India Transformed
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Unfortunately, however, this effort also came to naught since, at the last minute, Prime Minister V.P. Singh ditched Ajit Singh and inexplicably nominated Arif Mohammad Khan, the minister for civil aviation and energy, to go in his stead. The powerful official delegation—comprising A.N. Verma, Montek Singh Ahluwalia, secretary in the prime minister’s office (PMO), and Nitin Desai, the finance ministry’s chief economic adviser, and with me carrying the bags, had already left Delhi, and it was only when we arrived in Zürich that we learnt of the ministerial switch. Since Arif had no background on industrial or economic policy issues and there had been no time for a briefing, there could be no productive presentation in the meeting. So, the trip ended up being a fiasco. For me personally, however, it was an extremely enriching experience being exposed to the global business and policymaking elite in a concentrated course of four days, and also becoming familiar with the titans of Indian business who comprised the Indian business delegation. This came to be extremely helpful over the next two decades during my policymaking period in India, as they became personal friends and very useful interlocutors for understanding business viewpoints over the following couple of decades. In fact, some of them are contributors to this volume: Tarun Das, in his chapter on government–industry interaction, has talked about the value of consistent government–industry relations fostered in an environment of mutual trust.
This experience, however, did not deter Ajit Singh from continuing the work to prepare a new industrial reform blueprint. Under the continued leadership of A.N. Verma, then ensued a very intense period of due diligence and research as we prepared a detailed comprehensive framework for what could constitute a very significant departure for Indian industrial policy after a period of almost four decades. This was indeed an opportunity of a lifetime, which I felt fortunate to get. A.N. Verma was a demanding taskmaster who wanted to cover all possibilities before putting forward any proposals to the government. We did a mountain of quantitative research on all the different aspects of industrial policy so that we could answer most questions that may be expected to arise. Much of this work fell on my office—the Office of the Economic Adviser. The enthusiasm and hard work of my small staff of half a dozen Indian economic service officials had to be seen to be believed.
For his part, Ajit Singh kept a busy schedule of public meetings and speeches to gauge the reaction of the country’s businessmen on possible radical approaches to industrial policy. He also held meetings with economists and businessmen to solicit suggestions. The task of ministerial speeches usually falls on the lot of the economic adviser, since this is also seen to be a thankless one. With Minister Ajit Singh’s encouragement, I used this opportunity to keep pushing the envelope for possible industrial policy reforms as a sounding board for testing public reactions to propose changes. Given the long record of controls, I found that expectations from the private sector in terms of reforms were indeed very modest. They simply could not imagine the possibility of implementation of wide-ranging policy reforms.
Much of the difficulty that arose in pushing reform was really within the government. The Cabinet consisted of a motley group of leaders from different parties, with different backgrounds and ideologies, assembled in an unwieldy coalition. Finance Minister Madhu Dandavate was an old socialist and his senior staff consisted of Bimal Jalan31 as finance secretary and Nitin Desai as the chief economic adviser.32 As we sought the prime minister’s in-principle approval to go ahead with a liberalizing industrial policy, he asked Ajit Singh to forge a consensus with the other main economic ministries, particularly the finance ministry. This we failed to do, since Dandavate, backed by his advisers, was not in favor, and nor were some other members in the government, including some in the Planning Commission. In a stormy meeting of the two ministers, backed up by their respective senior officials, we did not succeed in reaching a consensus on the kind of reforms that we wanted.
We barrelled on regardless, and all our hard work eventually resulted in something concrete, though much diluted: the New Industrial Policy of 1990. This document was a relatively comprehensive policy statement, clumsily titled ‘Policy measures for the Promotion of Small-Scale and Agro-based Industries and Changes in Procedures for Industrial Approvals’. Reflecting the many different views in the government, the new directions in the policy were effectively camouflaged under the rubric of even greater protection being given to small industries! This long-forgotten policy33 had made it past the Cabinet and was formally announced by Ajit Singh in Parliament on 31 May 1990, and the document was laid on the table of the House. This can be seen as the third stage in the preparation of the 1991 industrial policy reforms.
The policy addressed issues ranging from the promotion of small and medium enterprises, removal of ‘unnecessary bureaucratic shackles’ and easing raw-material import restrictions to delicensing, deregulation and welcoming foreign investment. Among other ideas, it proposed that various licensing requirements be withdrawn for certain sets of priority industries. Similarly, it proposed a major departure in liberalizing FDI, once again in a specified list of industries. The major drawback of the document was a lack of clarity over these lists. The policy announcement had just mentioned, in principle, that there would be these lists of industries to be notified later; but these lists were yet to be prepared.
There was then a comical bureaucratic interlude, which effectively buried the policy even before it got into political difficulties. As part of the modernization effort embedded in the policy announcement, I had attempted to make these industry lists in the new globally accepted harmonized system of international trade classification (ITC-HS), a departure from the antiquated classification system used in the original 1951 IDR Act. As we labored to make these lists in the new classification, we prepared documents to be taken to the committee of secretaries, then headed by Seshan’s successor, V.C. Pande, for approval. As luck would have it, the first entry in the ITC-HS classification34 happens to be: 0101 Live Horses, Asses, Mules and Hinnies-Horses.
As the document was opened in the meeting, Pande’s eyes fell on this unfortunate line and he exploded, exclaiming (in Hindi), ‘Have we assembled here to discuss horses, asses and mules?’ The mirth that then ensued among the assembled group of dour-faced secretaries of the economic ministries sitting in the rarefied confines of the Cabinet room can only be imagined. The curmudgeonly V.C. Pande led the charge, and I was unceremoniously hustled out of the room to my great and lasting embarrassment. Thus ended the life of the stillborn 1990 Industrial Policy Statement! This was fortunate since the eventual 1991 policy statement was far more comprehensive and radical.
In any case, a number of political forces, starting with Chandra Shekhar’s rebellion (ostensibly) over the industrial policy, Deputy Prime Minister and Agriculture Minister Devi Lal’s farmer agitation, and the BJP’s Rath Yatra as a counter to the Mandal Commission, combined to bring down the V.P. Singh government on 10 November 1990. Consequently, Chandra Shekhar finally realized his dream to become the prime minister, with outside support from the Congress.
As one of the leading faces behind the opposition to industrial reforms, Prime Minister Chandra Shekhar chose to retain the industry portfolio: a first in Indian government history. As industry minister, he then visited Udyog Bhawan, the headquarters of the industry ministry, where he addressed the assembled senior bureaucrats in that ministry. He told us, ‘I have just come to see you. I have become industry minister because I had disagreed with what you had done. However, I want you to know that I want you to keep giving me your best, impartial advice of whatever you think is correct. Don’t worry about what I said in the past few months!’
As the new government came in, there was another reshuffle of secretaries and A.N. Verma got shifted to the Planning Commission as the member secretary and was succeeded by his close friend and colleague Suresh Mathur, who was another liberal-minded bureaucrat. After Chandra Shekhar’s visit, I asked whether we should take his words at face value and con
tinue working on the New Industrial Policy. He said, ‘Why not? You keep trucking on. And we will see what happens.’ So we continued the process of refinement of the policy document as it existed then.
The economic crisis was already gathering force by then. Save for firefighting on the economic and political fronts, the government was paralysed. There was certainly no question of initiating any significant policy reforms in any sphere. Within a few months, by mid-March 1991, Chandra Shekhar’s rump administration collapsed without even facing a parliamentary test, but it continued as a caretaker government while elections were called. In view of the political confusion and instability experienced over the previous year and a half, there was general expectation that the Rajiv Gandhi-led Congress party would come back to power. It was rumoured that his secretariat, which included Jairam Ramesh, was working on radical economic policy reforms to be set in motion once he came to power. His tragic assassination, however, extinguished all those expectations.
The 1991 Industrial Policy Reforms
In the event, a new Congress government did get elected and P.V. Narasimha Rao became the prime minister. He retained many of the faces of the outgoing regime. Perhaps of most consequence was the decision to select Amar Nath Verma as his principal secretary. This made Verma the prime minister’s personal enforcer and the most powerful bureaucrat, along with Cabinet Secretary Naresh Chandra.
Narasimha Rao, like Chandra Shekhar, chose to retain the industry portfolio. Whether it was out of personal inclination or because he simply followed the portfolio allocation of his predecessor is a contested fact. Perhaps the new principal secretary, Verma, influenced Rao. In any case, that one of the authors of the 1990 New Industrial Policy landed in the PMO and that the prime minister chose to retain the industry portfolio turned out to be a fortunate coincidence. Along with Verma, he also chose to induct Jairam Ramesh in the PMO. This was perhaps a signal that he wanted to pursue a liberalization agenda and implement what had been in Rajiv Gandhi’s mind. Furthermore, in view of the grave economic crisis, he appointed Dr Manmohan Singh as the finance minister.
Within a few days of his appointment, Manmohan Singh called a meeting of all the secretaries of the major economic ministries and the chief economic adviser. I was the only non-secretary present, as the new industry secretary, Suresh Mathur, took me along with him. Manmohan Singh outlined the full economic reform programme that was to be followed over the next five years—and more importantly, over the next six weeks. The latter included immediate action to be taken on industry policy. He said quite clearly that he had the full mandate of the prime minister to do whatever had to be done to solve the crisis and to put India on a self-sustained medium- and long-term growth path. Since he knew that some of the mandarins present were not on board with the kind of liberalizing economic reforms envisaged, he added, ‘If any of you have any difficulty with the proposed reform programme, we can find other things for you to do!’ This was perhaps the most firm and forceful that I ever saw Dr Manmohan Singh.
Manmohan Singh knew that a framework on industrial policy reforms had already been prepared. With the looming economic crisis, Prime Minister Chandra Shekhar had appointed him as his economic adviser (with Cabinet rank) when he returned from Geneva in late 1990. It was during that period, as he was grappling with all the measures that needed to be taken to ward off the dual fiscal and balance-of-payments crises, that Dr Singh called me to say that he had heard that we had prepared an industrial policy document and, if so, could he see it? So, I trotted off to the Cabinet secretariat with alacrity the next day, where his office was (those were the days of hard copy and no Internet). Therefore, he knew that all the groundwork had already been done and he could be confident that they could deliver a credible document within a period of a few weeks.
After the ‘horses, asses and mules’ fiasco of June 1990, and as the emerging instability in the political situation gathered force, with Suresh Mathur’s concurrence, we had continued our work in the industry ministry economic adviser’s office to refine the 1990 policy document. We had filled in the blanks with respect to the missing lists and had also purged it of the camouflaging parts related to protection of small-scale industry. This was the refurbished draft document that I handed over to Dr Singh in December 1990.
With the finance minister having given a clear direction, a steering committee for economic reforms was created in the PMO under Principal Secretary A.N. Verma. The committee, consisting of the secretaries of the major economic ministries, particularly from finance and commerce, along with us from the industry ministry, met almost every day over the next six weeks. The draft policy document served as the basis for discussion and was refined almost daily. It was fortuitous of course that A.N. Verma knew every detail of the document and could hence shepherd the discussion very forcefully and efficiently. The main difficulties ironically came from the finance ministry officials, S.P. Shukla35 as the finance secretary and Deepak Nayyar36 as the chief economic adviser, who were holdovers from Chandra Shekhar’s government. They had honest and principled differences in views and did not hesitate to express them.37 The discussions were helped greatly by the strong support of Jairam Ramesh and Montek Ahluwalia,38 then commerce secretary, in the meetings.
As a consequence of these daily meetings, we in the industry ministry had to redraft the policy every night, burning the midnight oil. In those days, few people in the government knew how to use a word processor efficiently. My personal assistant, Ajay Gupta, was one of them, and he used to churn out draft copies, in WordStar, on stencils, to be duplicated and distributed to other ministries every night!
As the document emerged from the steering committee discussions, it then had to go to a newly formed Cabinet committee, which also met quite frequently in order to meet the six-week deadline.
It was decided that the industrial policy would be presented along with the budget on 24 July 1991. A Cabinet note was prepared by my office in the industry ministry, which had to be approved by the new Cabinet on 19 July. Meanwhile, a note prepared for the prime minister by Jairam Ramesh on the radical new policy measures was leaked and published in the Hindustan Times on 12 July. The cat was out of the bag, and the reaction in the Cabinet meeting was predictable.
However innocuous those reforms might seem today, they were revolutionary in 1991. Years of ideological baggage was being shed. Years of rhetoric was effectively being disowned. It seemed to some that Jawaharlal Nehru and Indira Gandhi were being repudiated.
The note did not pass the Cabinet. Instead, a group of ministers was set up to look into the policy proposals again, and it met on the evening of 20 July to discuss an amended, toned-down Cabinet note. But it did little to assuage the other side. Much of the opposition came from the old-guard, Gandhi family loyalists such as M.L. Fotedar39 and Arjun Singh.40 From the liberalization of industrial location policies and the relaxation of MRTP controls to ‘anti-PSU’ measures and openness to FDI, every proposal under the policy came under attack. The meeting broke up without a final decision. To assuage Arjun Singh, I was sent to lobby him along with my colleague from the industry ministry, Additional Secretary N.R. Krishnan, who had worked very closely with Arjun Singh as his special assistant when he was the chief minister of Madhya Pradesh. But this was to no avail. We failed miserably!
It was felt that the ‘political packaging’ of the reforms was not right. Instead of tinkering with the policy proposals again, a long preamble to the Cabinet note was then prepared. Authored by the deft hands of wordsmiths Jairam Ramesh and Commerce Minister P. Chidambaram,41 in consultation with Manmohan Singh, it stressed continuity and change in the proposed policy reforms. It stressed that all interests were being taken care of, and mentioned the successive contributions of Prime Ministers Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi to industrial policy over the years, and how this document was in the same proud tradition. Not a word was changed in the substantive part of the document that had failed to pass muster earlier!42
The new preamble did the trick and the Cabinet gave its seal of approval to the industrial reforms on 23 July. The Congress Working Committee (CWC) followed suit later that afternoon.
Having learnt the ‘Horses, asses and mules’ lesson, this time, I had retreated to the original antiquated classification of industries in the different lists embodied in the policy document. These lists were notified later in the ITC HS classification. The only discussion that took place late at night with Naresh Chandra,43 the Cabinet secretary, was whether the industry lists appended to the policy statement should be called ‘Annexes’ or ‘Annexures’. I insisted that the world ‘annexure’ did not exist in any dictionary that I had come across, even though it was in common usage in Indian official documents. So, various dictionaries were consulted in the middle of the night and I had my little victory: among other innovations in this path-breaking New Industrial Policy was the use of the term ‘Annex’ rather than ‘Annexure’.
The next day, at 12.50 p.m. on 24 July 1991, quite unceremoniously, a reluctant P.J. Kurien,44 the minister of state for industry, stood up in the Lok Sabha and tabled the New Industrial Policy, ushering in a new India, along with Finance Minister Manmohan Singh’s path-breaking Budget speech later in the day at 5 p.m.45
The New Industrial Policy consisted of announcements related to: