A masterful insight into India’s economic growth
The Story Behind India’s High Growth Years
By Montek Singh Ahluwahlia, Rupa Publications India, 2020
IN As You like It, William Shakespeare stated famously: “All the world’s a stage, and all the men and women merely players; they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”
As India is the second largest stage in the world by population, former planning commission deputy chairman Montek Ahluwahlia has played his backstage role impeccably, rising through a brilliant student career from a modest middle class family to become one of the key economic thinkers and actors in India’s economic rise to the global stage.
The front stage stars are often the politicians, but backstage public servants have critical roles behind the scenes, only sometimes stepping into the limelight to explain very technical and complex issues in simple language.
The fall and rise of the two population giants, India and China, played key roles in gloenebal economic history.
In the 18th century, before colonisation, both together accounted for half of world GDP.
Only today has history been re-written – British colonisation brought India from one quarter of world GDP to 4% at the time of independence (Maddison, World Economy: Historical Statistics, OECD 2003). The glory of the British Empire was paid at the expense of India and other colonies.
The story of India’s re-entry to global stage since Independence is therefore a heroic struggle of ideas, policies and institution building. Between 1950-1973, India’s GDP grew at an average rate of 3.5% per annum, slower than the global average of 4.4 %, resulting in a fall in her share of world GDP from 4.2 % to 3.1%.
It was only during the 1973-2001 period that growth accelerated to an average of 5.1 %, increasing her world share to 5.4 % (Maddison, Table 8B). By 2019, India had attained the status of the fifth largest economy in the world, overtaking both Britain and France, accounting for 8% of world GDP.
Geography, population and human ingenuity shapes destiny. But destiny is neither inevitable nor ordained. History has to be scripted and acted either crudely or in style.
Ahluwalia’s entry into this story began in 1979 when he returned from the World Bank to become economic adviser to the Finance Ministry, at the invitation of then chief economic adviser and later Prime Minister Manmohan Singh.
To break out of the low growth rate of a predominantly agricultural economy clearly needed re-thinking the policies in place in the first forty years of independence.
But re-thinking these policies was not enough, one had to “get into the policymaking process, persuade those in senior positions that change was needed, and build a sufficient momentum for change.”
But these reforms would not have been possible without the vital dedication to education and elocution, a distinct characteristic of Indian culture. Without the cadre of top educated technocrats that are world class by any standards, open to the best ideas, India could not have broken her barrier of poverty.
But ideas have to be translated into action that delivers.
Montek Ahluwahlia was a beneficiary of his father’s sacrifice for his children’s education, in the crucial family move to Delhi, from which he leapt from St.stephen’s University to Oxford, where he became president of the Oxford Union.
From there, he moved to a distinguished career at the World Bank, before returning home to start a career as an economic adviser in the Finance Ministry.
The World Bank and IMF gave many Indian technocrats the exposure to witness and experience at first hand the development lessons across the world, both successes and failures.
Understanding how these large bureaucracies functioned in their interaction with member states at the political and institutional levels helped many developing country technocrats to return home to shape the domestic policies that proved vital for development and poverty break-throughs.
Global perspective
In this age of global interconnectivity and interdependence, you cannot formulate domestic policies without a global perspective.
But without any deep understanding how domestic institutions and politics and people interact, policies that look great on paper would not work well.
Technocrats like Montek who could work like fish in these opaque domestic and foreign waters find that they are more effective than shouting theoretical wisdoms through the media from outside.
This book has a very important place in the development economics literature because of its clear and insightful telling of the subtle but crucial interplay between politics and bureaucratic policy formulation and execution.
Politicians are those who have to “seize the moment”, but they cannot execute their visions without the backstage technocrats who have to draw up the details and plan its execution.
This is one of the few books by an insider on how to manage very large geographical and populous economies.
There are, for example, few books available, even less in English, by Chinese technocrats on the Chinese development and reform experience.
This book explains the thinking and context during two significant phases of rapid growth: the 1991 reforms to 2000 and the UPA governments of 2004-2014.
In between, Ahluwahlia served with distinction as the founding director of the Office of the Independent Evaluation Office of the IMF in Washington DC, drawing important lessons from the Asian financial crisis (1997-98) and enabling him to review the development experience from China within the context of major global shifts, notably the rise of the BRICS economies.
I personally found the story behind the crisis and reforms of 1990-1991 totally riveting because India had to break out of the growth trap and could only do so out of necessity.
In the 1980s, China had already started on its high growth path by opening up to exports, foreign direct investments and investing heavily in infrastructure and education.
In contrast, India had high variations in GDP growth rate due to its agricultural sector being subject to fluctuations in rainfall.
It was Prime Minister Rajiv Gandhi who had started to release some of the brakes that were holding back India’s growth, such as his crucial reforms on telecommunications, today a key infrastructure for India’s technological revolution.
‘Open economy with closed mind’
It took the crisis of 1990 to shake up India’s “open economy with a closed mind” to address the key issues blocking major reforms.
The famous ‘M document’ entitled “Restructuring India’s Industrial, Trade and Fiscal Policies” stressed the need to move out of gradual liberalisation into a more rapid market-oriented phase.
The oil crisis sparked off by the Iraqi invasion of Kuwait worsened the balance of payments deficit, resulting in foreign exchange reserves declining to Us$1.9bil or three weeks of imports.
This led to devaluation and speedy changes in trade, fiscal, financial and industrial policies that ended the crisis and paved the way for the second stage of growth in the 21st century.
The 1990s was a decade of modest improvement in growth, interrupted by the 1997-98 Asian financial crisis.
But it was also clear that with divided politics, public sector reforms were slow.
Montek’s move to the Planning Commission in 1998 gave him the insights on the complexities to tackling infrastructure investments in a giant economy.
This was augmented by drawing lessons from international experience as the first director of the Independent Evaluation Office of the IMF between 2001-2004.
When he was called back to India as the deputy chairman of the Planning Commission in 2004, under Prime Minister Manmohan Singh, the second phase of Indian fast growth unfolded, interrupted only by the North Atlantic financial crisis of 2007/2009.
In Chinese phraseology, India began during this decade to enjoy the three dividends of “opening up, demographics and reforms”.
The demographic dividend of a young labour force entering into its most productive phase cannot be taken for granted.
Many developing countries wasted this advantage by not making the key structural reforms and in opening up to international technology and markets.
What “backstage” showed is that it takes very skillful politics and bureaucratic maneuvering to deliver the right reforms at the right time.
Getting the right talent (and leadership) at the right time, getting the right reform script, and knowing how to orchestrate all the players and the audience (the public and international optics) was more an art than a science.
Balancing between union and state level interests, managing an argumentative political and bureaucratic menage of players, sherpaing India’s voice on the international stage, is a tour de force by any standards.
No one said it was easy, but the achievements and the missed opportunities needed to be told, and it has been told very well indeed.
This is a practitioner’s textbook, written with verve, style and wit, showing masterly grasp of both theory and practice on economic development in large complex economies. Any person aspiring to enter the stage of national economic development will profit from the deep and wise insights that would help them negotiate complex domestic and international bureaucracies that make or break growth trajectories.
Those who want to be truly frontstage must have the humility to perform effectively backstage. This is the script that must be read.
This is a practitioner’s textbook, written with verve, style and wit, showing masterly grasp of both theory and practice on economic development in large, complex economies.