‘An Arthashastra for emerging India’ New Indian Express

PENGUIN BOOKS EMERGING INDIA

Bimal Jalan is one of India’s well-known economists. He was Governor of the Reserve Bank of India from 1997 to 2003, demitting office on his nomination to the Upper House of Parliament by the President for distinguished service to the country. He has held several top positions in the ministries of finance and industry and in the Planning Commission. He was also Chairman of the Economic Advisory Council to the Prime Minister and represented India on the boards of the IMF and the World Bank. He was educated at Presidency College, Calcutta and Cambridge and Oxford universities. His books include India’s Economic Crisis: The Way Ahead (1991), India’s Economic Policy: Preparing for the Twenty-first Century (1996), India’s Economy in the New Millennium (2002), The Future of India (2006) and, as editor, The Indian Economy: Problems and Prospects (Revised edition, 2004).

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First published in Viking by Penguin Books India 2012 Published in Penguin Books 2013 Copyright © Bimal Jalan 2012 All rights reserved 10 9 8 7 6 5 4 3 2 The views and opinions expressed in this book are the author’s own and the facts are as reported by him which have been verified to the extent possible, and the publishers are not in any way liable for the same. ISBN 9780143420323 Typeset in Caslon Roman by SÜRYA, New Delhi

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To Maahira and Ayushman Ananmay and Tanay Yes, you can . . .

CONTENTS Preface Introduction

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SECTION 1: THE POLITICAL CONTEXT 1. The Triumph and Travails of Democracy Edited version of chapter 1 in Future of India: Politics, Economics and Governance, Penguin, 2005

3

2. Separation of Powers: The Myth and the Reality Third Nani A. Palkhivala Memorial Lecture, Mumbai, 16 January 2006

19

3. Politics and Governance Address at the India International Centre, New Delhi, 31 August 2007

35

4. Economics, Civil Service and Governance in Emerging India Memorial Lecture in honour of Mr P.K. Kaul, New Delhi, 29 March 2008

46

5. Wanted: A Barefoot Minister Speech in Rajya Sabha, Parliament of India, during the debate on the Rural Employment Guarantee Bill, 24 August 2005

53

SECTION 2: INDIA’S ECONOMY, POLICY AND PROSPECTS 6. After the Crisis: Need for a New Strategy Edited version of M.A. Master Memorial Lecture, Economic Research and Training Foundation, Indian Merchants’ Chamber, Bombay, 22 July 1992

61

7. India’s Comparative Advantage in the Twenty-First Century Unpublished essay, 31 March 1997

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8. India’s Economy in the Twenty-First Century: A New Beginning or a False Dawn? Address at the India International Centre, New Delhi, 15 January 2001

83

9. India’s Record in the Social Sectors Edited version of chapter 6 in India’s Economic Policy: Preparing for the Twenty-First Century, Penguin, 1996

99

10. Science, Technology and Development Third Sir Vithal N. Chandavarkar Memorial Lecture, Indian Institute of Science, Bangalore, 8 May 1998

115

11. India and Globalization Thirty-Sixth Convocation Address, Indian Statistical Institute, Kolkata,15 January 2002

136

SECTION 3: MONEY, FINANCE AND BANKING 12. Towards a More Vibrant Banking System Bank Economists’ Conference (BECON’98), Bangalore, 16 December 1998

143

13. Economic Growth, Banking and Information Technology Excerpts from the inaugural address at the BancIT 2000, Bangalore, 14 July 2000

155

14. Ethics in Banking Seventh Nurul Matin Memorial Lecture, Bangladesh Institute of Bank Management, Dhaka, 2007

161

15. International Financial Architecture: 169 Developing Countries’ Perspective Forty-Ninth Anniversary Lecture, Central Bank of Sri Lanka, Colombo, 25 August 1999 16. International Financial Architecture-II Address at Bank of England, London, 5 July 2002

189

CONTENTS

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17. Finance and Development: Which Way Now? Administrative Staff College of India, Hyderabad, 6 December 1999

193

18. Exchange Rate Management: An Emerging Consensus? Address at 14th National Assembly of Forex Association of India, 14 August 2003

213

SECTION 4:

INDIA’S ECONOMIC REFORMS: A PERSPECTIVE

19. Priorities for Industrial Policy in the 1970s Unpublished note for a panel discussion, Ministry of Industry, 1974

227

20. Proposals for the Reform of Import Licensing in the 1970s Unpublished paper, Ministry of Industry, 11 April 1975

232

21. Industrial Reforms in the 1970s Unpublished note, Ministry of Industry, 1975

240

22. Controls, Regulations and the State An extract from India’s Economic Policy: Preparing for the Twenty-First Century, Penguin, 1996

248

23. Indian Banking and Finance: Managing New Challenges Banking Economists’ Conference, Kolkata, 14 January 2002

262

24. The Politics of India’s Reforms Financial Times, London, 15 July 2005

285

25. Measures to Reduce the Supply and Demand 288 of Corruption Second Annual Lecture, Transparency International, Delhi, 19 February 2011 Index 299

PREFACE

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his book is different from my earlier ones. This is a collection of selected papers, lectures and some unpublished notes from personal archives. Most of the papers selected for publication in this book relate to the period 1990–2010, with the exception of three unpublished notes from 1974–75, on the reform of the industrial and import licensing policy. The papers brought together in this book have been chosen to provide a broad overview of the evolution of India’s politics, economics, governance and economic reforms over the past two decades and their implications for the future. I should mention that papers in this book are a relatively small part of a larger collection of old papers in the archives. The larger collection—containing more than 450 papers—has been passed on to the library of the National Council of Applied Economic Research (NCAER), New Delhi, for use by staff members of NCAER for research and reference purposes, subject to applicable copyright rules. In addition to my own papers, notes and memos, the collection of papers in the NCAER archive contains copies of published articles by several eminent economists and experts on India’s past, present and future. These articles, spread over the past five decades, provide a most useful account of developments in the theory and practice of economic policymaking in developing societies, including India, after the end of the colonial era. I owe a deep debt of gratitude to several persons who helped me at various stages of the project. Papers in my personal archives were written at different points of time over a long period, in different contexts, and covered a large variety of subjects. The task of preparing xi

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this volume, and selecting papers of contemporary interest, turned out to be much more difficult than I had originally anticipated. I am particularly grateful to Satish Choudhary for his meticulous work in preparing the manuscript for publication, to B.B. Chand and his team at the NCAER library for downloading numerous articles and scanning them for consideration and to K.D. Sharma for his organizational and other help. I deeply appreciate the expert advice received from Shashanka Bhide on the selection of papers, whenever I asked for it, and to Ms Anuradha Bhasin for copy-editing and preparing the manuscript. I am especially grateful to Udayan Mitra at Penguin for his invaluable help and guidance at different stages of the book’s publication. Ameya Nagarajan did the final editing of the book within a very short period. I am thankful to her for her meticulous work. August 2011

BIMAL JALAN

INTRODUCTION

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ust a year or two ago, India’s reputation as both a democracy and a global emerging power was at its peak. Today, with daily reports of widening corruption, misgovernment and public despair about the working of India’s politics, the picture has changed dramatically. India’s reputation seems to have swung from that of a land of great opportunity to that of a country with an uncertain future. The change in perceptions of the working of India’s democracy and its economic prospects is, of course, nothing new. In the mid1980s also, from 1984–85 to 1990–91, India had registered a rate of growth of more than 8 per cent per annum. And, soon thereafter, in 1991 India went through one of its worst economic crises. With two short-lived governments in the two years prior to the crisis, there was also a big question mark about the country’s political future. In the light of current concerns about India’s prospects and the past history of sharp swings in India’s fortunes I have tried, in this volume, to bring together a set of papers on India’s past, present and future. Most of these papers were written over the last twenty years, with the exception of three short notes from the mid-1970s regarding the need for reforms in the import and industrial licensing policy to boost growth. The primary message of these essays, as I look back, is simply that in the past twenty years, unlike the period before, India’s capacity to grow faster than ever before and eliminate poverty has increased substantially because of certain positive changes in its comparative advantage in relation to other countries. However, for India to seize the opportunities that lie ahead, it is essential to bring about reforms in the working of our politics and administration. xiii

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The main areas of concern in the light of recent events are basically two: (a) the growing disjuncture between economics and politics, and (b) the emergence of a ‘public–private’ dichotomy in the growth trajectory. There is simply no doubt that, in recent years, as the economy has become vibrant, politics has become more fragmented and ‘messier’. Most of us, as observers of the Indian scene, are, of course, familiar with these developments, such as the diminishing accountability of the executive to Parliament, rising corruption, the preponderance of criminals in politics and the disproportionate power of small regional parties in multiparty coalitions. Unfortunately, while these unsavoury political developments are well known and dominate the media space, there is not much appreciation of the urgent need for political reforms to strengthen accountability, reduce the scope for corruption and reverse the incentives for small parties to destabilize coalitions. Another core issue with multiple dimensions that needs to be resolved is what can be best described as the growing ‘public– private’ dichotomy in economic life. It is a striking fact that growth is now occurring largely outside the public sector. India has the distinction of having a large number of dollar billionaires. The assets of the top twenty billionaires are more than 20 per cent of India’s gross domestic product (GDP). This is larger than the share of the GDP contributed by the entire agricultural sector, on which more than 600 million Indian citizens are dependent for survival. No wonder economic disparities are rising and becoming a major source of concern and discontent in several parts of the country. There is also a marked deterioration in public administration at all levels, particularly in the provision of essential public services in the fields of education, health, water and transport. As we look ahead, it is important to ask ourselves: how long can this dichotomy in the performance in the economy of the public and private sectors continue without causing severe turbulence and affecting growth? The present volume contains twenty-five papers divided into four sections. Section one is on political issues that require urgent attention if India is to maintain its position as an emerging global economic power of the twenty-first century. This section is based on papers and lectures delivered during the period when I had the

INTRODUCTION

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privilege of observing the work of Parliament from inside as a nonparty nominated member of the Rajya Sabha (2003–09). A lot of what is said in these papers has been discussed in an earlier book (India’s Politics: A View from the Backbench, Viking–Penguin, 2007). The worrisome developments in the working of India’s politics have undoubtedly become even more pronounced in the four years since that book was published. Section 2 deals with India’s economic policy and prospects, particularly whether the changes witnessed in India’s performance after the deep crisis of 1991 are likely to last or wither away in the event of unforeseen global or domestic developments. The answer to this question, in my view, is that India now has the capacity to realize its potential, provided we avoid over-exuberance and take timely measures to exploit India’s emerging strengths in technology, skill-based services and high-productivity industries. Section 3 is on money, finance and banking. Most of the papers in this section are based on talks and discussions at conferences held at central banks and professional institutions during the period I served as Governor of the Reserve Bank of India (RBI) (1997– 2003). Several of these papers capture the essence of the position taken by India on contemporary financial and banking issues in international institutions, such as the World Bank, the International Monetary Fund and the Bank for International Settlement. These papers may be of interest in our understanding of the reasons why and how India was able to avoid the contagious and adverse effects of the US and global financial crisis of 2008. The final section provides a historical perspective on India’s economic reforms launched in 1991 in the midst of a severe crisis. An important issue which deserves consideration is the reason why India delayed comprehensive industrial and trade reforms for so long when the need for such reforms had been evident for quite some time. It is hoped that some of the papers here, including a short article on the politics of India’s reforms, will cast light on this question. In the light of recent public concerns about the widening ambit of corruption, this section includes a paper on measures that are necessary to reduce the supply and demand of corruption in India.

What must IndIa do to keep groWIng? Bimal Jalan has closely followed the path of India’s economic policies across its changing trajectories, from before the time the economy was liberalized to the present. The pieces in Emerging India study the relationship between political and economic reforms and inclusive and incremental growth. This book is essential reading for anyone seriously interested in the history and future of India’s development as a nation.

Praise for the Author ‘Thoughtful analysis that needs to be read by all, especially parliamentarians’ Outlook ‘One cannot but agree with most of the suggestions made by Mr Jalan’ Economic Times

Non-fiction

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