Was the 1991 agenda home grown or west imposed? (also the role of mysterious M document)

The recent EPW edition ( Vol. 51, Issue No. 29, 16 Jul, 2016) has a series of articles on the 25 year anniversary of 1991.

This one by Montek S Ahluwalia is a great read. It narrates this historical thought process behind 1991. He says it was hardly a case of imposition by western agencies like IMF and World Bank. Infact the thinking started much before 1991 as well. One can always argue whether the process was domestic driven or external driven but the historical process is something worth knowing:

The 25th anniversary of the 1991 reforms is an important occasion for reflection. There were reforms before 1991, but they were at best incremental, adding flexibility to the system without changing the system itself. It was in 1991 that an effort was made for the first time to change the system of economic management, which was devised in the 1950s and early 1960s, and had become quite unsuitable for the times.

The story of how the reforms were conceived and implemented, whether they were well designed and appropriately paced and sequenced, how the resistance to change was dealt with, and, most importantly, what went right and what did not, deserves to be explored in full detail. I am currently working on a book that hopes to do precisely that. This article deals with only one aspect of the story, and that is whether the reforms were home-grown or pushed by the International Monetary Fund (IMF) onto a helpless government as the price for financial assistance.

The widely believed allegation that the reforms were pushed by the IMF was a constant refrain when the reforms were unveiled. This completely ignores the fact that there was a home-grown process of rethinking on economic policy that had been underway and pointed towards many changes. These changes certainly formed part of the conditionality of the IMF’s assistance, because the IMF is expected to lend only in situations where the government has a credible adjustment programme. The IMF obviously approved the reforms in that sense, but that is not the same thing as saying it dictated the contents.

The domestic pedigree of the 1991 reforms is best assessed by looking at the evolution of thinking in the pre-reforms period. For this, it is useful to distinguish between the period up to 1980 and the period between 1980 and 1990.

He discusses the broad economic policy thinking in all the three periods.

In 1990, he points to this M document which was authored by him and was a kind of progenitor of things to come:

The next step documenting the internal rethinking on policy was a paper I wrote in June 1990. I apologise to readers if this seems like unseemly self projection, but it is relevant to the issue of how much of the thinking behind the reforms was home-grown.

I had served as the special secretary to Prime Minister Rajiv Gandhi, and I remained in that position when V P Singh took over from him. In the course of a conversation in May 1990, in which V P Singh commented on the performance of Southeast Asian countries, he asked me why these countries had done so much better than India. I responded that it is because they had been much bolder in undertaking structural reforms. He asked me to prepare a paper on what we should do. I prepared a note on “Restructuring India’s Industrial and Trade Policies.” The note put together ideas we had planned to submit to Rajiv Gandhi if he was re-elected. V P Singh instructed that it should be discussed in the Committee of Secretaries chaired by the cabinet secretary. The note was discussed in two meetings of the Committee of Secretaries.

The press soon got hold of a copy and it was printed in the Financial Express. Although the authorship of the paper was never acknowledged, it was widely known that it was authored by me, and it came to be referred to in the press as the M Document. The specific proposals in the M Document were never approved as government policy. But the fact that it was sent by the Prime Minister to the Committee of Secretaries for discussion establishes that the proposals were being considered internally, well before any IMF arrangement was contemplated, and indeed even before the crisis exploded. The specific points made in the M Document are summarised below. (Readers can access a copy of the M document at http://www.epw.in/system/files/The%20M%20Document%201990%20%281%29.pdf

The M Document argued that the process of liberalisation that had been underway needed to be taken further. Most developing countries had already gone further than we had, and even the Eastern European countries were replacing state and bureaucratic controls with market economy mechanisms. India’s competitive ability would suffer if our industry continued to operate in a restricted environment.

It also pointed out a weakness in our approach, arising from the fact that our liberalisation initiatives consisted of ad hoc steps in a particular direction. They were not conceived as part of an explicitly stated medium-term strategy, in which the end point is clearly identified, and the specific policy initiatives needed to get where we want are then identified and appropriately sequenced and coordinated across ministries to ensure implementation of the whole package. It then went on to identify a reform programme in five interrelated areas discussed briefly below. The note explicitly excluded two important sectors—agriculture and infrastructure—which needed to be considered separately.

Hmm… One has heard so many make claims how they were behind 1991 agenda. But none really give any credit to many others who made a case for freer enterprise much earlier (like of Prof B.R.Shenoy, Forumof Free Enterprise etc).

Then there is this Dr MM Singh speech he have in Apr- 1991 at IIM Bangalore not knowing he would implement the same agenda three months later:

Before moving to what was actually done by the new government, it is important to note that just before the election, in April 1991, Manmohan Singh delivered the convocation address at the IIM Bangalore. He knew at the time that the country was facing a crisis, and his remarks were, therefore, made in the context of a crisis. What he did not know was that two months later he would be directly in charge of handling the crisis. The address outlined a course of action proposed by someone speaking at the time as a technocrat, and it is important because it is a reflection of what he thought was the professionally correct thing to do.

The address called for action on both the fiscal deficit and on structural reforms to improve efficiency and growth. On the fiscal deficit, the address was conventional, focusing on the need to contain current expenditure and reduce subsidies. The difficulty in reducing subsidies, especially food subsidies, was recognised, but it was suggested that the ends could be better met by other means. Export subsidies could be replaced by a more aggressive use of the exchange rate, which is exactly what happened. Fertiliser subsidies could be reduced by raising fertiliser prices, without affecting fertiliser use, provided procurement prices were raised.

The address also dealt with tax reforms to generate the revenue needed for rural infrastructure and universalising access to basic social services, like health and education. It called for “a broad-based, moderately progressive and elastic tax system, so that tax revenues can increase faster than national income growth even without frequent revision of tax rates.” The tax structure should also have “built in incentives to promote savings and reward risk-bearing activities” (Singh 1991).

Wow..Didn’t know this at all. Dr Singh’s lecture is here.

In the end, the agenda continues despite politics:

The limited purpose of this article was to show that the 1991 reforms were a logical culmination of a home-grown process of rethinking. In fact, the policy response in the area of both trade and exchange rate policy went well beyond what the IMF and the World Bank had thought possible. Equally, the conscious exclusion of privatisation made the Indian reform programme very different from what the IMF and the World Bank would have liked.

Two other points are relevant to establish that the reforms were not imposed from outside. First, the IMF programme ended within two years, and we did not need to make subsequent drawings under the Enhanced Structural Adjustment Facility (ESAF), which we were considering. Nevertheless, the reforms continued, at a slower pace admittedly, but they did continue. Had the government only been forced to do the reforms because of the need for IMF funding, it could have reversed course from 1994 onwards; it did not.

Second, the consensus in favour of the reforms went beyond the Congress government in practice. The left-leaning United Front government that followed, under Prime Ministers Deve Gowda and Inder Kumar Gujral, continued down the same track. So did the National Democratic Alliance (NDA) government under Prime Minister Atal Bihari Vajpayee. Politicians vociferously criticised the policy initiatives when they were in the opposition, but this did not prevent them from continuing the very same policies in office, and on many occasions even strengthening them.

There are important lessons here. Democracy is not a consensual form of government. It is an adversarial form in which it is the business of the opposition to oppose. Claiming a consensus on reforms when introducing them runs the risk of an immediate denial by the political opposition, whose function is to oppose. This often worries investors, but they need to separate the noise from the signal, and in India the noise to signal ratio is typically high. What is really important is that there should be no sudden disruptive reversals in policy just because governments change. Indian policymaking since 1991 has survived that test thus far.

Interesting bit of history behind 1991 which one believes is as important to know than just what happened post 1991 (which is also poorly told)…

Coming back to whether it was a domestic agenda or a western one, it is true that thinking goes way back in time. Infact even before Dr Shenoy, the idea of a liberal economy based on free enterprise and markets was pretty much there. What 1991 crisis did was to push government into taking that very route. The crisis could have happened in any of the years but but 1991 became the destiny year. So even if the thinking went long back, the action was mainly determined by aid conditions imposed by external agencies.

Apart from changing many things, 1991 went onto forever change careers of certain economic technocrats and policymakers involved in the discussions. They went onto dominate pretty much every economic policy for around next 25 years..

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