Context:-
It is now celebrates 30 years since India’s economic liberalization programme began. Massive libraries can be built solely devoted to how the Indian economy and Indian lives have changed since 24 July 1991, but let us swim against the tide and go back several decades before 1991, and look at something that’s core to reforms, an area where much has changed, yet much may not have.
Mohammadali Carim Chagla, an extraordinary man who is largely forgotten today.
Chagla was chief justice of the Bombay High Court, was handpicked by India’s first prime minister, Jawaharlal Nehru, to be our ambassador to the United States, was education minister from 1963 to 1966 and then briefly minister for external affairs in Indira Gandhi’s cabinet.
He went on to be a leading voice against the Emergency. Throughout his distinguished career, he stood for certain inalienable principles of liberty, nationalism and secularism.
Chagla saw from close quarters, the like of Muhammad Ali Jinnah to Nehru, John F. Kennedy to Fidel Castro. But lets confine to one episode, again largely forgotten today—the Haridas Mundhra affair, which was the first big financial scandal of independent India.
In 1957, Parliament was rocked by allegations that Life Insurance Corporation (LIC), under pressure from the finance ministry, had bought worthless shares in companies promoted by Calcutta-based businessman Mundhra for ₹1.24 crore—about ₹9,000 crore in current terms.
The finger of suspicion pointed towards then finance minister T.T. Krishnamachari and finance secretary H.M. Patel, both of whom denied any knowledge of the matter. Under fire in Parliament and in the media, Nehru appointed Chagla as a one-man inquiry commission.
Chagla submitted his report within a month, which must still be a record for Indian inquiry commissions. Though no direct guilt could be established, Nehru had no option but to ask Krishnamachari to take responsibility for the LIC scandal and resign. Mundhra went to prison.
The last section of Chagla’s report starts with the words: “If I may say so, without undue presumption, the following principles seemed to be established as a result of a careful consideration of all the material that has been placed before me…“
He then made some recommendations.
- One, the government should not interfere with the working of autonomous statutory corporations.
- Two, the chairman of the corporation should be appointed from among persons who have business and financial experience.
- Three, if executive officers of the corporation are to be appointed from the civil services, it should be impressed upon them that they owe a duty to the corporation, and that they should not permit themselves to be influenced by senior officials of government, or surrender their judgement to them.
- Four, the funds of LIC can only be used for the benefit of its policy holders and not for any extraneous purpose. If they are used for any extraneous purpose, that purpose should be in the larger interests of the country.
- Five, in a parliamentary form of government, Parliament should be taken into confidence by the relevant minister at every stage, and all the relevant material must be placed before it.
- Six, a minister must take full responsibility for the acts of his subordinates, and he cannot be permitted to say that his subordinates did not reflect his policy or acted contrary to his wishes and directions.
These recommendations were made in February 1958. Can anyone argue that they were wrong? And can anyone claim that they have not been extensively ignored by almost every government?
Politicians in power have routinely used the resources—in cash and kind—of public sector units (PSUs) to further their own narrow objectives.
Ability vs Loyalty
- By the 1970s, the heads of some of the largest and wealthiest of these corporations were being appointed for political loyalty rather than ability.
- Bureaucrats with no domain expertise were heading PSUs in sectors that needed specialized knowledge, and they would do the bidding of the bureaucrats they reported to.
- This was in their personal career interests, which may or may not have had anything to do with the company’s.
- LIC has traditionally been the favourite milch cow for governments. Its money has been used to shore up markets, buy useless stock in dead-end PSUs and help out crony capitalists.
- A significant part of the disinvestment figures claimed by governments has been one PSU being forced to buy shares in another PSU, which is nothing other than transferring money from one pocket to another without real economic or financial goals being met.
- On the other hand, several once-valuable PSUs have been sold off at a pittance after they had been systematically run into the ground.
Conclusion
Yes, an LIC public issue is said to be in the works, and a general insurance company is to be privatized. But there is uncertainty about when these could happen. The longer the government waits, the less money it will possibly end up raising. Meanwhile, as we celebrate 30 years of the economic reforms, Chagla’s recommendations remain as valid as they were more than six decades ago.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.