India Transformed

by Rakesh Mohan

  A cash-and-queue economy. In 1991, for all practical purposes, there were no debit cards, no credit cards and incredibly few cash machines. It suited many. Unless you were a salary earner in the organized sector, what you earned or spent could not be tracked; and what you paid as taxes, if you did so at all, was entirely based on what you thought would pass muster. If it didn’t, it was a matter of ‘adjustment’ between the tax officer, you and your chartered accountant. No transparency of data or systems meant a cash-and-queue raj for virtually any transaction involving the state. Although there were occasional instances of big-time graft, such as the Bofors scandal, Indian corruption up to the early 1990s was pervasive but small-time: getting rail tickets faster than others; jumping the queue for driving licences; paying a series of small bribes to each clerk at the port or airport to sign at different places in the import documents—grafts that were considered to be an integral part of the system, essentially ‘speed’ money arising out of over-controlled, non-transparent systems.

  Kores stencils, pink correcting fluids, duplicating ink and Gestetner Roneo machines. In 1991, very few offices had computers; none had laser jet printers. Documents were either carbon copied or mimeographed—a term that is beyond the realms of understanding of a thirty-year-old today. Up to four copies were typed with carbon papers. For more, the document was typed on wax-paper stencils, on which the typos were first covered by a hideous pink correcting fluid, which had to dry, and were then typed over. The final document was taken to a Gestetner Roneo machine. The operator would coat the top of the machine with black duplicating ink, get smudged in the process, thread the stencil and let it rip. The first five copies were over-inked. The next fifteen were passable. After that, he had to re-ink and repeat the process. Every large office and government department had this critical device.

  Office of the Textile Commissioner. The genesis of India’s control-and-permit raj predates the Nehruvian era. It came into being during the Second World War under the Defence of India Rules promulgated in 1939. Many legislations, rules and offices that existed in the early 1990s—such as the Foreign Exchange Regulation Act, the Imports and Exports (Control) Act, the Chief Controller of Imports and Exports, the Cement Controller, the Iron and Steel Controller, and the Textile Commissioner—came into being under the Defence of India Rules.2

  My favourite example of the control raj is the Office of the Textile Commissioner, which was given the regulatory function of administering prices, distribution and control of mill-made cloth meant for civilian consumption. It was bureaucracy at its most absurd.

  Even in 1991, the textile commissioner insisted that a factory classified as a cotton textile mill could not weave any fabric without the weft and warp containing cotton yarn. So, ‘cotton mills’ could weave blended cloth using yarn consisting of cotton and polyester fibre, but not nylon or polyester filament yarn (PFY) fabrics. In such a setting, these mills still manufactured pure synthetic cloth, but in an utterly wasteful way. Mills would tightly double-weave cloth where both the warp and the weft were dominated by synthetic yarn with some ‘face-saving’ cotton. This apparently blended grey cloth passed the textile commissioner’s scrutiny because it contained cotton yarn. Thereafter, the cloth was given an acid bath to burn out the cotton. Thus was born a diaphanous synthetic bolt, at a huge cost to the system.

  Then there were the regional offices of the textile commissioner, each with supposedly awesome regulatory power, yet universally under-budgeted, underpaid and overstaffed. The regional head of the Coimbatore office, for instance, ran out of money to fill diesel in his jeep by the second week of the month. The denouement: complete dependence upon the mill owners for everything, including a Scotch or two and dinner at the Coimbatore Club.

  By 1991, the Office of the Textile Commissioner had become a joke: headed by worthless bureaucrats; staffed by underpaid people; and doing absolutely nothing to help turn around a crippled, seriously ailing composite mill sector. Yet, it existed then. More absurdly, it continues up to now, claiming that it has a ‘very strong, technical and economic wing manned by professionally qualified and experienced officers’ across eight regional offices.

  Indian Airlines. As I write, Indian Airlines—now a part of Air India—continues to dive into its financial and organizational destruction. It was in dire straits even in 1991, except that nobody cared to recognize it. There was no competition. Each of us who flew in the 1970s, 1980s and early 1990s has at least one horror story of a sudden strike-driven delay; inordinately long lines in the check-in counters; uncalled for rudeness; shabby service; the timetable being a figment of the imagination unrelated to actual arrivals and departures; and the genuflections to politicians and local bureaucrats who could, and often did, delay flights to suit their convenience. Indian Airlines epitomized the inefficiency of a government-owned and cocooned service enterprise, whose motto seemed to be, ‘First, service to us the employees; then the netas; followed by the babus; and finally, a tiny residual for the silly customers bereft of choice’.

  Yet, there was change. The most profound in urban India was a nifty little car, a four-wheeler that had everything that no Indian automobile ever did.

  The Maruti 800. On 14 December 1983, Indira Gandhi inaugurated the assembly line of the Maruti factory at Gurgaon, neighbouring Delhi, and presented the first car key to one Harpal Singh.3 Demand far exceeded supply, as the Indian middle-class discovered that it could finally own and drive well-engineered, fuel-efficient yet peppy, and small but extremely comfortable cars at reasonable prices, which were far superior to the Fiats, Ambassadors and Standard Heralds of the land. Maruti owners claimed unheard-of speed with fuel efficiency, and zipped around everywhere with their car ACs at full blast. Those who were still driving Ambassadors derogatorily called the Marutis ‘dinky toys’. Envy aside, a change had come. Irreversibly.

  Maruti not only created a new market for automobiles but also led to the setting up of a quality- and precision-driven modern industry in and around Gurgaon to produce and supply automobile ancillaries—the first of its kind in India. Companies such as Sona Koyo, Asahi India, Rico, Minda, Amtek, Shakti and Wheels India started as ancillary suppliers to Maruti, were coached in Japanese shop-floor practices of quality, manufacturing perfection and productivity, and eventually became major corporations that they are today. Much of the initial establishment and subsequent growth of today’s $50-billion auto-components industry has to do with Maruti, which started the auto revolution in 1983.

  Reliance’s Naroda and Patalganga plants. In late 1984, I visited Reliance’s Naroda plant in Ahmedabad, which manufactured polyester fabrics sold as ‘Vimal’—already a powerful brand in India. I was met by Anil Ambani, then all of twenty-five years old. In a city of decaying composite mills with ancient spindles and sclerotic looms, here was a plant advanced beyond dreams. The Naroda facility was the most modern textile mill in India by a long shot, and among the best in the world. It had a state-of-the-art texturizing unit to convert partially oriented polyester yarn to PFY; high-speed spinning facilities to make yarn out of polyester staple fibre (PSF); Japanese air jet and Swiss broad-frame rapier looms to weave shirting, saris and wide-width suiting at very high speeds and astounding quality; and processed close to a million metres of fibre and piece-dyed fabric per month.

  That was not all. In October 1982, Anil’s brother, Mukesh Ambani, started a new plant at Patalganga, in the foothills of the Western Ghats, some 70 kilometres from Bombay, to manufacture PFY out of purified terephthalic acid (PTA) and mono-ethylene glycol (MEG). By 1986, Patalganga was producing PSF, also from the same sources. In 1988, it backward integrated to manufacture PTA and paraxylene, so that a single feedstock—naphtha—could produce vast amounts of PSF and PFY for a market that was rapidly shifting to blended and synthetic fabric.

  Computerized railway reservation system. Before 1985, the time-honoured way of getting a railway reservation was to go very early to the reservation counter, fill a slip and stand in a long
line. Eventually, the clerk would laboriously examine a huge ledger to check whether he could accommodate your request. Often to no avail. At which point, there would be much to-ing and fro-ing between the passenger and the clerk about alternative trains and dates, with other sweaty passengers in the line getting increasingly infuriated.

  Then came computerized reservations designed by Tata Consulting Services (TCS), then a division of Tata Sons. It started with Delhi in 1985, and moved on to Bombay, Madras and Calcutta. The change was amazing. The lines still existed, but the reservation clerk could immediately know the status of available berths and seats on any date for all trains between two cities, without going through manual ledgers. Suddenly, the transaction time reduced quite dramatically. Passengers got computerized tickets. There were no errors between the berths allotted at the reservation counter and those actually allocated on the trains.

  The Change: July 1991 and Thereafter

  By 21 June 1991, when Pamulaparti Venkata (P.V.) Narasimha Rao was sworn in as the ninth prime minister of India, the economy was in tatters. In 1990–91, wholesale or producer price inflation was at 10.3 per cent—the highest in a decade. Consumer-price inflation for industrial workers was at 11.6 per cent. With no check on expenditure, the combined fiscal deficit of the central and state governments had crossed 9 per cent of GDP. Public debt of the central and state governments rose to almost 71 per cent of GDP. The current-account deficit of India’s balance of payments was close to 3 per cent of GDP, the highest in decades; and hawking the State Bank of India’s and the Reserve Bank’s gold reserves did nothing to dent the huge shortfall in foreign currency, which had plummeted to less than three weeks of imports.4

  It was not just that the balance-of-payments crisis was at its tipping point. The economic situation was disastrous everywhere you looked. Decades of poor lending practices coupled with inadequate recognition and insufficient provisioning of bad debts had led to a seriously weakened banking system. Entrepreneurial growth was stultified by a pervasively restrictive environment of industrial licensing, extensive public-sector reservations, a dysfunctional anti-monopolies law, severe limitations on the use of foreign exchange and over 900 products kept reserved for small-scale industries. Competition was further curtailed thanks to a peak tariff of 300 per cent, backed by some of the highest customs duties among industrializing nations and a massive list of quantitative restrictions on imports.

  It was time for radical change. The new finance minister, Manmohan Singh, fully understood the gravity of the crisis. Luckily for him, so did his prime minister, thanks to the efficacy of some key civil servants and his principal secretary, Amar Nath Verma, who made a powerful case for reforms. Some immediate tasks needed to be done.

  The first was the exchange rate. Although it had drifted down through the economic chaos of 1989, 1990 and the first half of 1991, the rupee was still highly overvalued. There came two sharp currency depreciations—on 1 July 1991 followed by 3 July—that were pushed through as executive fiat; they devalued the rupee by almost 18 per cent. The depreciation created some breathing room. But only just. Much more was needed for India to claw out of its self-dug hole.

  The second was the big bang of 24 July 1991. Since end-June, two teams were working at breakneck speed. One at the Ministry of Finance was focusing on crafting the Union Budget, which was to be presented to the Parliament on 24 July 1991. The other, at the Ministry of Industry, led by Rakesh Mohan, was drafting a major statement on industrial policy. A.N. Verma got Narasimha Rao’s permission to announce, in a single day, 24 July, both sets of reforms—the industrial and the fiscal.

  The day started with the Statement of Industrial Policy. After twenty-two paragraphs of pious messages, the policy got down to real reforms.

  Substantial abolition of industrial licensing. Arguing for ‘bold and imaginative decisions designed to remove restraints on capacity creation’, it announced that irrespective of levels of investment, ‘industrial licensing will henceforth be abolished for all industries, except [for] those specified’. Activities that still needed licensing were pruned to fifteen categories—down from the hundreds that existed earlier.5

  Reducing public-sector reservation. The number of industries reserved exclusively for the public sector was slashed from seventeen to seven, which were mostly related to defence, atomic energy and mining.6 It was as if an unbearable weight of the state had been lifted to allow entrepreneurship and private industry to breathe again.

  Curtailing the scope of the Monopolies and Restrictive Trade Practices (MRTP) Act. After explicitly recognizing that ‘interference of the government through the MRTP Act in investment decisions of large companies has become deleterious in its effects on Indian industrial growth’, the policy (i) eliminated the process of pre-entry scrutiny of investment decisions by the so-called MRTP companies; (ii) repealed the ambit of MRTP in mergers, amalgamations and takeover; and (iii) committed to the Act being restructured to eliminate the legal provision that required prior government approval for both the expansion of existing undertakings and the establishment of new undertakings.

  Easier approval of foreign investments. The policy approved direct foreign investment up to 51 per cent foreign equity in high-priority industries, without any procedural bottlenecks. Although this was politically clothed for ‘high-priority industries’, the list was long enough to cover most industries that mattered in India.

  Then came the Union Budget. I remember sitting in front of the TV watching Manmohan Singh deliver his first Budget speech. It was a dramatic moment, not because of Singh’s flair for oration, of which he has none, but of the promises of a new dawn that rode on the Budget.

  ‘There is no time to lose,’ Singh said. ‘Neither the government nor the economy can live beyond its means year after year. The room for manoeuvre, to live on borrowed money or time, does not exist any more.’ Making a strong case for credible fiscal adjustment and macroeconomic stabilization, he exhorted the nation ‘to make necessary sacrifices to preserve our economic independence and restore the health of our economy’.7

  Manmohan Singh’s first Budget was tough; but with it came several reforms.

  Divestment: Up to 20 per cent of the Government of India’s equity in selected state-owned enterprises was to be divested in favor of mutual funds and investment institutions in the public sector, which was estimated to yield Rs 2500 crore to the exchequer during 1991–92.

  Freeing of interest rates: The RBI had already given commercial banks freedom to charge interest based on risk perceptions, subject to a stipulated floor rate. Singh extended this to term-lending development finance institutions (DFIs), subject to a minimum interest rate of 15 per cent. He also removed all caps and floors on interest rates for corporate debentures floated in the capital market.

  Empowering the Securities and Exchange Board of India (SEBI): Although the SEBI was set up before 1991, the legislation to give it adequate regulatory and rule-making powers was not enacted. Singh committed to doing so in the fiscal year. This ended the reign of the Controller of Capital Issues and started the journey of an independent regulator for the capital markets and stock exchanges in India.

  Banking reforms: To fix the health of Indian banks and DFIs, Singh proposed to appoint a high-level committee under M. Narasimham, an ex-RBI governor, to consider all aspects of structure, functions and procedures of the financial system. The committee’s report ushered in the first set of significant reforms in banking.

  Reducing tax on dividend income and long-term capital gains: The former was cut from 25 per cent to 10 per cent and the latter from 45 per cent to 10 per cent.

  Freeing the inflow of foreign currency: Two schemes were proposed. Under the first, foreign-exchange remittances could be made to any person in India, none of which would be taxed or scrutinized by the exchange-control authorities. Under the second, the State Bank of India was to issue US-dollar India Development Bonds of a five-year maturity for non-resident Indians and overseas corpor
ate bodies. There was no investment ceiling for these bonds; interest was tax free; and there was full exchange-rate protection.

  Reducing peak import duty: The rate was cut from 300 per cent to 150 per cent, with the exception of imported alcoholic beverages and passenger baggage.

  Reducing import duty of capital goods and their components: Import duty was reduced from 85 per cent to 80 per cent for the former, and from 75 per cent to 70 per cent for the latter. This speaks volumes of how protected we were at the time.

  Singh ended the speech with uncharacteristic flourish. Before commending the Budget to Parliament, he said: ‘As Victor Hugo once said, “No power on earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.’

  At the time, it seemed like the ushering of a new India. The signals were just right, of a government that had finally shown purpose by leveraging a major economic crisis to kick-start the much-needed fiscal and industrial reforms. Most English-language and all financial dailies praised the Budget; economists loved it; corporate honchos sang hosannas; and the left parties hated it with a vengeance. The stock markets reacted positively. On 24 July 1991, the day of the Industrial Policy Statement and the Union Budget, the Sensex, the Bombay Stock Exchange’s (BSE’s) key index, was ruling at 1596. By 24 December 1991, it was at 1909—up by almost 20 per cent in five months.

  Select Bibliography

  Anant, T.C.A., and Omkar Goswami. ‘Getting Everything Wrong: India’s Policies Regarding “Sick” Firms’. In Indian Industry: Policies and Performance, edited by Dilip Mookherjee. Oxford: Oxford University Press, 1995, 236–88.