Back'A moment 30 years ago that had been a year and a half in the making’
The President and Distinguished Fellow of the Centre for Social and Economic Progress narrates how the logic-defying system of industrial controls was dismantled, and discusses policies required to deal with the emerging challenges of redeploying labour
PremiumDr. Rakesh Mohan was an adviser in the Industry Ministry from 1988, and later the Chief Economic Adviser in the Vajpayee government, which also appointed him Deputy Governor of the Reserve Bank of India (RBI). He was subsequently appointed Economic Affairs Secretary by the Manmohan Singh-led government, and is currently President and Distinguished Fellow of the Centre for Social and Economic Progress. He narrates how the logic-defying system of industrial controls was dismantled. He also has advice on the policies required to deal with the emerging challenges of redeploying labour and capital in industries going defunct or running into losses.
Why was the industrial control system before 1991 irrational and dysfunctional?
Soon after independence, the dominant view in development strategy globally was that poor countries have to grow through industrial development. Import restrictions were needed because we could not compete with developed countries. Second, planning was needed to accelerate economic development by channelling limited savings to desirable activities. Third, you needed industrial licensing because the domestic market was limited. It was a rational whole in the context of the understanding that you can’t compete, and you have limited resources. The private sector did not have financial resources or technology, so the government reserved large industries for the public sector. Over the 1950s to the 70s, this whole system became rigid, irrational and dysfunctional even though the theory might have been well-intentioned to begin with. In the late 1960s-70s, there was a change in international development thinking because South Korea and Taiwan showed that developing countries could export manufactured goods. There was a move towards freer trade, less planning. This led to changes in thinking in India, but we were slower. Finally, when the Soviet Union collapsed, we changed. We were 15 to 20 years late in changing.
What steps were taken to dismantle this rigid system?
Through the 1980s, there was a slow domestic movement towards liberalization. In 1989-end, in the V.P. Singh government, Ajit Singh was appointed industries minister. He asked, “Why do we have all these controls?" I was economic adviser in the industries ministry. A.N. Varma was industry secretary. We worked intensively in 1990 to prepare an industry policy document designed to decontrol industry, invite FDI (foreign direct investment), technology. It was tabled in Parliament in May 1990. There was a pressure of ideas towards liberalization, mostly within government. Then various political things happened. Chandrashekar rebelled, the VP Singh government collapsed, we had the BoP (balance of payments) and economic crisis in 1991. When the Narasimha Rao government came in, and had to take action, we had everything ready. The government came in late May and we produced a fully reasoned document within six weeks, which was laid in Parliament on 24 July 1991. The point I want to make is that it had actually been a year and a half in preparation. All the homework had been done so that we could answer any question anyone could raise.
Urjit Patel, during whose term as RBI governor the insolvency and bankruptcy code (IBC) reform began to show results, has said dilution of the provisions is regressive…
We need to stick with the IBC. There is no question in my mind... It is very simple conceptually: Companies go bankrupt, the activities don’t. Let me put this in a simple example: When an airline company goes bankrupt, nothing happens to the aircraft, pilots, staff, travel agents. It has to be restructured to become productive again. When businesses get into trouble, you want an orderly exit of the company but not of the activities... When we started the National Renewal Fund Proposal in 1993-94, we proposed retraining activities. There is a lot of discussion currently on reskilling. But worldwide, retraining has never been easy. It is one of the issues the US economy has been subject to with the rapid decline of manufacturing. It has been convenient to blame China for their manufacturing decline. It is not China. It is much more due to technology changes and movement in comparative advantage and that adequate procedures and policies don’t exist to redeploy labour that is being displaced. The important point is if you don’t have an orderly insolvency and bankruptcy code, bankrupt companies will not get restructured, resources won’t get redeployed productively, leading to continuous all-round losses.
Puja Mehra is an independent journalist, a podcaster and the author of The Lost Decade (2008-18) How India’s Growth Story Devolved Into Growth Without a Story.
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