unseen and
#
Everything is Everything, which are about this subject from the show notes. You know, among
#
Indian books, a book that was eye-opening for me, which perhaps 25 years ago was India Unbound by
#
Gurcharan Das, which is a great book to get a sense of the economy until then. But among modern
#
books, I keep complaining that there isn't a body of knowledge that is being built up in the current
#
time. And I think that that is supremely important and in an Indian context. And two great recent
#
books that have come up in that category in recent times are In Service of the Republic by Vijay
#
Kelkar and Ajay Shah, Friends of Ours, a masterful book, How to Think About Public Policy. There's
#
also a wonderful graphic novel called We the Citizens by Khyati Pathak, Pranay Kutasane and
#
Anupam Manor. They're all fine thinkers. It's a wonderful book that anyone can understand. I mean,
#
they've done a masterful and underappreciated job of making complex ideas simple without being
#
simplistic. So do pick up We the Citizens among books from elsewhere to understand the state.
#
I recommend Seeing Like a State by James C. Scott. I recommend All the Papers of Land Pritchett,
#
which I'll link from the show notes. I think they are remarkable. He's a great mind. You can
#
listen to my episode with him. There's Milton Friedman's Free to Choose, which is a great book.
#
There's a British writer called Eamon Butler, who has a bunch of primers. And I will link to
#
his primers on Milton Friedman, on Frederick Hayek and on public choice theory. And he's got
#
a bunch of other primers as well. But these are like you can read them in one hour and it will
#
give you a great sense into the ideas of all of these people, which I think are super important.
#
I'll also recommend a wonderful book by a friend of mine, The Clash of Economic Ideas by Lawrence
#
H. White. And this is about it's essentially a history of economic ideas over the last century.
#
And Larry White is a great scholar. And this is also a great book to give a lot of perspective.
#
So I did promise to be brief, but I think I quickly went through all of these names. I'll
#
link them from the show notes. They're all great books and you should read them all.
#
And Amit, of course, many of the books that you recommended are common to what I was going to say,
#
for example, Seeing Like a State is Fantastic, In Service of the Republic, Milton, all of that,
#
right? So in addition, I would say that in the Indian context, there has been a whole
#
series of fantastic autobiographies, for example, Montek's book, then Subbarao, then Y. V. Reddy,
#
Ishar, Aloalia, Padma Desai, then Rakesh Mohan's book on 25 years of reforms. I mean,
#
the chapters by some of the experts are absolutely great to read. In terms of history, Tirthankar Roy,
#
absolutely fantastic economic historian, The Business History of India, couldn't recommend
#
Amit, couldn't stop recommending it. Then going outside India, I would say
#
one economist and policymaker that I deeply respect is Ben Bernanke. And the way he handled
#
the global financial crisis, the kind of negotiations, political negotiations that he had to do,
#
I thought was absolutely mind boggling. So any book by Bernanke during that period, for example,
#
Courage to Act is a worth read for anybody who's interested in understanding how do policymakers
#
navigate a very volatile situation like a global financial crisis. I forgot to mention in Indian
#
context, of course, you have had an episode with her as well, The Lost Decade by Pooja Mehera.
#
I don't think anybody else has written a nice detailed book to capture that period of Indian
#
history. Also Whole Numbers and Half Truths by Rukmini S, which is fantastic in terms of data,
#
since we talked about data quite a bit. They both have episodes with me. In fact,
#
Rukmini said that it was my first episode with her that sparked her to write the book.
#
Wow, that's fantastic. Maybe this episode is going to spark me to write some book.
#
Yeah, will you please? Will people on Twitter kindly add Rajeshwari because wouldn't this be
#
a great book? Like I would not be talking about In Service of the Republic and We the Citizens,
#
I'd be talking about three books if you had written this.
#
That is incentive enough, Amit. And continuing on it, since we talked about banking and banking
#
is something that I'm extremely interested in and I've studied, I've been studying it and learning
#
about it quite a lot in the recent times. There's a book called Fragile by Design by
#
Callum Maris and Habba about the great bargain between state and the financial sector,
#
which applies very nicely in the Indian context as well. You mentioned Milton Friedman Hayek,
#
so I'm not going to repeat it. But at the same time, there are books on Keynes,
#
which are absolutely fantastic to read. So for example, Seven Lives of John Maynard Keynes,
#
John Kenneth Galbraith has written A Life in Our Times, absolutely great. Also by Galbraith is The
#
Age of Uncertainty, that whole period of Great Depression, Second World War, etc. Since we are
#
living in a whole different kind of uncertainty now with climate change, AI, global geopolitical
#
tensions and whatnot, I think that's again a very suitable book to read. So I think this is
#
what my list would be. And yeah. Yeah, that's a wonderful list. And
#
so here's my final question. I often think about my approach to the world
#
as coinciding with that great phrase, pessimism of the intellect, optimism of the will.
#
You look at the world and you look at everything that's going wrong, there are
#
reasons to despair. Time moves fast, the state moves slowly, we've been going in the wrong
#
directions, people's default mindset is wrong. There are many, many reasons to despair. But
#
the pessimism of the intellect has to be matched by an optimism of the will, that you have to keep
#
doing whatever your dharma is. And a lot of people that I respect and admire in this space,
#
think of themselves as playing a long game. There's no immediate reward in it for them,
#
but they do what they do because you kind of got to do that because you can't just lie back
#
and be apathetic and etc. And I admire that greatly in many people I've seen, including
#
your whole community of economists and thinkers and policy people and so on and so forth.
#
So what is sort of your journey dealing with both pessimism and optimism? That on the one hand,
#
you can intellectually convince yourself that I should be optimistic and I should keep acting
#
and I should not think of the fruits of my actions. But on the other hand, it is common to so often
#
get completely dismayed by what is happening around one and just say that screw this man,
#
I don't want to get involved in this shit, nothing is going to happen, the world is going to hell,
#
we are all going to die. Okay, so let me answer that question, Amit, by saying a little bit about
#
how I came upon doing what I do now. So it's a bit of a digression, but it might help to throw some
#
light on what I'm going to say. When I finished my PhD from the US in 2011, and I started the
#
episode by saying I came back thinking I was going to ride the great Indian growth wave,
#
which I'm still waiting for. Personally, after coming back, the first two, three years were
#
extremely depressing. I mean, if depressing, it was a bit lonely. I didn't really know a whole
#
lot of people in India because I was already abroad for five, six years. I didn't have a
#
community that I could belong to. So I was in that usual American PhD mindset of writing papers and
#
getting publications, which also was a little bit hard because at that point of time, much of my
#
research was using data from the US, et cetera, a little bit from India. So it just felt so
#
disconnected. I'm sitting in India, but I'm looking at journals in the US and working with
#
people who are located far away. I almost felt like a glorified RA at that point of time because
#
I'm working with a whole lot of professors. So it just didn't fit right. I came back from the US
#
because I just couldn't relate to the US Academy community and the way that operates. And I wanted
#
to be doing something different. But when I came back to India, I found that it was extremely
#
difficult. And this was also, mind you, when you're reading the newspapers around 2011, 12,
#
all you are coming across is corruption scandals and scams and policy paralysis and nothing much
#
is moving. So it was generally the environment was quite disappointing and disheartening.
#
So I remember I almost came to the stage where every quarter or every year, I would keep thinking
#
that maybe I should move back to the US because nothing much is happening here.
#
What work am I doing? I wanted to create impact and do something meaningful in India. That was
#
always the underlying current, but I found it very hard. But then as luck would have it,
#
sometime around 2013, 14, I ended up meeting a bunch of absolutely fabulous people
#
at the institute where I'm currently working. And I was just completely taken in by the kind
#
of passion they had to understand the Indian economy, to understand what are the different
#
issues? What are the policy constraints? How can we impact the policy making process?
#
That knowledge community that I interacted with was completely different from what I had found
#
in the US. In the US, it's a very different game. Like academicians are doing journal publications
#
and policy ones of DC are doing something else. And here I found that there is this community
#
who's not so much bothered about just writing papers that maybe not many people will even read,
#
but just for their own glory and getting citations. But they were actually interested
#
in getting plugged into the Indian policy making process, which is very hard because
#
you have to understand this whole messy democracy. How does policy work? What are the different
#
issues? But it was just fascinating. And then again, as I started interacting with them and
#
as I started talking to them, the bankruptcy law happened, the whole committee of the IBC.
#
And I became a part of it because I was deeply interested in that. And that I feel was a complete
#
turning point in my life because that changed my mindset to think that I was going to go back
#
to the US to thinking that, no, I want to be in India. I want to study the backyard of the
#
economy. And I want to figure out what are the important issues that are worth investigating,
#
worth analyzing, irrespective of the data constraints. And from then on, I think the
#
purpose and the objective became that I want to understand the Indian economy in whichever limited
#
way I can and basically pursue truth. I think that's why I'm relatively less affected by
#
the political process. I don't get so disillusioned or disappointed by what is happening because
#
my goal ambition is not to be a part of that. My goal ambition is to be the intellectual thinker
#
where I can write, I can pontificate, I can think, I can teach. I love teaching. And I find teaching
#
is a great way to learn. I'm constantly learning through my courses for my students.
#
And also, as I said, ultimately, the objective is to understand various facets of the economy and
#
pursue truth. That's, I think, the overarching objective that basically keeps me going.
#
So in that process, since you asked the question about hopes and worries kind of a thing,
#
what is, I think, as I've been discussing, there are several worries about the Indian economy that
#
would deeply concern me, like most of us. We all think very similarly. And the general worry that
#
these days really I've been thinking about a lot is the way the intellectual discourse has gotten
#
affected by polarization, where you can't go to an event or a conference or a gathering or a forum
#
and openly and objectively analyze evidence and data and come up with conclusions because
#
there is something else at work as well. And that worries me, what group you belong to,
#
what side you're taking. That is something that deeply worries me. That's not something
#
that I had seen when I first started working on the Indian economy. But having said that,
#
I think what at a larger level gives me hope is that despite everything that has happened
#
in this country, and we have discussed so much of history, we have held on to democracy in a
#
remarkable way. I think India is a massive success story in democracy, despite being a country which
#
was in colonial rule for 200 years. And how far we have come, for example, in our own lives.
#
Our own lives have gotten massively transformed from our old childhood days we were discussing
#
at lunch of the 80s and 90s in India to what we do today, the kind of privilege we have,
#
the facilities, the amenities, and not just we, everybody in general. So how far we have come in
#
our own lives, the fact that we've held on to democracy, and the fact that we could do reforms
#
in a messy contentious, fractious democracy, climb out of extreme poverty, move from a situation
#
where we were dependent on food aid on other countries. And today we are self-sufficient on
#
food. We have a semblance of a private sector which is working. There is a massive amount of
#
dynamism that has been infused in the economy. It is an Indian version of a vibrant capitalism
#
with all its problems. I feel that journey that we have done is absolutely spectacular.
#
And of course, there's a whole long way to go. And I just hope that we don't go back on that
#
journey. I think that would be worse than not doing reforms. We shouldn't undo the progress
#
that we have had till now and go back and repeat the mistakes of the past, which is why we decided
#
to do this episode as well. As long as I feel we are moving forward, we may not have
#
Big Bang major reforms under every government. They are political compulsions. But as long as
#
we are moving in the direction of gradually reducing state intervention from the market
#
and letting the market operate, I think we will be fine. And that's why I remember starting this
#
episode also by saying that the goal shouldn't be to get 8% GDP growth rate in 10 years and become
#
such and such country. I think the goal should be to grow at this steady, even if it's 5-6%,
#
for the next 40-50 years and simultaneously keep building institutions and keep doing many of these
#
deep structural reforms which are pending so that we reach a stage where after that we can keep
#
doing incremental changes. But that process should not get affected. That process, we shouldn't go
#
back in that journey. I think that's the vision that we should have in mind.
#
So, you know, normally when an episode gets this long, it is partly because I do these oral
#
history episodes where I talk about someone's life and all that. In this episode, of course,
#
we decided that one, we've already discussed your life before in previous episodes and two,
#
let's stick to the subject and make it super deep dive into that. But however, I am going to come
#
to the personal for one more question, which is not just a personal, but it also it's a human
#
question, I think, which is this, that in every field that I look at, most people in that field
#
have learned what they have learned and then they are static, they are going through the motions,
#
they are ticking boxes and they are following whatever their incentives are. And I see this
#
even in academia where for a lot of economists, especially those trained abroad, the incentives
#
are towards things that don't actually have them interacting with the real world. You know,
#
if they remain in academia to get tenure, they have to do X number of papers and X number of
#
journals, a certain kind of turgid language is expected, they are expected to specialize and go
#
deeper and deeper, you know, wheat production in southwest Africa in 1876, that kind of nonsense,
#
which has no relation to the real world at all. And they get stuck in those silos. And, you know,
#
often they follow the fashions of the day in terms of whatever ideological imperatives there might be
#
for them wherever they are. And there are great minds wasted and lives wasted doing just that.
#
And I think of that in the context of India and economists from India or in India, where on the
#
one hand, there is that game being played, where people are chasing academic advancement, people
#
might be following the fashions of the day, which in development economics have gone in an entirely
#
crazy wrong direction in terms of kinky development and not national development, as
#
Lant would say, you know, not tackling the core problem of poverty just because it's too difficult.
#
And all of this gives me a certain amount of despair. But it is also for me a cautionary tale
#
that if there are young economists listening to this, I want to tell them that do what is important.
#
Don't do, you know, don't just follow that career path that you will do well in your career and
#
you will get your grants and you will become assistant professor and then professor and
#
etc, etc. And, you know, don't follow that. But think of the larger scheme of things that when
#
you end your life, what do you want to have done? You know, do you want, you know, citations and
#
publications and obscure journals? Or do you want to have made a difference in the real world,
#
even if it's hard to quantify? Do you want to have made that difference? And I want to ask you what
#
you think about this, because at one level there is, I think, a selection bias because
#
you are with the awesome community of people who were in our NIGID, our Susan Thomas and her entire
#
team, Ajay Shah and his entire team, all of these people who I find, I interact with regularly and,
#
you know, there's passion and there's purpose and all of that. To me, they're outliers. They would
#
deny that. To me, they're outliers. And I think part of their job is also to kind of create more
#
outliers like themselves, to build that community, to grow that community so it's not a fixed bunch
#
of people. It's always expanding and you don't know where the magic will happen, but you have
#
to let a thousand flowers bloom. What are sort of your thoughts on this? I know you don't think of
#
yourself in grandiose terms and higher purpose and long game and all of these things, but nevertheless,
#
what is your thinking? There is definitely a sense of purpose that drives this group. There is
#
something more. These are not people ticking boxes. Everyone I named and everyone in their
#
teams could have a job that pays them 3x, 4x, 10x more, right? So what's the deal? Tell me a little
#
bit about, you know, your thinking about this and if there are young economists or young policy people
#
listening to this who are like, yeah, I fucking care about the country.
#
So what is your advice to them? What would you say?
#
A fantastic question. I mean, very thought provoking. Let me first say that what you just
#
described, what some of these people have done is extremely hard, right? They are truly the outliers
#
and I'm not just saying this particular group. There are other groups in the country as well.
#
This is very hard because the way the industry is shaped by industry, I mean the academic industry,
#
right? The way the incentives are shaped is that unless you get publications in the top journals,
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you will not get a promotion. And of course, everybody ultimately has to fend for themselves,
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right? We are not getting grants and charities from other organizations. Somebody said,
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do whatever you want to do. So we are bound by the constraints of this industry where to get
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a promotion, to get a tenure, even in India, you have to publish, you have to count out to the
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editors of American journals who may not care at all about what is happening in India. And you also
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meet your peers in conferences, et cetera, and you are evaluated by your CV, which is the number
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of publications you have. It's a race, it's a game, right? Like an industry. And in academia,
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the stakes are low because in India, the monetary incentives are abysmally bad.
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So then everything is defined in terms of publication status and it's very,
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very hard to not be a part of the game. I have to say that, right? So my advice to the young
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people who genuinely feel that they care about what is happening in the country, I think first
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of all, that kira, right? That thing is extremely important to have. Either you have it or you don't,
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right? Either you have something in you going off saying, oh, but I really,
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really want to follow what is happening in the economy because I want to understand it.
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Not just because I want to earn a name for myself as an expert and I want to write five op-eds,
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simply because I just want to understand and make sense of the world. That is what drives me,
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for example. Even before I think I want to disseminate knowledge using a panel discussion
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or an op-ed or an article or a paper, the first thing that drives me is if I read a particular
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news or if something is happening, can I make sense of it? Can I explain it to you in layman's
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language to my students? And once I've understood it, then I feel, okay, fine, let me write something,
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let me do something about it. So I think that drive is extremely important that I want to
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understand what is happening in the Indian economy. If you don't have the drive,
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then it's impossible to get it later on in life. I almost feel it's either there or it's not there.
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The second thing that I would tell young people that if you have the drive, if what is happening
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in India is truly something that you're interested in, that you care about. The other thing you have
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to understand is academia is a very strange profession where there are no deadlines and
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deliverables like corporate India. If you do this, you get a bonus or if you do this,
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you get a promotion immediately in the next two years. There is a certain time slow process and
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you have to be extremely self-motivated. Now, either you use the motivation of a journal
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name in your CV or you use the motivation that I want to just stay deeply plugged into
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what's happening in India. And that's what I'm saying. Which way does your motivation swing?
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That's very important. And the second thing is if you find that you are genuinely motivated
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in understanding and that's the key that's working in your brain, then you have to strike
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this balance, which is what many of us have done. That to some extent, yes, you have to write the
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papers, you have to get the journal publications because you also need to retain a job, you have
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to get that whole promotional cycle. You need to be plugged into some extent to academic community
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also because sometimes interesting ideas germinate there too. It's not like they're completely
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detached from reality. That's not true. There is a lot of interesting discussions and ideas that
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you can get by talking to your academic colleagues as well. And you should not cut yourself off from
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that community at all. And the kind of rigor that happens in the academic community and economics
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is fantastic. So it's also a challenge to be able to say that, can I participate in the rigorous
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process? And can I use data and evidence in a rigorous manner to come to some conclusion? That
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is also a massive high in some sense. So I think to some extent, you should stay plugged to that
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community. And the important thing to remember is exactly as you said, interact with the real
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world people. And by the real world people, I mean the practitioners, the industry people,
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the financial sector people, the policymakers, to the extent that you can, so that you're constantly
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understanding, okay, this is what they're bothered about. These are the real issues.
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And can I convert that into some research idea, as opposed to reading some literature and finding
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some gap and writing some esoteric paper? So that's the balance, right? You stay in the
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academic community, but the questions on which you write papers, if to the extent possible,
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can they come from their own backyard? Can they come from talking to the real world people? And
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yes, these may not get you the top publications, get some pubs out of it. But again, do some
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esoteric question pursuit, whereas you also get, because you get credibility even in the policy
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community in India by journal publications. That's the distortion, right? I mean, that's,
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you can't run away from it. And it's okay, you don't have to also. But if you can strike a balance
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like that, I think that's sort of the holy grail. But as I said, the important thing, and this is
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very hard, is to find a community. We can't do this alone. Nobody can do this alone, right? You
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need to have a community to talk, to idea, to be mentored. I've had fantastic group of mentors,
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luckily, in the last 10 years. So having that mentorship and having that community that you
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can talk to and to just discuss and brainstorm and ideate without constantly thinking what is
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the output that I'm going to get out of it, that is very, very critical. So it's hard. It's probably
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much harder than saying, as I said, I'm just going to find a gap in the literature, apply my
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technical knowledge and write a paper. But I feel that is a much more satisfying and fulfilling
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purpose to have. If that Kira in your head is, no, I want to understand this extremely interesting,
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fascinating, dynamic economy, but every week something new or the other is happening.
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And it's worth trying to make sense of it. And wise words, especially about community,
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it takes a village to build a city. So, you know, well done getting here, we are done with the
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episode. How does it feel? Like, do you want to give a victory speech? This is the longest episode
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in the history of the scene and the unseen. I feel I'm like after 10 years of trying to
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understand and study the Indian economy, I'm done. I should just go and retire. No, I'm of course
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kidding. But I think this was a very, very satisfying experience. I think to bring all
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of this together and to talk to you about this across hours, I didn't even realize how many hours
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went by. I think this has been a very satisfying and fulfilling experience. And this is why I do
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what I do. I mean, to have this kind of a conversation and make sense of the world
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in the way that I understand. I'm not saying everything that we discussed is right. There's
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no right and wrong. There are views and opinions, right? But I feel this is why I do what I do.
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And that is why it has been an extremely satisfying experience. So thank you so much for this.
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Yeah, this episode is a labor of love. I just want it to be useful for many, many people. And
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dear listeners, if you've appreciated Rajeshwari's putting in all the hard work in doing this. And
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it's not even nine hours of work. It's a lifetime of work. It's a lifetime of learning.
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And you distill all of that. And you sort of come to the point where you can do this. So one,
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thank you for doing that. And two, if gentle listeners, if you want to let Rajeshwari know,
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tweet to her or whatever. I'm not on Twitter. You're not on Twitter. So how will they let you
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know? Let Amit know. Okay, fine. Let me know that you appreciate the episode. But that's why you're
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so productive. You're not on Twitter. So thank you. This was great. Thank you so much, Amit.
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If you enjoyed listening to this episode, share it widely share it with anyone you think might be
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interested. Check out the show notes. I put a lot of work into them. Enter rabbit holes at will you
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can engage with all of Rajeshwari's work there as well as past episodes of this show, and a lot of
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other great resources. Rajeshwari doesn't seem to be on Twitter, but you can follow me on Twitter
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at Amit Verma, A-M-I-T-B-A-R-M-A. You can browse past episodes of The Scene and the Unseen at
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sceneunseen.in and all podcast apps of your choice. Thank you for listening.
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Did you enjoy this episode of The Scene and the Unseen? If so, would you like to support the
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production of the show? You can go over to sceneunseen.in slash support and contribute any amount
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you like to keep this podcast alive and kicking. Thank you.
