You say in the first seven years of UPA, the economy grew at 8.4% and 138 million people escaped poverty. What happened later?
The growth momentum of the first seven years was remarkable, but economies have ups and downs and there was a down turn in the last three years. The global downturn after the Eurozone crisis in 2011 was one explanatory factor, but the system also ran into domestic constraints. Regulatory constraints prevented large projects from taking off. That problem continues even today. Allegations of corruption after 2011 also altered the political atmosphere. By the time of the election, the mood of the country turned completely against UPA.
Looking back, many positive developments in the earlier years were simply swamped. Look at the telecom story. The CAG came up with unrealistically large estimates of revenue losses and public opinion came to the view that not auctioning spectrum was a big mistake. However, the experience around the world was not that auctions were the best method and in any case, the TRAI had not recommended auctions. I have mentioned in the book that some of the decisions taken in allocating licenses were questionable but the real question to ask was whether the telecom policy succeeded in its objective of expanding telecom access. From that perspective the policy was an outstanding success but this was never brought out in the public debate.
The rules have always been ambiguous. Even the current government is struggling.
I agree that many of the problems we face arise from the fact that our rules and regulations are very poorly drafted and are open to multiple interpretations. This is true of environmental regulations and also our tax laws. We do not put enough high quality effort into converting policy intentions into specific regulations that are clear and transparent. Regulations that can be interpreted in different ways are a recipe for people trying to manipulate the rules while others claim that the rules have been violated. The result is a multiplication of disputes and litigation. It is also a vicious circle that lends itself to allegations of corruption which then acquire a life of their own.
How different has NDA been in pushing reforms?
As far as programmes are concerned, the NDA has more or less maintained most of the earlier programmes though many of them have been renamed and modified in some ways. The question to ask is whether they are being better implemented. This calls for credible independent evaluation.
GST is an important tax reform which was actually put on the agenda by the UPA but opposed at that time by the BJP ruled states. Be that as it may, I think it is good that the Constitution was amended to enable GST but I feel the design of the GST has got mangled with far too many rates and heavy compliance obligations on smaller firms. Demonetization is called a reform but in my view it was a negative development which imposed a huge and unnecessary burden on the informal sector.
The insolvency and bankruptcy code is a very important reform. I hope it proves to be a success.
There are some areas where the NDA government has actually reversed the reform process. The decision to raise import duties, with the possibility of further increases ahead, is a major reversal of the policy of gradually reducing import duties, which has been in place for thirty years and was followed by several governments including the Vajpayee government. It is not consistent with the objective of improving export performance and joining global value chains.
I also think it is a pity that the government has not joined RCEP. Asia is the one part of the world in which growth is expected to be high and which still remains open. Not joining RCEP is a negation of the Act East policy which was meant to replace the Look East Policy.
On economic issues, does BJP seem left of centre?
This right-left binary has become a little jaded. I think you are implying that the BJP was expected to be more pro private sector but it isn’t. Part of the problem is because, in the words of Arvind Subramanian, the private sector is now “stigmatized”. As Amartya Sen has said, India doesn’t really have a genuine right-wing party in economic terms.
In the Vodafone retrospective tax case, didn’t you advise finance minister Pranab Mukherjee against it?
I was called in to give some ideas for the budget. There was talk at the time that the government might bring in an amendment to overturn the Supreme Court judgement. I used the opportunity to say that if we wanted to change the law prospectively there could be no objection but we should not do so retrospectively to overcome the Supreme Court judgement.
Isn’t the banking structure unchanged?
I have said in my book that banking sector reform is a major task ahead. We have not seen any serious reform of public sector banking. Public sector banks are subject to dual control, by the Finance Ministry and the RBI. The Reserve bank does not have as much control over public sector banks as it does over private sector banks. That asymmetry vis a vis the private sector is wrong.
The PJ Nayak committee had recommended that if reducing government equity to a minority is not politically feasible the government share in public sector banks should be put into a holding company. That company should then appoint the chairman and top managers, not the ACC (cabinet). If the chairman of the bank is not beholden to a joint secretary within the finance ministry he will behave differently. I think the time has come to recognise that the bureaucracy in the finance ministry adds no value to the quality of banking.
You were the author of an early reforms blueprint, the M document. What lessons can today’s policy makers learn from your experience?
In the last year of the Rajiv Gandhi government, we felt that the economy was not responding as much as we thought it would to the reform initiatives. I came to the conclusion that it was because we were pushing individual reform initiatives and not pushing for a core set of mutually supportive reforms as a package. When V.P Singh became Prime Minister he asked me to prepare a paper proposing an integrated reform package and I prepared a 34 page paper, which proposed a set of core reforms: reducing the fiscal deficit, liberalising industrial licensing, decontrolling imports, and moving to a flexible exchange rate. The paper was discussed in a committee of secretaries. Some were totally against it, but others were supportive. It taught me that a clear statement about the direction of reforms can run into opposition but it can also meet with a lot of support.
The V.P Singh government wasn’t there for long enough to implement reforms but when the Narasimha Rao government came in, they were able to do quite a lot of what was proposed in that paper. The main lesson I would draw is that we need to outline a set of core reforms and allow them to be discussed so that the pros and cons are fully debated.