Book review: Montek Singh Ahluwalia's 'Backstage' gives an insider's take on India's reform years

by Montek Singh Ahluwalia

Economist Montek Singh Ahluwalia is best known for his work as a Government of India bureaucrat who was an integral part of the team which liberalised the Indian economy. Liberalisation launched India into a new age of high economic growth. But Ahluwalia was also part of the Congress-led United Progressive Alliance governments in the second decade of this century, a period in which the Indian economy grew rapidly. A book by him promises to offer rich insights into the workings of the United Progressive Alliance government as it sought to boost national economic growth. And it does offer these insights. This book gives us an insider’s view of these times. In the foreword, Ahluwalia explains that this book is not a memoir; that he is averse to the memoir genre, having heard it described as a “selfie in book form”. It is, rather, “... a travelogue of India’s journey of economic reforms, in which [he] had the privilege of being an insider for 30 long years”.

Ahluwalia proves to be an able communicator, proving himself adept at clinical, concise, accessible and vivid writing. This is a difficult feat to do, given that his subject is, for the most part, economic policy. Yet he pulls it off very well. Nonetheless, the nature of his subject makes this a difficult book to read for the lay reader of business books. This is a good book for economists, students of public policy, and civil service aspirants with an affinity for economics.

And so, even though the first part of the book is indeed personal, it is of importance to a younger reader of the book, because it offers a glimpse of the experience of being a consumer and manufacturer in the restrictive Indian economy before liberalisation. This part of the book shows us the planning-heavy ‘licence-permit raj’ economy during the governments led by Jawaharlal Nehru and Indira Gandhi, right up to Rajiv Gandhi and VP Singh. Ahluwalia recalls there were only two models of car in the market, the Ambassador and the Padmini; stagnating economic growth, controls on rent for housing. Ahluwalia is speaking not of some long-lost time, but of times that ended with the Nineties. The ‘licence-permit raj’ was a restrictive policy and practice that among other things necessitated applying for a licence to set up a manufacturing unit with a particular production capacity, among other conditions. Imports of “finished consumer goods were completely banned, except when brought in as luggage by returning travellers”. There were import restrictions on capital goods and some raw materials. Decisions on which imports were allowed, Ahluwalia writes, were subject to “a high degree of arbitrariness”. Naturally, there was “enormous scope for corruption”. There was also scope for corruption and red tape. Ahluwalia offers us an example of red tape: he tells us how NR Narayana Murthy, co-founder of Infosys, in 1983 had to apply several times in Delhi to get an import licence for a single computer.

In the first section of the book, we are also taken at a brisk pace through Ahluwalia’s early childhood, his youth and the glittering beginnings of his career as an economist at the World Bank in Washington DC. Ahluwalia joined the Finance Ministry when the Indian economy was flagging; the monsoon in 1979 was poor, and the Iranian Revolution had pushed up oil prices drastically. The result was a 5 percent fall in India’s GDP in 1979-80. Food prices rose considerably. You might be tempted to skip this part of the book and jump straight to the part about liberalisation or UPA-1; I’d advise against it. At this point the book deals with a variety of interesting topics. For instance, the ‘80s were the period when an ambitious businessman called Dhirubhai Ambani was “[spearheading] the use of convertible debentures to attract middle-class households to invest in debt...” in order to finance the growth of his company, Reliance. This was also the period when Maruti Udyog Ltd was set up to manufacture an “affordable people’s car”. Ahluwalia tells us an ‘insider’ anecdote or two about how Suzuki came to be the partner in MUL, and why MUL was structured the way it was (no spoilers, though).

The ‘M Document’

The second part of the book deals with “the decade or so leading up to the economic reforms that were launched in 1991”. Upon returning to India from his World Bank job, Ahluwalia worked with the Indian government under a number of Prime Ministers, including Indira and Rajiv Gandhi. Ahluwalia had the chance to closely observe Rajiv Gandhi’s outlook towards the economy and business. Rajiv Gandhi is shown as averse to red tape, tech-savvy, and rather more pro-enterprise than his mother. Rajiv Gandhi’s efforts to dismantle some aspects of the ‘licence-permit raj’ and introduce some reform in the Indian economy are depicted well; Ahluwalia writes, “Although Rajiv was not able to bring about the fundamental reform that was needed... [he legitimised] the goal of moving towards a less-controlled economy, with a much greater

role for the private sector”. Rajiv Gandhi was succeeded as PM by Vishwanath Pratap Singh; in Singh’s regime, Ahluwalia produced the ‘M Document’, which was his note recommending that the Indian economy be opened up. Ahluwalia writes, “Many of these ideas had been discussed informally at official levels but had never been put together as an internally consistent set of specific policy changes.” Many of these suggested changes would be implemented by Narasimha Rao and Manmohan Singh a few years later.

Ahluwalia never took credit for the ‘M Document’. In another context, he speaks candidly about the decision-making culture in the Finance Ministry, in particular the need for being “unobtrusive”, without which “senior civil servants would resist listening to an economist”. Rather, Ahluwalia writes, “An approach that seemed to work particularly well was to first introduce an idea as an suggestion, explore its implications with a senior colleague, subsequently refer to the idea as one that had evolved jointly in the discussion, and finally include more and more people in the discussion and share credit for the idea.”

The third part of the book is about liberalisation itself. We are also given a brief roundup of the circumstances that necessitated liberalisation – namely, the Balance of Payments crisis. The immediate trigger for it was the Gulf War of 1991 which led to a ballooning of crude oil prices. When the PV Narasimha Rao government took over in 1991, with Manmohan Singh as Finance Minister, Ahluwalia was commerce secretary; he would later become Secretary, Economic Affairs in the Ministry of Finance. He was an integral part of liberalisation, which caused “... a blizzard of action. The rupee was devalued, trade policy was liberalised, domestic investment controls were dismantled, and a new policy towards FDI was articulated”. Being a government insider, Ahluwalia is able to give us juicy details about liberalisation that may or may not have previously been in public record. For instance, I certainly did not know that the second devaluation of the Indian rupee during the Narasimha Rao administration was advanced after a business newspaper published a piece of fake news. That made markets “nervous”, so Singh advanced the devaluation before “speculative outflow” from the markets could take place.

The writer delves deeply into the details of liberalisation, which mainly included amending many laws and policies which governed Indian businesses – including tax reforms, financial sector reforms, and others. Liberalisation also reduced the number of industries reserved for the public sector from 18 to 8. This “unleashed private investment in sectors such as steel, aviation, telecommunications and petroleum refining”.

All major reforms are given space in the book, as they should be. They were continued by the United Front (UF) and the National Democratic Alliance (NDA) governments. For instance, Finance Minister P Chidambaram ushered in further tax reforms, as well as banking reforms that included the establishment of the National Securities Depository Ltd., which “made it possible to dematerialize paper securities and maintain all records of ownership electronically in the depository”.

Ahluwalia weighs in on the question whether Manmohan Singh or PV Narasimha Rao deserves more credit for liberalisation. In the writer’s view, most of it should go to Manmohan Singh, though Rao also deserves his place in history. Rao chose Singh to spearhead the reforms; Rao “also recognised that changes were necessary if India were to realise her true potential”. Rao, however, did not realise “the full gamut of changes needed to unleash the economy’s potential. Trade liberalisation, the shift to a flexible exchange rate and refoms in the financial sector occurred largely because of Manmohan Singh’s expertise and wisdom”. Moreover, the writer says, Manmohan Singh introduced reforms gradually because “change must be made slowly to be digestible”.

Ahluwalia also reminds us that liberalisation was not universally supported in India; that it was opposed by “senior bureaucrats in the Ministry of Finance” and the Indian Left. These objections are mentioned in the book; it is to Ahluwalia’s credit that he is able to discuss points of view that differ from his own.

Ahluwalia also had the opportunity to serve in the AB Vajpayee-led government that followed the United Front government. He points out that this government, too, ensured that there was continuity in the reform agenda for the most part, except where it held back for political reasons. The Vajpayee government allowed imports of consumer goods in 2001, reduced government stakes in several public sector undertakings, and sold off several PSUs: “VSNL to Tatas, CMC to Tata Consultancy Services (TCS), and Balco and Hindustan Zinc to Vedanta. Several public sector hotels were also privatized.” Ahluwalia covers in detail the fiasco around the Enron power plant at Dabhol, Maharashtra.

Further, the writer tells us about his tenure as Deputy Chairman of the Planning Commission in UPA-1, under Prime Minister Manmohan Singh. As the writer points out, the Indian economy “hit a high growth rate” as GDP grew at an average of 8.4 percent in the period 2004-05 to 2008-09; GDP growth was “robust” in 2009-10 and 2010-11. It “ran into a bump in 2011-12 and slowed down” in the two following years. Ahluwalia analyses, in detail, the reasons behind this high growth. First, he points to high investment by private companies as a reason. This was complemented by relaxing the limits in FDI in several sectors. Ahluwalia also takes us through the preventive measures that the UPA government implemented in order to soften the impact on India of the 2008 international economic crisis – a series of ‘stimulus packages’ that comprised cuts on indirect taxes and other measures.

The third such stimulus package was announced by then-finance minister Pranab Mukherjee. In times to come, he would be criticised for ‘overstimulating’ the economy and increasing the government’s fiscal deficit. This criticism appears, most recently, in Puja Mehra’s book The Lost Decade. Ahluwalia, however, defends Mukherjee’s decision, conceding only that he wondered if “the tax concession was intiated more with the coming elections in mind than the compulsions of macroeconomic management”. Ahluwalia says the third stimulus package was necessary to boost GDP growth in those times, and that giving the third package was vindicated by the results. “GDP grew robustly at 8.6 percent in 2009-10 and 8.9 percent in 2010-11 before slowing down.” Ahluwalia acknowledges, however, that the economic slowdown came in 2012 because the UPA government did not take corrective steps in time.

Ahluwalia defends the UPA from charges that it ushered in an economic slowdown during its tenure. He also takes on critics of the UPA who say that economic growth during UPA-1 was “due to favourable global conditions fanned by excess bank lending”. He acknowledges that “[s]ome of the lending turned into non-performing assets later”. The writer also gives us a quick roundup of legal amendments which the UPA was not able to push through because of opposition from civil society or political parties: allowing 100% FDI in retail, making it easier to pass environmental hurdles in sanctioning infra projects, and amend the Land Acquisition Act of 1894. Ahluwalia cannot and does not shy away from the fact that the economy slowed down in the UPA-2 regime; the writer goes into technical reasons behind the slowdown. This section will most benefit economists who are familiar with the terms involved, as well as students of economic policy. Ahluwalia gives due emphasis to the UPA’s Bharat Nirman programme that aimed to develop rural infrastructure as well as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). This part of the book allows us to re-evaluate the Right wing’s claim that the Congress did nothing in its decades in power. Ahluwalia also deals with the Right to Education and Food Security Act, which gave “legal guarantees” to supply basic necessities. He writes that he had “doubts about how effective this would be in practice”. He has nothing but praise, and rightly so, for the UPA government for passing the Right to Information Act 2015. He points out correctly that the NDA government has weakened “this critical institution”.

Of course, the writer is not a cheerleader of the UPA; he criticises the regime for failing to amend laws pertaining to agriculture – for instance the Agricultural Produce Market Committee (APMC) Act to “allow private markets to develop and encourage the private sector to buy from the farmers directly”. Much to my dismay, however, Ahluwalia is a supporter of Aadhaar, though he also points out that privacy issues are involved. He doesn’t seem to think that Aadhaar is essentially a surveillance mechanism. Considerable attention is devoted to the UPA-2 regime which was buffeted by allegations of corruption pertaining to the Commonwealth Games, allocation of 2G spectrum, and allocation of coal blocks, among others. So Ahluwalia comes across as largely fair in his assessment of the UPA.

Scathing criticism of NDA government

He is at his most scathing in his analysis of the National Democratic Alliance government led by Narendra Modi. He calls the NDA’s performance as “beginning with a bang and ending with a whimper”. He says that the NDA delivered an average growth rate that was lower than that during the UPA years, provided one calculates the growth rates using the same system of accounting. In fact, in 2015, the NDA began to use a system of accounting that was later found to be yielding unrealistic figures of GDP growth. Ahluwalia points out that rate of unemployment shot up “from 2.2 per cent in 2011-12 to 6.1 per cent in 2017-18”, as per the Periodic Labour Survey. The NSSO survey for 2017-18 even showed that “per capita consumption in 2017-18 was about 3.7 per cent lower in real terms than in 2011-12”. The NDA reacted to this survey by junking it and announcing that a new survey would be conducted in 2021. Ahluwalia says that poverty has increased under the NDA, mostly in the rural areas. The writer comes down heavily on the NDA for “its two major policy mistakes, demonetisation of November 2016 and the manner in which the GST was implemented in 2017”. Ahluwalia also says that a conducive atmosphere for business can only be created when there is social harmony. He says that the Citizenship Amendment Act and the proposed National Register of Citizens “have led to large-scale protests from students and the youth in many parts of the country”. He recommends dealing with these inflamed sentiments in a democratic and peaceful manner.

In conclusion, Ahluwalia makes the point that it is unlikely that the Indian economy will grow to the $5 billion mark by 2024-25 as promised by the NDA -- “[w]ith growth below 5 percent in 2019-20, and only a slow recovery expected next year, achieving an average of 9 percent for the period as a whole is simply not credible”. He suggests a number of reforms in the fields of taxation, agriculture and banking to kick-start the Indian economy.