Conversations With Indian Economists

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Conversations with Indian Economists

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Also by V. N. Balasubramanyam INTERNATIONAL TRANSFER OF TECHNOLOGY TO INDIA MEETING THE THIRD WORLD CHALLENGE (with A. I. MacBean) THE ECONOMY OF INDIA

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Conversations with Indian Economists V. N. Balasubramanyam Professor of Development Economics Lancaster University

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© V. N. Balasubramanyam 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–77774–3 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Conversations with Indian economists / V.N. Balasubramanyam. p. cm. Includes bibliographical references. ISBN 0–333–77774–3 1. India—Economic conditions—20th century. 2. India– –Economic policy—20th century. 3. Economists—India– –Interviews. I. Balasubramanyam, V. N. HC435 .C753 2000 338.954—dc21 00–044629 10 10

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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Contents Preface

vii

1 Introduction

1

2 P.R. Brahmananda

26

3 I.G. Patel

42

4 A.M. Khusro

61

5 Manmohan Singh

83

6 C. Rangarajan

99

7 T.N. Srinivasan

120

8 J.N. Bhagwati

138

9 Ashok V. Desai

155

10 K.L. Krishna

174

11 Bimal Jalan

184

12 B.V. Krishnamurti

198

Notes

202

v

Preface This book is based on my conversations with ten of India's reputable economists on various aspects of India's economic performance and policies. All the conversations were recorded. My edited versions of the tapes, though faithful to the recorded conversations, may have contained factual errors, inadvertent omissions, misplaced emphasis and perhaps misinterpretation on my part of what was said. Also, verbatim transcripts of the recorded conversations would have added many more pages to the book. For these reasons the taped conversations have been edited to a mutually agreed text. None of the ten economists, though, made substantial alterations to the transcribed text or changed the views they had expressed when I interviewed them. The changes they suggested were mostly those of style and not substance. I am indebted to Professor P.R. Brahmananda for the paper on education by the late Professor B.V. Krishnamurti reproduced in this volume. I am grateful to the ten economists who agreed to talk to me amidst their busy schedules. I appreciate their good humour and patience in coping with an interviewer who frequently skipped from one issue to another with gay abandon. I thank them for their kindness and hospitality. I owe a debt of gratitude to many friends and colleagues for their help and encouragement with this project. I thank my friend and colleague Professor Graham Chapman of the Geography Department at Lancaster, Professors N.S. Siddharthan and K.L. Krishna in Delhi who coped with my incessant demands for help and advice. I should thank Dr Sudhir Krishna and Dr Gaiti Hasan, scientists at the Tata Institute of Fundamental Research, Bangalore, for their hospitality and their provocative views on Nehruvian economic policies which shaped many of the questions I posed to the ten economists. My idea of doing a book on India based on conversations with Indian economists would not have materialised but for Dr Ahalya Balasubramanyam's help, encouragement and support at every stage of the endeavour. I should record my gratitude to Ms Carol Barlow and Ms Jackie Rodgers for transcribing the tapes and word processing successive drafts, tasks which they performed with patience and good humour. I am indebted to Mrs Ruth Willats for her help and advice on editing the typescript. I am grateful to R.K. Laxman of The Times of India for permission to reproduce the cartoon on the vii

viii Preface

cover of the book. I gratefully acknowledge the ®nancial support for the project provided by the Department of International Development of the UK and the Royal Economic Society. V.N. Balasubramanyam

1 Introduction On my visits to India over the past three years, researching the software industry, I met a number of young software engineers, scientists, journalists and economists. These are the young Indians in their twenties and thirties, quite a few of them educated in American and British universities, accustomed to patterns of life and work in the West, and all of whom are exposed to new ideas and methods of thinking in the age of information technology. Inevitably, the discussion turned to globalisation and economic reforms, India's much admired software industry being in many ways a product of globalisation and liberalisation. For this generation of Indians, the country's past economic policies and performance are an enigma. Why is India at the bottom of most league tables after 40 years of economic planning? Why did the country adopt an inward-looking policy framework in the ®rst place, why did we stick to it long after it had failed to deliver the goods? Why didn't our brilliant economists advise the government to switch gear during the 1970s and imitate the East Asian countries? Many argued `it was all Nehru's fault, he looked to the Soviet Union for a model instead of Japan or the United States'. Rightly or wrongly, they blamed the leadership of the past for the corruption, bureaucracy and red tape they encountered in their daily life. Others, drawing upon the experience of China and the East Asian tigers, attributed India's abysmal poverty and low levels of literacy and education to India's worship of democracy. Did our brilliant economists who crafted the grand design of the past sacri®ce social goals for growth? Much more parochial concerns too were aired. How do we know that software won't go the same way as other industries of the past, such as textiles and leather goods? The inspiration for this book comes from these young Indians. Many of the issues they raised have been discussed at length. There is a vast literature on India's economic philosophy, policies and performance over the past four decades. The 1991 economic reforms inspired several more books, monographs and articles, many by specialists, quite a few by informed journalists, all designed to educate the concerned citizen, the non-specialist and the intelligent observer of the Indian scene. Much of it is contentious, most of it is inevitably coloured by ideological dispositions of whoever is writing, notwithstanding protestations to the contrary. The concerned citizen, much like the one in the cartoons by India's well1

2 Conversations with Indian Economists

known cartoonist R.K. Laxman, is likely to be bewildered rather than enlightened by this barrage of books and articles. Why then another book? The excuse is that this is a book with a difference. It invites ten of India's reputable economists to comment on a variety of issues relating to the past and the present. All ten economists I chose to talk to are persons of great distinction with formidable reputations as academics, top civil servants, policy makers and policy analysts. All of them were associated in one way or the other with the grand design of the past, widely known as the Nehru±Mahalanobis development strategy. Some of them had a hand in crafting the theoretical design, some monitored its operation for over three decades, some were critics of the design and others were engaged in extensive research and teaching on a variety of issues associated with it. They have all played similar roles in relation to the 1991 economic reforms. It is said that `it is not entirely wrong to agree with the cynical view that India's misfortune was to have brilliant economists: an af¯iction that the Far Eastern super powers were spared.' This is not a comment by someone pandering to popular prejudice against economists, but from Jagdish Bhagwati, himself one of India's brilliant economists. Frustration rather than a loss of faith in his chosen profession appears to underlie Bhagwati's remarks: frustration that despite all the brilliance of her economists, India ranks well below most other developing countries on most criteria of growth and development. Lord Keynes (1930),1 talking about the economic problem, wrote `if economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid.' India's economists are much more than competent, they are brilliant people who should have been able to meet any challenge. But they seem to have got policy badly wrong. Why? Economists, much like other professionals, are prisoners of their training, the prevailing orthodoxy and ideologies. The economic philosophy and policies that India's economists shaped were conditioned by the prevailing ideology and orthodoxy during the 1950s and the 1960s. They rose to the challenge of producing intellectual support and rationale for the economic philosophy and ideology enunciated by India's leaders soon after the country had achieved political independence. It should, though, be a consolation that in recent years it is again India's brilliant economists who are attempting to erase the follies of the past and set the Indian economy on a new trajectory. The ten economists, because of their reputation and expertise, are well placed to discuss several of the issues raised earlier. Admittedly, they have all written copiously on many of the issues and continue to do so. I could

Introduction

3

have drawn upon their published work and produced an anthology or invited them to contribute an essay each to an edited volume. But then the choice of material to include in an anthology would be coloured by my prejudices and perceptions of the issues. Also, the format I chose allowed the ten economists to re¯ect and talk informally on a variety of issues, which they would have been hard pressed to do in an essay with all the formal paraphernalia of footnotes, quali®cations of statements and citations. Beyond that, within limits, I could set the agenda for discussion. It was not my intention to subject the interviewees to an interrogation on their earlier beliefs, their change of heart on policy issues and any mistakes they may have made. I wanted them to re¯ect on the events and circumstances that shaped economic policy, discuss the intellectual in¯uences which had shaped their own thinking, and comment on the present-day problems and future prospects for the Indian economy. This book is also a result of my desire to introduce the life and work of several of India's brilliant economists, albeit brie¯y, to the younger generation. The issues the ten economists re¯ect upon cover a wide terrain, from the intellectual underpinnings of the import-substitution strategy to the wideranging debate on liberalisation and the 1991 economic reforms. This brief chapter introduces the reader to some of the principal issues I discussed with the ten economists and provides the context for the rest of the book.

The grand design Nehru's ideals of democratic socialism, self-reliant industrialisation and social redistribution shaped the design of economic policies in place until recently. The main elements of the policy framework included extensive public ownership of the means of production in industry, bureaucratic control over production, investment and trade, and import-substitution with a highly regulated foreign trade and foreign investment regime. The grand design, which for the large part didn't work, has been analysed extensively; its roots have been examined, its inner contradictions have been exposed, its legacy of the so-called rent-seeking society and its bequest of an inef®cient and unspecialised industrial structure is lamented. Debate continues, however, on the reasons for the adoption of the strategy in the ®rst place, including the role of India's ®rst Prime Minister, in pushing it through. There are many interpretations of Nehru's role in crafting the inward-looking heavy industry-oriented strategy. Some argue that his acquaintance with the Fabian socialists in England, whilst he was a student there, conditioned his thinking in favour of an industrialised socialist democracy. Others attribute the strategy to his

4 Conversations with Indian Economists

perceived admiration for the Soviet model of industrialisation. His biographers and commentators on the Nehru era, though, cast doubts on these interpretations of Nehru's economic philosophy. No doubt Fabian socialism and the Soviet model in¯uenced his thinking, but there is no evidence to suggest that he accepted these ideas in toto and transplanted them in India. Nehru's biographer, Sarvepalli Gopal (1993),2 refers to Nehru's contempt for the motley crowd of Marxists, Fabians, Gandhians and orthodox Hindus who led the Congress Party. His brand of socialism was eclectic, with elements of Western socialism and Soviet planning, which emphasised socialism as a means to an end and not an end in itself. The end was distributive justice, to be attained through increased production with the utilisation of modern science and technology. There is also no evidence to suggest that Nehru was in¯uenced by the Soviet-style command economy model. In fact, he was highly critical of the political consequences of the Soviet experiment and, as Sunil Khilnani (1997)3 says, Nehru's ideas after 1947 `were more improvisatory than ideological and aimed to unite into a single, coherent strategy quite diverse intentions.' His advocacy of state ownership of industry too was guided by pragmatic considerations; the state would provide for stability, unlike the private sector which, guided by pro®t motives, would react to the vagaries of the market. Whilst the private sector would neither be able nor willing to undertake the substantial investments in capital-intensive heavy industries, the state could not only do so, but also garner the pro®ts of public enterprises for purposes of redistribution. It should also be added that Nehru did not advocate collectivisation of agriculture, instead he championed co-operative farming; he did not abjure private enterprise; instead he advocated a mixed economy in which private enterprise would have a role to play. Whether or not curtailment of imports and restrictions on foreign investment was an integral part of this philosophy is not clear; but a natural aversion to dependence on Britain, the former colonial power and India's main source of external investment and trade partner during the days of the Raj, was a factor in the inward-looking policies the country adopted. P.R. Brahmananda and I.G. Patel (see chapters 2 and 3), both of whom played an active role as advisors and critics of economic policy during the Nehru years, do not regard Nehru as an ideologue, but as a man with a vision. Perhaps his vision of a modern industrial society rooted in socialism and democracy was much too Utopian in the sense that it was attempting to reconcile the irreconcilable. As I.G. Patel (1998),4 commenting on India's economic philosophy over the years, puts it: `It is

Introduction

5

this desire to reconcile the opposites, to try and achieve all the goals all the time through each means, which is perhaps at the root of India's comparative economic failure.' The irreconcilables in Nehru's vision were the attempt to cream off the best of both capitalism and socialism, attain both growth and equity, not ultimately, but all the time, and exercise state control over the means and pattern of production whilst preserving consumer sovereignty. Nehru could also be accused of many sins of omission including his failure to push through land reforms with vigour before embarking on cooperative farming, failure to institute a vigorous population control policy and failure to promote mass education. With hindsight, it is easy to identify all that could have been done, it is also far too easy to ignore the severe institutional and resource constraints policy-makers were faced with during the early years of planning. Land reform legislation and its implementation belonged to the State governments, many of which honoured the legislation they enacted more in the breach than in the observance. Again, primary education was and continues to be the responsibility of state governments and it is not compulsory. In any case, in the early years, Nehru's mind was focused on establishing a cadre of scientists and technologists to assist the process of science-based industrialisation. He frequently exhorted State governments to promote primary education, but his active support and enthusiasm were for tertiary education. Nehru, at least during the early years of planning, did not consider population to be a major problem, and believed that spread of education would arrest the growth of population. As Gopal puts it: `[Nehru] was con®dent that as education spread and development accelerated, the birth rate would automatically go down; meanwhile, it was no good just getting a pill and making everybody swallow it.' That development is the most powerful method of arresting population growth is now a universally shared sentiment, though it failed to impress Nehru's grandson, Sanjay Gandhi. He opted for coercive and compulsory birth control policies with disastrous results. The grand design in its pristine form, bereft of the various controls and trappings it acquired later, was, however, the ®rst ever attempt at planned development. As the Oxford economist I.M.D. Little (1982)5 observes, the style of Indian planning and development owed nothing to the Western and Latin American debates on structuralism, import-substitution, externalities and linkages. It was swadeshi in conception, although the emphasis on heavy industry was inspired by the Soviet example. Its objective of self-reliant industrialisation within a socialist democratic framework was much admired. It was an experiment which had the

6 Conversations with Indian Economists

intellectual support of many American and British economists. The number of scholars who visited India at that time to observe and participate in the novel experiment, as Bimal Jalan says, reads like a Who's Who of the economics profession. For all its faults, Nehru's development strategy was not a total failure; it did deliver moderate growth with stability until the early 1960s, it endowed India with a substantial pool of scientists and technicians, and prestigious research and training institutions, and it laid the agenda for the future. Nehru's vision had to be crystallised in a model which could be implemented. The formal process of planning began essentially with the Second Five-Year Plan launched in 1956. The building blocks for the grand design were provided by the famous Mahalanobis model. Its emphasis on heavy industry, its reliance on small-scale industries and agriculture for the production of consumer goods, the pattern of investment allocation it suggested, and its neglect of foreign trade have all been widely discussed. Subsequent developments in India's economy were conditioned and shaped by the Mahalanobis model. There is considerable discussion on the various in¯uences which shaped the model. In this volume, Brahmananda (chapter 2) talks about the intellectual input from the Soviet economists which shaped the model, and his own well-known attempt at formulating an alternative strategy. I.G. Patel (chapter 3) refers to the unfolding economic forces which compelled the adoption of the inwardlooking strategy, and Jagdish Bhagwati (chapter 8) outlines how erroneous and untested assumptions concerning foreign trade and other aspects of the economy resulted in a model which he has recently referred to as `the model that couldn't' (1994).6

Controls The puzzle, though, is why did the policy-makers turn a blind eye to exports and the bene®ts of foreign trade, and why did India adhere to the strategy for more than three decades, long after it had failed to deliver the goods? The ®rst of the two questions is not that much of a puzzle. It was never the intention of the planners that self-reliance should be attained through import controls. Compulsion rather than choice appears to explain the genesis of import controls in India. The Second Five-Year Plan, which began, in fact, with import liberalisation, ran into a severe foreign exchange crisis both because of the liberalisation and the heavy import requirements of the Plan itself. As I.G. Patel (1998) notes, it was not economic theory or philosophy, but necessity which was the mother of the invention of extensive import controls.

Introduction

7

That which is a puzzle though is the vast extent of controls and their longevity. The key to the puzzle is that the strategy had the blessings of the economists which gave it a rationale, and the expertise of the bureaucrats sustained it. The economists did not have far to seek for a rationale. The prevailing orthodoxy during the 1940s and the 1950s was that import controls were essential for industrialisation. In fact, as I.M.D. Little suggests, the arguments for import controls, of which there were several, had little to do with planning. Ingenious Indian economists sought a rationale for controls on the basis of the argument that the demand for the products of developing countries in external markets was stagnant. This argument provided a rationale for the establishment of heavy industries or capital goods industries. Home-grown heavy industries were essential because exports could not be relied upon to provide the foreign exchange required to import capital goods. Indeed, even if the country were able to mobilise the savings required for investment, such savings could not be transformed into investment goods via foreign trade because there were no markets for exports. This thesis, which Jagdish Bhagwati and Padma Desai (1970)7 dubbed `Export Pessimism', provided a powerful rationale for the importsubstituting industrialisation strategy. It was the prevailing orthodoxy which neatly ®tted the heavy industry-oriented industrialisation model crafted by the policy-makers. It was a thesis which was not only supported at that time by Indian economists, but also blessed by several visiting economists including I.M.D. Little (1982). But little did they know that the model they had blessed would develop a momentum of its own and grow into monstrous proportions. Controls over imports, along with industrial licensing policies designed for purposes of investment allocation between and amongst the private and public sector ®rms, gave birth to what is now known as `the Permit Raj'. Once established, the Permit Raj knew no bounds; it grew in complexity nourished by power-hungry bureaucrats, pro®t-seeking businessmen and patronage-dispensing politicians. Its survival is a testimony to the patience and ingenuity of those who had to live with the mind-boggling complexities of the system. Ashok Desai (1993)8 succinctly captures the nature of the beast as it existed until the mid-1970s, when he writes: The entire policy was one of forbidding complexity, enough to put off all who could avoid importing. But the Red Book, as it was called, was a best seller. All importers bought it, studied its complexities and looked for ways of exploiting them pro®tably; where they felt they had been

8 Conversations with Indian Economists

done by, they petitioned the Joint Chief Controllers of Imports and Exports or special appellate committees set up for the purpose; if they won their point, the JCCI&Es issued noti®cations to modify the Red Book ± hundreds were issued every year. The Byzantine system remained more or less intact until the reforms of 1991 were introduced, though attempts to streamline it were made during the late 1970s and the early 1980s. The widespread corruption, enormous waste of resources and inequities the system inevitably generated have all been extensively analysed (Bhagwati and Desai, 1970, Bhagwati and Srinivasan, 1975).9 Far from delivering the cherished socialistic pattern of society, the system of controls turned India into a rent-seeking society as the economist Anne Kruger has labelled it, with Indian entrepreneurs actively pursuing what Bhagwati refers to as unproductive pro®t-seeking activities. One explanation for the survival of the system is its very complexity. As Rakesh Mohan (1992),10 a former advisor to the Ministry of Industry, writing soon after the 1991 reforms were introduced, notes: `it was almost impossible to comprehend all the various arcane categories of approvals which were endemic to the system. Even insiders had dif®culty in understanding the rationale for the various categories. The organisation of the government itself, with different ministries having different responsibilities and areas of turf to protect, also mitigated systematic change. As a result, the ®g leaf of planned development through licensing and controls remained until now. That the emperor had no clothes was too painful for the system to acknowledge.' This is a charitable explanation, with some truth in it, for the longevity of the system. The explanation much nearer to the whole truth is that the complex apparatus endured because of the alliance between businessmen, politicians and bureaucrats who had much to gain and little to lose from it. Economists may take comfort from I.G. Patel's (1998) view that `the blame for this rather disastrous aberration in economic policy cannot entirely or largely be laid at the door of economists ± although it is fair to say that once introduced, many economists were slow to realise the full long-term rami®cations of rampant protection.' Like the fabled Frankenstein, the economists didn't anticipate the monstrous demands of the creature they had brought to life. Those that were quick to realise the rami®cations did rail against the inef®ciencies and inequities of the system, but in vain, because of the entrenched vested interests and opposition to reform from other economists and ideologues who equate change with surrender to the dark forces of the market and capitalism.

Introduction

9

The public sector Public ownership and control of the means of production is a part of the socialist doctrine. In India, however, it was not the original intention of the policy-makers to pursue State ownership of industry as an end in itself. It was intended as a means towards an end ± the promotion of the social good. State-owned and State-controlled industries and services were to generate the resources for redistribution, a task which a poor country such as India could not achieve through ®scal means. The State was to invest in sectors such as heavy industry in which the private sector would not invest. And the State-owned enterprises were to complement the private sector and work alongside to promote development objectives. Nehru's statement to the Parliament in 1956 explicitly disavowed the pursuit of doctrinaire socialist policies: I can understand prevent that, control that, plan for that; but where there is such a vast ®eld to cover, it is foolish to take charge of the whole ®eld when you are totally incapable of using the huge area yourself. Therefore, you must not only permit the private sector, but I say, encourage it in its own ®eld. Here again is an expression of Nehru's desire to ride two horses at the same time; promote a socialistic pattern of society through gradual extension of State ownership and control of economic activity, and at the same time preserve economic freedom including the right to private property and private ownership of industry. In the event, the desire for promoting a socialistic pattern of society won the day. Not only was the private sector muzzled with the imposition of various sorts of controls and licensing procedures, but also heavy industry, which was to be the preserve of the State, was seen to be all-encompassing. The central government alone established 236 commercial enterprises, not counting the public ®nancial institutions, insurance companies and railways. These included enterprises in construction (6), services (74) and manufacturing (166). The total capital employed by these enterprises at the end of the year 1995 was around Rs 1600 billion. In addition, there are the enterprises owned by State governments. The public sector enterprises employ 19 million people, more than double the number of jobs provided by the private sector. Whilst the size of the public sector in India may satiate the socialists, it has hardly generated any resources for redistribution, instead it has imposed a heavy burden on the exchequer. The public sector enterprises

10 Conversations with Indian Economists

did sow the seeds of industrialisation. India could boast of producing a variety of investment goods including steel, chemicals and fertilisers, heavy engineering goods and transport equipment. The temples of modern India, in the words of Nehru, were in place, but most of them could only survive with huge donations from the State. Of the 236 enterprises owned by the central government, 104 incurred heavy losses in the year 1996/97. With rare exceptions, the number of lossmaking enterprises was never less than a 100. If many of the loss-making enterprises continue to be in business, it is because of the substantial subsidies from the government they enjoy (see K.L. Krishna on sick industries, chapter 10). They seem to have achieved the goal of redistribution, but unfortunately in a perverse fashion, from the poor to the managers and employees of the enterprises. Public funds which could have been used to provide health care and education for the poor are used to prop up inef®cient loss making enterprises. As a World Bank (1995)11 study notes, diverting subsidies from State-owned enterprises would have increased government spending on education by 550 per cent in India. Alternatively, these funds could have increased health expenditures ®vefold. A redeeming feature of the loss-making enterprises, if it could be called that, is that they provide jobs, but at a huge cost to the government in subsidies. One such enterprise, The Hindustan Fertiliser Factory in West Bengal, set up at a cost of $1.2 billion in 1986, employed 1,550 workers in the year 1994. And it had all the accoutrements to be found in a modern industrial establishment, such as a canteen, a personnel department, an accounts department, and engineers, electricians, plumbers and painters to maintain the equipment. The only thing missing was fertilisers: the factory had produced none since its establishment.12 Here again the story is one of good intentions gone wrong. The reasons for the failure of the public sector enterprises to live up to the expectations of the planners have been rehearsed time and again. They were granted virtual immunity from the rigours and discipline of the market because of the protection they enjoyed. While import quotas shut off competition from external sources, industrial licensing prevented privately owned domestic ®rms from encroaching on the reserved territory of the public sector enterprises. They were not accountable to shareholders as there was none save the government, the sole shareholder. Arguably, the nature of ownership does not matter; ultimately it is the ef®ciency with which the enterprises are managed which counts. Freedom of action and a degree of autonomy in decision-taking are values managers cherish. But Stateowned enterprises supervised and monitored by civil servants are unlikely

Introduction 11

to provide an environment in which enterprise and risk-taking can thrive. The problem is compounded when civil servants and bureaucrats arrogate to themselves managerial functions for which they are ill equipped by training and temperament. Add to this the power exercised by trade unions on these enterprises, they could hardly be expected to conform to norms of ef®ciency of any sort. Lack of accountability seems to be the nub of the problem. Shashi Tharoor (1997)13 captures the essence of the problem when he comments on the attitude of the government in response to complaints concerning rampant breakdowns of telephones in the country. C.M. Stephen, Prime Minister Indira Gandhi's Minister for Communications, is reported to have seethed with indignation when questioned in the Parliament about the inadequacies of the telephone system. Telephones were a luxury, not a right, according to the Minister, and any Indian who was not satis®ed with the telephone service could return his phone. Tharoor's comment on the minister's response is worth quoting in full. It was ignorant (he had no idea of the colossal economic losses caused by poor communications), wrong headed (he saw a practical problem as only an opportunity to score a political point), unconstructive, (responding to complaints by seeking a solution apparently did not occur to him) self righteous (the socialist cant about telephones being a luxury not a right), complacent (taking pride in an eight year waiting list which should have been a sense of shame, since it pointed to the poor performance of his own ministry), unresponsive (feeling no obligation to provide a service in return for the patience and the fees, of the country's telephone subscribers) and insulting (asking long suffering telephone subscribers to return their instruments instead of doing something about their complaints). What is to be done with the loss-making public enterprises? One idea mooted by the government sometime back was to ask the pro®tmaking enterprises to purchase some of the loss-making ones. If there was ever a poisoned chalice on offer to the ef®cient ones, this must be it. The economists I talked to suggest several solutions, including privatisation, management contracts to be awarded to private enterprise to manage public enterprises, and increased competition from private sector enterprises. It is an inescapable fact, however, that until and unless the loss-making enterprises are laid to rest in some fashion or the other, they will continue to be a drain on the public exchequer.

12 Conversations with Indian Economists

Agriculture The grand design crafted during the mid-1950s is often equated with industrial fundamentalism. It is accused of neglect of agriculture, which contributed more than half of the national product, and employed more than three-quarters of the country's labour force. This though may be an over-statement. As Francine Frankel (1978),14 in her admirable study of India's political economy, states: Nehru and the members of the Planning Commission were all aware that the new emphasis on rapid industrialisation and expansion of the public sector had far reaching implications for plan policies in agriculture. Large investment outlays on basic and heavy industries were bound to raise demands for food grains and raw materials. Nehru himself constantly reiterated that the entire programme of industrial development depended on achieving adequate increases in agricultural productivity, which he called the `keystone of our planning'. The First Five-Year Plan (1951±56) was essentially an agricultureoriented plan with more than a third of the planned investments of Rs 23 billion devoted to agriculture, irrigation and community development. No doubt the Second Plan (1956±61) veered heavily towards industry. Even so, the total amount of money devoted to agriculture in the Plan was not insubstantial. As against the total investment of Rs 7 billion in the First Plan, the Second Plan invested Rs 9.4 billion in agriculture. It is arguable if anything more could have been done for agriculture without shifting the entire emphasis of planning from industrialisation to agriculture (see Manmohan Singh, chapter 5). Indeed, an alternative model of development centred on agriculture and rural industries was proposed by the Bombay School economists ± P.R.Brahmananda and C.N. Vakil. The socalled wage goods model (see Brahmananda, chapter 2) would have put the economy on an entirely different trajectory from the one proposed by the Nehru±Mahalanobis model. But given the government's commitment to industrialisation, the best that could be hoped for was increased agricultural output with existing technology. It was the belief that institutional change in agriculture centred on co-operative farming, land reforms and community development, collectively known as integrated rural development programme, would transform the rural sector. This design too re¯ects Nehru's desire to promote socialism with a human face. As he put it: In the world today, there is an inevitable tendency for everything to be done on a larger and more centralised scale. It has many advantages,

Introduction 13

more especially if these large scale operations are controlled by a few private individuals; decentralisation by itself is not likely to succeed unless we bring to it the advantages of large-scale co-operative working through co-operative process. The alternative is State ownership. We have no other choice but co-operative farming. The real alternative is collective farms owned by the State, which most communist countries have. (cited in Frankel, 1978) Co-operative farming was an acceptable half-way house between a capitalist agrarian pattern and collectivisation. China's reported success with co-operatives and State procurement and distribution of food grains was often invoked in support of the strategy. Several high-powered delegations visited China and produced glowing reports on China's success in mobilising manpower to increase agricultural output, much to the exasperation of those responsible for policy implementation. The then Minister for Food A.P. Jains' remarks are illustrative: Our people were going to China. Delegations were coming and going. My Minister of State made fantastic statements in Parliament that the Chinese were ploughing four feet deep. He showed a fantastic photograph of a man climbing up the leaves of tobacco plants to show how tall it was. Children were shown dancing on the top of paddy crops. All this the planners were convinced came from mobilising surplus manpower. We had begun to believe that by sheer utilisation of the vast labour power, you can achieve anything and everything. (cited in Frankel, 1978) The delegations to China appear to have ignored one crucial difference between India and China: India's model of co-operatives, unlike those in China, was based on voluntary co-operation, not compulsion and coercion. The State governments which were responsible for the implementation of agrarian reforms were in general much less enthusiastic than the Prime Minister and the Planning Commission in implementing the reforms. Co-operative farming was largely a failure both because of a shortage of ®nancial and human resources required to promote it, and the lukewarm support for the philosophy in general. Legislation on land reforms enacted by most governments was notable for the many avenues for evasion it provided. Pranab Bardhan (1974)15 succinctly sums up the state of affairs: `Laws were frequently enacted with deliberate loopholes and tell-tale exemptions designed to induce ®ctitious transfers of land to close and distant relatives and to keep the permissible retentions high.

14 Conversations with Indian Economists

These laws were executed by a local bureaucracy largely indifferent, occasionally corrupt, and biased in favour of the rural oligarchy.' Even so, land reforms cannot be said to be a dismal failure everywhere and anywhere. Although they fell far short of the objectives of the planners, they were to a large degree successful in promoting security of tenure and equity. A.M. Khusro (chapter 4), one of India's leading experts on agriculture and agricultural policy, considers the promotion of equity as a signi®cant achievement of India's land reforms. And to have done so within the con®nes of a democratic framework is no mean achievement. In this context, T.N. Srinivasan's comment (chapter 7) that successful land reforms have been mostly carried out by radical governments or foreign powers is apt. In fact, Huntington and Nelson go further when they say: `the evidence is overwhelming that land reform is more likely to be introduced effectively by non-competitive and non-democratic governments ... Parliaments are the enemy of land reform' (cited in Tharoor, 1997). Agricultural reforms of any sort, let alone land reforms, appear to rouse opposition. By the mid-1960s, it was clear that agricultural growth required much more than half-hearted institutional change. The new strategy, proposed by the then Minister for Agriculture C. Subramanian, centred on technological change. This strategy too met with opposition from the Planning Commission and the Finance Ministry. In the event, the Minister for Agriculture had his way and the new strategy was implemented. The strategy which came to be known as the Green Revolution consisted of three elements: introduction of new, highyielding varieties of rice and wheat, institution of incentives to farmers in the form of remunerative prices, and gradualism in the sense that the policy was to be con®ned to selected areas. The new strategy opened up yet another fertile area for controversy and debate concerning its impact and ef®ciency. (See Balasubramanyam (1982)16 for a summary of the debate.) The consensus, though, is that whilst the strategy may not have wrought any miracles, it sustained growth of agricultural output. The 1991 reforms have rekindled debate on wider issues such as the interrelationship between agriculture and industry, and the prospects for integrating Indian agriculture with the world economy. The notion that agriculture has remained a poor cousin to industry, although it has enjoyed bouts of of®cial favour as in attempts at institutional change prior to the mid-1960s and the injection of technology thereafter cannot be discounted. Many of the woes of agriculture, though, have to do with the foreign trade policies India has hitherto pursued. Tariffs and quotas on imports of manufactured goods increased the price of these goods to agriculture; farmers had to pay increased prices for both the consumer goods

Introduction 15

and inputs such as machinery and pesticides they bought from the manufacturing sector. In addition, prices of most agricultural products were controlled and held below world prices, and in many cases, exports were discouraged. All this amounts to a heavy implicit taxation of agriculture despite the subsidies on fertilisers, water and electricity it receives. Most of the subsidies, however, are received by the relatively rich farmers engaged in the production of cash crops such as sugar and edible oils. And they also impose a heavy burden on the public ®nances of the country. The 1991 reforms of trade policy were to a large extent con®ned to the industrial sector. Liberalisation of trade in agriculture is yet to come. The debate, though, is on whether or not liberalisation of trade in agriculture would promote ef®ciency and equity. Most commentators are of the view that while it would free agriculture of the multitude of restrictions on trade, and promote production and trade in several commodities, it may also result in increased food prices. A properly functioning public distribution system should, however, contain the problem. The existing Public Distribution System (PDS) is known to be rife with corruption and inef®ciencies, and requires a major overhaul. T.N. Srinivasan's comments on the existing system and his proposal for a system of food vouchers in its place is notable in this context (chapter 7). Liberalisation of agriculture, however, has to be accompanied by investments in agricultural infrastructure to improve productive ef®ciency. Investments in infrastructure along with the removal of the implicit tax burden imposed on agriculture, referred to earlier, should serve to increase employment and incomes. Abolition of the heavy subsidies provided for agriculture, which on most accounts have hardly served to promote ef®ciency or equity, should generate the resources required for infrastructure investments. Such infrastructure could include facilities for the establishment of industries of the sort which utilise relatively large amounts of labour in the rural areas. Bringing industry to the rural areas rather than moving rural labour to the urban areas may be an ef®cient and cost effective solution for the unemployment problem. Both Brahmananda (chapter 2) and Khusro (chapter 4) who advocated the rural industry model in the past, revisit the theme and discuss it in the light of the 1991 reforms. Also instructive is Rangarajan's (chapter 6) analysis of the problems associated with provision of credit to farmers and the attempts at reforming the existing system.

Education Every other adult in India is illiterate. This unfortunate trait is shared only by India and Sub-Saharan Africa in the developing world. An adult literacy

16 Conversations with Indian Economists

rate of around 52 per cent (39 per cent for females and 64 per cent for males) after 50 years of independence from colonial rule and four decades of development effort de®es explanation. Admittedly, there are states such as Kerala which have achieved almost total literacy. But at the other extreme are Rajasthan and Uttar Pradesh where the adult literacy rate is as low as 40 per cent. The paradox, though, is that India also possesses a large stock of scientists and engineers and has been a fertile source of supply of skilled people to the American and British economies. From the beginning, India invested heavily in higher education to supply the engineers and scientists required by the industrialisation programme and ignored primary education. In other words, limited resources were used to meet the most pressing need at the time. Even so, it doesn't explain the high drop-out rates, and non-attendance of children from schools where they do exist. In fact, as Dre'ze and Gazdar (1996)17 commenting on the low level of literacy in the State of Uttar Pradesh note: `the physical supply of schooling infrastructure is no longer the main constraint on educational expansion at the primary level, in the sense that the vast majority of rural population lives within short distance of a primary school.' The problem in Uttar Pradesh appears to be the inef®cient use of existing resources. Dre'ze and Gazdar identify endemic absenteeism on the part of teachers, lack of accountability and the use of public resources by politicians to dispense favours rather than promote literacy as major factors contributing to the failure to spread literacy in the State. These problems, though acute in Uttar Pradesh, may not be speci®c to the State. Much like the State-owned manufacturing enterprises, publicly funded schools anywhere and everywhere seem to suffer from managerial inef®ciency and lack of accountability. Private schools in contrast are run much more ef®ciently, mainly because the management is responsible to the parents of fee-paying pupils. According to Dre'ze and Gazdar, teachers in private schools in Uttar Pradesh are paid much lower salaries than in State-owned schools, but unlike their counterparts in government schools, they turn up for work and do their job. They do so because they may lose their jobs if pupils do not turn up because of poor teaching. Private schools, however, charge substantial fees and good education thus becomes a preserve of the rich. I.G. Patel (chapter 3) asks, why can't parents complain and protest against the inef®ciencies and inequities? Perhaps they do protest, but it falls on deaf ears. It is likely that they lack the organisation, the means and the ability to ®ght entrenched interests. If each and every aspect of the economy which is State-owned is manipulated to further the interests of the few who control and direct the system, there is nothing much parents

Introduction 17

can do. The problem may be insoluble in the absence of organised mass movements, and the existence of enlightened governments as in the State of Kerala, which has achieved near total literacy (see V.K. Ramachandran, on Kerala's development objectives, in Drez'e and Sen, op. cit.). Kerala's experience may be unique in this respect because of its history and its culture which fostered female education. Kerala was able to overcome the rigidities of the caste system and gender bias mostly due to the presence of enlightened leaders and social reformers such as Shree Narayana Guru. Other states in India are not blessed with such enlightened leaders and social movements. Indeed, there is the suggestion, a somewhat cynical one, that education is deliberately held back from the masses lest it undermine the existing social order and hierarchy. If this is so, it is a throwback to the days of the British Raj. Commenting on the bill to institute compulsory elementary education in India introduced by Gopal Krishna Gokhale in 1911, the Governor of Bombay is reported to have warned the Viceroy: `The agitation for [primary] education is of quite recent origin and comes from the people who are anxious to make our rule impossible. They will realise that their power to stir up discontent would be immensely increased if every cultivator could read.'18 Gokhale's dream of introducing compulsory education in India is yet to be realised; primary education is not compulsory in independent India, there is only enabling legislation which permits State governments to enforce compulsory education. Perhaps the cynics are right, the powers that be do see a threat to the social order from mass education. There are, however, other dimensions to the debate on compulsory education. Introducing compulsory education in as large a country as India in one go would require substantial resources. There is also the much-debated issue of the opportunity cost of sending children to school, for the parents. Large numbers of peasant households would be deprived of the marginal additions to family incomes from children who perform various chores on the farm. This thesis is judged fallacious by some economists (see Bimal Jalan, chapter 11), whilst others (see Bhagwati, chapter 8) see some merit in it. It is a fact, that increasingly, parents in India have begun to see the merit of education and the pecuniary and non-pecuniary gains it yields. As Both Jalan and Patel note, parents are willing to make sacri®ces for the sake of their children's education. The debate on the issue, however, may be addressing the wrong proposition. It is not that there are no opportunity costs to sending children to school, nor is it that parents are reluctant to make sacri®ces for the sake of the education of the young; but it is a question of the level of

18 Conversations with Indian Economists

opportunity costs and the severity of sacri®ces parents have to make. For the abysmally poor who eke out a living as farm labourers, the opportunity costs of sending their children to school may be considerable. But with growth of incomes, they too would be able to bear the costs. The issue is one of the elasticity of demand for education; at very low levels of income, demand for education with respect to income may be quite low. But as growth in general generates incomes, and education offers increased avenues for gainful employment, demand for education would grow. The challenge is to generate suf®cient growth and hence job opportunities which would improve the expected returns for parents from sending their children to school. Bhagwati's contention is that in the absence of growth, the costs of sending children to school would be high, the expected returns would be low, and the demand for education on the part of the poor is likely to remain low. Statistical studies are often cited in support of the contention that poverty is not the cause of low levels of literacy and the opportunity costs of sending children to school are quite low. These studies argue that it is not poverty, but low levels of adult literacy and `social' factors associated with caste and gender which explain low levels of schooling. But these social factors cannot be changed rapidly. What can be changed is the level of economic opportunity and returns: here, Bhagwati suggests that abysmally low growth rates do not help. Also, investments in education require resources which increased rates of growth of incomes alone can generate. Admittedly, there is an element of the chicken and egg argument surrounding the issue. No one disputes the virtues of literacy and education in promoting ef®ciency and equity. Nor is there any doubt that, in the absence of high rates of growth, mass education would be a non-starter simply because of resource constraints. It would be all too easy to say that we should do both, but this would amount to evading the issue. There is no escape from the fact that in the absence of growth, there would be neither the resources for investments in education nor increased demand for education by the poor. Education and other social services have suffered in India mostly because of the low growth the country has achieved over the years. Low growth in turn is a consequence of the inef®cient industrialisation strategy sustained by heavy subsidies, that the country has pursued. Indeed, the late B.V. Krishnamurti, an eminent economist from the Bombay school, advocated compulsory primary education as early as 1956 when the heavy industry-oriented Second Five-Year Plan was formulated. His incisive critique of the Mahalanobis plan, which largely ignored education amidst its preoccupation with heavy industry, is illuminating

Introduction 19

(see chapter 12, which reproduces B.V. Krishnamurti's paper on education). Arguably, India's record on education and health may have matched that of China if only the alternative model of development advocated by the Bombay economists such as Brahmananda, Vakil, and Krishnamurti had been put in place. It is also incongruous that while primary education is starved of resources, higher education is heavily subsidised. According to a recent press report: `University fees in India haven't been revised for two decades. In Delhi University, fees have remained at a laughable Rs 25 per month since the seventies. The maximum fee charged by any central university is Rs 100 a month.' Subsidies paid to central universities alone amount to Rs 10 billion. As Jalan, Patel and Khusro argue, there is little justi®cation for such subsidies; a reasonable fee to cover costs could be charged to students pursuing higher education with appropriate subsidies for those who cannot afford the fee. Middle income groups who place a premium on higher education would be more than willing to pay for it. In fact, in some of the major cities such as Bangalore, privately run tutorial centres, which are no more than crammers preparing students for ®rst-degree examinations, are big business. Most of these crammers function in the evenings and weekends. Most students, even the most able ones, are compelled to attend the crammers because of the poor quality of teaching in the Staterun colleges. More often than not, the crammers are staffed by the teachers in the State-run colleges who appear to have identi®ed a lucrative source of additional income. Here again, the problem is one of lack of accountability in the State-run education institutions as is the case with most State-run organisations. `Government work is God's work,' a former Chief Minister of Karnataka is reported to have said, exhorting the virtues of public service. The riposte of a wag that `if government work is God's work, let God do it', just about sums it up. No discussion of education in India is complete without a reference to the phenomenon of `brain drain'. Over the years, India has supplied a large number of scientists, engineers and physicians to the US and the UK. During the 1970s and the 1980s, Bhagwati pioneered studies on the economics of the brain drain. Whilst emigration of skilled people was then regarded as a `loss', that viewpoint has now yielded to the notion that it can yield substantial bene®ts. These bene®ts are not con®ned to the money that the migrants abroad remit back home, but they also include the investments they undertake in the home country and their contribution to the growth of new service-oriented industries such as the software industry in India. The presence of expatriates in the developed countries can also generate other intangible bene®ts to their

20 Conversations with Indian Economists

countries of origin: they would be an in¯uential constituency with connections and they may act as lobbyists for the home country. The diaspora model of skilled-labour out¯ows, as Bhagwati refers to it now, embodies these ideas (see chapter 8).

The 1991 reforms Most of the issues brie¯y sketched in the foregoing have been the subject of debate and discussion for long. The economic reforms of 1991 masterminded by the then Finance Minister Manmohan Singh, however, have recast the debate in a new light. Most of these and other issues are now discussed in the broader context of globalisation. Simply put, the term globalisation denotes no more than a description of the rapid growth in international trade and investment in recent years. But because of the actors involved in the process, and the challenge it poses to policy formulation at the level of national economies, globalisation arouses intense debate. The critics of globalisation equate it with a surrender of national economic policies to market forces, which are shaped by multinational enterprises who control most of world trade and investment. Any attempts at liberalising trade and investment by developing countries will only serve to bolster the pro®ts of multinationals, serve the interests of the rich in these countries, widen income inequalities and impair policies designed to promote the interests of the poor. For the advocates of globalisation, it amounts to no more than an international division and location of economic activity based on the comparative advantage of nation states, which enables economic agents to realise economies of scale and other advantages of specialisation on a world scale. In this scenario, multinationals are important actors, they not only facilitate growth of trade and investment, but also provide the developing countries with technology and managerial know-how. The 1991 reforms heralded a break with the past. They loosened the dirigiste foreign trade and foreign investment regime to a considerable extent. The reform package included reduction of tariffs on a wide range of imports, relaxation of the import licensing system, removal of several restrictions on foreign direct investment, liberalisation of the foreign exchange rate and exchange controls, and a virtual abolition of the industrial licensing system. Many would argue that these measures are just the ®rst steps towards liberalisation, noting that the average tariff rate on imports continues to be one of the highest in the developing world, most consumer goods imports continue to be governed by import

Introduction 21

licences, and the agricultural sector is hardly touched by the trade reforms. In addition, the problems associated with inef®cient State-owned enterprises and the arcane labour laws are yet to be addressed. Even so, the reforms amount to a giant step for India. The beast the reforms attempted to transform was mammoth and complex, and compared with previous half-hearted attempts at taming it, as during the decade of the 1980s, the 1991 reforms were bold and far-reaching. But do the reforms spell an abject surrender to the dark forces of globalisation? Are they likely to exacerbate income inequalities, increase the absolute level of poverty, and impede efforts at promoting wider development objectives such as education, health facilities and agrarian reforms? It is tempting to appeal to facts and ask what has happened to poverty levels seven years after the reforms. There is, though, not much joy here. The evidence is con¯icting given the various problems of data and differing estimation procedures adopted to assess the level of poverty. There is, however, no evidence which suggests that the absolute level of poverty has increased after the reforms. At best, it appears to have declined marginally in urban areas, increased somewhat in rural areas and at the aggregate level, the absolute level of poverty has remained unchanged at 36 per cent. There is also evidence to show that the poor are getting less poor or the so-called ultra poor are declining in number. In any case, it may be too soon to arrive at a statistical judgement on the impact of reforms on poverty. There are three major variants of the critique of the reforms. The ®rst of these is that the reforms were a knee-jerk reaction to the severe crisis the economy was faced with in 1991, rather than a carefully thought out design. Admittedly, as Manmohan Singh (Chapter 5), the architect of the reforms, himself says, the economy was in a crisis and the crisis had to be met. There was a substantial de®cit on the current account of the balance of payments, the country's foreign exchange reserves were down to two weeks of imports, the ®scal de®cit was beyond manageable proportions and the rate of in¯ation exceeded 10 per cent. Economic crises are nothing new in India, the economy has often lurched from one crisis to another. The 1991 crisis, however, was of a different order of magnitude which could not be coped with ®re-®ghting tactics such as short-term stabilisation policies, external borrowing and exchange rate manipulation. In a vastly changed international environment characterised by intense competition for aid funds and private capital, and a general loss of faith in State-managed capitalism, India could hardly expect external agencies to bail her out of the crisis. The 1991 crisis appears to have provided a splendid opportunity to initiate reforms. Political opposition

22 Conversations with Indian Economists

to reforms would be muted in the face of a severe crisis. Indeed, very few economies appear to have initiated large-scale reforms in the absence of a crisis. The fact that the 1991 reforms were spearheaded by Manmohan Singh, with impeccable credentials as both an economist and civil servant, served to inspire con®dence in the design, credibility and objectives of the reforms. The critique that the country should have ®rst set its house in order before opening up to trade and investment does not also hold water. Here the argument is that the needs of the so-called common man in terms of food, shelter, health and education should be met ®rst before opening up the economy. There may be more than one fallacy in this argument. First is the implicit assumption that the reformers were impervious to the needs of the common man. This is an assertion with no basis in fact and doesn't merit discussion. The second is that a relatively closed economy would somehow generate the resources required to meet the needs of the poor and deprived. Four decades of the inward development strategy hardly did much for the poor, if at all it did anything, it impoverished them further. It could, however, be argued that the speci®c policy instruments which were adopted in the past were wrong and the strategy could have been successful with a different set of instruments and priorities. There is some merit in this argument. But the speci®c instruments of policy which could have been deployed within the con®nes of the import-substitution strategy have rarely been identi®ed. Mere assertions and vague generalisations are no substitute for a cohesive workable policy framework. Perhaps an alternative strategy such as the one advocated by Brahmananda and Vakil may have been much more successful. Counterfactual scenarios though are dif®cult to sketch. In any case, the alternative strategy, as Brahmananda makes it clear, did not advocate a closed economy model. Exports were central to the model. The third fallacy in the argument is that liberalisation of foreign trade and foreign investment regimes ipso facto amount to a neglect of broader development objectives. This is the malign impact of the globalisation thesis. The obvious villain of the piece here is the multinational enterprise. The case against the multinationals has been rehearsed so often that it does not bear repetition here. The view that foreign direct investment is not a cure-all for the development problem though is noteworthy. The critics are right in arguing that in the absence of competition, multinationals are unlikely to bestow the various bene®ts on society expected of them. The tariff-jumping variety of foreign direct investment as opposed to investments undertaken in a competitive environment is unlikely to yield the hoped for social bene®ts. Multi-

Introduction 23

nationals are also unlikely to be ef®cient in the absence of infrastructure facilities and labour with suf®cient skills. On this much, there could be no disagreement, a number of theoretical and empirical studies support each of these propositions. The case, then, is for foreign investment in a competitive environment. Competition has to be promoted both from imports and domestic investments. The abolition of the industrial licensing system and other controls on domestic investment should result in competition from locally owned ®rms. There is also a good case for improving infrastructure facilities. Poor infrastructure facilities will be a deterrent to foreign investment. Indeed, one of the reasons for the low volume of foreign investments India has attracted is poor infrastructure facilities. The reforms, however, appear to have come unstuck with respect to import competition. Most consumer goods are subject to steep import restrictions and there is an identi®able volume of foreign investment in India's consumer goods industries. Add to this the relatively low levels of tariffs at which intermediates and capital goods can be imported, foreign ®rms and domestic ®rms functioning in the protected consumer goods industries enjoy relatively high levels of effective protection. The decision to continue protection for consumer goods may have been forced on the reformers by political considerations and the power of lobbies in the consumer goods industries. The case then is for relaxation of controls over imports of consumer goods and not for barriers to foreign investment in these industries. Controls over foreign investments in these industries will only result in domestically owned monopolies. Another frequently heard argument is that multinationals cater to the needs of the rich, they produce luxury goods. This is an old refrain dating back to the 1960s. The argument here is a bit muddled, it is not clear if the objection is to the production of luxuries by multinationals or to the production and consumption of luxuries in general. If it is the latter, the judicious policy is to ban the production and imports of luxury goods in toto. But then such a policy would result in smuggling and black markets in the production and distribution of the banned goods. And, as T.N. Srinivasan notes (chapter 7), one must ask whether, in a developing economy with a sizeable middle class, it is wise to rail against the so-called luxury goods, most of which may now be necessities and contribute to productive ef®ciency. Some of the arguments concerning multinational enterprises in the context of reforms and globalisation are worth debate and discussion in the light of economic theory and facts. But the thesis that liberalisation and globalisation in general thwart broader development objectives is

24 Conversations with Indian Economists

dif®cult to comprehend. For instance, V.K. Ramachandran ends his analysis of Kerala's development achievements with the words: `in the conditions of contemporary India, it is worth remembering that public action and not policies of globalisation and liberalisation, was the locomotive of Kerala's progress.' Perhaps ± but even here, we must not forget that contemporary Kerala appears to have bene®ted from the substantial amounts of remittances made by the temporary emigrants from the State in the Gulf region. Surely, globalisation which facilitates international movement of goods and services can provide the resources needed for public action. Admittedly, as India's Nobel Laureate Amartya Sen puts it: `the social opportunities offered by market-based economic growth, particularly of integration with world markets, are severely limited when a large part of the community cannot read or write or count, cannot follow instructions, cannot cope easily with modern technology and so on.' This is not to say that India should refrain from liberalisation. As Bhagwati argues, globalisation or liberal economic reforms, by generating economic opportunities, can themselves set in motion the incentives, both on supply and demand side, to advance literacy and other social agendas. Quite often, India's achievements are compared with that of China which has outclassed India on various indicators of development including mass education, health care and land reform. China notched up these achievements prior to opening up its economy to world markets. And again as Sen argues,19 `the force of China's market economy rests on solid foundations of social change that had occurred earlier, and India cannot simply jump on that bandwagon without paying attention to the enabling social changes ± in education, health care, and land reforms ± that made the market function the way it has in China'. This statement is incontrovertible. The danger, though, is that it is likely to be misinterpreted to mean that in some sense, laying foundations for social change on the one hand and liberalisation on the other are mutually exclusive. Sen's concern is that social reforms should not be lost sight of in the enthusiasm for liberalisation. It could, though, be argued that China got its priorities right and India has got it wrong and should not embark on further liberalisation until solid foundations for social change are laid. But then foundations for social change can't be laid in a short span of time and globalisation of the world economy will continue apace without waiting for India to get ready to board the bus. In any case, China's policies were not wrought overnight, it may have got its priorities right by sheer accident rather than design, and its social and political set-up during the pre-reform years cannot be held up as role models. The debate on

Introduction 25

India versus China is a long-standing one and the comments by Manmohan Singh (chapter 5) and I.G. Patel (chapter 3) on the debate are instructive. If we are to grasp a better future, it is essential that we learn from the past. My hope is that this book, with responses to my many questions by some of our leading economists, makes a contribution to that important task.

2 P.R. Brahmananda P.R. Brahmananda draws inspiration for his work on development from the grand masters. His celebrated wage-goods model is grounded in the work of Adam Smith, Ricardo and Malthus. His numerous articles and books on a variety of development issues are replete with references to Friedrich List, Schumpeter, A.C. Pigou, P. Sraffa and K. Arrow. Brahmananda was educated at the University of Mysore and Bombay University. He is currently writing a monetary history of the Indian economy from the beginning of the nineteenth century to the end of the British rule in 1947. The ®rst volume dealing with the nineteenth century has been completed and will be published shortly. Drs A. Vasudevan, D.M. Nachane and A.V. Karnik have recently brought out a festschrift volume titled Fifty Years of Development Economics ± Essays in Honour of Prof. P.R. Brahmananda. The volume contains a detailed bibliography of his scholarly writings from 1949 to 1998. *

You are a graduate of Mysore University and Bombay University. I obtained a BA (Hons) degree in Economics from Maharaja's college, Mysore and in 1946, I went to Bombay for my doctorate.

What was your doctoral thesis on? It was on the economics of welfare maximisation with special reference to public utility pricing. At that time, there were very few books on welfare economics, only two books I can recall ± Reder's book on studies on welfare maximisation and the other by Hla Mynt on welfare economics. Then there were several chapters on welfare economics in Paul Samuelson's Foundations of Economic Analysis. But there was no systematic account of the attitude of the classical economists to welfare economics, specially from the angle of development. In my thesis, I examined the work of, among others, Adam Smith, Ricardo and Malthus in relation to development. My book on the subject was published in 1959. 26

P.R. Brahmananda 27

It was this work which in¯uenced your later work on the wage-goods model. Yes, it did. The work of classical economists, especially that of Ricardo seemed to have considerable relevance to conditions in developing countries such as India. The concept of the stationary state fascinated me. I thought it could be used for sequential analysis, that is, you could have several types of bottlenecks or scarcities, any one of which could lead to a stationary state. You may break out of one of these only to land in another stationary state. During the process of hopping from one stationary state to another, incomes would be rising. So you have to overcome these sorts of quasi-stationary state phenomena through changes in the parameters which determine growth and development. These ideas of the classical economists together with their analysis of population growth fascinated me. I did not accept the classical position that the size of population through time would always adjust itself to the available amount of circulating capital, i.e. the amount of wage-goods, especially food. Ricardo proceeded to say that growth in food supply will lead to population growth, unlike Malthus. This is a nice supposition as it would rule out excessive labour supply in the system. I did not accept this thesis, I did not also accept Malthus's concept of subsistence wage. I identi®ed three components ± the Malthusian subsistence wage, wages required to sustain work and an incentive component. Ricardo did not take into account the latter two components. These three components of the wage had to be separated. In the Ricardian scheme, there would be no disguised unemployment or work-sharing. This is because in the schema of the classicals, organisational structures would remove the perpetuation of excess population; there would be workhouses, for instance. Under Indian conditions, organisational structures would deteriorate to absorb surplus labour, with the result the system would not grow and it would eat up potential savings. My view was also in opposition to that of Ragnar Nurkse's argument that population is not a problem. Nurkse failed to recognise that surplus population would reduce savings. So there was a basic difference between my view and the views of Ragnar Nurkse and Arthur Lewis. I have written several papers on this issue. Keynesian ideas concerning employment also did not appeal to me. I published a long paper in 1952 on the relevance of Keynes's General Theory to development problems. We cannot assume the existence of excess capacity in developing countries, especially so when excess capacity, to be meaningful, requires stocks of wage-goods and other circulating capital. I argued that the multiplier would not work at all in the absence of stocks of

28 Conversations with Indian Economists

wage-goods. If it did work and create employment in one area, it would be at the expense of employment elsewhere in the system. Further, these stocks could be held back through hoarding in times of expected scarcities. Hence, real liquidity preference due to the speculative motive was more important than the Keynesian monetary liquidity preference.

Attempts at expansion of the economy would lead to in¯ation. Yes, prices would rise, the quantity theory of money rather than the Keynesian multiplier would be relevant for analysis. Later in my book Growthless In¯ation by means of Stockless Money (1980), I developed the theory that inadequate growth in wage-goods supplies in the face of expansion of money along with an arti®cially low rate of interest would be the cause of in¯ation. The quantity theory was linked with de®ciencies in the supply side of production in terms of wage-goods, such de®ciencies being aggravated by the inde®nite elongation of the structure of production due to arti®cially low rates of interest. So, you see, wage-goods de®ciency had already formed part of my thinking as early as the early 1950s. Savings available for investment would depend on the volume of wage goods surplus, the wage rate and the consumption of the disguised unemployed. All this could be expressed in the form of an elegant formula, which I have done elsewhere. It is suf®cient to note here that the savings available for reinvestment would be low if the dole rate or the consumption of the disguised unemployed is high and if the consumption of the employed is high. Now, if population increased, it would increase the amount of consumption of the disguised unemployed in the economy, so that savings would not grow; actually savings would go down. My model is, therefore, in harmony with that of Malthus; surplus population would create problems. May I mention that in the standard neoclassical model, surplus population would lead to increase in production with lower capital-labour intensity. My model was therefore anti-neoclassical.

Your position is that higher the aggregate consumption of disguised unemployed, higher would be the wage-goods which are consumed without growth in output, and hence lower would be the volume of savings in the system. Yes, you are right. I also rejected Arthur Lewis's model of unlimited supplies of labour. This is because in his model, unlimited supplies of

P.R. Brahmananda 29

labour came with unlimited supplies of wage-goods. But employment cannot expand without wage-goods. So, you see, for these reasons, agricultural development becomes fundamental. It has to be accorded priority independent of whatever you posit for industry. The service and industry sectors cannot absorb more than a small proportion of the labour force. The service sector is important, but services can be expanded only with growing wage-goods surpluses.

But the thinking at that time in Delhi was different from yours on these issues. Yes, you have to think back to the India of the 1950s, Jawaharlal Nehru had accepted the Soviet model of industrialisation, he was very much in¯uenced by the intellectuals belonging to the Left. There was a view prior to independence that India should be self-reliant in heavy industry goods. In the earlier plans, such as the Bombay plan, there was no concept of foreign trade. During the days of the Raj, we were importing industrial goods. Now the thinking was, `let us build the industries which produce machines which then produce industrial goods'. Also at the time, Sir M. Visvesvarayya gave tremendous support to industrialisation. `Industrialise or perish' was his slogan. He was also in¯uential in the All India Manufacturers Association, and was involved in the formulation of the Bombay Plan. But the instrument or the organisational mode of the Bombay Plan was capitalism. The All India Congress committee at that time passed a resolution on industrialisation in which they introduced the phrase `socialistic method of development'.

So the Bombay Plan did not advocate state ownership of industry. It was Nehru and the Congress Party that introduced the idea. I guess, for Nehru, it was the mode of development ± the Soviet model of industrialisation and not so much state ownership, which was important. But it was the left-wing intellectuals who were keen on State ownership of industry. I don't think State ownership appealed all that much to Nehru.

Who then persuaded Nehru on State ownership? No one in particular, I would say the course of events in¯uenced him. By the time planning got going in India, Sardar Patel had passed away. He

30 Conversations with Indian Economists

was a champion of private enterprise. His idea was that the government should not enter into trade and industry; if it did enter, people would become impoverished, as the Gujarati saying goes `Raja Vyapari, Praja Bhikari!' Loosely translated into English, it means `When the King becomes a trader, the people become beggars'. Now Patel was dead and the ®eld was open for Nehru. The Planning Commission with V.T. Krishnamachari as vice-chairman and J.J. Anjaria as Adviser was a conservative organisation. And by the mid-1950s, the Soviets had established a presence in the Indian Statistical Institute at Calcutta, where Mahalanobis was the Director. Now the idea was that if you want to carry through the Soviet type of development model in India, it had to be inducted into the Indian system, hence an in¯uential Indian intellectual to support it was needed. This is where Mahalanobis comes in. He was associated with Nehru, he was a brilliant man with fresh ideas. He was the instrument through which Soviet type of ideas were projected to Nehru and the Planning Commission.

So, we can't blame Mahalanobis for the idea of State ownership of industry. No, we shouldn't do an injustice to Mahalanobis. He was non-ideological. You see, there was the hidden agenda, the Soviet agenda ± to replicate their model in India. If you put the economy into a groove or a model, it will gradually spin itself out. The model will have implications for the pattern of ownership, which will unravel over time. You will have food shortages and you take over trade, you will have problems with allocation of credit and you then take over banking and so on. I am told that Charles Bettelheim sketched these scenarios and it has been now published in book form.

It was the Feldman model though which was the basis for the Mahalanobis model, which provided the framework for the Second Five-Year Plan. Feldman's model was known to Mahalanobis. The model was clear in its message. You hold consumption constant and continue to allocate savings and investment to heavy industry. The idea that at one remove or the other, you produce consumption goods was not in the Feldman model. You have heavy industry for its own sake. The heavy industries, which were identi®ed, were coal, transport including railways, power, fuel and machine-building. These were to be expanded, they eat their own surpluses as it were, and the supply of consumption goods including agriculture should remain constant.

P.R. Brahmananda 31

I had studied the Soviet model and the Feldman model. (Actually Tugan Baranowskii had shown that capital goods could go on expanding, feeding on their own production surpluses.) It was clear that agriculture and wage-goods production would suffer. The model would not promote employment, it would not help the poor. It would not even lead to a high growth rate. But these implications were clear to me, but not to Nehru and his advisers. The model came from Mahalanobis. The Planning Commission had a problem. They didn't want to accept a model which was framed outside of their realm. They couldn't accept Mahalanobis crashing into their world. Then a panel to discuss the model was constituted, with C.D. Deshmukh as the Chairman, C.N. Vakil, D.T. Lakdawala and Dantwala as members. D.R. Gadgil was the ViceChairman. There were also other members ± A.K. Dasgupta, V.K.R.V. Rao, S.K. Muranjan and K.N. Raj. The panel was to discuss the Mahalanobis draft. Nehru wanted the economists to approve the model. When I received the papers, it was clear to me that the model would not promote consumption or employment, and it would land us in what we now call the Licence-Permit Raj. The model would place the economy in the groove of a tunnel, whose implications would be revealed only through the passage of time. It was clear to me that a communistic organisational form would be gradually imposed on the economy by the emerging necessity of circumstances as implied in the model. But how to ®ght it? I was only a junior lecturer at the Bombay School at that time. If you are going to ®ght it, you had to produce an alternative. None of the panelists were theorists in the sense that they had studied development implications of theoretical models, as I think I had done. By then I had already published more than a dozen papers on development. I prepared three papers for the panel with C.N. Vakil, one on investment pattern, one on general and institutional considerations, and one on small industries. There was also a separate paper by me on the capital-output ratio. There was also another group in Bombay constituted by Jaiprakash Narain, consisting of M.R. Masani and Hannan Ezekiel. They were intuitively aware of the political implications of the model. Dantwala was an agricultural economist, but he was a socialist and was willing to support the Mahalanobis model, though it implied neglect of investment and productivity in agriculture. We were divided on the model. The model appealed to the nationalist fervour, since it aimed at domestic production of heavy industry goods. But Vakil did not want differences among economists to be publicised. A paper on basic considerations of the plan was prepared by the economists, but it did not amount to a frontal attack on the model. So there was no minute of

32 Conversations with Indian Economists

dissent, except by B.R. Shenoy, to the paper by the panel of economists. But that was on de®cit ®nancing, not on the emphasis put on heavy industry by the model. I then protested to C.N. Vakil that the paper of the economists' panel had not noted our objections. Ultimately, I convinced him of the latter. He then wrote a letter to Deshmukh saying that we in Bombay had differences between ourselves and the paper on basic considerations prepared by the economists' panel should not be regarded as approval of the Mahalanobis model by all the members of the panel.

So, were your objections taken into account? No, by then in 1956, Vakil and I had also published the book ± Planning in an Expanding Economy which provided an alternative to the Mahalanobis model.

Even so you couldn't in¯uence the ®nal outcome. No, because the Russian planners were present at the meetings. They were doing the talking. To repeat, the panel of economists had no theorists on development. The Russian planners had economic and political advantages in promoting the Soviet model. I am told that Mahalanobis later on did not show enthusiasm for the model. This comes through, according to me, in Ashok Rudra's biography of Mahalanobis. I believe the Russians, the Gos planners, used him. You should also note that at that time, most of the British intellectuals were also left-leaning, including Bertrand Russell, and in Cambridge probably Kahn, Reddaway, Joan Robinson and Dobb were sympathetic to the Soviet Union. I may mention for the record that Krishna Menon, who came to Bombay around that time was against the heavy industry model! In all this, the Americans were very funny. They thought that in the Mahalanobis framework, there was something economists could in¯uence. They had built the so-called turnpike models. These models also dealt with the Feldman problem. Unlike in the Feldman model, these turnpike models, known then as the `Pie in the Sky' models, provided for consumption goods over an inde®nite future. But they didn't realise that each and every capital good cannot produce consumption goods. Steel, for instance, cannot be expected to have any strong connection with, say, the production of agricultural goods. So the American economists too produced some support for the model even though it was ¯awed. Strangely, their models ignored foreign trade.

P.R. Brahmananda 33

The Americans also came to the aid of Nehru in yet another fashion. They had agreed to supply 20 million tons of foodgrains to India under the Public Law (PL) 480 programme. What is not generally known in India is that at that time Sukhmoy Chakravarty had written a paper with Rosenstein Rodan justifying food aid. But the fact that the volume of food aid provided was not suf®cient, that it may retard domestic agriculture and there would be no chance for the wage-goods production multiplier to work, was not recognised. Nehru's point, though, was that the food shortage problem Vakil and Brahmananda talked about could be taken care of by food imports. But all the negative effects of food imports, I noted earlier, were not recognised by him. He was not an economist, you see.

Your book with Vakil was appreciated by others. Yes, I had sent the book to several economists here and abroad. They realised its import. In fact, Nurkse in his review of the book in the Quarterly Journal of Economics said that it was amazing such a book could be published in India at a time when the Soviet model had gripped everyone's imagination. Haberler, John and Ursula Hicks, Ellis, Leontief, Alvin Hansen, Theodre Schultz were all sympathetic to our approach. Many of them communicated to us expressing their support. Planning for an Expanding Economy received soaring reviews in many international journals. Mahalanobis read the book and wrote to me. He said, `l am not an economist, but I want the quantitative details of the wage-goods model worked out.' He made it clear he had no views on the matter. He had probably realised the consequences of what we had written and was probably not unsympathetic to our views. From all this, I believe the Feldman model was foisted on him. Later on, he formulated the four-sector model in which the original Feldman ideas were, so to speak, dissipated. The real problem occurred in 1965±66, when crops failed. The Americans had frequently bailed us out with food aid, but they too were now urging us to shift our attention to agriculture. It was then that we devalued the exchange rate, a policy which Bhagwati had advocated a little earlier. But note that while Bhagwati and others advocated devaluation and export promotion, they did not then attack the basic structure of the heavy industry-oriented import-substitution model. In fact, the Delhi School with Rao, Raj, Chakravarty, Sen and even Bhagwati were all euphoric then about the Mahalanobis plan frame. Bhagawati's attack on the import-substitution implications of the above came later.

34 Conversations with Indian Economists

You should also note that none of these economists, not even Sen, had even referred to education. It was only B.V. Krishnamurti20 of the Bombay School who wrote a brilliant paper at this time, suggesting that India should provide free primary education for all. He even wanted outlays on heavy industries to be cut in favour of education.

But you had lost the battle. There was no change of heart in Delhi in response to your model. Yes, but then I changed tack. Using National Sample Survey data in 1962, in a paper on `Perspective Planning for an Indigent Society', which was widely circulated, I estimated the number of people in abject poverty and suggested that, if you were to do anything for the poor, you have to improve our agriculture. I showed that on the then basis, mass poverty would not disappear even by the turn of the century. This caught on. Politicians wake up when you talk of poverty. Ram Manohor Lohia quoted my paper in Parliament. So poverty and agriculture became prominent items for policy discussion in later plans ± the ®fth Five-Year Plan, I think.

But why did we persist with the policy for 35 years or so? Because once you put the economy into a complex model, it is dif®cult to change. You can change an open economy model, but not a closed economy model. You see, no one could freely discuss the investment pattern. It was given from outside. The bulk of savings and foreign exchange had been earmarked for continuing heavy industry and related expansions. I think the true history of Indian planning based on unpublished documents is yet to be written. I think these papers are destroyed. I am told that before the Janatha Party government came into power, a large number of internal papers were destroyed ± were wantonly destroyed! In any case, the economy got into a groove. All the objections were raised, but they were ignored because of the stronghold of ideology. The period from the mid-1950s to the late 1960s was a nightmarish period for economists like me who had attacked the Mahalanobis model. Professor Vakil, myself and Shenoy were blacked out of all of®cial meetings connected with planning. Anyone who attacked the Mahalanobis strategy was condemned as an anti-nationalist or worse, as a CIA agent.

P.R. Brahmananda 35

Thinking back, do you think your wage-goods model would have worked? Counterfactual scenarios are dif®cult to sketch. But the wage-goods model was realistic. It attacked the Mahalanobis/Feldman model on two scores. First, in an economy such as India, where decisions concerning consumption are left to the market, how would you avoid resources seeping into production and import of luxury goods? Second, in the Feldman type of models, capital goods would be reproducing themselves with wage-goods nowhere in sight. As I have written more recently, `an economy adopting this strategy comes to be blessed with large capacities in heavy industry, but is not able to reproduce adequate amounts of essential consumer goods. Widespread mass poverty and signi®cant unemployment will co-exist with a massive heavy industry complex as glaring symbols of modernisation.'21

In your model, the capital goods sector is related to the wage-goods sector. Yes, it is called the integrated wage-goods model. You integrate the relevant capital goods and wage-goods. The wage-goods model generates more and more employment, but you may not need a large structure of capital goods to sustain such employment. You may need basic goods and public services such as water. There are quite a number of areas of expansion, which do not require heavy capital goods, for example, basic services such as those of teachers. So the constraint on employment is wage-goods or a commodity constraint.

The principal wage-good you are talking about is corn as in the classical models. Corn and clothing. I identi®ed 14 or 15 of them ± food grains, food articles like meat, eggs and ®sh, fruits, vegetables, sugar, edible oils, beverages, such as tea and coffee, kerosene oil, matches and salt. And remember water, which has to be costed. These include both privately purchased and publicly produced goods. But the list excludes goods which are obviously luxury products. You see, the basic idea of the wage-goods model is that low per capita incomes and real consumption coexist with underutilisation of the full potential of labour or what I term as normal work-ef®ciency potential. Such unemployment of labour exists because supply of wage-goods to

36 Conversations with Indian Economists

sustain labour as a co-operant factor with land and capital is inadequate. Such supply of wage-goods inadequacy exists because suf®cient amounts of capital are not devoted to their production. Instead, capital is used, as has happened in India, for the production of heavy industry goods and luxury goods. The former is sustained by ideology and the latter because of demand from higher-income groups, including property owners and labourers, who enjoy real wages much above those justi®ed by their marginal product. This is so because of various distortions such as trade union pressure.

These are constraints on employment. But the constraint on wage-goods production would be agricultural productivity or agricultural technology. Yes, in the mid-1950s, when I was writing, I accepted as given whatever agricultural technology we had. But, you see, in my model, employment could be generated in both agriculture and industry. I was not thinking on the lines of Arthur Lewis, i.e. surplus labour in agriculture being employed in industry. Lewis was thinking in terms of labour-intensive industrial goods, which could be exported. I was thinking of a whole range of production activities, including self-employment. If the system is expanding and you have a supply of food, people could stay in their homes and produce wagegoods. This is what I called the household multiplier. Through the supply of inputs, say simple tools, household labour can be fully utilised. The net value added arising from such low-level investments could be quite high. You should note that such projects are heavily labour-oriented and labour-absorbing and do not make a heavy draft on materials and ®xed capital. The major constraint here again is the availability of wage-goods to feed and clothe household labour. It is essential to generate a surplus of wage-goods.

This proposal of yours reminds me of the Chinese village enterprises and Gandhi's advocacy of village industries. Yes, the wage-goods model aims at encompassing all the excluded sections in the economy. In our economy, 40±50 per cent of potentially useful labour is excluded from economic activity. The wage-goods approach leads to a higher growth rate of consumption of essential goods. The economic process gets a rural sanction. In a sense, it satis®es utilitarian and Rawlsian concepts of social justice, and also the Gandhian concept of social justice, without sacri®cing growth.

P.R. Brahmananda 37

You have coined the phrase `triple full employment'. This denotes much more than what we understand by full employment. Yes, In India, unemployment is of three varieties or dimensions. First, there are those who are wholly unemployed throughout the year. Second, there are those who are unemployed for a part of the year, working week or working day. Third, there are those who are employed whose work does not re¯ect full-intensity of ef®ciency. Now triple full employment refers to a situation where every worker who is willing to work is employed for a full normal year on a real wage/ earnings rate, which yields a ¯ow of effort based on full-intensity of work.

You emphasise ef®ciency of labour and your model has a foreign trade sector. Yes, you need to assume full ef®ciency of labour for which you require investment goods, but not the Mahalanobis variety of heavy industry ± simple labour-intensive goods will do. And you have to have roads, irrigation and that sort of infrastructure. Wage-goods could themselves be exported, and they would provide for any imports you may need.

Supposing we had adopted your wage-goods based model, where would India be now, another South Korea? I guess we would have been better off than we are now, had we adopted the wage-goods model. It took more than 43 years to double our per capita income and the level of absolute poverty continues to be high. The wagegoods model would have led to a higher growth rate of income because of its lower capital output ratio and a higher savings ratio. It would also have led to development of exports to help in the imports of the needed capital goods for the wage-goods productions. It would also have led to a higher growth rate of employment, and a fast rate of reduction in poverty. You have to understand the full model, which I advocated. First, you have to augment the savings ratio, then increase the proportion of savings/investment allocated to the wage-goods sector. Third, you have to improve productivity growth in the wage-goods sector. You have to keep down the wage differentials between the organised and unorganised sectors. Labour-intensive capital-formation processes has to be favoured. At the same time, population growth rate has to be reduced. We would employ all the available surplus labour in producing wage-goods and

38 Conversations with Indian Economists

capital formation activity relating to the above. As production grows, you raise the wage rate above the basic minimum to give your labour some of the comforts of life. You then get into a stage where you have to mechanise operations if you are to release labour to do other things. But all along, you should guard against very high wage differentials, because wage differentials restrict employment. The model would also allow for exports based on comparative advantage. Remember, in all this, I was planning for a growth rate of 7 to 8 per cent per annum which was unheard of in those days. We now know it can be achieved, my model would also have accommodated the private sector in a big way.

Your model was sanguine about export growth at a time when export pessimism was rife. No, I was not an export pessimist. In the papers submitted at the time of the Second Plan, I had pointed out the neglect of the foreign trade sector in the Mahalanobis plan frame. It was the Second Five-Year Plan which killed our export sector. We made our exporters purchase capital goods they needed from domestic sources, local brand, local machinery local this and local that. These were very high-cost sources. The main reason for the high growth rate in recent years is liberalisation of imports, which should have happened much earlier. The capital output ratio which was rising has started coming down since liberalisation of imports in 1991. Agriculture is also growing at close to 3 per cent per annum. All this has helped to foster a higher growth rate. It is important to note that the measure of factor productivity growth is highly sensitive to agriculturerelated growth. This has been empirically proved in my book published in 1982.22

What sort of wage-goods would we have exported? Look at what we are exporting now ± textiles and clothing, gems and jewellery, leather goods, oilseeds and tobacco. We could have exported these traditional goods then also. Also, remember services. Services become cheaper with increased productivity in agriculture. Growth in productivity in wage-goods makes services cheap. India could be the centre for world engineering and software education. The new services that have appeared now, such as communication and information systems, would have ®tted naturally into my wage-goods model.

P.R. Brahmananda 39

Your wage-goods model is very much in fashion now. The President of the Indian Economic Association wants to institute it now. Should we revisit your model? I think so. Today, the wage-goods set is not more than 40 per cent of the economy. I would like it to expand. Our main problem is unemployment. The wage-goods model would provide a solution to the problem sooner or later. We have to transit to a wage-goods model to solve the unemployment problem. Dr Manohar Rao, currently the Director of the Department of Economics of Bombay University, has argued that the wage-goods model is the only developmental model focusing on employment. As I say in my recent book,23 India has now the option of plunging into a full market economy or accepting the wage-goods model as the core, along with a market economy. Adoption of the wage-goods model as the core of the planning process will reduce the government's responsibility as compared with what it has shouldered all these years. It will shift it in new directions while at the same time divesting it of huge encumbrances from the past, and while the market improves the fortunes of the rich, the vast masses of the poor will also have a place in the sun.

Can we now turn to liberalisation of the economy? Have we liberalised in the true sense of the word? No, we have a long way to go. A large component of import trade is yet to be liberalised. In terms of capital ¯ows and the exchange rate regime, we have some way to go. In banking, we have allowed foreign banks to come in and domestic banks have got a greater degree of freedom than ever before. The ®scal system has to be revamped. Then, we have problems with our stringent labour laws and our inef®cient public enterprises. One problem with the opening of the economy is that we are depending more and more on foreign in¯ows to augment domestic savings. But we are neglecting the growth of domestic savings. Proper policies can enable us to save close to 30 per cent and with a proper investment pattern favouring wage-goods, directly and indirectly, the capital output ratio can be brought down to 3.5:1. Hence, we can easily target for a growth rate of 8±9 per cent.

Everyone seems to have a solution to the problem with public enterprises. What is your solution? The solution needs a political crisis. There is so much political opposition to reform of labour laws and also to divestment of government holdings

40 Conversations with Indian Economists

in public sector enterprises. The bulk of the enterprises are a legacy of the indiscriminate expansion of the public sector on ideological grounds. The heavy industries in the public sector have become high-cost enterprises. The low prices in world markets of these commodities have made these industries uneconomical. The best way would be to adopt marginal cost pricing and ignore recoveries of sunk costs in these enterprises. But, there is strong opposition to this.

Finally, you are aware of the recent debate amongst economists about growth and development. What are your views? I think the only model that recognises the need for investments in health, education and basic human necessities is the wage-goods model. It provides the wherewithal to produce these public goods. I don't agree with Amartya Sen's idea that people and commodities are distinctly different. I disagree strongly. What is labour ultimately in classical economics? May I mention that Schultz says that he took the idea of investment in education from the approach to labour adopted in Planning for an Expanding Economy. Can you think of labour without commodities? Can you think of anything which can work without commodities? Sen also talks of capabilities. But capability itself is a commodity. Like capital, it is a composite good; it is composed of health, education and all that, it has a cost. Anything, which has a price and a cost, becomes a commodity.

We come back to the centrality of wage-goods. Not just wage-goods, it is the surplus of wage-goods which is important. If wage-goods producers absorb all the food, there will be no surplus. It is the potential investment surplus in the wage-goods sector which is the key to growth. This surplus depends on adequate investments in the wage-goods sector and high productivity growth therein. In the larger context, a number of publicly supplied basic services, such as education, water supply and health, also form part of the wage-goods spectrum. But, I am strongly opposed to need-based approaches. Through employment expansion, real purchasing power with reciprocal demands should be created such that people are willing to pay for the so-called basic needs. Permit me to mention that the wage-goods approach provides an alternative paradigm in economics, with its own angle on value, demand, development, money, trade, public ®nance and related issues. The

P.R. Brahmananda 41

standard neoclassical paradigm as well as the Marxian paradigm are not fully relevant in the context of the gigantic problems of developing countries.

Thank you for your succinct discussion of the wage-goods model and the early debates on planning.

3 I.G. Patel I.G. Patel was intimately involved with India's economic policy formulation and implementation almost since the very inception of economic planning. He was expert advisor to the government for 18 years, from 1954 to 1972, he was Secretary in the Ministry of Finance from 1967 to 1972 and he was the Governor of the Reserve Bank of India from 1977 to 1982. He was also India's Alternate Director at the IMF, and Deputy Administrator of the UNDP. He was Director of the Indian Institute of Management, Ahmedabad from 1982 to 1984 and of the London School of Economics from 1984 to 1990. Talking about economics and economists, Dr Patel remarks `in a subject which concerns everyone so intimately and which is almost always in the headlines, the temptation for the economist to play to the gallery and to seek the limelight by simpli®cation, exaggeration and even glamorisation is not easy to resist.' Dr Patel, though, appears to have resisted this temptation admirably. In his various roles as adviser, international civil servant, diplomat and manager of higher education, he has had to wrestle with complex issues of policy, engage in controversy and cope with many a crisis. His two volumes of essays copiously draw upon this varied experience, and analyse, illuminate and clarify complex economic policy issues, but hardly exaggerate, simplify or glamorise. Dr Patel was educated at the University of Bombay, Cambridge and Harvard.

*

You did the economics tripos at Cambridge and also obtained a doctorate from Cambridge. What was the topic of your doctoral thesis? It was on `Economic Development and International Trade'. Like any other student from India, I was interested in India's development problems, but I wanted to do something more general. One of the questions which interested me was: `What would be the impact of development of a country such as India on world trade?' I was interested in the impact of development on trade, not the impact of trade on 42

I.G. Patel 43

development. How would development affect patterns of world trade? Would it hurt the industrialised countries? At that time, there were arguments about fairness and unfairness in trade, discrimination against imports from America and Japan. America was blamed for creating the `permanent dollar shortage' and Japan was blamed for the advantages it possessed from low wages. So, I asked the question: As more and more countries industrialise and tend to become broadly similar in structure, what happens to world trade? Does it adversely affect the interests of the already advanced countries?

What were the main conclusions of your thesis? The study was in several parts, ®rst was an analytical review of the literature followed by case studies on Japan, Australia and Argentina. Naturally, the conclusions re¯ected the stage of development of each country. Basically, the general conclusion was that development of poor countries did not adversely affect the interests of advanced countries. It does not also necessarily follow that world trade will contract in proportion to world income. Based on comparative advantage, there may be divergences in trade balances of countries. Capital ¯ows will, of course, bridge these imbalances. The interesting question was whether such capital ¯ows will ever be reduced and reversed. Looking back, I found that issue interesting, given that I spent most of my later life as a diplomat organising aid for India. I asked why such capital ¯ows should be reversed at all. If there are differences in savings and differences in standard of living between countries, then what is wrong with permanent transfers of capital from the rich to the poor? One would have thought there should be unrequited transfers. You know, given the climate at that time, it was all Utopian. But later, I had to spend most of my time mobilising foreign aid.

You spent some time at Harvard. I was interested in the problems of developing countries such as India. But I was aware of the fact that my training at Cambridge was mostly related to closed economies, closed economy Keynesian models. You mentioned Kaldor, I was impressed by him. In my ®rst year, he gave ®ve lectures on Keynesian economics, speci®cally on the management of the domestic macroeconomy in the context of an open economy. The war was coming to an end and economies of the world were becoming more open. In America, there were people like Walter Salant who were writing

44 Conversations with Indian Economists

on open economy macroeconomics. All this aroused my interest in balance of payments and macro-management problems. I had the means to study these problems. I was working for a PhD, I had a fellowship for three years, I had ®nished my tripos in two years and I had money for one more year. So I did some reading. Nobody bothers at Cambridge about what you do, you read something, if you feel like writing something, you write. Then I got a fellowship for a year at Harvard. Then I thought I have money for a fourth year, I can't justify doing nothing, why not ®nish the PhD?

So you wrote your thesis at Harvard and submitted it to Cambridge. When I went to Harvard I was not decided. Harvard had more material at Wiedner Library. But ®nally I decided to come back and submit the thesis to Cambridge.

Then you returned to India. Yes, I was at Cambridge on a fellowship from the government of Baroda and was under contract to return to Baroda. I joined the MS University of Baroda and was Head of the Department of Economics. In 1950, I left for the IMF, I was there for four years. Then I came back to Delhi to the Ministry of Finance as Deputy Economic Advisor. In 1958 I was sent to Washington by the government as Alternate Director of the IMF. I came back to Delhi in 1961 as Chief Economic Advisor to the Ministry of Finance. Later, for one year, I was at Delhi University as a Visiting Professor. I had some difference of opinion with TTK,24 I resigned. He wooed me back. He said, `I know why you are going, you will understand in politics, sometimes these things happen.' I came back, I enjoyed working at the Ministry. In 1967 I was appointed as Secretary, Department of Economic Affairs. I did that for ®ve years until 1972, when I went to UNDP. I came back in 1977 to the Reserve Bank of India for ®ve years as Governor.

After a short stint in academia, you went into the Civil Service. Academia wasn't challenging enough? No, academia was always my primary interest. If circumstances were different, I would have been an academic. One part of my mind was always open to the academic world. Even as Chief Economic Advisor, I

I.G. Patel 45

used to go at least once a year to some conference or the other, and write a conference paper. It is a way of keeping your mental antennae working.

I would like to turn to some of the policy issues. What factors in¯uenced us to adopt import-substitution as a development strategy from mid-1950s onwards? You were at the helm of policy-making then. I ®nd this dif®cult to answer succinctly. I would refer you to my Lakdawala 25 memorial lecture; it is included in my latest book.

Could you brie¯y summarise the main points you make in the Lakdawala lecture? No one consciously initiated the policy. I can think of one or two explanations. One is that there were extensive import controls during the war. The civil servants in the government were used to running a regime of import controls and exchange control because of the war. We inherited the whole machinery of controls. Second is that everyone was surprised by the severity of the exchange crisis which hit us in 1956. We were all gung-ho with the exchange reserves we had accumulated during the war and maintained during the First Five-Year Plan and we were keen on an ambitious Second Plan. Import licences were freed mostly because we wanted rapid progress, and a consequence was the 1956 crisis.

When did we relax controls? In 1954/55, before the Second Plan began in 1956. We were keen on a big push for industrialisation, but no one knew what the impact of relaxation of controls would be on an India, hungry without imports for so many years. Very large orders were placed for steel and fertiliser plants, they were not intended to be aid-®nanced, but later on, we had to look for aid for them. All this led to the 1956 foreign exchange crisis. It was this liberalisation of imports combined with the heavy import requirements of the Second Plan which produced the exchange crisis and drained away most of our reserves in a matter of months. It was not theory or philosophy, but necessity which was the mother of the invention of import controls. How it multiplied into a sort of a system where nothing could be imported if you could produce it at home, irrespective of costs, is still a mystery to me. Once the bureaucrats got their hands on controls, they

46 Conversations with Indian Economists

developed import controls into a ®ne art, which became more bizarre by the day, and soon import controls developed their own vested interests and momentum for continuance in an arbitrary fashion.

In your article on Nehru and private enterprise, you say that control of in¯ation and our tendency to look to the government for everything were the other reasons for our embrace of controls. You also say economists and civil servants were in¯uenced by these factors. Would you include yourself amongst them? The main thing was the belief that we could industrialise quickly and we could also have capital goods industries. We all knew that the Second Plan model was a closed economy model and neglected the advantages international trade could bring. But we were not saying that international trade should be neglected. What we were saying was that the model was a shortcut to rapid industrialisation. In the meanwhile, whatever advantages we could get from trade should be exploited. But the assumption that a large country with diversi®ed reserves should have a broad-based industrial structure if it wants to be rich, you cannot deny. There is no rich country which does not have a broadly based industrial infrastructure. Even in my doctoral thesis, I had come to that conclusion. So, if you can somehow ®nd a way of getting there quickly, we should do it. Purely in a mechanistic sense, it is true that if you can set up capital goods industries ®rst, you can get there quicker, provided, in the meanwhile, you can manage your supply of consumer goods, balance of payments and in¯ation. But maybe it was wishful thinking. We wanted to get there quickly, we underestimated import requirements and potential dangers of in¯ation because savings wouldn't grow, we told ourselves that small-scale industries would take care of consumer goods supplies and there will be no in¯ation. There was a lot of wishful thinking. We may be economists, politicians and civil servants, but we were also hungry for industrialisation. Blood, tears, whatever was involved, we wanted to get there as quickly as we could. We were not unaware of the complexity of the problems and the limitations of the model. The economists, largely myself, wrote the draft plan in economic terms. Mahalanobis rewrote our draft plan frame. The statistical work was done by others.

The statisticians moulded the model. Yes, Mahalanobis had a style of putting it all across. Many economists of repute fuelled this ambition of ours to industrialise fast. I remember, as

I.G. Patel 47

objective a person as Arthur Lewis, when he visited us in 1955 or so, said that India had a comparative advantage in producing steel and we should aim at producing 10 million tons of steel, not 3 million tons. So, at that time, overoptimism was a part of the fabric of our national vision or patriotic vision, and it was fuelled by the humiliation we all felt for being left so far behind by colonial rule.

I enjoyed reading your essay on Nehru. How in¯uential was Nehru in our adopting the inward-looking industrialisation strategy? Don't blame Nehru. It was not as if he was propping up importsubstitution or anything like that. He was excited about the prospect of rapid industrialisation.

Was he in¯uenced by the Russian model? That is also an exaggeration. The Russian model, purely physical planning and all that, his advisors may have talked about. Yes, he was interested in planning. He was a man who believed in himself and believed in the ability of the government to deliver. In those days, it was the assumption that the public sector and political leaders stood for the public good. Today, we take it for granted that they don't stand for the public good, but not in those days. Nehru certainly believed, like all of us, that industrialisation was the answer. He wasn't much impressed by Gandhiji's charka and all that. In the earlier years, he might have been, but he quickly departed from it all. He also believed that to be independent or be a third force or whatever, even in terms of economic strength, you had to industrialise. Then, of course, he had tremendous faith in people like Mahalanobis, who was his personal friend. Mahalanobis provided a rational explanation for the vision Nehru had. He was very much a nuance man, there were no dogmas about him.

It is often said that in his enthusiasm for industrialisation, Nehru neglected agriculture. I don't think so. The First Plan talks of Bhakra Nangal dam, irrigation, community development, extension work, import of fertilisers ± this is all about agriculture. In fact, some of the work on agriculture was begun before independence, under the British administration. In the 1950s, we

48 Conversations with Indian Economists

were faced with a food shortage, we had to do something about it, and given the technology at that time, enough was done. The fact that we may have overemphasised heavy industry doesn't mean we underemphasised agriculture. These are all preconceptions.

But why did we persist with the inward-looking import-substitution strategy for so long? It carries its own momentum, we instituted the policy for a variety of reasons, as I said earlier. But it doesn't justify a policy which says that nothing should be imported if it can be produced at home. But with that done as a policy, it meant that if I wanted to produce something, l could exercise pressure and say, `don't allow this product to be imported'. And once the thing went into the bureaucratic and political machinery, vested interests developed. In life, it does not take long to commit a mistake, but it takes a long time to correct it, because each policy develops its own momentum. To reverse the policy, you need not only logical persuasion, but also a means of getting the vested interests out of the way. Even today, why are we not able to deregulate and globalise as effectively as we want to? At the logical level, people are convinced of the need to do so. But at the practical level, there are pluses and minuses in any change in policy. Those who are likely to lose are very vocal, but those who are likely to gain are not. In many cases, they don't even know they are likely to gain.

Vested interests cannot have their way without the support of the bureaucrats. I guess it is the bureaucrats who crafted the intricate licensing procedures. They were done at the Commerce and Industry Ministry at the bureaucratic level. But I dare say that once something gets going, you justify your own policies. All this was, of course, fed by certain sets of beliefs. One was the infant industry argument for protection which, even the staunchest free traders would concede, is a valid argument. Even Haberler, a free trader who taught me, believed in it. But the problem is, most infants never grow up. In any case, how many infants can you support? Second, at that time, a sort of a permanent dollar shortage fear was prevalent in development economics. It was thought that developing economies would always have a balance of payments problem. No amount of good policies would cure it, so protection was a method of containing it.

I.G. Patel 49

It was the then prevailing philosophy. More than that. It was given theoretical justi®cation. Mrs Joan Robinson wrote that the savings bottleneck is different from the balance of payments bottleneck. This was because of the assumption that resources are not fungible in a developing country, they cannot be easily transferred from one place to another, from one use to another. In an accounting sense, the two gaps are equal to one another, but in a practical sense, they need not be so. In a developing country, therefore, a balance of payments gap can arise before a savings gap. So if you can somehow reduce the balance of payments gap either by aid or by import controls, then you can open up your potential savings for development. This argument was used extensively not only to support import controls, but also as a justi®cation for foreign aid.

The foreign exchange gap argument. Yes, that was the argument. It is not a gap which can be corrected by good policies, it was something inherent in the fact of underdevelopment. These arguments may be intellectually sound. But the question is, how long can you follow protectionist policies based on these arguments? But everyone forgot that these policies could breed vested interests. Then you protect what you have already created. I used to ask ± how come a few textile company owners and a few shoe manufacturers in the US and Europe can succeed in getting imports of these goods from India reduced, when millions of consumers in these countries are losing out? The answer is simple ± the few textile and shoe company owners are organised and vocal, the millions of consumers are not; in fact, they don't even know they are losing.

You haven't talked about exports. You could solve or at least alleviate balance of payments problems through increased export earnings. Is this because of export pessimism which prevailed then? No, there was no export pessimism then. At that time, no one believed that developed countries would be open to ordinary consumer goods from developing countries, particularly the Americans. To the extent that we thought that the environment for trade will not be all that open, we were pessimistic. But no one said we shouldn't promote exports. In fact, export incentives were given as much importance as import controls. All these

50 Conversations with Indian Economists

arguments about savings and balance of payments gaps and infant industries apply as much to export industries as to import-substitution industries. We did provide incentives for exports, but we provided them so indiscriminately that they ceased to be incentives. If you give incentives to everyone, no one gets an incentive. An incentive has to be selective. The theory was right, where we went wrong was in believing that if the theory applied to one we could apply it to ten. It is the same sort of thing which has happened with reservations for less privileged groups, they are justi®ed we know, but if we apply it to everyone there will be no reservations at all.

In one of your essays, you argue that we shouldn't forget our achievements during the early years of planning. Which of these would you single out? I believe that over the long haul, India has been under-sold. I will be the ®rst to admit that there were many negative things and our overall failure is unpardonable. But that doesn't mean that we have had no successes from time to time. As Amartya Sen says about famines, we may not have done very well, but with the kind of attention these sorts of failures attract in an open society, we have avoided major disasters. There is no other country like India. We are a large country with historical differences. We can't, for example, say we will only develop coastal regions and not the interior regions, we can't do that sort of a thing. But all this does not justify errors of policy. Our errors were not remedied and that failure to do so still remains.

What were our major achievements over the ®rst 25 years of planning? I am frequently asked what were our positive achievements, what were our failures. It is a dif®cult question. I would, however, say that it was not merely that we have a democracy, I think there was a whole renaissance on the cultural front, on the intellectual front and on the scienti®c front. A whole lot of new energy of the middle classes and perhaps to some extent also that of those below the middle classes was released. You have to give credit for this to Pandit Nehru. People criticise him for many things, particularly economic policy, but it should not be forgotten that he changed the face of India in many ways. Today, we are a vibrant, intellectual, scienti®c and cultural community. We may be a closed economy, but certainly not a closed mind society.

I.G. Patel 51

In one of your recent essays, you talk about recent economic liberalisation efforts. Reading between the lines, I get the impression you are somewhat pessimistic about prospects for liberalisation. It is not a subject on which you can make a single statement. All I can say is that we have not done anywhere near to what we need to do. There are gaping holes. Nothing very signi®cant has been done in the sphere of ®scal policy for instance. So we can't even say we have done a lot, but not succeeded. In the nature of things, I do not believe that it is a question of socialism or capitalism. The State has an active role to play in many areas. Even in those ®elds which you want to hand over to the private sector, you need regulation and regulatory mechanisms. It still needs to be proved in years to come that we can have a totally capitalist system, unsupported by regulatory mechanism, whether it be regulation of telecommunications or technology. This is not to say that the regulatory body should be intrusive, but we do need to have regulatory mechanisms which support private investment. We need to devise a tax structure which would enable us to have free primary and secondary education, provide reasonable health facilities for the poor. There is no way you can escape from redistribution policies in this country. I do not believe that if we are not doing well today, it is a negative mark against deregulation or privatisation, because we haven't done it yet. You know, economic policies alone do not determine positive outcomes as much as we think they do. If people do not have con®dence in the law and order situation in the country, if people think things do not go by merit but by corruption, and they can't trust the government in power, economic policy, however good it is, cannot produce positive outcomes.

The main problems seem to be the inef®cient public enterprises and our rigid labour laws. You mention two things which are absolutely essential if we are to move on. Privatisation means that you hand over a particular public sector project to one party so that they become if not the whole owners, at least whole managers and whole operators. You should declare that on such and such a date, this particular industry will be privatised and invite bids for whatever the volume of shares in the industry you wish to sell. We are not doing anything of that sort. Even if you do that, it won't work unless you give these new owners, new managers and entrepreneurs the freedom

52 Conversations with Indian Economists

to restructure the enterprises. Can it be done with our present labour laws? Nobody wants to touch them. I have said at my meetings with the Prime Minister that we should at the very least appoint a committee or commission to look into the problem. No one is against the legitimate interests and powers of labour, but they also have responsibilities. There must be limits to what they can do in terms of interfering with the rights of management. They cannot decide what the policy of privatisation or non-privatisation should be. They can't take the law into their own hands.

Is it because we are a democracy that we have problems dealing with labour? China appears to have done it. Yes, China has done it. I have just returned from Vietnam, they have privatised. We have a problem. Our Parliament has become unduly competitive. The Congress Party opposes policies which it itself initiated. BJP26 was all along saying that they were against controls, but they come to power and they also oppose their removal. As I said earlier, it has all got to do with vested interests. It becomes very dif®cult for a chap to give up earning money by selling licences. If there is a particular public sector project in a particular ministry, the minister in charge is not going to be a party to that enterprise being sold, because his power is reduced. The act of privatisation must be separated from the Ministry. How do we get over this in-built resistance to change? Somebody must have the courage to say, let the government fall tomorrow, but we are going to do this. Politicians have to rise above their temporary short-term interests. They are making a mistake in thinking that the short-term advantage is long-term political strength. People want results, not this constant squabble.

What we need from our leaders, then, is decisive action within a democratic framework. I think I can illustrate what I am saying from my experience at the London School of Economics (LSE), there is supposed to be some sort of mystique about LSE. A few months after I had arrived there as Director, the Chairman of the UGC who visited us asked me what my explanation for this mystique about LSE was. I had thought about it. What is special about LSE from what I had seen and known is that there is participation with decisiveness. It is an extremely participatory organisation. Students,

I.G. Patel 53

teachers, everyone participates, but we also knew how to take decisions. We allowed participation, argument and dispute, but we were also decisive. So democracies have to ®nd a way of participation with decisiveness, otherwise they cannot compete, they cannot deliver.

Has recent liberalisation had any impact on poverty? Is it too early to say? I don't think it has had much of an impact. I was shocked to learn recently, when I was in Vietnam, that around the year 1975, 52 per cent of the population was below the poverty line in India, in Indonesia, the ®gure then was around 57 percent. Today in Indonesia, only something like 9 per cent of the population is below the poverty line, in India the ®gure is 35±36 per cent. If only we had 6±7 per cent rate of growth over the past 20 years, we could have reduced poverty. Somehow we have failed to achieve it.

India's population growth has been a problem. Yes, now no one talks about population control anymore. We have made Sanjay Gandhi immortal. Even Bangladesh has done better than us with family planning in recent years. Why can't we openly talk about it? Why can't we tell the churches, mosques and temples to talk about family planning? But we are afraid to do so. Caste leaders do not want to talk about it, religious leaders do not want to talk about it and ministers do not want to talk about it.

Maybe it is an unfair question, but what would you have done now if you were at the helm? The short answer to that is that I would be 100 per cent behind policies of deregulation, privatisation, liberalisation and also opening up markets for foreign direct investment. Some regulation would be necessary. I believe that to some extent, in areas such as power, transport and irrigation, public investment will have to continue at a much higher level than it has been in the last ten years. We should also be much more active with regard to education. I see absolutely no reason why we should be afraid of selling off half of our public enterprises in the public sector, if it comes to that, lock, stock and barrel to foreign ®rms. Nothing untoward will happen, our industry

54 Conversations with Indian Economists

would be more ef®cient, our exports will increase and there will be more jobs. The foreign ®rms certainly will make money, but what is wrong with it if they make money for us also?

But some of these enterprises are so inef®cient, and they are incurring huge losses. Who will buy them? We may have to give them away. You won't have to give them away. Well, in a sense, if they are making huge losses, by giving them away I would make a gain. But these enterprises have assets which are valuable. They can be sold at a good price. Steel plants today are incurring losses, but with rationalisation and restructuring, they can be pro®table. There will be competition amongst buyers for these assets.

For ®ve years, you were the Governor of the Reserve Bank of India. What are your thoughts on independence for the Central Bank of the country? No, when I was Governor I did not advocate independence for the Central Bank. But I have said all along that nobody should be able to say that the Governor is beholden to the government or to anyone. Personally, I do not think that there can be any democratic political system with total independence for the Reserve Bank. One can de®ne areas in which there should be non-interference. The Governor is a political appointee, you cannot say the Governor should be appointed by ten wise men and they all serve on a committee. In a representative government, you can't have the Governor appointed by say a committee of former Governors of the Bank. But at the same time, conventions can be built up, certain things can be put beyond the immediate decision of the Finance Minister. As much freedom as is possible should be given to the Governor, but it must be well de®ned. The Governor of the Reserve Bank is not the Chief Justice of the Supreme Court. The Chief Justice has to be totally independent, he shouldn't ask the government or be told about the judgements he delivers. But the Governor of the Bank has to inform and even consult the Finance Minister of what he is doing on some matters, e.g., the exchange rate.

But the contentious issue has to do with the funding of the government debt by the Bank. This is something where the responsibility should be put where responsibility belongs. The Governor can say, `I am not going to buy

I.G. Patel 55

any more government bonds'. But can it be done like that? We have a rule, for instance, that the Reserve Bank will not give any loans to the state governments, they will only get a line of credit which can be enlarged. But when one of these state governments runs amok, the central government bails it out. Of course, no one can bail out the central government if you don't buy central government securities. If that is what we want, what prevents the Parliament from passing a law? You can say that the government should have the sanction of the Parliament to borrow. The Parliament can limit the amount the government can borrow, it is the function of the Parliament to pass that law. If no limit is set, and the Reserve Bank sets a limit on its own, interest rates can go haywire.

What about monetary policy? Would you advocate the sort of a model we have in Britain where the Monetary Policy Committee of the Bank of England determines the interest rates? Monetary policy is a different matter. It acquires signi®cance because of the relationship between the commercial banks and the Reserve Bank. The Central Bank acts as the lender of the last resort, but that relationship is more or less broken in this country. The lender of the last resort doesn't lend much. Where the relationship prevails, it is entirely an activity of the Reserve Bank and the government shouldn't interfere.

Your earlier book is titled Essays on Growth and Development. There is now a debate on growth versus development. Some would say growth ®rst, others would say we must invest more in social goods to generate growth. Education and health are the social goods one talks about. Absolutely. Education today is not just a human right, it is an absolute economic necessity. It is not just primary education, but also secondary education. If today China, Vietnam, Malaysia and Mauritius are all well ahead of us, it is because they have primary and secondary education for nearly 90 per cent of the relevant age groups. Education is crucial if you wish to compete in export markets. Education, health and the environment are no longer a luxury, they are absolute necessities. They are all essential for growth. Obviously, you need resources for all this. They have to come from somewhere. That is why we have to cut down on subsidies and on our bureaucracy, get rid of inef®cient public enterprises and cut down expenditure on useless armaments.

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Better resource allocation is one solution. Yes, I can't say everything should be free either. For secondary education, there must be some system of fees, if only to make people responsible.

India's expenditure per capita on education does not seem to be much different from that of Sri Lanka. Yet Sri Lanka has done much better. Why is it so? Probably Sri Lanka's education standards are much higher. I was with a Sri Lankan friend of mine recently. He was complaining, he said, `Your people talk in your national language, you communicate with your wives in Hindi, but here in Sri Lanka everything is English, the medium of instruction in the schools in English.' In a way, education in English may have given them an advantage. Maybe because Sri Lanka is a smaller country, investments are concentrated and monitored better. But I must say, we can't blame only the government, parents in this country should also bear some of the blame for the poor quality of our education. Why can't they insist on good education? Why can't they demand it? If teachers do not attend to their job, if schools are ill equipped, why can't parents complain?

Of course, if parents themselves are not well educated, they don't bother to complain. No, No. Even illiterate parents value education, they sacri®ce a lot to educate their children. It is happening, but it has not spread far enough in all communities in all social strata. In Baroda, I know a lot of people who take advantage of subsidies, reservations and preferences for their children's education. But, there are many who do not do so. We have to educate such people. During the 1930s and 1940s in India, middle-class income groups took to education because there were prominent public ®gures who emphasised education. They set up schools, they did not wait for the government to set up schools. There has to be a popular demand for education. You can't expect the government to do everything.

The next question on my list is about foreign aid. You have written an essay on freedom from foreign debt in your latest book. What are your views on aid, a topic on which debate continues? I think the time has come when India should stop getting foreign aid. I think it is ridiculous to go on asking for aid after 50 years of independence.

I.G. Patel 57

It is just not on. We say positive discrimination should cease after a while. If so, how can we say aid should go on forever? It is just not on. In cases of distress, yes we need aid and there can always be people-to-people help. I am all for foreign investment, I am all for getting our share of credits from the World Bank and IDA, I am all for commercial transactions, but not for concessional aid from governments.

May I now talk to you about the East Asian crisis and its implications for India? I have heard it said that we may not have had high growth, but we have had no crisis either. So the Hindu growth rate is not without its advantages. Would you call it a gain? It is like saying, if I have no shirt I can live without a shirt, so I shouldn't want a shirt. We haven't had a crisis because we have not imported capital. I am no expert on East Asia, but let me make a couple of points. I am not a great advocate of portfolio capital ¯ows. I certainly do not believe that our ®nancial corporations and ®nancial system should be allowed to borrow unlimited amounts of money short term. I am an advocate of foreign direct investment, but portfolio investments and short-term borrowing from banks must be monitored and kept within limits. If central banks do not lend to commercial banks at will, why should commercial banks be allowed to borrow from abroad at will? But having said that, I think a ®nancial crisis occurs when there is mismanagement somewhere. Countries where there is likely to be interference or trouble, they don't get the money. We are in this category. But others get the money and when they mismanage their economy, money leaves the country. But we shouldn't conclude that because Indonesia, Malaysia and Thailand experienced crises, they are crisis-ridden. They may experience three years of low growth, even negative growth. But they have the infrastructure, none of the prosperity they have enjoyed over the last 30 years or so has totally gone. The standard of living in Thailand, Singapore and Malaysia is much higher than ours and will remain so. Take the example of Thailand. I went there in 1951, the baht was 18±20 baht to a dollar. After the crisis it went down to 50 baht to a dollar. Now it is back to 36 baht to a dollar. So over a 50-year period with the crisis and all that, the Baht has depreciated from 22 to 36 baht. How much has the rupee depreciated over the same period?

58 Conversations with Indian Economists

Would you advocate capital controls? What I would advocate is good ®nancial management. It is good management when you save the country from excessive dependence on foreign borrowing for what can be done at home. Where the question of our people taking money out is concerned, I think much more freedom can be given. But at this stage we are not rich enough, we are not yet at the stage where we can say `take your money abroad', because to sustain that kind of a policy, there must be credibility that the policy will be sustained. None of us has enough con®dence to say that the policy of free capital movements once instituted will not be reversed. So if you allow for free capital movements, everyone will take money out for fear the policy will be reversed. But if it is a policy with credibility, money will not ¯ow out. When you have acquired that degree of con®dence, and the exchange rate has remained stable for some years, money will begin to come in.

China is attracting a lot more foreign direct investment than India ± around US$ 30±40 billion a year, whereas India is attracting around US$ 2 billion. India has a stable legal framework, our policy towards foreign investment now is liberal. Why are we attracting so little foreign investment when compared to what China has managed? I don't know the precise ®gures. Part of the explanation I think is that a substantial part of foreign investment in China is Chinese investment, from overseas Chinese. Also, Hong Kong had developed over the years a large industrial base which was based on things made in China, but went through Hong Kong. Once Hong Kong was absorbed into China, the Chinese export drive gathered pace. What was being done illegally is now done legally in an organised fashion. There was always the feeling that China can deliver because of authoritarian rule. And the Chinese do deliver. Once you get results, the coin is stuck. But why the great difference in the volume of foreign investment the two countries attract, I do not know. My hunch, though, is that sooner or later, there will be some disappointment with China. There is a lot of regional inequalities in China. In a way China has bene®ted from the absence of a free system with all this paraphernalia of controls, such as capital goods control act, industrial disputes act. The fact that we have a legal framework has become a liability because the legal framework is not consistent with today's world. Our so-called democratic framework of laws may be abused, they may be out-of-date and not properly implemented. The Chinese on

I.G. Patel 59

the other hand are building a new framework, they can have a bankruptcy law, if they wish, just like that.

In your ®rst book, in your essay on agriculture, you talk about equity versus ef®ciency and you also wonder if capitalist agriculture could be a viable system. Here too there are contrasts between India and China. This is a question which has worried me for sometime. We are an overpopulated country, land is scarce and millions of people remain on land. We have been patting ourselves on the back saying that the green revolution is scale-neutral in the sense that a small piece of land will be as productive as a large piece. But will it always be so? If it is not always so and there are real scale economies in 20-acre farms, I am not talking about 5,000-acre farms, rather than in 2-acre farms, then where will we go? A 20acre farm will be a capitalist farm with lots of hired cultivators and one owner. Can we say we can't have that, we will import all our food and pay for it with exports? There is a real problem here, I don't know the answer. I cannot help feeling that you cannot totally dismiss forever some of the communist ideas. I believe you may have to make co-operative farms work or introduce community ownership of large farms.

Mainly because of scale economics. Because of scale and because you cannot avoid equity considerations. You can't throw 20 million people out of jobs. Some people say, it will all be sorted out. But how? I am not sure.

It can be argued that our problem is not with agriculture, but with industry. We have to remove people from agriculture and employ them in industry. Industry or services. But whatever it is, we have to have an ef®cient physical base of production, be it industry, services or agriculture. You may say that markets in other countries are rich, we can always export to them. This is true. We may not be able to afford luxuries, but others can. We can export, provided we produce with our rural labour in rural areas, sophisticated products of standard quality in large volumes. Now that is the challenge. To some extent, the Chinese have succeeded in meeting that challenge. The communist regime established rural industries, Mao's ideas were very

60 Conversations with Indian Economists

much Gandhian. Each rural area should be self-suf®cient. So in each area, you have publicly owned small-scale industries belonging to the town, to the village. With liberalisation, these may have become private industries. But rural industrialisation was an established framework. And then came the support from overseas Chinese to modernise these industries. So there was a framework to build upon. Now it doesn't mean we can necessarily replicate the Chinese system here. It is just an historical statement and may not have relevance to what we should do. But the real challenge is ± how do we make rural industry competitive on world markets? One likes to think it can be done. We can make excellent carpets, shoes and a number of other products.

Thank you. I have enjoyed reading your two books. Talking to you is a bonus.

4 A.M. Khusro Indian economists are renowned for their work on agriculture, a reputation which they owe in large measure to the seminal work of A.M. Khusro on land reform, size of farms, productivity and terms of trade. Khusro began his career as a monetary economist; his early work on monetary policy attracted wide attention including that of many a future Nobel Laureate. He continues with this interest in money and banking issues, but it is policy issues concerning agriculture which preoccupy him. Khusro has had a varied career as academic, diplomat (he was India's Ambassador to Germany from 1980 to 1982), Vice-Chancellor, Chancellor of Aligarh University (1974±79, 1992±95), Member of India's Planning Commission (1982±84). Currently, he is the Chairman of the Indian Finance Commission. Khusro was educated at Madras University and Leeds University. He has taught economics at Osmania University, Delhi University and the Fletcher School of Law and Diplomacy at Tufts University, USA. *

You were educated at Madras University and you obtained your doctorate from Leeds University. I did my Masters degree at Nizam College in Hyderabad which was then af®liated to Madras University. Then I went to Leeds and read for the B.A. (Hons) degree in Economics. I was exempted from the ®rst year, so I managed to get my Economics degree in two years, and then for two and a quarter years, I was occupied with my doctorate at Leeds on liquidity preference.

A.J. Brown was your supervisor. Yes, Professor A.J. Brown and then Professor Walter Newlyn, a development economist and a specialist in banking and ®nance. After completing 61

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my doctorate, I joined Osmania University in Hyderabad as a lecturer and began my research work on Jagir Abolition and Land Reforms.

When did you join the Delhi School of Economics? In 1957, and remained there until 1974. I was doing my research at the Institute of Economic Growth and teaching at the School. It was a fascinating period. During the 1960s, there was a reverse brain drain as it were. All the young stalwarts came back for a period of 8±10 years ± Amartya Sen, Jagdish Bhagwati, Sukhmoy Chakravarti and a little later, T.N. Srinivasan, B.S. Minhas, all came back. It was a fascinating period, discussion, seminars and debates ¯ourished. Professor K.N. Raj was the leader of all this, doctoral theses started rolling in. The so-called New Delhi School of Economics consisting of the Planning Commission, the National Council of Applied Economic Research and the Indian Statistical Institute began to participate in our seminars and discussions. It was a fascinating period.

Did Western economists also visit India then, and participate in your seminar programmes? Yes, economists of great distinction such as Milton Friedman, Thomas Balogh, Ian Little, T.W. Swan, Don Humphrey and several others visited India. They wanted to examine our experiment of planning within a market economy. Some of our stalwarts, who were well trained in economics and econometrics, went back to the UK and US after a while. They were in great demand.

Your early work was on Keynesian liquidity preference. You worked with data on the UK? I worked with four sets of data 1919±1948 for the UK, 1920±1948 for the US, a third set for the UK from 1898±1918 and a little later, yet another set for India from 1936 to 1952.

None of your tests rati®ed Keynesian liquidity preference. No, none of them rati®ed the simple relationship between demand for money and the rate of interest. One had to think, why so? In the postwar

A.M. Khusro 63

period, because of the huge borrowing by the government, the volume of assets had increased phenomenally. Now assets in the form of money are a part of total assets, so money demand which bears a relationship with assets, especially liquid assets, has to increase pari passu with other assets. Thus, money demand will change not only in relation to the rate of interest, but also in relation to total assets. So I set up an equation where the rate of interest was dependent not just on money, but on the ratio of money to assets. Of course, I had to do some further ®ddling, as it were, to bring out some of the nuances of this relationship. For example, the rate of interest, which is the earning on assets, had to be adjusted for the rate of tax. I discovered that the relationship between the adjusted rate of interest and the ratio of money to assets was much stronger than the relationship between the gross rate and the ratio of money to assets. This relationship appears to be important in more than one respect for monetary policy. It turns out that if the revised liquidity preference schedule was elastic, as it was found to be in the more recent period for the UK, that is to say, if small changes in money supply in relation to assets can bring about large changes in the rate of interest, monetary policy can be successful. On the other hand, for the earlier period for the UK and for India, the schedule turned out to be inelastic. In other words, however much you play upon the money to assets ratio, interest rates do not respond. So you have to rely on ®scal policy and other controls to realise objectives of stabilisation.

This work of yours attracted a lot of attention in the 1960s. Joan Robinson and Milton Friedman debated the issue at the Delhi School. Yes, it attracted much attention. Friedman invited me to Chicago. Several others, including Paul Samuelson, James Tobin, Modigliani and Klein, commented on it. I had, as it were, the bene®t of the comments of several Nobel Laureates.

What are the implications of your early work for monetary policy in countries such as India? Now in the current age, economics has become more complex. Also since development economics grew as a discipline in its own right, there has been less emphasis on monetary policy. Friedman, to an extent, revived

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interest in money. In the post-Keynesian phase, in general, it was ®scal policy and development policy, not monetary policy which was given importance, though the latter remains a formidable pillar of economic statesmanship.

I guess when the Central Bank becomes the government's banker and purchases the debt of the government, monetary policy would be ineffective. Yes, it would be. If the Ministry of Finance decides to keep on borrowing from the Reserve Bank of India, in preference to other borrowings or taxes, then I think the prime dependency of the interest rate and the in¯ation rate would be on the debt of the government to the Reserve Bank of India, that is to say monetary de®cit. And this, until recently has been a dominant feature of India's economic strategy. In the UK and the USA, they realised all this, but we in this country just kept on borrowing heavily, for 30±40 years, until in the early 1990s, the Manmohan Singh regime reduced the quantum of borrowing as a matter of policy. That is to say, the quantum of borrowing from the Reserve Bank, was reduced signi®cantly or was shifted to market borrowing and external borrowing. Anyway, we have recognised that indebtedness to the Reserve Bank must be resisted. Well, that is still the prevailing theme, but I notice that a disregard of RBI debt or monetised de®cit has restarted. I have published my work and some recent pieces in the form of a book, Monetary and Banking Econometrics.27

When did you begin your research on agriculture? When I returned to India I taught at Osmania University for about 512 years. I soon found that Hyderabad was not the place for monetary economics. So my attention shifted to the ground level reality in Hyderabad and generally in India. This was agricultural development. The big thing that was happening at that time in Hyderabad, and elsewhere, was the abolition of landlordism (Jagirdari), the launching of land reforms to establish the tenant as a protected individual who could not be treated lightly and dismissed left and right, and an attempt to ®x land ceilings and ¯oors in order to redistribute land. But that resulted in escalation of rents unilaterally by the landlord and eviction of tenants. Such developments were holding back agriculture and agricultural development, and solutions had to be found.

A.M. Khusro 65

Did Hyderabad lead the ®eld in all this? The Bombay Tenancy Act, and Hyderabad Tenancy Act were the prominent legislations, and in both places, the impact in terms of implementation, I think was good. Later on, in both places and nearly everywhere else, the movement ®zzled out, much later West Bengal took to it with some gusto and a good deal of success. My work and the work of Professor V.M. Dandekar were the pioneering studies of land reform in Hyderabad and Bombay respectively. It so happened that along with my published work on Liquidity Preference, my published study on Jagirdari Abolition in Hyderabad became the cause of my being appointed Professor of Economics, in the University of Delhi in 1957.

There you worked on the effectiveness of land reforms. I wanted to examine whether as a consequence of land reforms, the tenants were able to get security of tenure, have their rents reduced or buy up the land from the landlords. Land reform laws had made it possible for tenants to buy the land from the landowners at less than market price. If they did not buy up the land, they could continue eternally as tenants on that land and their children could continue too. Thus the security of tenure was guaranteed. And if they wanted to continue as tenants, the rents could be reduced in their favour, according to pre-announced formulae.

But isn't it true, though, that this happened only in some States? It didn't happen all over India? This was the general provision of land reform. I would say, yes, you are right, it happened substantially in Bombay, Hyderabad, Jammu and Kashmir and West Bengal, and partially in U.P. The intention everywhere was to get the rents reduced, but reforms by themselves did not do this. The intention everywhere was to provide security of tenure, but that also fell short of the intentions. So it was patchy. We discovered in the Hyderabad case, and perhaps Dandekar also discovered in the Bombay case, that in areas which were politically conscious like Telangana, land reform went through quite well, but not in less politically conscious areas such as Marathwada, and Karnataka. We discovered that very often, the tenants who had been cultivating land for a period of ®ve years prior to

66 Conversations with Indian Economists

the enactment of the legislation were given certi®cates of tenancy, so that they could get security of tenure and if they wanted, they could get their rents reduced later on, and also if they wanted to buy up the land, they could do so, within prescribed limits.

So it was a kind of squatter's rights given to them. Yes, quite right, squatter's rights were given to them, but in many cases, it was more than that. Very often, the position of the tenants was weak anyway, the landowning community was dominant in village life. Quite often, they managed to bribe the tenants and asked them to go and surrender their tenancy certi®cates. There was a clause in the law saying that tenants could give up land if they did not want it. So masses of them surrendered their land, and the landlords got it back, and in all such cases, the tenancy reforms were a failure. This could have been avoided with a little bit more thinking on the prerequisites of reform. Land surrendered by the tenant, if any, could have been made returnable to the government and not to the landlord.

Were they bribed or cajoled, or both? They were generally poor cultivators and could not ®nd adequate inputs to cultivate land on their own. So, some of them voluntarily gave up the land, while others were cajoled or bribed to do so.

Did this happen in Telangana also? In Telangana also, to a lesser degree, because people were more conscious and would not surrender easily. In other areas, such as Karnataka, they surrendered voluntarily, and under pressure through various tricks in some cases.

And the landlords undid what had been done. Yes, sometimes the landlord would give them money to surrender. On the whole, tenancy reform was a partial success, with different degrees of success in different states. A spate of studies followed; these were the pioneering works, on land reform, sponsored by the Planning Commission. With my team of research workers, I spent two years to study and analyse the success

A.M. Khusro 67

and failure of the reforms. We surveyed 90 villages, and I myself visited 15 villages and stayed there. I thought I had a feel for agriculture and the rural economy, as I was the son of a revenue of®cer. My father was a deputy collector and earlier Tahsiladar in Hyderabad. For many years in my early life, I moved around with him in various parts of Telangana and Karnataka. That awareness and that feel remains with me, I think; it was a big factor in my understanding of the agricultural and the rural economy.

So in general, would you say that land reforms have been a success? No, I would not say that; I would not say that on the whole, they have not been a success. Only in some aspects, in some pockets and for some categories of people, land reforms have been helpful. The land ceiling legislation was a near-total failure. Tenancy legislation has been a patchy success. As agricultural prices rose over time, and as agricultural productivity too rose slowly, the ®xed rents, though exploitative and unbearable to begin with, became a small proportion of the value of output. As output per acre itself was rising, rents in kind became a smaller proportion of the volume of output. In due course, rent burdens fell. The objective of land reforms was achieved through secular forces, but not primarily through anything that land reform themselves might have done. In other words, rent did not actually come down through the machinery set up by the land reforms, but rents did come down as a proportion of the volume and value of the produce, through the normal increase in productivity and in agricultural prices. Today, there is no clamour in India about rents being extraordinarily high. That worry is gone; rent reduction has been achieved, but not so much through land reform. The other issue was security of tenure. In the early phase of land reforms, landlords did everything possible to remove the tenants. Once that phase was over, slowly, you know, the tenants came into their own, and today I think it is not so easy in India to remove a tenant. Again it is a big country, so exceptions must be made. But on the whole, it is not so easy to get rid of tenants, and tenants have become conscious of this right of security.

That has promoted equity in a sense, but has it promoted productivity and growth? On the whole, productivity has been rising; as you know, Indian productivity growth in agriculture is positive, but very slow. My studies

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showed that there were differences in productivity between farms cultivated by tenants and those cultivated by owners. It was very clear that the productivity of owner cultivators was higher than that of tenants.

Because the tenants did not have the inputs. Because the tenants did not have the inputs and they were dependent upon the landlords. Incentives were also low at that time; tenants were not sure whether the security of tenure would last. But ®ve years after land reform, the productivity of the tenant had increased faster than the productivity of the owner cultivators, so that the gap between the two productivities had de®nitely narrowed. In that sense, where land reforms were implemented, they were a partial success. On the whole ± it is very dif®cult to make a sweeping statement about Indian land reform, even after you have done your research!

Hanumantha Rao has shown that only 2 per cent of the total cultivable area was available for redistribution, after the issue of certi®cates and all that had been taken into account. So that is not very much, is it? That's absolutely right. My study also showed that. This is the third question, imposition of ceilings following zamindari abolition, and tenancy reform. The basic thing here is that you ®x an upper limit for land holding, differing from case to case, and you take away the surplus land and give it to the people at the lower end below a certain ¯oor level. So you take the land above the ceiling level and give it to people below the ¯oor. Very good logic. This masterly thinking behind Indian land reforms was by the way not a gift of the academicians, but of the administration. Several of the administrators such as Bhujang Rao Kulkarni and others were ®rst class-thinkers. In Hyderabad, Ramakrishna Rao was the Chief Minister, he was a very good lawyer, a good Chief Minister and very much devoted to land reforms. He was instrumental in making land reforms possible.

All this is coming from the South of India from Hyderabad. Is there any reason for this? Yes, the motivation for it was the communist movement in Telangana. We didn't have the Naxalite movement at that time; it was a communist

A.M. Khusro 69

movement of serious proportions. But Ramakrishna Rao was seized of it, and I think it was the need of the moment. He thought people should be given their rights, if they were to resist temptation to encroach on land and take the law into their own hands. That was one reason, and I think there were similar reasons in the Bombay area also. Moreover, society had arrived in terms of economic consciousness, that was another factor which promoted land reforms.

In your essay on economic theory and agriculture, you emphasise political factors, quite a bit. In the context of land reform, this has been a major problem in the sense that landowners are a fairly strong lobby not only in Hyderabad but elsewhere also. Yes, that remains so even today. There is one last thing I would like to mention ± one key aspect of land reform, unresolved so far. That is, many tenants everywhere, holding large proportions of land are not recorded as tenants. They are actually tenants, but they are shown as farm servants who cultivate the land for the landlord. I often hesitate to use the word landlord in the case of those with just 2 acres, 3 acres of land-holding. Be that as it may, the tenant leases the land from the landowner and he cultivates it; but he can be thrown out at any time, as his name is not registered in the record of rights and in the village papers. So the landlord calls him a farm servant. `This Mallappa is my farm servant and I Rangachari, am the landlord.' The real fact is that the tenant, Mallappa, pays half the produce or more as rent to this landowner who says he is paying a salary to the cultivator and claims to be an owner-cultivator. But Mallappa is actually the cultivator, he is paying rent. He is providing his own inputs. This is the real test. If a man is providing his labour to a farm, he is a labourer, but if he is providing a pair of bullocks, fertilisers, seeds and manure and other inputs, why is he doing that, unless he is actually the tenant? So the acid test is the provision of inputs. Whose pair of bullocks is it, Rangachari's or Mallappa's? And who is providing the seeds and fertiliser? If it is Mallappa, he should be declared a tenant and not a farm-labourer. In Indian society, it should be quite easily possible to determine this, within the village society. If you call a meeting of the Panchayat, or a meeting of the village community, the truth about who is providing the inputs will come out. An average village may consist of say 120 families, with an average of 600 people, something like that. If you call a meeting of these people, which is quite possible, then there is no way of hiding the

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fact that the pair of bullocks belongs to Mallappa. And similarly for other inputs; who is providing the manure, who is providing the plough and other inputs? It should be quite possible to determine in the village meetings who is the provider of inputs and that should determine the status of the provider as a tenant. If Mallappa is providing inputs, he is a tenant, if he is providing only labour, he is a labourer. On that criterion, tenants can be identi®ed and their names could be registered in the record of rights as tenants. Once they are made tenants, they get the three rights ± the right to security, right to purchase the land at a price which has been determined and the right to get rents reduced, should the rents be extraordinarily high. This is not being done, only the governments of West Bengal and one or two other areas have succeeded in doing so. They have done very well by getting hold of this point.

Well, it's not being done everywhere, especially in Karnataka, I don't think it has been done. It is being done almost nowhere at all; so one still pays lip-service to the reforms; even Amartya Sen mentions land reform, but no administration has gone to the root of the matter.

There is still the issue of land reform for the sake of equity, some would argue that redistribution should not be based on economic viability alone, in other words, redistribution for redistribution's sake or equity should be the norm. There is no point in doing that. If you redistribute for redistribution's sake, the redistribution will be a failure, and the man who acquired land may not be able to continue with cultivation. He may not have the inputs. But it is also possible that, over time, those who were not economically viable, through some process such as bank loans and loans provided by the government and inputs by the service co-operatives, could become viable. So there could be dynamic factors, which will make non-viable people viable over time. It is a possibility, though much would have to be done to make it realistic.

Where does all this ®t into your work on the optimum size of farms, because you were the ®rst one to do that kind of a work I think? Can I take half a minute going over the last point. Ceilings could not be implemented, almost anywhere in India. The large landlords hung on to

A.M. Khusro 71

their land by dispossessing the tenants, by transferring the land, `benami', in names of people who were not supposed to be connected with them, but were actually their sons and their daughter or nephews and nieces and other relations. So they split the land, and when the administration tried to impose ceilings to take away the surplus, there was no surplus left. And that is why ¯oors and ceilings could not be implemented. This was a universal phenomenon in India and this is where the ceiling part of the land reform has been more or less a total failure. This is where the 2 per cent ®gure you referred to earlier came up. Surplus available for distribution amounted to a few hundreds of thousand acres when it should have been hundreds of millions of acres. Then coming to the productivity or the ef®ciency aspect, in relation to farm size, my work focused on all the seven states for which data were available for the relevant variables. That work was summed up in an article, which I published in the Indian Journal of Agricultural Economics in 1971, I think. That also made the round and Nobel laureate Professor Schultz of Chicago told me that he had admired it and said, `You have done something important there.' Now, in that work, I examined a sample of land-holdings or farms in seven different states, and tried to see what proportion of farms were cost-effective, and I studied them from secondary data. I tried to get the magnitudes of gross output per acre, costs per acre and net output per acre (net of cost), call it productivity per acre. I also examined farm business income per acre, and gross pro®t per acre. Thus, three kinds of returns were studied. In all the seven states, without exception, I found that gross output per acre declined with an increase in the size of farm. That is to say smaller farms were more ef®cient and more productive per acre than the larger ones and as size increased, productivity declined. Then, deducting from gross output the costs of materials purchased from the market, I obtained a key variable called farm business income, which consistently declined as farm size increased. And ®nally, imputed costs of farm produced inputs increased with farm size in all the seven states. Gross pro®ts were negative up to a certain point in farm size, but positive beyond that size and kept rising with farm size.

All this lends considerable support for land reform. It does. It does indeed, it shows that if you impose a ceiling at a certain farm size ± let us say 10 acres ± you are going to chop off the larger farms with low productivity and you are not going to hurt the small farms which have high productivity. So it did make a theoretical case for imposing

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ceilings and an economic logic for ceilings was established. But the governments did not ask the right questions when they imposed ceilings. They were only on the redistributive track and did not consider the ef®ciency question.

Ceilings were a failure as a land reform measure. As I have written in my articles on the issue, ceilings legislation ended in a ®asco and India lost an excellent opportunity for using a major programme of land redistribution, a programme which would have ushered a far-reaching agrarian revolution.

Your estimate of the optimum size of farms is based on these studies on productivity. Yes, optimum size comes from this, and you are quite right, I forget the details but something around 5 acres. It must have now changed to around 7 acres. But now because of the primogeniture law, the average size of holdings has declined to around 3 acres. For that reason, among others, annually about 5 million people shift from the agricultural-rural sector to the urban-industrial sector, they move to towns and cities and cause a mess for themselves and others as well, because not all of them get employment, and there is not enough infrastructure in towns and cities to support them.

That brings up one of the important things in your study. Your paper on economic theory and agriculture suggests that we can have agricultural development without a movement of labour from agriculture to industry. This goes against the grain of received wisdom. This was the ®rst paper I published at the Institute of Economic Growth, later on I revised it, maybe ten years later and published it in the Journal of Social Sciences of UNESCO. I estimated that in the early 1970s approximately 3.5 million people, now perhaps 5 million, shifted every year from the rural-agricultural to urban-industries sector. This puts a heavy strain on urban infrastructure. The establishment puts in new infrastructure every year, but then the newcomers come with such gusto that there is never enough, and hence the availability of infrastructure per person declines.

A.M. Khusro 73

So the argument is that a broadly based agricultural development programme should be designed to provide employment for the prospective migrants, within the rural-agricultural sector. The idea was that instead of sending people to where infrastructures is, one should send infrastructure to where people are, i.e. in the rural areas. Hold them back by supplying appropriate infrastructure and raising the quality of life and providing employment thereby reducing the degree of shift to urban centres. In other words, urbanise rural areas in a sensible, civilised fashion by building infrastructures through town-and-country planning and converting labour into capital. This will surely increase agricultural productivity and the increased agricultural production can be transferred to the urban areas where it is badly needed to feed the rising population, and can indeed be exported.

Sort of rural townships of China. Yes, something like that. Put this idea into practice in selected areas. Let us say select 200 rural pockets and therein put infrastructures speedily within a period of two to three years. This infrastructure will consist of electricity and water supply, sewerage, local roads, municipal facilities and administration plus a few other things. While you are laying these infrastructures, employment will increase. The infrastructure itself will absorb labour, and it will surely be local labour. So it is not a geographical shift of labour but a functional, sectoral shift that will generate the ®rst round of employment and income. At this stage, move on to the second round and invite industry, business and other people to come and use the infrastructure ± and build shops, factories, workshops, of®ces, schools, training centres, clinics, hospitals, cinemas and other facilities for themselves. Industry loves infrastructure being given to them. If you give them infrastructure, they will respond and move and may not even want tax holidays, etc. As they build these premises and start their businesses, a second round of employment and income generation will follow. As these activities begin to enrich the rural areas, people will be required to work in the new premises. This will generate a large demand for housing and thus a third round of employment and income generation will emerge. In this way the rural scene will change and new dynamics of growth will take over.

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Your idea here runs counter to the celebrated Nurkse±Lewis model which favours moving surplus labour from agriculture to industry. Yes, in my scheme of things, the Lewis±Nurkse thesis would remain in cold storage for sometime. The Lewis±Nurkse thesis will, of course, come into its own when near full-employment is reached in agriculture. But until then, and to reach that stage, my strategy, I think, has numerous bene®ts and will resolve numerous problems of today's Indian economy and society.

What are your views on the Green Revolution? In the initial years it actually increased inequality, didn't it? And rich farmers got richer. According to some observers, agricultural prices declined as a result of the Green Revolution, so this has lifted real incomes. The Green Revolution has provided money for anti-poverty programmes. So, in other words, it has indirectly helped poverty elimination, rather than directly. It used to be said, in the earlier days, immediately after 1965, when the phenomenon emerged, that it was only in Punjab and Western Uttar Pradesh that the revolution occurred. But now, it is quite clear that it has spread widely in many parts of the country. Nowhere has a whole state been seized of the revolution, but everywhere in Kanartaka, Andhra Pradesh, Kerala, Maharashtra and Gujarat, large parts of agriculture have been in¯uenced. I would say that it is now a major phenomenon, which has spread all over the country, but it has lost the glamour that it used to have. Increased use of fertilisers, a search for newer inputs, better combinations of inputs, a search for new high yielding varieties, all of these things have become very common now, and the farmers' knowledge of new techniques has improved signi®cantly. I would say Indian agriculture has moved on. Productivity per acre has grown a shade faster than population growth, though it has not increased rapidly.

Has the Green Revolution provided yet another argument for land reform? No, I think it has bypassed land reforms. There is another thing about agriculture that I have been writing about for some time that I should mention. Large chunks of India's land is still available for reclamation under the category of reclaimable waste and a huge acreage of this variety exists in almost every state. In fact, these areas are en block in Maharashtra, in Rajasthan.

A.M. Khusro 75

Reclamation from what, from forests? No, from unused, reclaimable, cultivable waste. Now these are huge areas and very often enblock together. We are talking about huge extents in almost every state, running into millions of acres. Now these can't be reclaimed by individual farmers because these require heavy equipment, bulldozers, tractors and what not, and only the corporate sector or the government corporate sector can reclaim it. So what about giving incentives or allowing the corporate sector to reclaim these lands without encroaching upon the existing farmland of small people, which should be protected by the Land Alientation Act.

Can it be redistributed to the small farmers? No, not entirely. In a total plan, there could be a chunk used for redistribution, why not? What the ceiling and ¯oor legislation could not do, reclamation can do. But the real purpose of this vast reclamation is for reclamation and subsequent cultivation by the organised sector, followed by processing and agricultural exports.

You will have an increased supply of land. Yes, increased supply, a certain proportion such as one-®fth of which could be distributed. The remaining four-®fths can be used by the corporate sector to grow what I call the new agriculture, that is to say horticulture, ®shery, forestry, livestock, and milk and milk products, etc. The corporate sector should continue not only to cultivate new agriculture, new crops, but also do the processing and link up land reclamation with production, processing and then exports. Only the organised sector can do this. If we don't do this, the forthcoming opportunities about to emerge from the provisions of the World Trade Organisation (WTO) will be lost to India.

Rates of return from your schemes could be quite high. Quite high, yes; but the country would have to go through the process of reclamation of land, production of new crops whose income elasticity of demand is about 1.5, unlike in the case of cereals for which income elasticity of demand is about 0.5. So let the farmers do it, let the co-

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operatives do it, if not let the corporate sector do it. The ®nal destination of these products should be exports. And now that the WTO is forcing western countries to abolish subsidies, world prices are bound to rise in the next two to three years. That would be the great opportunity for Indian farmers to take advantage of the rising world prices for these new products.

Now that is interesting because one of the criticisms of liberalisation is that it will increase agricultural prices, and it will be detrimental to the consumer. But your scheme is export-oriented and it will actually increase farmer's income in the face of an increase in world agricultural prices, not Indian prices. Now you have given me one more idea, just as you spoke a minute earlier; that these huge chunks of land, which are reclaimed (by the government, not the corporations), what about giving a chunk, say a proportion of the land, to the small farmers and raise their incomes?

That would be a politically astute move; it would get support for your reclamation idea. Could I shift gear and talk about education? You were Vice-Chancellor at Aligarh University. The theme that has been repeated again and again is that India has over-invested in higher education and neglected primary and secondary education. So as an educationist, what are your thoughts on this? Did we really over-invest in higher education? This is a matter for detailed exercises on the rates of return to different types of education and many other factors. Those I have not examined, but intuitively, it is quite clear that literacy and primary education de®nitely need to be expanded very rapidly. Think of the huge unexploited potential that exists, and because it is not exploited, the poor suffer on the one hand, the country and society on the other. I also think that the education policy in this country is open to a lot of criticism. For one thing, education is highly subsidised, and this subsidisation is of the wrong variety and it is preventing education itself from expanding. Just to take an example, at the college level, I learned at Aligarh, it is also true of nearly all Indian universities that in the early 1980s, in a hall of residence, a student paid only around Rs. 175 per month and got two teas and three meals and a room. It couldn't be done without a heavy subsidy. Now millions of students could actually afford to pay much higher fees

A.M. Khusro 77

and they were being unnecessarily given a subsidy. So in other words, because those millions who could afford to pay the service charges were not paying, millions of deserving poor students, who could have used that subsidy and acquired education could not do so. Thus, in this respect, our education policy has been quite faulty.

Such heavy student subsidies leave little for investment to improve the quality of education. Yes, expenditure on research and development and on better teaching methods which has to do with ef®ciency is much too low in Indian academic institutions. Also, you see a lot of the time of the top authorities, the Vice-Chancellor, Pro-Vice Chancellor, the Deans, and the Heads of Departments goes into the settlement of disputes and con¯icts, leaving very little time for policy formulation and improvement of the educational system. So mostly it has become a B class and C class educational system in the country, barring important exceptions.

Education has been politicised? Politicisation is one of the reasons why there is over-subsidisation of education. Populism, which is linked up with politics, is yet another reason. Also, the mere size of the universities and colleges is staggering. In my days as Vice-Chancellor at Aligarh Muslim University, the total number of students was 13,000, but now it is 24,000 and it is impossible to administer the institution in any sensible way. I found it dif®cult, but somehow, with a great deal of exertion, tried to manage those 13,000 students, 1,000 teachers and about 5,000 other staff in 1 square mile. But it is interesting that this number included about 2,000 undergraduate women students, about 700 postgraduate and PhD women scholars and about 300 PhD men scholars.

That is impressive. Yes, in general, what we have achieved in the country in the sphere of education in numerical terms is impressive. Over the last 50 years, the total number of young people who have moved from illiteracy amount to more than the whole population of Europe or the whole population of the USA. Still a lot needs to be done. Our literacy rate is still very low and the quality of literacy is generally quite poor.

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That brings me to the next issue I wish to discuss with you. There is a big debate going on now with many arguing that liberalisation is well and good, but we should have invested ®rst in education, health and social goods of various kinds. In other words, development is as important as growth. Others, however, have argued that without growth, you wouldn't have resources for development. It is true that growth impacts on welfare, and it is best that the surplus that emerges out of growth is devoted substantially to public welfare, including education, health and sanitation. But these investments should be ef®cient; otherwise it will all be transitory and temporary. The Indian mistake has been to neglect ef®ciency and not to bother about quality. All the growth and all the plans emphasise quantity, quantity, quantity! And you see very little by way of improvement of quality ± larger quantity with better quality. This development has not come about.

Why is it we are always concerned with quantity? Is it because we are a big country, we must have volume? Yes, size is a factor. Moreover, in a bureaucratically managed country, this is bound to happen. As Amartya Sen once said, those who are trained to administer the districts and do it quite well are called upon to make and administer economic policies. Our IAS of®cers are well chosen and well trained to administer district level policies. Then, one day, they are brought to the state capital and asked to make and implement economic policies, for which they hardly have any conceptual training or a real feel for economic theory, policy or economic ground-level reality. Thus, Indian economic policy, generally made by bureaucrats, as I have often said, is devoid of good economic theory, and hence emphasis comes to be on what is obvious: numbers, numbers, numbers. The inside story of quality doesn't get enough emphasis.

That leads into your latest role, as Chairman of the Finance Commission of India. What are your views on it? Regional disparities are quite high between states. What actually is the goal of the Commission? Can it address regional disparities? I will come to that in a moment. Could I just, with your permission, come to the un®nished part of this liberalisation of current policies. For the 40 years from 1951 to 1991, India was moving towards a semi-command

A.M. Khusro 79

economy and the network of controls was expanding. Not that anybody demanded more and more controls, but that controls have a habit of proliferating. Controls are not only self-perpetuating, but self-expanding. To cut a long story short, by the end of the 1980s, all such crucial decisions as to what to produce, where to produce, when to produce, how much to produce, with what technique to produce, with what capacity to produce ± all these crucial matters throughout the economy were being determined by bureaucrats. And they didn't have a feel for this at all. In their hands and in the hands of politicians guided by bureaucrats, restrictiveness and adherence to rigid rules with no relation to the market forces came to be the order of the day. That is why numerous brakes came to be applied on the production process and India became not a supply-oriented economy, but a demand managed economy. These proliferating controls generated what now goes under the term `black money'. In a supply-controlled regime, what the market was demanding could not be achieved. When supply is lower than demand, there are bound to be incentives to sell, not at the controlled price, but at the higher price which the market offers. Dr Manmohan Singh tried to change the whole approach of economic policy. By the time he took over, several major crises had already seized the Indian economy. One was the crisis of supplies with too many regulations, too many controls, and too many licences. The second was the crisis of foreign exchange and the third was the budgetary crisis, i.e. large budget de®cits. Manmohan Singh tried to correct these with great conceptual clarity and vigour. All the major tax rates were reduced, including the income tax, the corporation tax, the customs duties and the excise duties and yet much larger tax collection was achieved. Fiscal de®cits were reduced from 8 per cent of GDP to less than 5 per cent. In¯ation was brought down from 17 per cent to around 5 per cent and as a result the interest rates also came down impressively. The next thing was to take away the determination of the foreign exchange rate of the rupee from the bureaucrats and hand it over to the market forces of demand and supply. This was a major change. The market determination of the exchange rate along with relative freedom of capital ¯ows enabled substantial in¯ows of foreign capital which rose from $300 million per annum in 1991 to much more than $2,000 million, that is $2 billion dollars per annum. Foreign institutional investors were allowed to invest through the Indian stock exchanges in Indian equity. All these amounted to a major shift towards liberalisation. And the third substantial move was the delicensing of Indian industry. No longer was it necessary for industrialists to stand in a queue for permission to expand their capacity, they could expand capacity as they desired.

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The Manmohan Singh regime basked in the sun with these reforms for a while, but it could not sustain the reform process in the last two years. Political factors got in and economic policy began to take the back seat. Numerous other sectors in the Indian economy were crying out loudly for reform, but the reform process slowed down considerably. For example, until this day, the public sector enterprises have remained unreformed. All reforms seem to be for the private sector and none really for the public sector. Public enterprises remain as much as before the slaves of the respective ministries from which they were supposed to be liberated. For some time they were liberated, but were brought back more or less to square one by the same bureaucracy which had presided over them. Public enterprises are not really free agents, and are not run generally by professional managers.

Labour legislation is another of the problems; you cannot really make anybody redundant. Yes, that is true. Of course, lately industry has found its own way for laying off workers. Legitimacy came partly through the innovation of some sort of a renewal fund and a golden handshake. You are allowed to give a golden handshake, if you can do so, and retire the staff before their time. Retire the staff and don't ®ll the post, that is one possibility. So golden handshakes were offered. Those who took advantage of the golden handshake were the more ef®cient people who had a span of life left for doing something in the private sector. But those who had no other opportunities, possibly the inef®cient ones, stayed on. In sum, we have had only partial reforms. The public sector is unreformed and so are the education sector, the co-operative sector, the ®nancial sector (partially reformed), the area of urban land ceiling, the agricultural land ceiling, the electric power sector and so on. To take an example, a businessman may say: `I am glad about the deregulation and de-licensing and I don't have to stand in a queue. I can now double my factory capacity as I need it.' So he goes to double it. He wants to buy land; but the land sector has not been reformed and liberalised, so he has to go to the same Commissioner, the same Collector, and face the same hassles, the same bribery, etc., to obtain land. Then in, say, two years' time the land is obtained. By that time, the project is nearly out of date. Then the entrepreneur says he needs electric power; but the electric power sector has not been reformed or liberalised and the same old hassles of applying, cajoling, bribing get the better of the producer and by then the project is an old number.

A.M. Khusro 81

There must be a way in which this liberalised economy can really help India grow fast, both growth-wise and equity-wise. But this way has not been spelled out by the government sector or the private sector, or by economists as to how this reform at the top will reach the bottom, and lift up the Indian society from poverty. The question is often raised; does the market economy give both equity and growth?

Looking at the East Asian experience, most people would say, yes. Most East Asian countries before the crisis seem to have achieved equity with growth. They would say that market economies lift up people from poverty through the market system itself, through the involvement of everybody in the market system. But I have had two other thoughts. A net growth rate of 1 per cent after netting out population growth, is not good enough to trickle down to the bottom of the poorer segments of the society and lift them up into economic activity. So they remain a sector apart and cut off from the growing sector. Whereas in Korea, Malaysia, Indonesia and other East Asian countries, a 6 per cent growth at least, if not 10 per cent, coupled with a 3 per cent growth of population, leaves 3 per cent net growth. And that seems to be the critical thing. With a 3 per cent per capita growth, societies do get involved in the growth process and uplift themselves. The Indian society has not done that until recently and had got stuck at a 312 per cent GDP growth with 212 per cent population growth and only 1 per cent net per capita growth. Hence we did not conquer poverty and did not have faith in the trickle down phenomenon. As we did not think that growth will trickle down, we tried to run anti-poverty programmes with very limited effect. Now, can this new market economy that is being forcefully advocated lead to substantial poverty reduction or elimination? I think the answer is yes, it can and perhaps will. But of course, other steps are needed. Decontrols and delicensing is step number one ± in order to free the economies to produce and supply. The second step is to bring in more ®rms. In a controlled economy, suppose four ®rms were operating in a particular sector. There may even be 16, but 12 of them were small, inef®cient and not worth mentioning; and they accounted for only 5 per cent of the output. But four ®rms accounted for 95 per cent of the product. In this way a controlled economy promotes oligopoly ± non-competitive ®rms which appear to compete, but actually do not. This oligopolistic setup has to be replaced by competition. So instead of four ®rms, there were, say, 20 ®rms that enter the market. In this group of 20 competitive ®rms, none would be so large as to dominate the market.

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The third step would be that, as competition proceeds, some of these ®rms which cannot compete fall by the wayside, they may shift to other lines or disappear. In that case, this industry of 20 gets reduced to 16. These still remain competitive, but each has a larger scale of production and greater ef®ciency. There may also be amalgamations and takeovers, reducing the 16 to say 10 ®rms, all quite ef®cient.

Which is happening? Yes, it is happening. All the three developments I mentioned have happened and are happening, decontrols, competition and closure of some ®rms, but in any case, amalgamations are taking place. All this should lead to increased ef®ciency, increased pro®ts which can be ploughed back to achieve scale economies. In other words, mass production of consumer goods emerges from these same ®rms, now specialised and with scale economies, which generate employment. This new employment created out of market surpluses matches the new supplies of mass-produced goods and thus begins the process of poverty reduction and eventual elimination.

So, to use a currently fashionable phrase, entitlements should come through the market economy, an ef®cient market economy. Yes, but one doesn't rule out other means of entitlements ± empowering women, for instance, or empowering the backward classes, also legal entitlements to land for the poor. But these things do not happen just like that. It takes time and effort.

Thank you for your views on land reform, education and economic liberalisation.

5 Manmohan Singh Eminent economists such as James Buchanan and the late Harry Johnson are said to have repeatedly warned economists about the corrupting in¯uence of government, and the strong possibility that they would soon acquire the attributes of those self-seeking bureaucrats who stalk the pages of their works on public choice analysis. Dr Manmohan Singh, who has held several top-level positions in India's Civil Service, can hardly be accused of displaying any of these traits. He is widely admired for his integrity, objectivity and his single-minded devotion to the cause of the poor and the deprived in India. As Jagdish Bhagwati, paying tribute to Manmohan Singh's enormous success with India's economic reforms in 1991, writes: `He was so clearly a man of supreme integrity, and wholly without guile or hypocrisy, that he stood out among the politicians as one whose actions, even when causing pain, were actuated simply by the pursuit of social good and hence were to be applauded more often than resented.' Since 1971, he has held most of the important positions in the Indian Civil Service including Governor, Reserve Bank of India; Secretary, Economics Affairs in the Ministry of Finance and Deputy Chairman of the Planning Commission. Dr Singh, the architect of India's economic reforms in 1991, was India's Minister for Finance from 1991 to 1996. He was educated at the Punjab University, St. John's College, Cambridge and Nuf®eld College, Oxford. Currently Dr Singh is the Leader of the Opposition in the Rajya Sabha. *

You began your career as an academic. What attracted you to the Civil Service? I was always interested in the area of policy and the Civil Service gave me an opportunity to work on policy issues and to gain a better understanding of in¯uences which shape economic policies.

83

84 Conversations with Indian Economists

One of the areas of policy you ®rst worked on was India's exports. Your celebrated doctoral thesis at Oxford and the subsequent book on the subject have been variously interpreted. Is it right to say that the book did not advocate an export-led strategy, but emphasised the need to export in order to import? At the time, yes, it is essentially right. I wanted to look at how well India was doing in world trade, what were our strengths and weaknesses, how policy had in¯uenced exports and how much additional export effort was needed to reduce and ultimately eliminate our dependence on concessional aid ¯ows.

The relationship between open economy policies and growth and development in general are much debated issues. In this context, East Asia is held up as a role model. Is the East Asian model relevant to India? The East Asian experience can be interpreted in several ways and there are important differences in the policy mix pursued by different countries of East Asia. In general terms, the emphasis on exports and openness helps to improve the overall competitiveness and growth of the economy. A dynamic export sector adds to aggregate demand and also leads to an improvement in creditworthiness, which in turn is an important determinant of the ability to attract foreign capital. Export orientation also induces an economy to absorb and assimilate technical progress at a much faster pace than in an economy following an inward-looking development strategy. However, there are several other factors which also contributed to the growth process in East Asia. These include institutional changes such as land reforms, emphasis on human resource development and purposeful state intervention. The East Asian experience does not suggest that there is no need for state intervention in the development process. In countries like South Korea, the state did intervene aggressively, but on the whole, this intervention was designed to support the cause of ef®ciency. The real issue is not that the State should not intervene, but the quality of intervention. In India, the State intervened on a large scale to capture the commanding heights of the economy, but the development strategy did not lay adequate emphasis on ef®ciency and competitiveness. We have a large public sector, but it has not been able to generate pro®ts on a large enough scale. As a result, the process of capital accumulation and growth has not been as vigorous as in East Asia.

Manmohan Singh 85

Thus, India can learn a great deal from the East Asian experience. However, no two economies are alike and development cannot be simply imported. In social sciences, short sentences have their limitations and we must avoid hasty generalisations which ignore the in¯uence of the domestic institutional setting and the international environment in¯uencing in¯ows of trade and capital.

Growth and equity is a widely discussed issue. China and some of East Asian countries are cited as role models which have achieved both. What are your views on this issue? I would say that we have to walk on both legs. In a poor country, growth is very important, but the quality of growth is also important. If growth is of the immiserising variety, if it hurts the poor and if it does not lead to largescale generation of new employment opportunities, we will have trouble. The political acceptability of growth promoting policies would be seriously in question. Furthermore, redistribution of income and wealth will be politically a lot more dif®cult if the economy is stagnant instead of a fast-growing one. In a stagnant economy, attempts at redistribution of income must lead to a cut in the absolute share of the upper-income groups. By contrast, in a fast-growing economy, relative income shares can be affected without a cut in the absolute income level. Thus in a fast-growing economy, the political resistance to redistributive policies may be less severe. From a practical angle, growth which is labour-intensive and promotes productivity of small landholders in agriculture makes a major contribution to improving living standards. Equally important is the role of human resource development, particularly the universalisation of access to elementary education. It is also necessary to devise viable social safety nets which ensure that the burden of social and economic change is not excessively borne by the weakest segments of society. In agrarian societies, institutional changes such as abolition of absentee landlordism and protection of the rights of sharecroppers have also an important role to play. As regards taxation, progression is equitable, but in practice, moderation in progression is necessary to curb large-scale evasion and to avoid severe distortions in resource allocation. Con®scatory taxation in the name of equity produces neither growth nor equity.

86 Conversations with Indian Economists

Talking about farm productivity and agriculture, it is often said that Indian planning neglected agriculture. Is this so? I do believe that we could have done a lot more for agriculture. We should have given a lot more importance to controlling land and water degradation through more scienti®c land and water management practices. Public sector intervention in support of agriculture should have laid less emphasis on subsidies and more on public investment. The public sector should also be more actively involved in the expansion and modernisation of rural social infrastructure, particularly safe drinking water, elementary education, primary health care and rural roads. However, in aggregate terms, the improvement in the agricultural growth rate may not have exceeded 1 per cent. This is because viable technologies do not exist to improve the productivity of dry land agriculture which accounts for nearly two-thirds of the area under cultivation. In the absence of assured supply of water, it is not possible to create an environment in which farmers will have an adequate incentive to use modern inputs such as fertilisers and hybrid seeds. That is why expansion of irrigation facilities assumes great importance.

What are your views on land reform? It has not ®gured much in recent policy measures. Soon after independence, extensive land reforms were undertaken to remove excesses of the Zamindari system and to abolish absentee landlordism. Ownership rights were conferred on a large number of tenant cultivators. Subsequently, ceilings were also imposed on ownership holdings and excess land was sought to be distributed among the landless. This legislation has not been properly implemented in a number of States and, therefore, inequities in land tenure system do persist in several parts of India. In particular, effective measures need to be adopted to secure the rights of sharecroppers (such as was sought to be implemented through the operation Barga in West Bengal) so that they will have an adequate incentive to invest in agricultural improvements. Moreover, taking into account the recent improvements in agricultural technologies, we have to facilitate leasing in and leasing out of land to increase the size of operational holdings so as to make more effective use of economies of scale. Thus, there is still a considerable un®nished business on the land reform front. However, it has to be appreciated that the scope for a successful classical land reform involving large-scale redistribution of land

Manmohan Singh 87

is very limited. Since 1947, India's population has tripled while the cultivated area has remained constant at 143 million hectares. According to the 1972 land reform national guidelines, no single family can own more than 7.5 hectares of agricultural land in irrigated areas. If properly implemented, this land ceiling will not yield a very large number of agricultural families with annual incomes much above the current exemption limit for income tax. As I see it, the real failure in India is that we have not had the sort of industrialisation which would have taken a very large number of people away from land. This is what happened in England in the wake of the industrial revolution and the enclosure movement, and in East Asia since the 1960s. The failure of Indian industrialisation has been that it has not been strong enough and has not been suf®ciently labour-intensive.

Staying with issues relating to poverty and economic policy, it is often suggested that China implemented reforms such as land reforms and spread of education before embarking on what is termed as political reforms, meaning liberalisation of trade and investment and the opening up of the economy in general. It is often said that India should have followed the Chinese model. Political reform is not our problem. We are the only country which was a functioning democracy even before we embarked on the path of development. As Professor Babathosh Datta has said in his famous book on the economics of industrialisation, India was trying to combine a thorough-going commitment to parliamentary democracy with growth and that too, with growth which was largely ®nanced domestically. There is no other similar case in the world. However, I do agree that right from the beginning, we should have laid more emphasis on education, particularly elementary education.

When people talk of political reform in China, I think they mean introduction of market forces and by economic reform, they mean investments in education and health. China had invested heavily, even during the Mao period, in education and health. Economic reform in agriculture began with the disbanding of the commune system in the late 1970s. Reforms in industry came only after 1985. Chinese industrial growth, export growth and large in¯ows of private capital are all a post-1985 phenomenon.

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In our country, Kerala is often held up as a model of development where investment in education has been a priority and the State government has put development before growth. Kerala was fortunate in that even before independence, its government had an enlightened social policy. Kerala is also a very highly monetised economy, so you could tax the more developed plantation sector to provide the resources for investment in education. But if the economy is not growing, the capacity to sustain the process becomes limited. So I don't think Kerala can be a model for the rest of us. We need a policy mix which lays emphasis on strong resurgent growth, a progressive increase in tax revenues without too frequent adjustment of tax rates, restraint on growth of non-development expenditures and diverting an increasing share of public revenues for ®nancing investments in basic education, health and other social sectors.

Even after liberalisation in 1991, India has attracted a very low volume of foreign direct investment compared with the large in¯ows into China. First of all, the Chinese started much earlier; their economic reforms began in 1978/79. But ¯ows of investment started only in 1987. They coincided with the world cycle of large-scale foreign direct investment. The Chinese have also the advantage of a vast Chinese diaspora. Seventy®ve per cent of Chinese investment is from Chinese diaspora overseas. Flourishing Indian business communities abroad on that scale do not exist. The Chinese also have the advantages of enclaves such as Hong Kong. Hong Kong is a very large source of foreign investment in China. So also is Taiwan. The Indian diaspora put their money in foreign currency nonresident (FCNR) deposits. We have today roughly $22 billion accumulated in these deposits. These remittances do contribute to the balance of payments. However, I would agree that we have not fully exploited the potential for direct investment by the non-resident Indians (NRIs). Government approval procedures, dif®culties in project implementation and in many cases, the attitude of domestic industrialists constitute important barriers. The plain truth is that India is still not very clear whether or not it wants large in¯ows of foreign direct investment.

Manmohan Singh 89

Our economic philosophy and policies are conditioned by our colonial experience; anti-foreign investment attitudes is an example. In this context, commenting on the 1991 economic liberalisation which you led, Ashok Desai has written: `Dr Manmohan Singh tried to change the hearts of politicians, and he was to a large degree successful.' How dif®cult was it to overcome the opposition and what did you have to contend with? India was in the middle of a deep economic crisis. We were on the verge of bankruptcy as our foreign exchange reserves had been nearly exhausted. We converted that crisis into an opportunity to launch a wide-ranging programme of structural reforms. The traditional response to a balance of payments crisis is to compress domestic demand through a programme of ®scal retrenchment. However, in an economy characterised by wage rigidities and supply bottlenecks which prevent resources moving from one sector to another, the traditional stabilisation programmes end up by creating unemployment and idle capacity. Inevitably, these programmes run into severe political dif®culties particularly if unemployment and idle capacity persist for a long time. To deal with this problem, we devised a stabilisation programme which was expected to produce positive results in a fairly short period and additionally, we launched a programme of structural reforms to improve the supply side responses. The end result was that the duration of the recession resulting from the stabilisation programme was short enough to prevent a serious political backlash. By 1993±94, the Indian economy started growing at a fairly respectable rate. In this way, the political resistance to reforms was contained. Even then, there were problems once the sense of crisis was over. This is partly because we did not have enough time to educate public opinion. Until 1991, our economic policies were highly inward-looking. There was strong distrust of foreign investment, foreign trade and private entrepreneurship. In some ways, this distrust was a re¯ection of India's history whereby the East India Company, which came to India as a trader, ended up as a ruler. Our struggle against the colonial rule also strengthened these sentiments. In this background, it was natural that the opening up of the economy to foreign investment and liberalisation of imports should invite opposition from businessmen, trade unions and even political parties both on the right and the left. However, the fact that ours was a policy of measured opening up, that our economic reforms did not lead to unemployment and idle capacity, and that the growth performance of the economy improved year after year after the initial setback in 1991±92 diluted the vigour of opposition to economic reforms. Now, there is

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widespread appreciation that reforms of 1991 to 1996 on the whole were bene®cial in their impact and there can be no reversal of these policies.

The real fear seems to be with the policies of the BJP, fears of Hindu fundamentalism. Well, the BJP, like all political parties in India, is a coalition of various interest groups. During 1991±96, the BJP as well as the leftist parties had opposed the opening up of the economy to foreign investment and greater competition from imports. After coming into power, both the United Front Government and the BJP Government recognised that xenophobia is no answer to India's problems. However, the BJP Government's soft line towards foreign investment and import liberalisation is being opposed by the RSS and the Swadeshi Jagren Manch. In fact, all political parties contain elements which are not favourably disposed towards reforms. Even the Congress Party is no exception to this statement.

Why are we so insular? It is partly because of India's size. Like the USA, foreign trade accounts for only a small proportion of our national income. While coastal areas of India have had extensive contacts with the outside world over the centuries, Northern India came into contact with the outside world only through foreign invasions. Our experience of the colonial rule further strengthened our fear of the foreigner and foreign in¯uences. Thus an insular mind set has a wide appeal. Today, processes of globalisation have knit the world together in a way which was unthinkable even two decades ago. We cannot reverse this process. We cannot say to the rest of the world, please stop the train, we wish to get off. There are both opportunities and risks in the emerging world order. A freer ¯ow of trade, technology and capital gives latecomers an opportunity to leap-frog in the race for economic development. But there is also a risk of further marginalisation if we are not well equipped to face the challenge of competition. The challenge before our country is to create an environment which would enable us to take full advantage of the new opportunities while minimising the risks. Before the industrial revolution of the late eighteenth and nineteenth centuries, India was a much-admired economic power in the world. Since then, India has been left behind. The world is now going through another scienti®c and technological revolution. India has to be a

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part of that revolution if we are to emerge as a major economic power in the twenty-®rst century. Empires of the future are going to be the empires of the mind. Human resource development is the key to success in the world economy now on the horizon.

That India should be at the forefront of scienti®c and technological revolution was also Nehru's vision, a vision to be realised through industrialisation, based on heavy industries, state ownership and importsubstitution. Did you subscribe to this philosophy? Yes, I sympathise with Nehru's views on the importance of industrialisation. Indeed, until the 1960s, there was no questioning of that policy. Yes, I subscribed to it, in fact, most of us did. It seemed the right strategy at that time. Everybody who came to India also advocated that policy. Those were the days of take-off into self-sustained growth. Whosoever came to India advised us that increasing investment to the right level was the thing to do. It was considered right that India should run a large de®cit and the world should ®nance it. I do not think till the mid-1960s we did terribly wrong. I think we should have had the vision to shift gear once we knew that we had created the basic infrastructure. We should have taken full advantage of the opportunities offered by the international trading system to build a dynamic and ef®cient economy. We should have paid more attention to restructuring of public and private enterprises on the basis of ef®ciency and international competitiveness. The Japanese did it. Look at the nineteenth-century Japanese development. They created a large number of enterprises in the public sector and handed them over to the private sector. If we wish to industrialise quickly within a period of 15±25 years, in a country where private entrepreneurs are scarce, active state involvement in setting up industries is the only way to get things going. But if the process is to become self-sustaining, we need a progressive increase in productivity, improved capital productivity. Public sector and state instrumentalities are very inef®cient ways of getting this productivity growth. You have to rely on the private sector to do this.

What is the future for liberalisation? Are we likely to continue with the policies you initiated? I am not an astrologer and it is not easy to predict the course of social and economic evolution. The future is inherently uncertain. Even then, I

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venture to think that the trend towards liberalisation has come to stay. Both the United Front and the BJP led governments have not reversed any of the policies of the Congress Government (1991±96). Currently, the Indian State is highly overextended and the ®scal system is extremely fragile. In addition, there has been a rapid growth of managerial and entrepreneurial skills in the private sector. All these factors favour further liberalisation provided we do not land the economy into a serious macroeconomic crisis. However, rapid growth of inequalities in income and consumption worry me and if a way is not found to contain them within tolerable limits, there could be a backlash. Thus liberalisation with a human face has to be taken much more seriously if its irreversibility is to be assured.

We continue to impose quotas and tariffs on consumer goods. At the same time we have liberalised foreign investment ¯ow into these industries. I wonder if this is an ef®cient policy. No, it is not. In the type of situation mentioned by you, the primary motivation of the foreign investor is to jump over the tariff and quota wall. There is no assurance that industries thus established will meet the test of international competitiveness or large domestic value addition. However, import liberalisation of consumer goods still meets political opposition, even though WTO commitments oblige us to phase out import restrictions in the next three years. There is also opposition to liberalisation of foreign investment in consumer goods. The slogan `computer chips yes, potato chips no' is an expression of this sentiment. The opposition to foreign investment in consumer goods is now getting weaker partly because we need foreign exchange to manage our balance of payments.

Were you forced to yield on protection for consumer goods so that you could get the reforms in general going? Well, yes. In making policies, you have to make compromises. Very often, economically the ®rst best option is not politically feasible. Since we have to sell our policies to our Party, Parliament and the people, their political acceptability is of paramount importance. As a result, one often ends up adopting not the ®rst best, but the second or the third best option. Canvassing public opinion in a democracy is a very tiresome process. Although satisfying consumer demand is the ultimate objective of all

Manmohan Singh 93

economic activity, policies which promote consumption at the expense of investment, and those which promote import induced consumerism are widely criticised in India as being wasteful. Thus, even when we liberalised the foreign investment regime for consumer goods, we had to lay down a dividend-balancing obligation. This obligation was designed to ensure that any dividend out¯ow would be neutralised by extra exports, and would therefore not strain our balance of payments.

Democracy and development is now a much-discussed issue. My teacher, Jagdish Bhagwati, has written extensively on this issue arguing that democracy in combination with free markets works. What are your views? Let me say that democracy is a value I cherish regardless of its impact on the economy. A political system of the type we have, which respects all fundamental human freedoms, is something which I would not give up for anything. But democracy does create problems sometimes. If we wish to move fast enough and if we have to evolve a broad national consensus in a political system of the type we have in India now, which is fragmented, it is dif®cult. It is not so much the coalition as such which is the main problem, but it is the multiplicity of political parties, many of them with a narrow regional focus, which can delay decision-making processes unduly. Today, both the Centre and the States face a severe ®scal problem. The States expect the Centre to bail them out, but the Centre has no resources to come to their rescue. Tighter ®scal discipline is the need of the hour. Yet nobody is willing to bell the cat. The de®ciencies of the present political system have to be honestly recognised. Statements about democracy and development have to be quali®ed. A functioning democracy requires a high degree of maturity on the part of political leadership. This type of leadership is not in plentiful supply.

Has liberalisation had an impact on poverty? It is too early to say. I am convinced that if we had not introduced the economic reforms of the type we did during 1991±96, the situation on the poverty front would have been much worse. A collapsing economy with double-digit in¯ation which we inherited in June 1991 was hardly conducive to a reduction in poverty. The available data show that taking the period 1991±96 as a whole, there was a gradual decline in the proportion of people living below the poverty line. In any case, there is no evidence which supports the view that poverty increased as a result of reforms.

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There is much discussion on the issue of funding the Government debt by the Reserve Bank of India. You were the Governor of the Reserve Bank of India and later Minister for Finance. What are your views on the independence of the Central Bank? As Finance Minister, I put a halt to the automatic route through which the Reserve Bank was to fund the Government. I do believe that because of the close linkages between ®scal and monetary policies, we need a high degree of co-ordination between monetary and ®scal policies. I gave a lot of weightage to the advice of the Governor of the Reserve Bank. But I do not believe that the Reserve Bank can be totally independent. To a large extent, the autonomy of the Bank is a state of mind. It very much depends on the vision, knowledge and experience of the Governor of the Bank. If the advice is of a high quality, it cannot be ignored by any Government. But I do not believe that we can legislate the autonomy of the Reserve Bank. We are not in that position and when people talk of independence, they are all talking of economies where factor mobility is very high, where a large number of policy instruments are available, where frictions and rigidities in economic structures and operation of the economy are low. Here, we are operating relatively rudimentary structures with a lot of rigidity built into the system. We do not know the lags between policy implementation and its impact. So I believe that the Bank must have as much autonomy as possible in the sense that it must be free to give advice and if the government does not accept its advice, it should be made known to the public why that advice was not accepted. But to say that the Central Bank can operate in isolation of the overall economic environment, unmindful of other objectives of economic policy, is not possible.

The Bank though should concern itself with price stability. Well, yes, price stability should be an important concern of the Reserve Bank and the Bank should regulate liquidity in the system with an eye on the price situation. But there are limitations to the ef®cacy of monetary policy focusing exclusively on price stability. In India, agricultural prices are still the kingpin of the price structure and their behaviour is often independent of other prices. In the short run, we can have a situation where aggregate demand in the system is not excessive, yet the aggregate price index moves up because of a steep rise in agricultural prices due to a harvest failure. The purist might say that such a situation can never arise

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because if aggregate demand is not excessive, a rise in agricultural prices will be accompanied by a fall in non-agricultural prices. However, we all know that prices of industrial goods are often very sticky. If we superimpose a contractionary monetary policy on this situation, it will only accentuate the misery initially caused by the crop failure. Thus, an exclusive pursuit of price stability and ®xing a particular target for price increases without a detailed look at the overall structure of the country, may be counterproductive.

What progress have we made in liberalising ®nancial markets in India? We have brought in more competition and greater private sector participation in our ®nancial system. The licensing policy for banks was liberalised to expand the role of private commercial banks, including foreign banks. As regards the public sector banks, there is no consensus to change their public sector character. However, we did enact legislation to permit public sector banks to sell up to 49 per cent of their equity to the public at large. Several public sector banks have taken advantage of this provision. As a result, they are now much more sensitive to market perceptions. There is now much greater emphasis on pro®tability and control of non-performing assets. It was our intention to introduce a similar element of competition in the insurance sector. Our Government set up the Insurance Regulatory Authority. As regards the capital market, we abolished the old system of capital issues controls whereby the size, the premium and the timing of a new issue had to be approved by the Government. These decisions are now made in the boardrooms of our corporations subject of course to observance of guidelines laid down by the Securities and Exchange Board of India (SEBI). The entry of foreign institutional investors has created inducement mechanisms favouring greater transparency and improved corporate governance. Our Government gave statutory powers to SEBI and enhanced its ability to act as a watchdog for ensuring healthy growth of our capital markets.

What are your views on stock markets? There is the view that they are no more than casinos and there is no relationship between stock prices and the real sector. I do recognise the importance of a well-functioning capital market for mobilising resources for our development. Apart from the market for equities, we need a well-functioning market for long-term debt to raise resources for investment in infrastructure sectors. I also recognise that

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within limits, speculation plays a useful part. We need to free our stock markets of excessive micro-level control and depend more and more on the self-regulation imposed by the management of stock exchanges in the broad framework of guidelines laid down by the SEBI. However, we have to recognise that markets at times have a tendency to overshoot and that excessive speculation can at times lead to a situation where stock prices do not bear any relationship to underlying developments in the real sector. It is the joint responsibility of the corporate sector, stock exchange managements and SEBI to work out systems and procedures which will curb these undesirable tendencies and thereby enable ®nancial markets to allocate resources in an ef®cient manner. These are issues which require further in-depth examination in the light of evolving experience. As regards speculation, my views are similar to those of Lord Keynes who once said that `speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.' Excessive speculation in stock markets has attracted the attention of serious observers like Alan Greenspan as well as George Soros and others. With the growing integration of world ®nancial markets, and the rapid growth of instrumentalities such as programme trading, instability in our major markets can spill over to other markets in the world. There is need for more analytical work to control destabilising types of speculation.

Following the East Asian crisis, there is a lot of talk about meltdown and whether India is likely to experience one. India escaped the East Asian type of crisis because of prudent foreign debt management, in particular, avoidance of excessive exposure to short-term external debt and the very limited exposure of the banking system to real estate and stock markets. However, it is necessary for all those who deal with the Indian economy, particularly our politicians, not to assume that India is for ever immune to economic crisis and they can make as much of a mess as they please and we will still be free from all those ravages which have taken place elsewhere. We have to deal with ®scal problems, we have to deal with the large-scale unproductive assets, the functioning of the public sector, and we have to deal with our balance of payments problem. We need a lot more emphasis on modernising our infrastructure, we need well-functioning ®nancial markets to mobilise savings, and we need

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credible social safety nets plus large-scale investments in education and health. We need to ensure that our enterprises run as pro®t-making entities rather than as institutions of a grant economy. If the politicians don't recognise all this and believe that any country can become rich by spending more, regardless of its productivity, we are piling up trouble for the future.

We need to maintain controls on the capital account of the balance of payments. We have been cautious in dismantling capital controls. We have controls, but we have a regime in which inward ¯ows are largely free. Also, anybody who has brought in money and wishes to take it out, can take it out. But I do not think that capital account convertibility in the sense of permitting Indians to invest abroad is an immediate priority. We are a net importer of capital. However, ultimately we must move towards full capital account convertibility. A distinction between restrictions on current and capital transactions becomes messy. Therefore, the ultimate objective must be to remove all restrictions. But we are far away from that stage. To reach that stage, we need strong ®scal correctives and we need a strong ®nancial system. It is only then that we can think of removing all controls.

You have alluded to our inef®cient public enterprises. What is the solution? This is a very dif®cult area involving issues such as restructuring of labour force and privatisation of loss-making enterprises. Large-scale retrenchment of labour is socially very painful and will also invite political resistance. Even the Chinese, with all their authoritarian political structures, have not been able to cope with the problems posed by the loss-making public sector enterprises. In our country, organised labour is a very small part of the total labour force. But because it is unionised, this small segment can bring the economy of the country to a grinding halt. The labour force in the ®nancial system is highly unionised and it also knows that the Government cannot declare a lock-out. The unions are also backed by the left-wing political parties such as the two Communist Parties. I sympathise with the people who say that we cannot have a hire-and®re approach, because we do not have well-developed institutions of social security in our country. Unlike in most Western countries, we do not have unemployment insurance, health insurance and employment

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assistance schemes. Therefore, we cannot glibly talk of throwing people out of jobs. It has to be a gradual process. First of all, the macro-economic management must be such as to stimulate growth of new job opportunities on a large scale. In addition, we need credible social safety nets which would ensure that unemployed persons get unemployment assistance, facilities for training, retraining and redeployment and ®scal inducements for other industries to absorb them. That was my approach in 1991, when, while launching the reform programmes, I established a national renewal fund to deal with problems of restructuring the economy. I was not able to use this fund as effectively as I had intended. A very large part of it was used for retrenchment compensation instead of retraining and redeployment. We are a large country with diverse regions. We need more decentralisation in the administration of social safety nets.

Thank you for ®nding time to talk to me amidst your busy schedule.

6 C. Rangarajan Dr Rangarajan, it is often said, is India's only monetarist. He himself doesn't think he is a monetarist, but if he is one, he is a monetarist with a vision. His vision is to harness monetary policy to attain price stability, not as an end in itself, but as a means to promoting development. He has tried to accomplish this vision as a teacher of economics, as a researcher and as a policy-maker. Rangarajan studied economics at Madras University and the University of Pennsylvania. He taught economics and ®nance at the Wharton School, University of Pennsylvania, and at the Graduate School of Business Administration, New York University and in India for more than a decade at the Indian Institute of Management at Ahmedabad. He has written extensively on money and ®nance, economic forecasting and agricultural economics. Dr Rangarajan has been an active participant in India's economic policy formulation and implementation in his role as member of the Economic Advisory council of the Prime Minister, member of the tenth Finance Committee, and member of the Planning Commission. It was during his tenure as Deputy Governor and Governor of the Reserve Bank of India that Rangarajan brought to bear his vast intellectual resources acquired as a teacher and researcher to reforming India's ®nancial policies. At the Bank, he instituted a vast array of ®nancial reforms including simpli®cation and deregulation of the interest rate structure, rationalisation of the reserve requirements for commercial banks, and the management of the exchange rate. Dr Rangarajan is currently the Governor of Andhra Pradesh. *

You began your career as an academic at Pennsylvania University and the Indian Institute of Management, you then moved to the Civil Service. What attracted you to the Civil Service? Part of the reason was that I had spent a greater part of my working life in academia, and a point was reached when one felt whether one could translate what one has been talking about and researching into something tangible. Therefore, when the offer came to me from the Reserve Bank of 99

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India (RBI), I thought it was a good transition, and also I felt and I think it has been con®rmed by subsequent events, that the work at the RBI had many characteristics which are akin to what an academic does. Policymaking is extremely important in an institution such as the RBI and since one has been looking into some of these issues for a fairly long time, the transition to policy-making in relation to the broader questions of monetary policy was not that dif®cult. The dif®culty was not at the intellectual level. The transition was somewhat dif®cult at an institutional level. As a professor, as an academic, one is used to a certain institutional environment. When one moves to a government or quasi government institution, one has to operate in a different institutional environment. The operating environment did make a difference because these institutions tended to be hierarchical, whereas the academic institutions had a horizontal system.

You have more freedom in academia to do what you want. That is the major factor. In fact, if I may recall one incident, when a paper was put up to me by the Executive Director of the Reserve Bank, when I was Deputy Governor, I did not agree with him and therefore I called him to discuss it with him and to convince him that the position he was taking was not correct. But then he just turned to me and said, `Sir it is your prerogative to overrule me.' So in the Civil Service hierarchical system, the person above has automatically a right to overrule the person below if you differ from him, whereas in the academic ®eld, one was always trying to convince somebody else of why a certain policy was right, or why a certain decision was right. Apart from this, the kind of work that one was doing at the Reserve Bank didn't involve that big an adjustment.

I think you instituted all these structures. Now I am told the Bank organises seminars to which academics are invited and the Bank also commissions research studies by academics. You know, central banks are structured like that. After all, the major role of a central bank lies in policy-making and therefore in that sense, the need for interaction with academia, with the people who are thinking about monetary policy matters, is extremely important. I would, therefore, say that the Reserve Bank practice falls into the general pattern of the functioning of central banks all over the world now.

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You have done a lot of work on demand for money in India. I would like to ask you two questions on that. One is, you have got the reputation of being perhaps the only monetarist in India, rightly on wrongly. And secondly, your ®nding that price effects of growth in money supply are more important than output effects is a monetarist conclusion. No. I think the description that I am a monetarist is an incorrect description for the simple reason that monetarism essentially advocated a ®xed rate of growth in money supply, irrespective of the rate of increase in real income. Friedman and his followers wanted a ®xed and predetermined rate of growth of money supply.

I thought the monetarist rule tied the rate of growth of money to the rate of growth of output. No, it did not. What Friedman and others used to argue as part of monetarism was to let people know that money supply will grow at a particular rate, and that would eliminate one element of uncertainty from the system. But the system that the Chakravarthi committee recommended, and what we were trying to put into practice, was regulating the money supply consistent with the increase in the output or expected increase in real output. This is not monetarism. If the regulation of money supply is identi®ed with monetarism, then all Central Bankers are monetarists, because the one thing that is under the control or seemingly under the control of the Central Bank, is money supply. Now if they cannot regulate the money supply or interest rate, then there is no way by which they can in¯uence the economy. Therefore, I think in¯uencing money supply or regulating money supply cannot be treated as being identical with monetarism. Monetarism essentially implied a ®xed rate of growth of money supply, irrespective of what happens to the economy, whereas we were actually talking in terms of regulating the money supply, taking into account the expected increase in real output and changing the monetary target if warranted. And also, I have been arguing that this relationship between money, output and prices is something that holds good over a period of time and not within the framework of every single year. There are lags in the way the system works and, therefore, the Central Bank must regulate money supply over a period of time in a manner in which it is consistent with the increase in real output.

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You have estimated the lags. Yes. In the Indian context, because of the close nexus between ®scal policy and monetary policy, the regulation of money supply assumed importance. What the government could not ®nance through normal borrowing, they borrowed from the Reserve Bank. They depended on the Reserve Bank to supply the balance, so to say. Therefore, we felt that the regulation of money supply required a certain degree of co-ordination between ®scal policy and monetary policy, and a certain change in the institutional arrangement. However, coming back to the price effects and output effects, Keynesians simply argue, on the assumption that prices are sticky, that any money supply increase would have an effect upon the rate of interest, and the decline in the nominal rate of interest would also be a decline in the real rate of interest because prices are sticky, and that the decline in interest rate would impact on investment and investment would have an impact on output. But we were saying that, when money supply expands, it has several effects on the system. The process of money creation is also a process of credit creation, and therefore, when you are creating money, you are simultaneously creating credit. Expansion in credit has a certain impact upon output. Therefore, in the models we had estimated, we were trying to incorporate both. And then we found that the demand impact, and, therefore, the price effect, was much stronger than the output effect. This I have found in two models I have estimated ± one of the studies was published some years ago in the Economic and Political Weekly and the other more recently in the Occasional Papers Series of the Reserve Bank of India.

This is because of rigidities in the system in a developing economy. Not only that. Expansion in money supply and credit is required in order to support a growing economy. It is not, however, true the other way round, that is, by simply expanding money and credit, we cannot generate whatever level of increase in output we want. You must have heard of the old analogy that when a man grows he needs trousers of a larger girth, but by wearing trousers of a larger girth, he does not grow. Yes, money and credit must expand to support a certain expansion in output. It can also play the role of a catalyst. But if money and credit expand at rates which are totally inconsistent with the increase in output, then it will spill over into increases in prices.

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Since 1991, when you put into effect all the reforms, budget de®cits have come down, and in¯ation has come down. But what has happened to unemployment? Again, we are coming back to the trade-off issue. In India, unemployment is both hidden and open. And therefore, it is dif®cult to estimate the level of unemployment and, therefore, we have always looked at output growth rather than employment growth. But there is a view that the employment elasticity of output is also coming down. Nevertheless, I think we are focused much more on output, and if you look at it in terms of output, we have seen a fairly substantial increase in output during this period when the in¯ation rate also came down. Growth in the three years starting 1993±4 was in excess of 7 per cent, and that was the period during which we also tried to ensure that the in¯ation rate came down. Therefore, I think that in an economy like ours where a fairly large number of people do not have any hedge against in¯ation, price stability has an important role to play. I would add two other things. First, everyone desires that the nominal exchange rate does not depreciate too much, and when the rupee depreciates in terms of, let us say, the dollar, it creates some uneasiness. But it is obvious that we cannot bring about a reasonable degree of stability in the nominal exchange rate unless there is domestic price stability. Second, if interest rates, that is, nominal interest rates, are to remain low, we also have to work towards price stability. So from several angles, including sustaining a long-term rate of growth, price stability is important.

Your remarks open up several issues, one of which relates to the role of the Central Bank ± The Reserve Bank of India. I may be wrong, but the RBI seems to be unique in the sense that it is charged with promoting both stabilisation and what I call a development, or structural, change. Is this dual role of stabilisation and structural change or development viable in a developing economy? Shouldn't the Central Bank just promote stabilisation, and not take on development, a task for which it may not be equipped? Development has many dimensions. When the Reserve Bank was set up, the ®nancial system in this country was not well developed. Therefore, it was felt that one of the responsibilities of the RBI should also be to develop the ®nancial system. You cannot control the system until the system has also developed to a particular point. Therefore, the question of expanding the institutional framework, the ®nancial structure in the country, became very important. And that is why the RBI played an

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important role in the provision of agricultural credit, development of the co-operative system, establishment of long-term lending institutions such as the Industrial Finance Corporation of India, the Industrial Development Bank of India. Therefore, you will ®nd that many of the development ®nancial institutions that we see in India were originally part of the RBI. Whether it is the IDBI,28 or the NABARD29 or UTI,30 everything started from the Reserve Bank of India. Therefore, the role of development from this angle is something that is legitimate. The widening and the deepening of the ®nancial structure was a role that was expected of the RBI at that time. Now let us come to the other question about stability versus growth and development. This issue is being faced by the developed economies also. It is true that in the western countries, the Central Banks have opted for price stability as the major objective and this is also enshrined in the Maastricht Treaty. Therefore, the view that has been taken there is that price stability should be the major objective of monetary policy. I would say that in the Indian context too, price stability is a major objective. One can look at price stability not as an end in itself. Price stability is a means towards the end of sustained growth or sustained development. We should not pose price stability and growth as opposing contra relations. In the very short period, there could be a trade-off, and that is why the emphasis may shift from year to year, depending upon the conditions prevailing in that year or the previous year. If we have had two years, let us say, of double-digit in¯ation, obviously in the third year the concern about controlling in¯ation takes predominance over growth. But if, on the other hand, we have had a reasonably low in¯ation rate, and the economy is not picking up, then possibly the Central Bank should intervene to stimulate growth. That is why I have said that both of these remain objectives, but the emphasis will shift from year to year.

So you would say that there is no real con¯ict between the two objectives. Yes, but I still think that a major responsibility of the Bank is price stability because, whereas there are other instruments of economic policy which can deal with development problems, price stability as an objective is more amenable to control by the Central Bank. Once again, it does not mean that in¯ation is totally a monetary phenomenon; supply shocks are very often seen in a country like India because of ¯uctuations in agricultural production. Therefore, one-time increases in prices, or onetime changes in prices can be because of supply shocks. But sustained

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increases in prices can happen only if it is also supported by a continuing increase in money supply. It is because of these reasons that I think control of money supply becomes important.

Would you say that after 1991, because of fortuitous circumstances ± Manmohan Singh was at Finance and you were at the RBI ± the role of the Reserve Bank became much more clear, and price stability was taken as its predominant objective, therefore, the success that you and Manmohan Singh had can be attributed to a clear division of labour and the RBI was doing what it was supposed to do? This was a period which was marked by many changes, and structural reforms also implied structural reforms in the ®nancial area. I think the most important institutional change that occurred during this period in terms of the conduct of monetary policy, was the re-ordering of the relationship between the RBI and the Government of India in terms of ®nancing the de®cits of the government. This is much more than enunciation of an objective. It is this institutional arrangement under which the RBI gained greater autonomy in relation to the regulation of money supply, that is most important. Dr Manmohan Singh was also keenly interested in price stability as an objective. He has talked about it and he has said that the dharma of the Central Bank is price stability. But at the same time, I do not think that anybody in a developing economy like ours can ignore concerns of growth. Certainly, I would say that the change in the institutional arrangement was very important. It gave to the RBI a certain degree of autonomy in relation to the regulation of money supply. Now, institutional changes by themselves do not mean anything, unless they are also operated in the spirit in which the changes are made. I mean there could be a change in the form, but the substance could remain the same. Therefore it has to be worked in such a way that the freedom and the manoeuvrability given to the RBI is operated in a manner in which the Reserve Bank gains greater control over money supply.

In your recent book,31 you say qualitative aspects of ®nance for agriculture are very important. First, what are the qualitative aspects you have in mind, when you say that? And second, how can the Central Bank deal with the qualitative aspects of ®nance? The issue is in relation to the rural credit delivery system in our country, and the rural credit delivery system has gone through many changes. We

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have adopted what is often called the multi-agency approach. There are the rural branches of the commercial banks which provide credit, there are the rural co-operative societies, and the higher level co-operative organisations, which provide credit, and then we also have Regional Rural Banks. Therefore, in terms of institutional innovations, we have done a lot in the last let us say 20 or 30 years. Nevertheless, there is a feeling that an adequate amount of credit is not available in rural areas and, more importantly, that credit is not made available at the appropriate time. Therefore, the question which is being raised from time to time is, how to make credit available at the right time and in the right quantity. That is the sense in which one is talking about qualitative improvement. Timing and adequacy of ®nance ± these are the two issues. The Reserve Bank of India has been providing re®nance to the National Bank for Agriculture and Rural Development, and the Bank in turn has been providing re®nance to the co-operative institutions and others. Therefore, making available the required amount of ®nance is being taken care of in one way or the other, but the real question is whether at the ground level, the borrowers are satis®ed both with adequacy and timing. This is where the whole issue of strengthening the rural credit system comes up. How to make the rural branches of the commercial banks respond more effectively to the needs of the farmers is the issue.

In this context, Gramin, the rural credit bank in Bangladesh, is often held up as a role model for other developing countries. Well, we also experimented with regional rural banks. The Gramin bank is not obsessed with having to provide credit at a low rate of interest. In fact, they provide credit at fairly high rates of interest, whereas in India, there has always been a concern about providing credit at subsidised rates. This has, in a sense, come in the way of our rural ®nancial institutions being viable. While, on the deposit side, they have to compete with everybody else in raising deposits by paying the appropriate rate of interest, on the lending side, they are compelled to provide credit at rates of interest which will not give them enough margin. Many studies have shown that the interest rate margin that ®nancial institutions require, including the risk factor, is much higher than what they now get and that is why we wanted to free the interest rate regime. As far as the co-operative societies are concerned, we ®nally succeeded in doing so. But the rural branches of the commercial banks are still governed by whatever interest rate regulation that we still have. Therefore, this is one issue which must be resolved,

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namely, to let the rural credit ®nancial institutions function in a viable way and we should not prevent them from charging the appropriate rate of interest. This is very important, because otherwise, at the ground level, the branch manager does not ®nd lending a pro®table venture. This is an area in which there should be clarity in policy. I think we should move towards a situation in which we should require the rural credit institutions to provide adequate amounts of credit, at the right time, but the price or the rate of interest should be left to be determined by the ®nancial institutions.

There seems to be some confusion here between equity and ef®ciency. You are right, I think this is where the problem sometimes comes in.

But what about political factors here, because I believe that the Gramin didn't have the problem of appeasing politicians and that somehow, it went directly to the rural areas and reached the poor. You see, we started with an injunction that commercial banks and others should provide a certain proportion of credit for the priority sectors. Inherently, there is nothing wrong with it, except that a target-oriented approach always results in a dilution in the quality of lending. Superimposed on this requirement, there was an interest rate regulation, which did not give the lending institutions an adequate margin. And coupled with it, the repayment ethic was eroded because of the various waiver schemes. Therefore, farmers, instead of learning to repay their loans at the appropriate time, started waiting for some kind of a bonanza to come at some later date. Some damage has, therefore, been done to the rural ®nancial system by the introduction of the loan waivers. The RBI has not been against loan waivers on a case-by-case basis. Where there has been a drought or where there has been a dif®cult situation, the RBI recognised that there is always a need to reschedule the loans. I think this is not in dispute. But a general waiver with respect to the loans to be repaid to the ®nancial institutions has a very damaging effect.

Your comments on agricultural ®nance are interesting. In one of your lectures, you give an excellent analysis of the relationship between monetary policy and exchange rate management. It gives us a graphic description of the events after liberalisation. The Reserve Bank was in a sense ®re-®ghting.

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For instance, you imposed interest rate surcharges on borrowings for imports. You were re-instituting protection at that time, because you had interest rates surcharges on imports, and so on. In a sense, you were really activating trade policy through monetary policy. The point is that we were recognising, at that time, the growing integration between the money market and the foreign exchange market. And we were essentially using the interest rate instrument to check speculation. We had to tighten monetary policy; the rates of interest did rise very sharply and this is a very standard route that any Central Bank takes whenever the currency is under attack. And given the imperfections of the market, interest rates did shoot up very high at certain points in time, but that was necessary in order to prevent the domestic money market from funding the foreign exchange market. I do not think that we did anything that was different from what any Central Bank would do. In the system that prevailed then, we had a problem with respect to credit to exports; we were providing subsidised export credit. Because of the low rates of interest on export credit, there was no compulsion on the part of the exporters to bring back the earnings early. Therefore, we had to intervene directly and raise the rate of interest on export credit. On imports, yes it was an intervention which was very extraordinary, which had an implication for trade policy. But we did not continue that for more than three months. We had to deal with a special situation. There was an overshooting in the foreign exchange market, that is, whatever changes that were occurring were not justi®ed by the changes in the real effective exchange rate. And therefore, we had to intervene to turn the expectations in a different direction. We did succeed, but this import surcharge was a very temporary measure that we had to take. This also became necessary because of the fact that the interest rate structure itself was not totally free at that time and therefore, when there is an administered structure of interest rate, the surcharge is more like an interest rate adjustment rather than a change in trade policy.

You are also an eloquent advocate of Central Bank autonomy. During your time at the Bank, you may have achieved it in some measure. But can this state of affairs continue when governments change? I do not think any change in Government will affect the position. Under the statutes, the RBI has the discretion to give credit or not to give credit to

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the Government. There is only an enabling provision in the Reserve Bank of India Act under which the Reserve Bank can provide credit to the government. But this is true in almost all legislations because all Central Banks hold government paper. But the point is that we had an institutional arrangement, which cut at the root of the autonomy of the Central bank. I don't think there will be any change in the new institutional arrangement, because the government has also realised that price stability is extremely important. If anything, recent events have only re-emphasised that price stability is important, not only from an economic angle, but also from a political angle. When under pressure, governments do look for many avenues for resources, but the Reserve Bank will play its role taking into account what the current state of the economy is and with a clear vision, that price stability is one of its important concerns.

Can the independence of the Central Bank be guaranteed, if the Governor of the Central Bank is appointed, not through government channels but some other means? There is a difference between a parliamentary form of government, and a presidential form of government. In the parliamentary form of government, the Finance Minister is ultimately responsible to the Parliament for economic affairs. And monetary policy is part of economic policy and therefore he/she is responsible. Therefore, in the parliamentary form of government, we have to evolve a mechanism through which the autonomy of the Central Bank can be maintained, and at the same time the government is responsible for overall economic policy. I believe some changes are still desirable even within the present system, like making the tenure of the Central Bank Governor a ®xed tenure, and making it very dif®cult for the government to remove him/her from that of®ce. The appointment will still rest with the government. After all, the Chief Justice of the Supreme Court is also appointed by the government. One can evolve some mechanisms to ensure that the appointment of the Governor is made also according to certain guidelines. But more importantly, I think that the Governor should have a ®xed term and the removal of the Governor before the expiry of that ®xed term must be made extremely dif®cult. The analogy should be with respect to the appointments of judges in India.

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Staying on monetary policy and exchange rates, Ashok Desai has written saying that we must have zero tariffs and operate all policy through exchange rate changes. What are your views on this? Can it be done at all? Exchange rates have a uniform impact whereas tariffs need not be uniform. Most of us in this country are convinced that we should move towards a low tariff situation. Some distinctions in tariff rates between one commodity and another commodity can still be there, but what is important is to move towards a level of tariff which is comparable to what other developing economies have got.

What are your views on controls over the capital account of the balance of payments? We have had capital controls in this country, now Jagdish Bhagwati and others have been advocating it after the East Asian crisis. We need to make a distinction between capital controls and pure foreign exchange controls. This distinction is not often made very clear. Yes, capital controls in terms of regulating certain kinds of capital ¯ows, which are regarded as volatile, are something that everybody is advocating. In fact, in the East Asian crisis, it is very clear that one of the elements of the capital account which showed great volatility was not portfolio investment but bank credit. Short-term bank credit was withdrawn the moment conditions changed. Therefore, I think the emphasis on trying to restrict short-term ¯ows is well understood. Discouraging purely short-term ¯ows is acceptable and I think we should do it; it could be done in a number of ways. We have done it with respect to non-resident deposits. When we wanted to encourage them, we lowered the reserve requirements. When we wanted to discourage them at some particular point, we brought it on par with domestic deposits. But we should not go to the extent of totally preventing people from holding money outside, as we did before. Yes, capital controls in relation to speci®c types of capital ¯ows are understandable and acceptable. But extreme forms of foreign exchange control can result in leakages through under-invoicing or over-invoicing. We should not go back to that kind of a situation.

You talk about Latin American economies in one of your lectures, where they went to extremes with regard to ®nancial liberalisation and several economies collapsed. Does this suggest to you a sequence of liberalisation,

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in the sense that we should liberalise the real sector ®rst before liberalising the ®nancial sector? Even with respect to ®nancial liberalisation, one has to proceed step by step. That's what we have done in India. Large capital in¯ows without proper control over the ®nancial system can invite danger and this has happened. Whether or not the domestic ®nancial system is in a position to absorb capital in¯ows is a very important thing in terms of liberalisation. If the capital in¯ows are very small, then the question doesn't really arise. It is only when capital in¯ows are of a large magnitude that the issue whether the ®nancial markets that mediate are properly controlled becomes important. That is really the lesson.

What lessons have we learned from the East Asian crisis? I think there are some lessons that we learnt from the 1991 crisis itself. These are being reinforced by the East Asian crisis. First of all, we also had a problem with short-term credit in 1991. We had dif®culty in rolling over short-term credit, and that is why we brought down the proportion of short-term credit in the total external debt, to the point that currently, it is only about 7 per cent of the total debt. So, this lesson we learnt in 1991 has been reinforced by the East Asian crisis. Second, even with respect to portfolio investment, unlike other countries which allowed all individuals and others to invest in the stock market, we have allowed portfolio investment only by foreign institutional investors. We took the view that portfolio investment or investment in the stock market in India should be done by institutional investors, which may be regarded as having a certain long-term view. That is why foreign institutional investors who were recognised by the RBI were the ones who were allowed to invest in the stock market. It is possible that foreign institutional investors may also act in the same way as foreign individuals. If things go wrong, they might also take the funds back. But one is hoping that the foreign institutional investor will take a longer-term view than an individual who gets panicky the moment something goes wrong. While portfolio investment has been ¯owing into the East Asian countries in a very large way, it has in no way been regulated. While there has been some out¯ow of portfolio investment even from India, the out¯ow has not been of a nature where it could destabilise the system. Yet another thing is that we have been looking at our volatile funds, and we have been trying to keep our reserves in some relationship to these volatile funds. Therefore, our level of

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reserves will still be much higher than the accumulated portfolio investment plus the short-term credit. This gives a buffer which is very different from the buffer that other countries have had.

So is bank regulation and regulation of capital ¯ows in India much better than say in Korea or Thailand? We did not, ®rst of all experience the kind of capital ¯ows which some of these countries experienced. Mexico, I understand in one year received something like $20±30 billion, but our total cumulative in¯ows over the ®ve-year period was only of that order. The maximum we had in the total investment ¯ows in a year was about $7±10 billion. That is of a different magnitude.

So in a sense, it is a blessing in disguise that we didn't attract large volumes of capital from abroad. Yes, but we also took care to see that in terms of borrowing, we had some kind of overall ceiling, and borrowing beyond a particular time period required pre-sanction.

You seem to suggest in one of your lectures, I may be wrong in my interpretation, that there is no substitution between the formal and informal sectors in India. Am I right in saying that, when the formal ®nancial sector is regulated, it has little impact on the informal sector? Am I misinterpreting you? I do not know whether I have said that. What is really happening is that the formal sector in the rural areas is expanding. There is a considerable difference between what the institutional ®nance was in the ®fties when the Gorwala Committee report was given, and now. There has been a very signi®cant increase in institutional ®nance as a proportion of the total credit requirements that is being met. The informal sector is also getting integrated in some way with the overall ®nancial system. With the freeing of the interest rate structure, the formal sector has a structure of interest rates which, at least on the deposit side, is not very different from what the informal system can offer. The point really is that earlier on, when you had an administered structure of interest rate, both on the deposit side and the credit side, the rates of interest that were prevailing in the informal system were totally divorced from those in the formal system. But with the freeing of the interest rate in the formal sector, there is some

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convergence. Of course on the lending side, there are still some restrictions on the rate of interest that the formal institutions can offer. But I think the most important thing that comes out is that the informal sector still charges a much higher rate of interest than the formal sector. Therefore, my argument is that if we give freedom to the formal system to charge what it considers to be an appropriate rate of interest, it will be able to provide a larger amount of credit and at rates of interest which will not be found to be too onerous by the borrowers.

So what you are suggesting is that once we have removed distortions elsewhere, there will be a convergence of interest rates? You are right. I think there are two things that are required. One, at the policy level, we have to remove these distortions. The second is that we need further institutional strengthening. We have already experimented enough with new institutional forms. I do not think we should go into another type of institution. We should make the institutions that are already available within the system more responsive. What can be done in order to do it? When the regional rural banks were set up, we thought that people recruited from the local areas would have a better feel and they would be relatively low cost institutions. But all that doesn't seem to have happened, and this is where greater attention needs to be paid. How do we make these institutions respond to the environment in which they are operating? Is it the recruitment policy? Is it the promotion policy? Or is it something else that we must do, in order to be able to make people functioning at the grass root level to be more responsive?

But unless we deal with the real sector distortions including those in public enterprises and in trade policy, the ®nancial sector may merely react to these distortions. So shouldn't we ®rst remove distortions in the real sector? The real sector has many dimensions, but when we come to the rural areas, and when we observe the rural ®nancial system, the distortions are of a different nature. Yes, if agriculture is to compete effectively in the world market, it will have its own implications. But if you look at the ®nancial system in the rural areas and the requirements of the farmers and others, you ®nd certain distortions at the policy level, which have had an impact on the way the organised system has been growing. And at the same time, organisational effectiveness is weak. Because of ± I do not know what ± several factors. We need to research more in this area.

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But as long as the stipulation that banks have to lend a certain proportion to the so called priority sectors continues, there will be a spillover of demand into the informal sector and interest rates there will be high. There was a time when availability was a very serious problem. It was a serious problem because the government was also pre-empting a fairly substantial amount of credit. But now, with the reduction in the Cash Reserve Ratio (CRR), and with the reduction in the Statutory Liquidity Ratio (SLR), availability of funds is not as much of a problem today as it was some years ago. You may remember that there was a time in 1991, when the pre-emptions in the form of CRR and SLR on increment of deposits were something like 63 per cent. Now that situation has changed. The CRR has come down to lower levels. There is scope for further reduction, as the economy gets stabilised. If the government is able to tap from the normal market sources, then the pre-emptions from deposits in the form of SLR may also come down. The 40 per cent prescription needs to be seen in the context that agriculture alone contributes 30 per cent of the national income. The problem earlier on with the 40 per cent prescription was that there was a high degree of subsidisation also, and banks were lending this quantum at rates of interest which were not remunerative. But now we have removed the interest rate distortion to a large extent. Even in priority sectors, loans above 200,000 rupees, are free from any interest rate regulations. Therefore the degree of crosssubsidisation which was there with respect to priority sector credit has come down substantially. If we now move towards the next stage, when we totally free interest rate structure as we have done with respect to the co-operatives, then the 40 per cent rule by itself will not be a hindrance.

Has liberalisation really impacted on the poor? You have argued in one of your lectures that it hasn't increased poverty, there has not been any reallocation of resources away from the poor. Some argue that it has increased income inequalities, because the market is reacting to demand from the rich, and, of course, the poor don't have any entitlements as Sen would say. So in a market economy, the poor may be losing out, they are left out. Well, ®rst of all, we have had too short a period with this experiment ± all this started in late 1991. 1991/92 was still a crisis year, and we were really trying to put the economy back on the rails. So, there is about a ®ve-year period in which one could look at what has happened to the economy.

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Data on the poverty ratio are not conclusive. But the real problem is that we have not allowed enough time for the reform process to percolate. I have been arguing more on an a priori basis to ®nd out whether there is anything in the new economic policy which is inherently anti-poor, or which is against poverty reduction, and I am saying that there is nothing, no bias whatsoever against the poor in the New Economic Policy. In fact, the economy has grown at a much higher growth rate than what it has done in the past; all studies show that economic growth has been a major factor in reducing the poverty ratio. If we grow at 7 per cent per annum, it would make a big difference. Anyway, today we talk about even a 5 per cent rate of growth as something that is not very satisfactory, but about 10 years ago...

3 per cent was good. That's right. Five per cent was considered to be very optimistic. After all, most of our plans were talking about only 5±5.5 per cent of rate of growth of the economy. Therefore, I would say that liberalisation in terms of the removal of controls has enabled the system to function more effectively. And if the economy grows faster, some of the employment-oriented programmes could also be undertaken more vigorously. Where will the resources for such programmes come from? I have argued that a higher rate of growth will give us greater manoeuvrability in terms of resources for attacking directly the problems of poverty and unemployment.

Turning to economic policy in general, why did we embark on an importsubstitution strategy and why did we persist with it for more than three decades? You suggest in one of your essays on India that it was all due to market failure. I think we ®rst of all misjudged that the export growth rate could not be high. So the argument for import-substitution came from the end of export pessimism, a doubt which was reinforced by a large domestic market. Therefore, we argued that if we could not take the route of exports supporting a larger level of imports, we should protect ourselves. As I have said in the speech that you refer to, there were thus two mistakes that we made, one was that we did not estimate properly the import content of an import-substitution programme, which itself turned out to be very high. The second was that we certainly underestimated the export possibilities of the country and in fact, missed the bus at a time when world trade was

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expanding at a very fast rate. We are trying to get on the bus at a time when world trade is slowing down. In fact, this is unfortunate. When we are reshaping our policies towards greater export orientation, world trade is not growing at a fast rate.

I guess we are always doing the right thing at the wrong time. Not exactly. I am merely saying that earlier, we did not fully understand that the import-substitution strategy would involve a fairly large level of imports and also that it would lead to a technological gap in the system.

But why did we persist with this for 30 years or more? Well, there was a herd instinct. This was true of the economists in this country. I think most economists, except for a few, did advocate this policy for quite some time.

Another issue which is frequently debated is the relationship between democratic forms of government and development. Democracies promise a certain minimum standard of living to all the people; whether they achieve it or not, they prevent extremes. Sen's argument has been that the prevention of famines in India has been essentially because of the democratic system, and a reasonably free press ensures that extreme tragedies do not occur. Such tragedies could occur under other forms of government. Democracy has come to stay; and it has become a way of life in this country. But the critical question is in terms of the roles of market and the State. There is need for a clearer de®nition of where markets will function and where State will play its role. If we can ®nd a blend which is different from the blend which we adopted in the 1950s, we would have found an answer. In the areas of social infrastructure and related ®elds, the role of the State will continue to be important. But even here, one should formulate some ground rules regarding where the State should play an important role. For example, even in education, is it necessary that the government should provide free education at all levels? Leaving aside education at the primary level, at the secondary and college levels, there could be some blend of the private sector and the State. What is really required is not a discussion at the abstract level as to what the roles of the State and the market should be,

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but to take sector by sector and analyse in relation to each one of them the roles that the market and the State can play. For example, it is very clear in the case of the ®nancial system, that the regulatory role of the State is much more important than anything else. What matters is not whether the banks are run by the government or the private sector as much as whether a regulatory system is ®rmly in place, so that it controls all the institutions. We really need to move beyond the ®rst principles regarding where the state should play a role, and where market should play a role. We need to arrive at a clear-cut differentiation of the roles of the State and the market in the various spheres of economic activity. I think more homework needs to be done here.

What are your views on public enterprises in India? You have written about it in your book, but there seems to be no way of privatising them because several of them are so unpro®table that you can't put them on the market, their shares wouldn't be worth very much. What else can be done? Could we ask private enterprise to manage them for a while, make them pro®table and then sell them off? We have so many models here, the British model, the Czech model and the East German model. The Disinvestment Commission and many others have talked about some rules that can govern privatisation in the areas where no public purpose is served by State-owned enterprises. I think we should go ahead and sell as much of the share of the State as possible on the market in these enterprises, where no speci®c public purpose is served.

But will the market accept them? That is the problem. Well I think you should make it attractive to the market.

Or just write it off as a bad debt. No, no. But if you are going to write it off as a bad debt, then I think it means that you are willing to sell it at some price. In the case of enterprises in which the government continues to incur heavy losses, we will have to sell them at a reasonable price, and use that money to safeguard the interests of the people who are thrown out of employment. And in some other cases, a strategic partner (as they say) should be brought in, and he/ she should look after the management. In our Committee on Disinvest-

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ment, we had outlined some guidelines where the government should retain 74 per cent, and where the government should retain only 24 per cent. There is no doubt that the process of disinvestment must be such that it is transparent and gives to the government a reasonable price based on one or the other of the well-known valuation procedures.

What are your views on intellectual property rights at debate in Parliament now? Well, we will have to do whatever is consistent with our being a member of the WTO, because we have an interest in the expansion of world trade. If we give in on some counts, we should gain on others. It is a question of give and take. We must bargain hard.

You have expressed some interesting views on education in a recent article in the Times of India. The need to focus on the issues which have a direct bearing on the quality of life is widely recognised. However, there is no assurance that improved health and improved education by themselves will contribute to economic growth. They only create conditions under which growth in the sense of rise in national income can be accelerated. However, enhanced human development expenditures cannot be sustained over a long period unless supported by accelerated economic growth. There are examples of regions and countries where substantial improvement in human development indicators have not necessarily resulted in higher economic growth. When there is a dichotomy between human development indicators and economic development, it can be a source of social tensions. For example, as education spreads, the economy must have the ability to absorb the growing number of educated. We need, therefore, to stress simultaneously economic development in the conventional sense and social development. Cross-country comparisons on human development expenditure do throw interesting light on the effectiveness of expenditures incurred. For example, according to the Human Development Report 1991, both Sri Lanka and India had a similar human development expenditure ratio of 2.5 per cent of GDP. Human development expenditure per capita in 1988 was $10 for Sri Lanka while it was $9 for India. However, in the ranking of Human Development Index, Sir Lanka occupies the 75th rank, whereas India is lower down at 123rd . Part of the reason for the difference in the ranking could be enhanced expenditure at a certain level

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over a longer period. However, it does point to the importance of the effectiveness of expenditure. To expect social development to occur independent of economic development and to be sustained is not realistic. To achieve higher standards of human development in our country, a multi-pronged approach is necessary. This approach must comprise of a higher growth rate, a larger expenditure on social sectors, and ef®cient utilisation of the funds allocated, and development of appropriate institutions at the grassroot levels to promote community participation and monitoring.

Thank you for giving me the time to talk to you. You have clari®ed a number of issues at debate.

7 T.N. Srinivasan Versatile and forthright would best describe T.N. Srinivasan, a mathematician-turned-economist. Few could list `a note on approximation to ®nite sample moments of estimation whose exact sampling distribution is unknown' (Econometrica 1970), along with `Democracy, Markets and Development', and `Destitution: A Discourse', in their list of publications. T.N. Srinivasan has written extensively on trade theory, trade policy and various aspects of India's economic problems and policies. His critique of the Human Development Report, his critical review of the basic needs approach and a variety of other fashionable themes such as the new trade theories are well known. Srinivasan and Bhagwati are credited with providing the intellectual underpinning for India's recent economic reforms. Srinivasan was educated at Madras University, Indian Statistical Institute and Yale University. He is Samuel C. Park Jr. Professor of Economics and Chairman, Department of Economics at Yale University.

*

You read mathematics at the University of Madras, then you switched to economics. I ®rst did an undergraduate honours degree in mathematics at Loyola College, Madras, then I went to the Indian Statistical Institute in Calcutta. At that time the Indian Statistical Institute (ISI) had not yet been made an institute of national importance under an Act of Parliament with power to grant degrees and so on. But the Institute's reputation as an academic institution was the one that attracted people there. In those days, the certi®cate that the Statistical Institute granted was called the two-year professional certi®cate in statistics which was valued very highly. So I went there, and I was a student of C.R. Rao.

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When and why did you switch to economics? Well, I will come to that. While I was about to ®nish the training in statistics, there was a conference on statistical quality control at ISI, Calcutta and I was involved as a student-volunteer in that conference. For some reason, the authorities at ISI decided that I should do statistical quality control. So I went to the Indian Statistical Institute's quality control unit in Bombay. I was doing statistical quality control in Bombay textile mills for two years. It was a rather frustrating experience. Most of the industries, given our import substituting industrialisation policies, had a huge domestic market and they were not particularly interested in quality control or anything of that sort.

This was during the 1960s. The 1950s, late 1950s, they were not interested particularly in quality control or anything of that sort. But they were indulgent, so they let me do control charts and so on. If I may digress for a moment, Walter Shewhart and Fred Demming are the two people who introduced quality control in Japan, and Japan is well known for its emphasis on quality control. Professor Mahalanobis, the founder-director of ISI, recognised the importance of quality control and statistical quality control techniques. He wanted Indian industry to appreciate quality control, and establish quality control. He, in fact, brought Walter Shewhart and Fred Demming to the ISI to visit Indian industries. And so the Indian Statistical Institute established a quality control unit in major industrial centres such as Madras, Calcutta, Delhi and Bombay to promote quality control. But it never took off in Indian industry because there were no incentives to adopt it; if you can sell anything you produce at any price you can charge, why bother? It was a frustrating experience, but one good thing that happened was that I came to learn linear programming and methods of operations research as part of my job. And I was interested in pursuing research in these areas. My classmates from Loyola College were then at the Tata Institute of Fundamental Research in Bombay. We used to get together very often. A mathematical statistician from the US called Barucha Reid, was visiting the Tata Institute. I met him and told him of my interest in pursuing operations research studies. He asked me to write to prominent scholars in the ®eld. And I wrote to the late Tjalling Koopmans, the future Nobel Laureate, who was then at Yale, saying that I was interested in studying with him since he was doing activity analysis and linear programming. He passed my letter on to the Director of

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Graduate Studies at Yale's Economics Department, John Perry Miller. It so happened that Miller was to visit India. He interviewed me in Bombay and I got a fellowship to go to Yale. Ford Foundation had given money to Yale for fellowships. That's where I studied for my doctorate. My thesis supervisor at Yale was Koopmans.

And the thesis was on mathematical modelling. Yes, on investment criteria and choice of techniques of production.

And that was before Amartya Sen's work on choice of techniques. No, not much before Sen. He was working on the problem at around the same time with Joan Robinson at Cambridge. In fact, I reviewed Sen's choice of techniques for the Journal of Political Economy, in 1962.

I was reading Paul Romer's paper on `Two Strategies for Economic Development'. There he suggests that it is high time we stopped building mathematical models and working out solutions to systems of equations, and spent more time de®ning precisely in words what we mean. You are by training a mathematical economist and have done much work in the area. What are your views? Is there too much mathematicising in the profession? I don't think so. You see, mathematics and statistics are tools of analysis, and using mathematical tools forces one to be logically coherent and consistent and for that reason, mathematics is essential for any discipline which aspires to be scienti®c. So I don't see use of mathematics as excessive, but one can let it become excessive if instead of using it as a tool, one uses it as an end in itself.

You have talked about development economics as a discipline and suggest economics should be much more interdisciplinary. Have you changed your views recently? No, on interdisciplinary research, I haven't really changed my perspective. It is a very dif®cult thing to bring about if several scholars from different disciplines attempt to do research together. It is more likely to succeed if a scholar of one discipline appreciates the need to use tools of other disciplines, so to put it crudely, best interdisciplinary research is

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interdisciplinary research which goes on under one head, rather than several heads.

There is a lot of discussion whether or not development economics is a subdiscipline of economics in its own right. There again I have expressed my views on several occasions. My view is that development economics is economics as applied to developing countries. For that reason, any and every branch of economics has a development counterpart. In that sense trade theory, or public ®nance and macro- and microeconomics are all relevant for analysing development problems. Thus all of these are parts of development economics.

The paper by Romer I referred to earlier is the one where he talks about Taiwan and Mauritius. There he talks about importance of ideas. A commentator on the paper draws a distinction between ideas and beliefs. You also commented on Romer's paper. What is the distinction between ideas and beliefs? Yes, there is a distinction. Beliefs condition the way one views the world and the way one operates and so we cannot ignore them and so they are important.

What do we mean by beliefs? Are they sociologically determined? Well, of course, it is dif®cult to describe what one precisely means by beliefs. What I have in mind is a framework which maybe philosophical, religious and also cultural that one implicitly or explicitly adopts in thinking about problems.

And that generates ideas? Yes.

Because Romer at one point appears to suggest that ideas come only from developed countries. I think that is wrong. We in India have ideas but we cannot really germinate them, so we go abroad. Absolutely, yes incentives matter.

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You may not agree with me when I say that you are somewhat of an iconoclast. You have criticised many a received wisdom. I have in mind your critique of the Human Development Report; basic needs approach, and aid. You have also argued that most problems lie within developing countries and not so much with the structure and policies of the global economy. Well, what I have long argued is that whatever dimension or aspect of poverty you take, the variations within poor countries are often much larger than the variation within rich countries, as well as between poor countries. Differences in poverty level between Kerala at one end and Bihar at the other end in India, is much wider than the variation that you ®nd across countries at the same level of development as India. So it seems to me that focusing on what one perceives to be external environmental constraints and ignoring what is feasible or what is not feasible within one's own society is a wrong way of thinking about it. It is more of an excuse for not doing things that you should do, and that is what I have said. In the Indian case, there is no reason why other states cannot follow Kerala's footsteps. As you know, right now, Tamil Nadu has achieved replacement level of fertility, Kerala achieved it sometime ago, and Karnataka is nor far behind. Karnataka, Kerala and Tamil Nadu are operating under the same political economic system, the same social system as elsewhere in India. There is no separate economic policy or framework in Tamil Nadu. So why not see what one can learn from the experience within the countries and see what is replicable and what is not replicable, and why is it not replicable. This would be far more productive than focusing on external factors.

At the same time, you are highly critical of regionalism and global protectionism. Yes that is so. As I have written in one of my articles on that subject, multilateralism is the best defence of the weak. Since the conclusion of the Uruguay Round, there is an increasing tendency to create preferential trading arrangements, euphemistically called `free trade areas'. A detailed analysis of Preferential Trading Arrangements (PTAs) has led me to conclude that the adverse systemic and other effects of PTAs far outweigh their bene®cial effects. As I say in one of my recent articles, the best approach for WTO members when presented with any proposed PTA for approval could be, ®rst, to follow the advice of Nancy Reagan and `just say no' and second to follow the advice of Senator Robert Dole and say `just don't do it'.

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You were also critical of the basic needs approach endorsed by the ILO. You are referring to my paper on Basic Needs. I noted two things. First, what came to be known as the basic needs approach is nothing new. In 1962, the Perspective Planning Division of the Indian Planning Commission produced a paper on minimum levels of living which identi®ed the constituents of basic needs. Second, the World Bank and ILO did not take on board the argument that in poor countries, a relatively small proportion of people are weakly connected or unconnected with the income generation process because of various constraints. In India, these constraints would be loss of a breadwinner in the family, not having a male earner, and so on. For the rest of the population which is well connected with the income generation process, growth, and not redistribution, is the means for improving levels of living. My paper identi®ed these two groups in the population and emphasised rapid growth, and not redistribution, as the means to poverty eradication.

The growth approach encompasses employment and the so-called entitlements concept. Entitlements is a fancy word for the ability to command purchasing power. I do not ®nd entitlements a particularly powerful concept.

In your paper on `A Discourse on Destitution', you seem to be weary of the thesis that lack of access to land and resources explains destitution. I was surprised to learn from your paper that just 10 per cent of the minimum wage could eradicate destitution. If this is so, we need not worry about land reform. There are two problems with the land reform story. One is, wherever land reform has been successful, most often it has been imposed by outsiders. Take Japan, it was the American occupation authorities who did quite a lot by way of land reforms. In Korea, it happened that Japanese colonialists owned land and after the defeat of Japan, the landlords ¯ed or were dead. The Americans ensured that land reform was completed after the Korean War. In Taiwan, it was the mainland Chinese who engineered land reform. In China, they had a revolution. So to harp on land reforms does not take us very far, because domestic political processes do not seem to have instituted land reforms anywhere.

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In any case, if assets and factors of production are suf®ciently mobile and there are no constraints on access to technology and credit, you may not need land reform per se to achieve what you need to achieve.

You also advocate distribution of food stamps to the poor. But a secondary market in food stamps may develop. I don't mind that. If your intention is for somebody to acquire food, but that person decides that the use of stamps for other purposes is more urgent, that is ®ne. The best solution would be to give them cash and let them do whatever they want to do with it. If a cheap means test were available, providing `de®ciency' payments to those identi®ed as poor to offset a part or whole of the difference between their means and poverty level would at once relieve the government of intervening in any market and also let the poor choose what they wish to do with their incomes. Short of that, saleable food stamps would be an alternative. A system of food stamps under which stamps are used to pay for part of the cost of purchases from the open market of commodities, now covered by the public distribution system (PDS), would save valuable resources. If the poor buy from the market, the government would not be involved in the purchase, transport and storage of commodities. Of course, in¯ation may reduce the real value of food tamps with a ®xed nominal value. But this problem can be overcome, say, by indexing the value of stamps by the price of coarse grains and other such commodities bought only by the poor.

Staying with agriculture, what sort of policies should be adopted apart from land reforms? What sort of agricultural liberalisation policies should we consider adopting? Let us recognise that India has not liberalised agriculture within the country, India has not got a common market in agriculture. The states impose restrictions on inter-state movement of agricultural commodities on private account. They can also impose restrictions on inter-district movement of commodities. There is certainly no common market in agriculture in India. So ®rst, once and for all, get rid of internal trade restrictions. Second, integrate agricultural trade with world trade. We have to do that, and we have an opportunity to do so when the review of the Uruguay Round Agreement on agriculture comes up in 2000. We should say: `Look, you guys in the industrialised countries, you should

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give up your massive interventions. Europeans should abandon their common agricultural policy, and peanut quotas, sugar quotas and all that in the US should go. And we for our part will integrate our agriculture with world agriculture.' Adjustments would be painful in the short run in the Indian case, because if India truly integrates, for example, the bulk of sugar cane cultivation in north India would no longer be viable, though it may be viable in the south. Shift of cropping patterns across the country would be signi®cant. And also in some commodities, for example, rice, if we move into the world market in a large way, there will be terms of trade effects. Unlike wheat, the world rice market is a relatively thin market. And if India went in, even with 10 million tons of rice to sell on world markets, there will be signi®cant price effects. So there are problems, but I would argue that these are manageable problems.

You have written extensively on India and China. You also talk about Korea, which may serve better than China for a comparative analysis of growth and development. Yes. From an institutional perspective, the institutions in India and China are vastly different and not comparable. But if you think of India as a continental-sized economy with a large population and signi®cant poverty, there is no other comparator for India other than China. So if China is able to grow rapidly and reduce poverty, we need to ask why is it that they are able to do so and why we are not able to do so. When the Chinese want to do something, they seem to think through all the implications of what they want to do, and they do it. For example, they created the coastal economic zones in Shenzen and other places. I visited one of them about ten years ago. They realised that it is not enough to simply open up a small area and call it a free trade zone. They provided all the necessary concomitants in the form of labour, capital and infrastructure. Hiring and ®ring of labour is permitted in the zones though not on the mainland. They allow for 100 per cent foreign equity ownership on the zones. We too have free trade zones in India, but they did not take off. The main reason is that we carried the inward-oriented mind set on to the zone also. The Khandla free trade zone was established in the 1960s. It failed, ®rst, because it was neither well connected with the hinterland nor endowed with the necessary infrastructure and human capital. Second, because the government was ambivalent about permitting foreign investment in the zone, and it was reluctant to permit activities that

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were too different from those it permitted in the rest of India. This is where comparison of India with China is relevant. Of course, China too has its inef®cient State-owned enterprises, the dinosaurs are there. From what I hear, they seem to have contained the State-owned enterprises while allowing the village and township enterprises to go forward. Our policy in India is muddled and incoherent. We do not want to privatise State-owned enterprises for various reasons and then we have the smallscale enterprises, which, if successful, cannot expand without losing the privileges conferred by the government on them.

Perhaps it is all sociological. I think it was Galbraith who once said, there are two types of developing countries ± ones which have the Chinese and the others which do not. Mauritius has Indians, a large number of Indians and is doing well. Singapore has Chinese and Indians. It is not so much about Indians and Chinese. In the past, neither the Indians in India nor the Chinese in China performed as well as the Indians abroad or the Chinese abroad. It has all to do with incentive structures.

What sort of incentive structures do you have in mind? Market-oriented ones? Well, markets yes, but competitive markets, not any sort of markets. You could have incentive structures within government organisations. I was impressed with the sort of reforms Roger Gordon, the Finance Minister for New Zealand, implemented. He has written a book about it, also an article I think in Public Policy. He identi®es a set of prerequisites, both economic and political, for reforms. He instituted incentive structures for the bureaucracy too.

These are related to salaries and performance-oriented bonuses. Also a clear idea of accountability. Accountability is crucial. You should also identify what is good performance and how is it going to be assessed. Roger Gordon brought accountability into the management of the macro economy. For instance, targets were set for the Central Bank in terms of permissible in¯ation rate.

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It can be said that most of the countries we are talking about, Mauritius, Korea, Taiwan and New Zealand are all small countries. Well, I don't know. This argument of size came up whenever we talked about Korea. The late Professor Sukhamoy Chakravarty used to say that Korea is not a relevant case because it is small. Now Korea's industrial sector is larger than India's industrial sector. So what is one talking about when referring to size ± population, geographical area, industrial production?

Small countries do have homogeneous populations and culture. The in¯uence of culture is exaggerated. In this context, I am fond of quoting Jagdish Bhagwati. In a piece he wrote on Raul Prebisch in a volume on Pioneers in Development, he narrates an anecdote about an Australian expert who was invited by the Japanese to advise them on their industrial sector. In his report, the Australian expert said, `You Japanese have no sense of time, your labour may be cheap, but its productivity is low. And when I talked to managers of your enterprises, they told me that it is a national characteristic, there is no way you are going to change it.' And he was talking about Japan!! So you see, it all comes back to incentives. Any kind of cultural or religious predeterminism doesn't make sense.

Talking about incentives, our liberalisation process appears to have provided more than what is necessary by way of incentives to foreign ®rms. Consumer goods imports are virtually banned whilst intermediate inputs are allowed in almost duty-free, all this provides a very high effective rate of protection to foreign ®rms which are now allowed 100 per cent equity ownership. In our Report to the Government in 1993, Jagdish Bhagwati and I made this point. High effective rates of protection will bring in tariff-jumping foreign investment and it is likely to enjoy high private rates of return. This will pull resources towards their production. Such use of investible resources could not possibly be the intent of those who deem such goods as `luxuries'. This has happened and it should surprise no one. But this is the muddle-headed policy we have had for decades. To think of an automobile as a luxury only when it is imported, but not when it is produced domestically is strange. And domestically produced automo-

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biles are not taxed adequately. You see, this whole notion of `luxury goods', used in debates on import controls or controls of foreign investment, re¯ect the preferences and prejudices of those in charge of licensing rather than deep economic reasoning. We have a sizeable middle-income group in the country now in the 1990s. Given that, it is hard to see how you can say refrigerators, air conditioners and consumer electronics are luxuries. You also ignore the fact that `luxury' goods need not always be just ®nal consumer goods, they can also be used in production and they have a positive impact on productivity in a growth oriented modernising economy. An example is telephone and telecommunications. By viewing telephones as private luxury consumer services rather than as essential producer services, we ended up with an abysmal telecommunications sector. Recent privatisation and reforms have vastly improved these services.

This sort of a policy may be politically driven. There is a signi®cant element of politics in it. I will give you an example. Recently I was in Bangalore giving a set of lectures. While I was there, the Karnataka Government attempted to raise electricity prices by a small amount. Every Party, including Manmohan Singh's Congress Party, opposed it. Passing through Delhi on my way back from Bangalore, I asked Manmohan, `You have argued that the present system of electricitypricing is absurd, subsidisation of electricity is costing the economy enormous sums, and your party now opposes a small rise in electricity prices.' He simply said it is all a political necessity.

Political necessity unfortunately compels introduction of an inef®cient policy. I guess talk of increased investment in social goods, such as, health and education, goes down very well politically. In any case, it has generated an interesting debate on growth and development, with you and Jagdish Bhagwati arguing the point that you need growth to generate resources for investments in social goods. You see, at no point did Jagdish ever say that investing in health and education is not important. What is being argued, by Jagdish more so than anyone else, is that the import-substituting, public sector-oriented inef®cient set-up we have had has prevented generation of resources for investment in education and health. Remarks by Sen and DreÁze, that debate about whether Indians should drink Coca-Cola, crowd out the

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time left to discuss education and health and completely miss the point. It is not that education and health are not important, or are not discussed. But having recognised their importance, to ensure that resources are generated for investment in these areas is important. And providing the kind of schools and health care facilities, which generate the sort of externalities Amartya Sen talks about, is important. Our education and health care systems are not doing it. Take one example, in terms of school enrolments and drop-out rates, West Bengal is in a very bad state. You also know why: it is because teachers' unions are very strong there and the communist government doesn't have the gumption to confront the teachers' unions. Absenteeism of teachers is high there, but there is no will to bring them to book.

Kerala too is left-oriented, but Kerala has done better. Yes, but Kerala's education achievements pre-dates communism there, and there are historical reasons for Kerala's success. The interesting case though is the experiment now taking place in Madhya Pradesh. There they have the education guarantee programme, analogue of the employment guarantee programme. Villages are guaranteed a school if the village community is willing to bear a share of the costs in establishing the school. That is one part of it. The other part is that the village community gets the right to appoint the teachers, they pay the teachers, and they monitor the performance of teachers. They have the right incentives to ensure that their children are in school and they are being taught. So it is not simply a question of more resources, but one of ef®cient use of existing resources. There are also resource reallocation possibilities. We have invested too much in higher education, too little in primary education, and that has to be changed. The low tuition fees we are charging in educational institutions is scandalous. There is no reason why we should not step back from the public provision of higher education and move to private provision, and concentrate more on improving the quality of primary and secondary education.

There is, though, something to the argument that investment in social goods will generate growth. These are the growth promoting ingredients. Yes, there is something to it, but not as strongly as you put it. It is true that if you have a well-educated labour force, technological adaptation

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becomes easier and growth would be augmented. But in our case, given the size of the economy and the size of the trained labour force, the constraint of skilled labour need not be a major problem.

Has India truly liberalised the economy? No, I don't think so. We have made a beginning, of course. Getting rid of import licenses, industrial licencing and controls over capital issues is a major step. Then we stalled. It is interesting that recently the WTO has ruled against India invoking the balance of payments constraints as an excuse for imposing quotas on consumer goods imports. India has appealed against the ruling saying that the dispute settlements body has no jurisdiction over the issue, and it should be referred to the balance of payments committee of the WTO. In any case, using a trade policy instrument such as quotas for controlling balance of payments, which is a macroeconomic variable, is not ef®cient.

I am told India is also imposing anti-dumping measures (ADMs). Yes, Suresh Tendulkar and I have just written about it in a monograph we are writing on India in the World Economy. We have said `the EU Commission recommended imposition of anti-dumping duties on grey cotton cloth exports from India and a few other countries, the recommendation could be attributed only to crass protectionist motives. Fortunately, the Council of Ministers did not go with it. Rather than attempt to toughen the discipline on ADMs, we would suggest that India and other developing countries should take the lead in pushing for the abolition of ADMs altogether. In our view, ADMs are the analogues of chemical and biological weapons in the arsenal of trade policy instruments. Unfortunately, India has begun to emulate the worst of practices of industrialised countries by becoming the third or the fourth most frequent users of ADMs in 1998. We strongly deplore this.'

These ADMs set back liberalisation policies. Yes, this is precisely what the industrialised countries are doing to circumvent their commitment to liberalisation. They are being used by the EC and the US for protectionist purposes, even though the rationale for ADMs was that predation needs to be prevented for free trade to assure

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mutual gains to trading nations. As I said earlier, in recent years, India and other developing countries have imposed ADMs. If this trend continues, and more and more countries, developed and developing, impose ADMs, the process of liberalisation undertaken by the Uruguay Round agreements will be undercut and global and national welfare will be reduced.

We can't afford to do that. How can India justify ADMs? What is the proof of dumping? That is the problem with ADMs. Proof is dif®cult. The WTO rules respect national laws on AD. As far as I know, we have no anti-dumping laws. We are in a worse situation.

There is a lot of controversy on the impact of liberalisation; you seem to be optimistic on that count in your early papers on liberalisation. Immediately after 1991, the ®rst year of adjustment to the opening of the economy, we had a poor agricultural year. Poverty did seem to go up, but that has reversed, and the situation seems to be better now. In the years following the reforms, the growth rate increased, in¯ation rate came down, industrial output too increased. There is some evidence to show that the incidence of poverty may have declined. There doesn't seem to be much change in income distribution.

What about employment? Well, at least in the ®rst few years, there was evidence of improvement in agricultural wage which is a good indicator, because in the market for unskilled agricultural labour, there are no government interventions of any signi®cance. Except possibly in Kerala, minimum wage laws are not effective.

What about the sequencing of liberalisation? There is much debate on whether the ®nancial sector should be liberalised ®rst before the opening up of the real sector. We haven't liberalised capital ¯ows. All we have liberalised is the in¯ow of FDI and portfolio investment, we haven't liberalised out¯ows. You see, ultimately what matters is the credibility of the whole reform package. If it

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is credible, sequencing may not be a problem. There is some progress on ®nancial sector reforms. After the Two Narasimham Committee Reports on ®nancial sector reforms, the Government seems to have taken some steps. There are more private banks in the system. But nothing has been done on insurance. As you know, an insurance reform bill was introduced in Parliament and now Parliament has been dissolved. So I don't know what is going to happen there. There are a number of things that still need to be done in the ®nancial sector. The reform of the ®nancial sector should not be viewed independently of the attempts to reduce the ®scal de®cits and the reform of the ®scal system, but as an integral part of the reform of the public sector. Until all this is done, making rupee convertible on capital account is very risky.

One of my graduate students has done a paper on ®nancial liberalisation and savings. She ®nds that liberalisation has had no impact on the volume of savings, though the composition of savings may have changed. As you know, even in theory, the interest elasticity of savings could go either way because there are income and substitution effects which go in opposite directions. I wouldn't use your student's ®ndings in arguing for or against liberalisation process per se.

No, that is not the intention. It is interesting that the composition of savings seems to have changed, the ratio of ®nancial savings to physical savings appears to have gone up. Data on physical savings in the Indian case are noisy. We know it is estimated as a residual, and there are problems with that. Total savings rate has been around 25 per cent, and the component of household savings in the form of ®nancial assets has been going up, and particularly, after the nationalisation of the banking sector and opening up of branches in the rural areas. Financial savings have increased, relative to other sorts of savings.

What are your views on Central Bank independence? Independence of the Central Bank is a way of assuring the market and the private sector of the credibility of other programmes of the government, particularly its ®scal prudence. Now for that reason, it is very important,

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particularly in economies where there is a tendency to use the ®nancial system, for ®nancing the de®cit of the government.

We have contained in¯ation in India much better than other developing countries. That has been the case historically. Our tolerance of in¯ation is much lower and we do not have indexing of wages and salaries to the price level as in Latin American economies.

I suppose our conservative monetary policies have contained in¯ation, but they have also contained the growth rate. Maybe we have sacri®ced growth for stability. Perhaps, at one level. If you take the 1980s, there was reckless ®scal expansion. Revenue surpluses turned into de®cits, we borrowed heavily at commercial rates abroad and at home too. That was the time when the growth rate was high, but the problem was that it was not sustainable, so in that sense, you could say in those years, we traded off stability for growth. But the issue is, how to get the fundamentals right, so that you have growth with stability.

We have had episodes of expansion and liberalisation here and there. But generally we persisted with the Import substitution strategy for long after other countries had given it up. Why? One response to your question could be inertia, and political reasons. I have always felt that we had an opportunity to give up importsubstitution and adopt an outward policy in 1966 when the rupee was devalued. If we had done so, then India would have been a very different India today. Remember it was also at that time that the Taiwanese and Koreans moved away from import-substitution towards outward-looking policies. The devaluation occurred in June 1966. But what happened at that time is an interesting story. The World Bank and IMF were instigators of the devaluation of the rupee, which was to be a ®rst step towards liberalisation. The quid pro quo for doing so was that the Bank would provide non-project assistance of $800 million to a billion. But because of our opposition to the Vietnam War, the US opposed World Bank loans to

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India and the Bank did not come through with the money. There was a drought in 1965. It was followed by another in 1966. This resulted in price increases and a decline in our traditional exports and a recession in industrial production. Many in the ruling and opposition parties were against devaluation. Mrs Gandhi, who was the Prime Minister at that time, was vulnerable and under extreme political pressure, took all this as a lesson in what not to do. So she reversed the whole process of liberalisation and wouldn't hear anyone suggesting reforms. The hesitant steps towards liberalisation introduced with the devaluation were abandoned by 1968. In fact, we reverted back to where we were with signi®cant import controls, export subsidies, industrial licensing and all that. This is one part of the story.

The other aspect, I guess, has to do with the vested interest of the bureaucracy and business. That is the Pranab Bardhan thesis which suggests a collusion between businessmen, large farmers and bureaucrats. There is some truth in it. You see, even now, the Bombay Club of businessmen demands level playing ®elds and more time to adjust, as if four decades haven't been enough.

The other reason is that India is a big country and can sustain the importsubstitution strategy. That excuse began to wear thin by the mid-1960s and by the mid-1970s no one in his/her right mind would hold that view.

You have said that during Rajiv Gandhi's attempts at liberalisation, the necessary structures weren't built. Have we got such structures now? Now it is much more systematic, there is an understanding that different parts have to hang together, which was not there earlier. The 1991 reforms were systemic and conceived as a package of co-ordinated action in several areas. And there is a signi®cant element of the population, politically signi®cant element of the population, which has bene®ted from liberalisation. They wouldn't like to go back on reforms. I am talking about the middle class and the younger generation, they wouldn't like to go back. I am con®dent we won't revert back to the licensing system and the Permit Raj. But whether we will go forward at full speed or not, I am

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not sanguine. No political party of any consequence is advocating a return to pre-reform system of economic management. A lot more needs to be done. As I said in my September 1996 paper on reforms, `The reality in the contemporary global economy is that without a considerable acceleration and deepening reforms, India cannot hope to achieve the rapid and sustained growth needed to eliminate abject poverty and will be left behind by other Asian Countries.'

Thank you for talking to me on such a wide range of issues.

8 J.N. Bhagwati Jagdish Bhagwati's work has so dominated thinking on trade theory and policy for the last three decades that Paul Samuelson has described it as `The Age of Bhagwati' ± in international trade. Precocious, public nuisance and contrary are some of the other epithets, less elevated than Samuelson's tribute, that Bhagwati and his work have attracted. Only someone precocious could have produced an innovative article on trade and growth whilst still an undergraduate at Cambridge. Policy-makers in the US and elsewhere, the targets of his tenacious and many-pronged attack on protectionism, wouldn't dispute that he is a public nuisance. Neither his pen nor his tongue appears to run dry even after 40 books (authored and edited) and more than 250 articles on trade theory, trade policy, political economy and a variety of development issues including a vast number relating to India. Bhagwati was educated at the Universities of Bombay, Cambridge, Oxford and MIT. He is Arthur Lehman Professor of Economics and Professor of Political Science at Columbia University. *

You did your ®rst degree in commerce at Sydenham College. You then went to Cambridge to read economics. What attracted you to economics? I was not interested in making money. I did not see commerce as a career. I was interested in scholarship, and economics seemed like a very natural progression from commerce. I got really interested in economics at Cambridge.

At Cambridge, Kaldor, Joan Robinson and others were your teachers. Who in¯uenced you most? Yes, I had the good luck to be there when Joan Robinson and Nicky Kaldor were lecturing. They were the two major presences. Richard Kahn was also there, but I saw him only a few times. And then there was Harry Johnson lecturing on international trade. He was young, full of vitality and he was 138

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interested in students. He got me interested in international trade. I got interested in economics because of the fascinating group of people there. It became clear that economics could be used for social change, and coming from India, that was important to me. You suddenly saw the power of economics in thinking about policy issues. In those days, English economics was not just about chess problems and fun and games. English economists reacted to real world problems and did what today you would call medium-level theory. Economics is an intellectual discipline, a social science, which can help you with policy issues. This was important to me coming from a poor country.

You went to MIT from Cambridge. Yes, MIT was in many ways, I suppose it still is, the leading economics department in the world. My teachers suggested I go there for a year. Harry Johnson helped me apply to MIT. I got the Ford Foundation fellowship given to ®nance a developing-country student at MIT. Subsequently, Ronald Findlay (from Burma) and Carlos Diaz Alejandro (from Cuba) also got the same MIT fellowship. So there is a good track record for that fellowship, I would say.

From MIT you went to Nuf®eld College at Oxford. Yes, because after about nine months, I had learned as much as I wanted to learn at MIT. I enjoyed England, I am an anglophile, and I wanted to get back. Nuf®eld had just started; it was still being built. They had studentships. I applied and got one. When I arrived, half the college was not yet built. But all kinds of college policies were being established, because it was going to be a co-educational college, one of the very early ones. I was involved in very `radical' issues, as Chairman of the Junior Common Room, on policies such as whether women and men should be on the same staircase and whether people could bring their wives into lunch and other such issues. I can tell you a funny story about it all. Padma (Desai), who was not my wife then, was coming back from Harvard and I wanted to put her up for the night in college on her way to India. So I went to the Chairman of the Senior Common Room, David Butler, who was very bachelorish in those days and now he is married to Marion Butler (Professor of English at Cambridge) and is very much a `family man' now. I said, `I want to put up

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a female friend in the college overnight; I hope that is OK.' He hummed and hawed and was obviously deeply embarrassed and said, `Oh, you can do that, provided you treat her the way you would treat a male guest.' So I said mischievously: `What do you take me for, a homosexual?' Today, my image, at least in India, is mistakenly that of a conservative simply because I believe in markets and free trade. But, at Nuf®eld, I was already ®ghting for gender equality and later pursued this question in my research as well on returning to India.

Then you went back to India from Nuf®eld. Yes, after about two years. Professor Mahalanobis was passing through Oxford. One of his great strengths was that he could spot talent. He also had no hang-ups about picking up talented people from anywhere and promoting them. That is how he built up the Indian Statistical Institute (ISI) at Calcutta to world-class status. He had set up a cell of the ISI in the Planning Commission at Delhi. Professors working there were loaned to the Perspective Planning Division of the Planning Commission, which was then headed by Pitambar Pant, a long-time associate of the `Professor', as Mahalanobis was fondly called. Mahalanobis asked me to come back. So I resigned my fellowship at Nuf®eld and went to the Indian Statistical Institute at Delhi with the rank of a Professor. I was the only economist there. Ashok Rudra was there too, but he really was a statistician, and extremely clever. So I was one of `the Professor's boys'.

What did you work on at the ISI? My main work there from the beginning was on income distribution and poverty, a fact that would surprise many in India. Pitambar Pant had the idea that the country should aim at providing minimum levels of living for the poor, the bottom three deciles of the population. Then T.N. Srinivasan and B.S. Minhas joined us: both were on the way to being world-class economists. We became a terri®c group of economists, assisting and advising Pitambar Pant. Many distinguished economists also passed through, Ian Little, Alan Manne and Sir Donald MacDougall among them. But basically, we three were the `think tank'.

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From the ISI, you moved to Delhi School of Economics as Professor of International Trade. Yes, in 1963, I moved to Delhi School as Professor of International Trade. Professor Ganguly had become Vice-Chancellor and there was what was called a `leave vacancy'. I still remember the bureaucracy of those days. I received a `warm' letter from the Registrar saying, `You have been appointed Professor of International Trade to ®ll the leave vacancy caused by Professor Ganguly's departure. You will not get any provident fund or fringe bene®ts, and you will be subject to dismissal without notice'!

When did you go to MIT? In 1968. In 1966±67, I visited Columbia for a year, at which point both Columbia and MIT offered me a tenured Professorship. I accepted the MIT offer, but then I decided to go back to Delhi School for a year since it would have been unfair to disappear without giving them time to adjust.

Your ®rst major paper was on Immiserising Growth. Yes, it is one of my best-known papers. I thought of the idea and started working on it in my ®rst year itself at Cambridge as an undergraduate. Harry Johnson encouraged me; in fact, he became my de facto supervisor. He was a very warm person, enormously helpful to students and much loved by them. He became my role model. I help my students and I am overwhelmed by the effusion of warmth of my students for me. I have been given three festschrifts, one organised by you at Lancaster. Johnson helped me publish the Immiserising Growth paper. I had sent it to the Quarterly Journal of Economics, but it was rejected. Then Harry Johnson suggested I send it to the Review of Economic Studies. It came out in June 1958, became one of the famous papers in economics, and launched me on my career.

When did you begin work on the 1968 `Survey of International Trade' paper in The Economic Journal? I wrote this paper when I went back from MIT to Oxford. Roy Harrod was in charge of a major conference to be held in Brissago. Paul Samuelson was

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supposed to write the lead paper. But a month before the conference, one of his triplets fell sick and he opted out. There was no paper from him either. Apparently he had planned to write the paper at the last moment, the way he was reputed to prepare his lectures. We used to say at MIT that the quality of his lectures depended on whether he got into the elevator on the ground ¯oor right away or it took him ®ve minutes: If the latter, the lecture was better! So Harrod came to me and said, we have a problem, could you write the paper in about three weeks? It was such a big opportunity, because unlike today, there were few conferences in those days. I could not turn Harrod down, even though I was petri®ed at the short time available and the daunting nature of the task. It was as if Laurence Olivier had dropped out and I, an understudy, was suddenly playing Hamlet, the Prince. It was a big break. All the top international economists including Haberler, Harrod, Johnson, Ohlin and Kindleberger were at the conference.

That is when you were called an agnostic on free trade. Right, I was accused of agnosticism on policy. I was reporting on what Haberler had said in his 1950 paper in The Economic Journal, to the effect that if you had distortions or market failure in the economy, you could not rank-order free trade and autarchy. Haberler was really undermining the case for free trade, which is a bit surprising because he himself was a free trader. I was not yet into policy, I was a theorist then. I was jumped upon by people who were into policy and told that what I was saying was nihilistic.

This discussion later resulted in the famous 1963 paper with V.K. Ramaswami on domestic distortions and trade in the Journal of Political Economy. Yes, perhaps my most important paper on commercial policy and trade theory. There we put out the view that if you could ®x domestic market failures with appropriate domestic policy instruments, you could restore free trade. Another way of looking at it is to say that you must have two policy instruments, one for trade ± the free trade instrument ± and another for ®xing domestic distortions or market failure. This was a big breakthrough. This paper is a classic in the literature on the theory of trade policy; it gets you away from nihilism about free trade.

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So, in a sense, free trade becomes the rule rather than the exception. It was the other way round before your paper was published. Exactly, it is just that. You see, the most important papers in economics are not complex. They turn on how you look at a problem. It is not the complexity of your paper that matters, it is the way you transform the way a problem has been conventionally viewed. This is why the distortion paper is important: it overturned almost 200 years of theorising about free trade.

Isn't it ironic that you wrote this paper, putting free trade back on the agenda in New Delhi, where import-substitution was the accepted policy? And you wrote it with the late V.K. Ramaswami, who as Secretary to the Commerce Ministry, was implementing the policy. Of course, I can't speak for why Ramaswami came to it. In those days, I was thinking about the problem as a trained trade theorist. I was also thinking about policy, being close to policy-making at ISI where I worked mainly on income distribution. I had developed a close friendship with Ramaswami and I used to ask him questions on policy: How do you take these decisions? In particular, as the economist operating industrial licensing, how do you choose between diesel engines and tractors or between the production of Fiat cars and other types of cars for awarding or rejecting industrial licenses and associated protection?. Ramaswami confessed to me that he took the decisions but had no meaningful criteria for these decisions; there was really no theory you could bring to bear on these policy choices. In the Planning Commission also, I used to ask how various targets were set. When you looked at the targets carefully, you found no consistency, no optimality and no economic principles that make any sense. Besides, once set, these targets were actually turning into constrictive devices. I began to think seriously about these issues. I had no left-wing constituency to worry about, unlike our Calcutta colleagues. Temperamentally, I also do not let others decide for me what I think and do. In 1965, Minister C. Subramaniam and Dr I.G. Patel asked me to study the question of devaluation, as it was clear that the rupee was overvalued. I wrote a lengthy report on the subject for the Ministry of Finance. That is when I developed the concept of export bias (resulting from overvaluation), developing it further in my Frank Graham lecture32 in 1968. Then Professor Balassa also came out with the concept, independently of my work I believe.

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But you were ®ghting against a whole lot of people who didn't believe in exports. Absolutely. I said you could do away with both export subsidies (which had grown hugely) and import restrictions and unify the exchange rate. They all jumped on me, including the late Professor A.K. Dasgupta. That is how the controversy started. Nearly all of the old order economists were against devaluation. Ultimately, I won out. At one stage, C. Subramaniam enlisted me to sell the idea of devaluation to Mrs Indira Gandhi who was then the Prime Minister, taking me to see her.

But in the beginning, say until the early 1960s, you too supported the importsubstitution strategy. Yes, when I ®rst came back from Oxford, we all were supporters of the policy. For a couple of years, we were all export pessimists. Like everyone else, I was a prisoner of my training. But I got off the bus very quickly once I saw the inef®ciencies of import-substitution. I don't know anyone whom we respected who was against import-substitution in those days. B.R. Shenoy was a vocal opponent but we (wrongly) put him down as a libertarian and an ideologue.

The protectionists, though, can always fall back on non-economic objectives to defend their case. It is interesting that you say that. Reminds me of Kindleberger's recent review of my latest book of essays A Stream of Windows.33 He says very nice things about the book, but also misinterprets me and says, `unfortunately we have lost our MIT boy to Chicago'. He thinks I do not pay enough attention to factors such as culture. In my book on Protectionism,34 I explicitly address the issue of culture. The question is not whether you should encourage cultural objectives such as promoting locally made ®lms, but how you do it. If you do it by protecting domestic movie-makers with import controls on Hollywood ®lms, it doesn't really help them. What you should do is encourage local production through subsidies ± by setting up a Film Institute, for example, which supports the making of local ®lms, and then let them compete against foreign producers. What I am saying is ± what we teach our students is what is called the theory of `non-economic objectives' and optional policy intervention'. The case for free trade is thus far more sophisticated than its critics think.

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You wrote often and kindly about Raul Prebisch, who is sometimes considered to be one of the architects of import-substitution policies that you criticise. Why? Raul Prebisch was a man of great distinction and there were many attractive sides to his personality. Unfortunately, he went wrong in advocating import-substitution. I do honour the man, but one has to say he went down the wrong road. Young Latin Americans today are prepared to say it. That enables them to embrace boldly new policies. But in India, we are not prepared to do this: we build up cult ®gures instead. We should honour people for their scholarship and achievements, but not embrace their policy advice when it is patently wrong. For instance, when Rajiv Gandhi wanted to introduce reforms, he talked to a lot of people like myself who were keen on reforms, but then reappointed Professor Sukhamoy Chakravarty as Chairman of his Council of Advisors. Sukhamoy was a great scholar, but his policy preferences belonged to an era that the young Prime Minister was keen to put behind him. If you do this kind of thing, the Civil Service gets mixed messages. So what you don't get in India is clarity of purpose.

Did the East Asian experience reinforce your conversion to free trade? No, the East Asian experience came much later. Mine was an intellectual conversion based on an examination of both the theory and the policy of protectionism. It was back in 1962 that I began to change my views. Before that, I remember being sent to Japan as a member of a Committee of Wise Men, consisting of P.C. Mahalanobis, C.D. Deshmukh and Bharat Ram. I was talking to Saburo Okita, the Japanese economist, and telling him ± `you don't understand that external markets are tight, you can't promote exports and therefore import-substitution was desirable for Japan too.' Elasticity pessimism was all over the place at that time and I shared belief in it. But all that vanished by 1964/65.

It can be argued that at that time Japan was not doing all that well in external markets and other East Asian countries captured external markets. India didn't have such an opportunity. You are wrong, I am afraid. What you observe is a standard ladder of comparative advantage. When one rung is vacated by a country and it

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moves up, another country occupies the vacated rung. Continuous upgrading goes on as technology becomes sophisticated. There is a chart in Chapter 1 of my book, A Stream of Windows, prepared by Ross Garnaut, the Australian economist. There he shows that Japan's net exports of labour-intensive goods as a proportion of world trade in these goods went down steadily from 1970 to 1980, making room for the East Asian countries. Then in the 1980s, their share went down and guess who is coming up ± China. So these changes are not additive, there is a progression. As you accumulate, you move out of labour-intensive production, the Rybczyinski theorem applies. As you accumulate you move out of labour-intensive production, and others move in. So, the only thing that we learned from East Asia is that we had been foolish in thinking there were no export markets. That is also a selfful®lling prophecy. If you believe there are no export markets, you will not invest for exports, only for the home market.

Your book with Padma Desai on India35 built on your theoretical work and attempted to measure the costs of protection. Yes, Padma should get credit for that work. She had a book on importsubstitution and she had actually looked at how the Tariff Commission worked and how it decided on tariff levels. Again, she found there was not much economic analysis in decisions about tariff levels. Tariffs were automatically granted on a cost-plus basis! This is what Max Corden later called `made to measure' protection and we have called `automatic' protection. The beauty of the book with Padma was that it built up a case against import-substitution from many directions. We didn't do econometrics, but we did a lot of institutional and analytical work to see how decisions were taken, what were the criteria for the decisions, and thus built up a strong case against India's inward-looking policies.

The system was very complex. But there were economic models on which the complex edi®ce was built. Sukhamoy Chakravarty used to call them `simple decision' models. Take the decision to have heavy industry. This followed from a `simple decision' model that you can't produce and export more consumer goods and import more investment goods. Therefore, growth requires that you produce the investment goods (i.e. heavy industry) yourself. But this model led to bad policy because it was based on the erroneous assumption

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of export pessimism. The same mistake was made by the Raj±Sen model, a variant on the same theme, against which I wrote at the time. Moreover, this led to other mistakes. Once you want to establish capitalintensive heavy industry, you have to do it in the public sector because the private sector won't invest in it the amount you want. This is where we got a heavy reinforcement of public sector enterprises. Given their inef®ciency, which the Bhagwati±Desai book also highlighted, they cut into India's savings effort as well.

So the establishment of public enterprises was a consequence of this need for accumulation, not so much social justice, income distribution and all that. No, the decision to establish public enterprises was always savings oriented in my opinion. I was in¯uenced by Professor Mahalanobis who was saying that if we have public enterprises, you don't have to worry about taxing the private sector for savings, because you simply have access to the pro®ts of the public enterprises. It was because of all this that Padma Desai and I wrote extensively about public enterprises in our 1970 book on India. It is not that we were ideologically against public enterprises: far from it. Rather, we had already begun to see how our assumptions about the public sector had been, not just too optimistic, but downright wrong.

Most American economists supported the overall Indian development strategy, I am told. Yes, everybody was rooting for India's success because India was pitted against China which was a totalitarian regime. These days, with the end of the Cold War, I don't think anyone abroad really cares whether we succeed or not. It is not hostility, it is just indifference.

Looking at the other side of the picture, where do jobs come from if you adopt a free trade policy or an EP policy? Generally speaking, trade (in a static analysis) does not create jobs; it reshuf¯es jobs and creates `better jobs' while giving up on `worse jobs'. But, in the dynamic view, it can create jobs because export-oriented countries have managed high growth rates and growth generates jobs. In any case, where is the evidence that import-substitution generates growth and jobs?

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The controversy is fed by econometric work which attempts to relate exports or outward orientation to growth and ®nds the results inconclusive. There are so many things going on which regressions can't pick up. For example when we had the devaluation in 1966, there was also a huge harvest failure at the same time. And exports would have gone down anyway by a substantial amount, devaluation or no devaluation. T.N. Srinivasan and I concluded that, once the effects of the bad harvests were allowed for, the devaluation was a success. It is incumbent on you to be more sophisticated. I am worried about the simple-minded cross-country regressions which are now multiplying. Jeffrey Sachs produces one set of regressions to prove trade is good. Then Lance Taylor or Danny Rodrik changes a variable, a proxy, or a lag or whatever and shows trade doesn't matter. So, to me this is `mutual assured destruction' among regression-mongers. We really have to probe various mechanisms through which trade impacts on growth. This is what T.N. Srinivasan and I tried to do in our National Bureau of Economic Research book on India.36 We have also written a paper recently, arguing against Rodrik's criticisms of the view that EP strategy improves growth rates.

What about the size of countries? There are those who argue EP is a small country phenomenon. Why should size matter? EP is good for everyone, more or less.

It could be argued that homogeneity of population makes it easier to promote outward-looking policies. Large size promotes insularity. Yes, there is something to that. But a large country like the US has been fairly open, at least in the last 50 years.

I guess there is considerable support for liberalisation in India from the middle-income groups and the younger generation. But there is still some way to go. Yes, we have still a long way to go. We still have signi®cant tariffs and quotas; quotas will however be reduced because we lost to the US the WTO case brought against our import restrictions under Article 18(b).

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Could we revert back to pre-1991 levels of protection? No, I do not think we will do that. Rather, the problem is with moving ahead. It is like a cart which is stuck in the mud, it will move neither backward nor forward. I don't think we will move back on trade or foreign investment. Even if there is a foreign exchange crisis, it nowadays leads to liberalisation rather than tightening of import controls. A crisis also compels you to encourage in¯ows of foreign investment.

At present, we appear to have gone a long way in liberalising foreign investment, much further than trade. We still have tariffs on consumer goods. This would result in tariff-jumping foreign investment. I guess this was clear to our policy makers, but they had to retain tariffs on consumer goods for political reasons. I guess there are several reasons for this. Lobbying for tariffs by highpowered industrialists is one reason. In fact, lobbyists would have asked for high effective rates of protection ± low tariffs on intermediates but high tariffs on ®nal goods. There was also some bad advice from economists. The Chelliah Report, otherwise excellent, set out different categories of goods on which tariffs should be reduced differentially instead of saying you should liberalise across the board.

What would you do with the loss-making public enterprises? Several solutions have been suggested. I think one way to get at them is the indirect way the Chinese did it to begin with, though their current programme is for privatisation. The Chinese method was to impose a hard budget constraint on the Stateowned enterprises and let the private sector move in as rivals, thus a sort of crowding the state enterprises in a pincer movement. But this approach will work only if you are able to stick to the hard budget constraint.

And then there are the labour laws which compound the problem. Yes, that is a tough problem. The ILO is pushing for labour unions and for labour rights to be recognised as fundamental rights. I agree. But those rights have to be quali®ed. Along with the rights, we should have

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obligations. The record of irresponsible unions in Britain and in Peron's Argentina, and even our own in India, is not exactly heart-warming. We therefore need to have labour protection, but also labour obligations with penalties for counterproductive behaviour that grossly and gratuitously compromises productivity.

On a related matter, do you think that the movement to impose higher labour standards on us by Western nations such as the US, making them a precondition for WTO-guaranteed market access, is because of their fear of competition from us? Yes, that is certainly part of the reason. I have little doubt that labour unions are largely motivated by their worry about the competitiveness of our exports and would like to raise our production costs. You can see this from the fact that the AFL-CIO, the leading union organisation in the US, trained a lot of young students last summer through internships to agitate against sweatshops. But they all wound up screaming on campuses against multinationals paying low wages ± which is certainly not the same as sweatshops ± in Guatemala and elsewhere abroad, while ignoring the presence of real sweatshops (that violate safety and minimum-wage standards) in the US itself. That surely re¯ected the competitiveness concerns of the unions: they were concerned about US ®rms going abroad rather than sweatshops per se. But there are also morally motivated groups which wish to extend labour rights everywhere regardless of competitiveness reasons. My response to them is: it is better to pursue these `social' and `moral' agendas in appropriate agencies such as the ILO and UNICEF. I have written extensively on this proposal. I have also recently organised a Statement by Third World Intellectuals and NGOs which develops this viewpoint and argues against `Linkage' of such labour and other social agendas to WTO.

At the same time, the left in the host countries complain that the multinationals pay too high a wage and create a labour aristocracy in these countries. This argument, of course, goes back to the 1960s. In the US, the young activists want multinationals to pay even higher wages. Workers in foreign ®rms are already paid a premium relative to those who work in locally owned ®rms. My stakeholder position is not that labour should be paid even higher wages for the lucky few, but that

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the multinationals should invest money in the community so that others pro®t also. That is the kind of humanitarian stakeholding I would like to see. Many ®rms do that here in the US, but they don't do it enough in developing countries. I would urge them to play the kind of role that they play here when they operate abroad in India, Bangladesh or wherever.

Some of the developed countries are keen to make higher labour and environmental standards a precondition for WTO-guaranteed market access by our producers. Are our NGOs and governments looking at these threats? Few do, I am now in touch with NGOs in the Third World ± India and Malaysia in particular. I am saying to them that they should mobilise. I am planning a Third World Intellectuals and NGOs statement on the subject. You know, in September there is a WTO ministerial at which the dimensions of the next round of trade negotiations will be discussed. The labour unions and NGOs here are taking 10,000 people to Seattle to agitate for the inclusion of a Social Clause in the WTO. We have to counter that with our own NGOs who speak to our viewpoints.

May I ask you about education? In your Radhakrishnan lectures,37 you talk about illiteracy and under-investment in primary education in India. I would emphasise that incentives matter here. People must have an economic incentive to send their children to school rather than to use them to work. There are cases where schools have been built and children haven't gone to school. Lots of people have documented these facts in evaluation reports. This is not news as far as I am concerned. We have to ask why children don't go to school. One thing, we can say, based upon the work of Becker on education, is that people do take economic factors into account when deciding whether or not to send their children to school. If you are at the margin of subsistence, the opportunity cost of sending children to school is very high. Losing a rupee of income could be fatal to your tight budget. Hence, if the returns to education improve, given the costs, the greater will be the incentive to send children to school. But social beliefs can also matter here. Myron Weiner makes the point that in today's developed societies, social beliefs often provided the countervailing force to low pecuniary returns in education. Thus, in Prussia and Scotland, until the Protestant Reformation did away with them, the Catholic priests were the intermediaries to God: they prayed for

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you. With Protestantism, one got Bible Schools, so that children could learn to read the Bible instead of relying on the priests. His argument is that in the Indian case, unfortunately, social factors have worked against education. The caste system, instead of providing a countervailing force, actually reinforces lack of social and economic mobility and hence reduces further the incentive to send children to school. So he is saying that there is no incentive in the system provided by religion and the social structure for learning. But then if you bring in a rapidly growing economy which provides paying jobs, people will invest in learning. In other words, what the social factors can't do, economic factors can. That is why I think that, if we had experienced rapid growth, rather than the 3±3.5 per cent we had for long, it would have made a big difference. Our policy failure is that we did not generate growth: poverty and illiteracy are both the result of these growth-reducing policy failures.

Talking about labour ¯ows, I would like to ask you if you have changed your position on brain drain. In your recent book A Stream of Windows, you seem to advocate freer mobility for skilled labour. On brain drain, I changed my views some time ago. Earlier, I was coming to it from the model which said that skilled manpower going out of developing countries would create problems at home. But now I have been in¯uenced by my work on what I call the diaspora model. It is that you really can gain in many ways by having your people here in the US, integrating them with the institutions here and establishing connections. There are a number of bene®ts which outweigh the losses. So, I now look upon emigration of skilled people from developing countries in a more benign fashion.

Many skilled people are going back to India. Software engineers, for example. That illustrates why I have changed my policy position. They are part of the diaspora.

Recently you have written on unskilled labour ¯ows. Here too your views are benign. Yes, my views are also rather benign on unskilled immigrants into the US. I am in the middle of a book on the issue. The adverse effects of even illegal immigration have been grossly exaggerated here. The basic argument here

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is that unskilled illegal immigrants from Mexico are driving down the real wages of workers here. Now, if you are a liberal and worry about the poor here, you should worry about the poor in Mexico also. Moreover, outputmix changes seem to be absorbing the in¯ux, without a serious decline in wages: this is the Rybczynski effect, of course. Finally, if you look at the data, there is an annual in¯ow only of 200,000, whereas the population of the US is 280 million and the labour force is around 190 million. Remember also that the supply of capital is also increasing and keeps the aggregate capital to labour ratio in balance, and so once again, there should not be much of an impact on real wages. The fact that illegal immigrants are unskilled has led to a lot of anxiety as well. But this raises another issue which has to do with the welfare of the immigrant himself/herself in this country of immigrants: we should not worry only about the welfare impact of his/her arrival on others. Here, the ethics of the choice of immigrants must point in favour of the unskilled. Thus imagine an island paradise somewhere which is owned by America. You are allowed to take in one more person. Which will you choose, a rich doctor from India or an unskilled peasant from Haiti?

The unskilled peasant. Of course the Americans would say exactly that. This is what the Statue of Liberty is all about, the huddled masses and all that. Then let us look at the impact of the arrival of the immigrant on us here. It raises the externality issue. You can't assume that the externality from the doctor is greater than that from the peasant. But when it comes to implementing policy, you don't know how to measure externalities. As Professor Solow says wittily, `I know there are lots of industries with externalities, but my problem is that I don't know which ones they are.' The conservatives here think there are externalities associated only with skilled immigrants. But I can argue that, when unskilled immigrants take up jobs as housemaids, for instance, that enables women to go to work and that this is a positive externality.

The frequent argument though is that unskilled immigrants accept low wages and create unemployment for local labour. A lot of immigrants come into the inner cities and take up jobs. But they are demonstrating that, where locals complain that employment is hard to ®nd, they actually ®nd work to do. It is not that there is some `iron

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ceiling' on employment and work. The immigrants are demonstrating that you can ®nd work and that `structural-cum-cultural' barriers to ®nding gainful work must be examined. This is a big positive externality.

You are surely not advocating free immigration without controls; there would be problems if you remove all controls. I agree. Huge rates of immigrants can create social problems. We have to worry about the place at which immigration occurs. But that still leaves us more relaxed about immigration than most immigration opponents.

Your views on immigration now complement your views on trade and direct foreign investment. However, you have recently advocated capital controls. Yes, but not quite. I am talking about monitoring a willingness to tax capital ¯ows. If you face suddenly huge capital out¯ows, however, temporary controls make sense. Thus, I thought it was absurd that the IMF did not insist that Russia should restrict out¯ows when the IMF loan of $5 billion was immediately taken out as Russia defended the rouble. As Padma Desai, now a leading Russian expert in the US, has argued, it was wrong to eschew capital controls when the Russian economy was in chaos, following the Asian crisis and the collapse of oil prices, and it could be reasonably forecast that the defense of the ruble, while capital out¯ows were permitted, would simply `eat up' the IMF loan.

Thank you for talking to me on such a wide range of issues including your recent views on brain drain.

9 Ashok V. Desai Ashok Desai likes to be known as an extremist economist. But there is nothing extremist about his various pronouncements on economic policy, only provocative and contentious. Educated at Bombay University and Cambridge, Desai has donned many hats ± academic, consultant to international agencies, economic advisor and journalist. He has written extensively on technology and energy issues. Desai was one of those who was present at the birth of the 1991 economic liberalisation policies, he was economic advisor at the Department of Economic Affairs, Ministry of Finance from 1991 to 1993. His publications include several books on the economics of energy and the widely reviewed book titled My Economic Affair, which outlines a blueprint for further reforms born out of his experience as Economic Adviser. Currently, Desai is Consulting Editor of Business Standard.

*

Like most of our well-known economists you were trained at Cambridge. Yes, I ®rst did commerce in Bombay at Sydenham College and then went to Cambridge. I had a teacher at Sydenham called G.R. Dikshit who taught us economic history. He was an unpopular teacher, students used to bunk his classes. Most students there wanted to become chartered accountants; for them, economic history was irrelevant. But he made economics interesting for me.

Who taught you at Cambridge? Nicky Kaldor and Joan Robinson. What I think we all learnt at Cambridge was to think clearly, how to cut out nonsense. This is a characteristic of all Cambridge economists.

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How much of Indian socialism and economic policy was in¯uenced by Cambridge? Cambridge probably did in¯uence our socialistic politics. Nehru was at Cambridge, so was Mahalanobis. But they were not Cambridge economists.

Why did we persist with import-substitution, licensing and state intervention in economic activity for nearly 40 years? There was the nexus between industry and politicians. Industry did extremely well out of import-substitution, which was based on domestic availability principle. If something was available within the country, then its imports were banned; hence there were huge pro®ts in making anything at any cost. This was extremely nice for the industrialists. It was only when the economy started running into market problems in the 1980s that people started having doubts about it. I ®rst started writing in newspapers in 1968, I think. I have been consistently a liberal, I have always written against these things. But at that time, it was a heretical view; it was simply not done to express it. One reason why I wrote so much in the newspapers at that time was that no one was writing anything of that sort.

Was the nexus between politics and business so strong that even Nehru could not do anything about it? Nehru did not want to do anything about it, Nehru was perhaps not even aware that this nexus was growing. The nexus started growing only after the policy of import substitution was introduced in 1956. And Nehru ignored the signs; he didn't concern himself with money, and so on. The nexus is really a phenomenon of the 1960s.

In one of your columns you say, `I think Nehru was a patriot, but the harm he did to India's economic performance is incalculable.' Could you explain that a bit more? I grew up in the Nehru era and I have heard him speak in public meetings. I was a great admirer of Nehru. He was really a charismatic

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man, he had a terri®c presence, and I was a follower of Nehru. It was only when I came back to India from Britain in 1964 and saw what his policies were leading to that I started changing my views. I was a lecturer at Bombay University. I was a bachelor, I used to eat out in restaurants, and there was the great food shortage in 1966. Shastri ordered all restaurants to close on Mondays, so I used to starve on those days. That was when I started thinking whether these hardships were necessary.

But you say Nehru did incalculable harm. Well, the harm can be measured in terms of the difference in the growth rates of the South East Asian economies, or East Asian economies and our growth rate. Korea's per capita GDP was actually lower than India's in 1961, Japan's was not much higher soon after the war. The Japanese started manufacturing cars with technology from the same people as we did; Toyota had collaborations with Morris exactly like Hindustan, and look at where they have got to today.

There are those who argue that our folly really was neglect of agriculture. It was because of PL 480. We didn't need to bother about agriculture, we had unlimited supplies of US wheat. The more we imported from them, the bigger the contribution of PL 480 to the government budget, and the bigger the plan. So there was hard money behind those policies.

You subscribe to the view that PL 480 had a negative incentive effect on domestic agriculture? No, what I would say is that the very heavy in¯ow of foreign aid during the Second and Third Five-Year Plans required a trade de®cit to absorb the capital in¯ows. In order to engineer a trade de®cit, domestic consumption had to be higher than domestic production and it just happened that this de®cit was in agriculture, because the policy of across-the-board importsubstitution in industry ensured that the de®cit could not be on account of industry.

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You have written more than once on our inef®cient bureaucracy. You have argued that our inef®cient bureaucracy has dampened enterprise, but Indian entrepreneurs thrive in Britain because Britain has an ef®cient bureaucracy. Is our bureaucracy inef®cient because India is yet to learn to cope with problems the democratic process poses for bureaucracy? I don't think we are a democracy at all. I think we are inheritors of the British colonial state and this hostility between business and bureaucracy goes back to the colonial days. Civil servants were really ministers in the colonial times; they were quite unapproachable and extremely unsympathetic to industry and trade. That was the tradition in which our bureaucracy was trained. And that tradition has been greatly reinforced by socialism, in two ways. One is that ideologically, from the 1950s onwards, businessmen were looked upon as traitors. Second, Mrs Gandhi, very cleverly, cut the salaries of civil servants. Until the 1950s, a civil servant earned more than a senior executive in industry. The British Indian civil servant was really paid to be the king of a district; he was paid so much that he would be the richest man in the district, and therefore, even when we became independent, he was extremely well off and then Mrs Gandhi began to cut their real salaries, and over 20 years reduced them to paupers. That is when the enmity and greed and jealousy all came into play.

But the import-substitution policy also in¯uenced the bureaucrats to get together with businessmen in a sense. All the rent-seeking and corruption we hear about these days is a consequence of the chosen strategy. No, it created jobs for them. I would say that all this corruption is very much a post-Mrs Gandhi phenomenon. You should talk to I.G. Patel. I.G. has given a couple of lectures recently on it. He talks about how clean the government was right up until 1971, and how it changed from 1971 onwards.

Beause of the reduction in bureaucrat's salaries, privileges, and so on. That's right. Also, Mrs Gandhi faced competition from the old guard in the Congress. And industry was with the old guard. So she tightened up everything, for example, she brought in MRTP38 control, to bring industrialists to heel.

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You have also written saying that bureaucrats need more freedom, freedom from whom and to do what? I think today, ministers are doing bureaucrats' work. The business of the government is basically like this. You have to take decisions which will be applicable to a very large number of cases. You want to ensure that those decisions are objective, and the way you do it is that you frame a set of rules and you follow them. Now what democracy has done is to bring politicians into the system, and they have developed a function for themselves in asking the bureaucracy to either change or circumvent the rules for the bene®t of particular constituents. Now that worked up to a point, in fact it worked too well; this is why, for example, the rules governing our taxes are so extraordinarily complicated, irrational and subjective. Because incrementally rules have been introduced to favour X or Y and together they just don't make sense. But this also gives the bureaucracy a lot of power, because when a minister wants to do something, a bureaucrat can always come up with rule 209 or whatever saying, you can't do that. So how does he get round that? What the minister does is to ®nd a compliant civil servant. So the entire process of appointment of civil servants has by now been subverted by this need of the politician.

In one of your columns, you talk about our education system, teaching of economics in particular. You say that our students of economics are brought up on a diet of Dewett and Varma.39 Are our civil servants poorly trained, especially those in the Indian Economic Service? Dewett and Varma is from my time from the 1960s, by now it must be much worse. You see, until the 1970s, possibly later, a lot of public schoolboys used to go into the civil service. The thing about public schools is not that the training is terribly good, but children of literate households go to these schools and therefore they are, from their childhood, trained well. And that element has virtually disappeared today, almost no public schoolboy goes into government any more, they are all going into industry and banking. You ®nd ± not so much in the administrative service but in the other services ± a lot of graduates of second rank universities. The best among the young IAS probationers are still very good, but a very large proportion are really very poorly trained and not just in subjects like economics, but even in English. What happens to someone who comes into the government with that sort of a background? What he does is to start following the norms. He reads a ®le

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and he ®nds there is a certain way of writing a note and he just copies it; he doesn't think any more. The other factor which prevents them from thinking is that after a year, they are sent to districts for training, and they get a strong impression that the way you rise in the civil service is not by doing good work, not through ability, but by aligning yourself to some powerful civil servant, and the powerful civil servant would have powerful friends amongst the politicians. So immediately, his attention is directed towards getting into a clique; so you ®nd very bright and optimistic probationers when they are fresh, but when you go and talk to them in the second year, they all look listless and they look away, they are not really interested in what you are telling them. So, very early on, the deterioration begins.

How do we get out of this system, what do we do? We should get out of the life-long civil service syndrome. I have said in my book40 that civil service jobs must be contractual jobs. First, we must have a prerequisite that civil servants should have a three-year probation. We should take people into the government without an exam to just make them work in the system. Once they have worked for three years or more, they should be allowed to take an exam and be appointed on the basis of their examination performance. And they should be given contracts for three years up to the age of 30, for ®ve years between 30 and 40 years of age, and contracts of 10 years beyond 40 years of age. In this way you ensure continuity, you give longer contracts as they get older, but at the same time you allow, and in fact, build in the possibility of throwing out people as the pyramid gets narrower at the top, and of bringing in new people. You can't do this unless the civil service salaries become comparable to those in the private sector. And you cannot make them comparable to the private sector unless you greatly slim down the civil service.

Did the 1991 reforms have any impact on the bureaucracy? Well, the reforms polarised the bureaucracy. The vast majority did not like the reforms at all, though some of them were extremely enthusiastic. For example, A.N. Varma was really a great force for reforms, though he was a life-long civil servant. But on the whole, they disliked it. But I would also say that the reforms have had very little impact on the government itself, they were very much a matter for the Finance Ministry and the Industry Ministry.

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And the Prime Minister's Of®ce. You had the full backing of Prime Minister Rao. I would say we had his benign neglect. I don't think he interested himself very much in reforms; and certainly he played politics. Whenever he found that the cost of doing something, costs of some reforms, was too high or the bene®ts were too low, he would block them. But on the whole he was supportive.

You were three economists spearheading the reforms. Yourself, Manmohan Singh and Rangarajan at the Bank and you had to contend with all the bureaucracy, the politicians and business. How did you do it? Was it shock treatment as the Americans would call it, or did you have some kind of a method for converting these people, or you just ignored them and got on with the job? No, you couldn't ignore them because you had to make deals with them. You see almost nothing can be done in the government without getting the agreement of some Ministry or the other. And that Ministry is not under your control, they can just put their foot down and say, `No, we don't agree, we will not allow you to do this.' So it has to be done by persuasion, and more than persuasion, you have to make deals. Usually you ®nd that they want something out of the Finance Ministry, so you say, look here, why don't you do this for me, and we will do something for you.

What happened to the Planning Commission in all this? The Planning Commission, as far as we were concerned, was irrelevant. We hardly gave it a thought. What Manmohan Singh did was to ensure that the Plan got as much money every year, as was written down in the base Plan. So he gave the same nominal amount as was decided on right at the beginning, and he let the Planning Commission distribute it. But otherwise, we simply did not bother with the Planning Commission. The Planning Commission also never came in with any intellectual inputs; but also, more positively, they never obstructed anything.

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In one of your columns, you wrote that Manmohan Singh tried to change the hearts of politicians. This must have been an uphill task. How did he reach them? He was in the Congress Party, he was a minister of the Congress. In every major congress meeting he spoke, he was attacked for the reforms. He had to defend himself, he had to explain the reforms, so in that sense he was selling the reforms to politicians. And after a time he failed; as you know, the reforms really stopped after 1993. Once the external emergency disappeared, the reforms stopped because the congress was not with him. So in that sense he failed. But he is continuing this work of persuading politicians every day, even now.

As leader of the opposition. Well, also as one of the leaders of the Congress. It is really the Congress that needs to be persuaded over reforms, not BJP. BJP would never become a reformist party. A party which says an Indian can set up a business and a foreigner can't, or that an Indian must have 26 per cent and that a foreigner must have 13 per cent, is bound to have licensing. There is no way you can enforce rules like this without licensing, and a party which believes in licensing cannot be a reformist party.

This line of reasoning has led you to advocate proportional representation. I think our political system is extremely sick. I don't think we have democracy, I think people with extremely narrow constituencies get into power; people with very suspect backgrounds get into positions of power. This political system has to be reformed. My proposal is to strengthen the parties vis-a -vis the individuals. Rajiv Gandhi tried to do that by introducing a constitutional amendment by which if less than a third of the members of a legislative party break away, they lose their seats. But a better way would be proportional representation based on a list system. In other words, people would vote for a party and the party would get seats in proportion to the votes it gets.

So you don't vote for personalities anymore? No, you could have limited introduction of persons as they do in Italy: the voter can change the list, can add names to the list.

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But do you think we are ready for that kind of an experiment yet, with a literacy rate of 56 per cent? It needs a lot of understanding on the part of voters, doesn't it? I think it is much much simpler for a voter to understand a party than a person. You have no idea how much this system is being misused. In my constituency in the 1991 elections, there were 96 candidates, and what every party was doing was to put up candidates with very similar names to those of their opponents in order to take away the votes. Ninety per cent of the candidates were not serious candidates. In the last elections there were more than 5,000 candidates in one constituency. The ballot paper was a big book. There is so much wastage involved. This system is not working.

Another provocative policy proposal you have advocated has to do with the exchange rate as a major policy instrument. You have argued that we should have zero tariffs if necessary, but manage everything through the exchange rate. I don't think anyone has advocated it before. That's the only way of abolishing the lobbying for higher tariffs. Behind that lobbying is a lot of corruption ± a lot of deals between politicians and industries. And it involves a lot of dirty business in the sense that every rise in tariff which bene®ts some industries must also hurt someone else. So it is one industrialist doing down another.

Could you explain how you would use the exchange rate as a trade policy tool? When I wrote that, I was thinking of the situation in 1998, when all the commodity industries such as plastic, steel, etc. were facing tremendous competition, and were in very bad trouble. In these circumstances, you can either protect them with tariffs as the government is now doing or you can ask what would be an objective policy, which would not involve subjective judgements. An objective policy would be to bring down the exchange rate to the point where you can ensure that a proportion of industry that you consider vital remains competitive. This was the idea; it was basically a short-term idea applied to this particular situation. But in general, I think that you should frame your exchange rate policy so as to keep your industries

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competitive. And for that you must base the exchange rate on relative wage costs. Our comparative advantage is in low labour costs, and we should maintain that advantage through exchange rate policy. In other words, if your wage goods in¯ation is higher than abroad, then you should devalue.

It is dif®cult to arrive at an optimum rate. How would you know how much to appreciate or depreciate the rate? No, I don't have to make up my mind about the optimum rate. I would just depreciate the rate up to the point where I think a suf®cient proportion of domestic industry ®nds it comfortable.

How would you ®nd the comfortable level of exchange rate? That I would decide when I get into policy-making, I don't have to decide now. But the principle is that you can't really allow entire commodity industries to disappear, you can't allow the whole steel industry, the whole metal industry to disappear, you have to save them and the way the government is trying to save them is through tariff increases, this is entirely wrong. They must be saved through a depreciation of the exchange rate.

So it would be an across-the-board cut in the exchange rate which is really a kind of uniform increase in tariffs. But it could result in differing effective rates of protection. I am arguing for zero tariffs.

Yes, that is true, but if I devalue the currency, now different industries would be affected differently depending upon elasticities, import content and so on. Most certainly, yes.

So you would have the same sort of problems you would have with administrative protection. Not at all. Some industries will expand, some will contract, but it would be a natural process.

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But the import-intensive industries would be hit harder, wouldn't they? Yes, export-intensive industries would grow faster. There would be transfer of resources from the import-competing industries to export industries.

Your suggestion arises from your belief in a market-based system. No, not at all, because it eliminates corruption. Liberalism is not so much an ideological issue for me, it is more a practical issue. I might perfectly well be a ®re-eating socialist in, let us, say Germany, simply because bureaucracy works there. Here the bureaucracy does not work, it is extremely corrupt, it is extremely inef®cient, and that's why I am for elimination of bureaucracy in trade policy by means of zero tariffs.

Paul Krugman in a recent interview with Business World says that you should have a very tight ®scal policy, which should be accompanied by an easy monetary policy. How does that square with your exchange rate policy? No. Actually, Krugman was asked what would you do in India? What he was saying essentially was that the ®scal de®cit must be brought down, or eliminated, because its consequences over time are far too serious. The de®cit is becoming unsustainable. So, in the present situation of an industrial slowdown, it is not possible to use ®scal policy to regulate the economy, therefore you must use monetary policy. But you cannot use monetary policy until you have brought down borrowings to a very low level, which requires a tight ®scal policy.

If you did that, if you tightened ®scal policy, a lot of subsidies to agriculture and low-income groups would have to go. What would it do to income distribution and poverty levels? Well, there is a study by Kirit Parikh on the impact of the public distribution system on poverty which shows that its impact is virtually zero in the vast Indo-Gangetic belt, where the bulk of the poverty lies, and that its main bene®ciaries are the urban working classes, the four Metros and a few states like West Bengal and Kerala. So the bene®ts are extremely skewed and, in fact, extremely unjust. The largest recipients of public distribution grants are the northeastern states with extremely small

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populations and the consequences are disastrous. Many of these states are ceasing to grow rice ± it is like PL480 ± and they are living by smuggling out rice, obtained from the public distribution system, smuggling rice into Bangladesh. In these circumstances, I cannot believe for a moment that the public distribution system is an anti-poverty measure. There are only two major subsidies in the central budget; there is the food subsidy and the fertiliser subsidy. The fertiliser subsidy is even worse, it does not even go to the farmers, most of it goes to loss-making government fertilisers factories.

So in your scheme, how would you take account of ideas of those who argue for increased expenditures on health and education, and women's participation in the labour force? If we tighten up our ®scal policy how are we going to manage this? The money I would save from food and fertiliser subsidies would be used for education and health. Don't use it for public consumption.

And related to that, you have written in your book and in several columns in Business World on the whole murky business of the state-owned enterprises of which about 130 are making pro®ts, but not very much, the rest are making losses. And you frequently refer to problems of privatisation. How do we go about it? How do we get rid of these white elephants? Have you come up with any answers? Yes, I have. I don't think disinvestment is the answer, because there is no market for shares, not just government shares, but any shares. The share market has collapsed. In these circumstances, privatisation would be a farce. You would virtually have to give them away ± free. All that would happen then is that some ruf®ans would get hold of these undertakings and strip them. It will not be a constructive activity. You must not sell off these enterprises, but you must certainly improve their running. The way you do it is to transfer these shares to an investment corporation which is independent of Ministers and Ministries, and which acts as a portfolio investor. It would get managers on contract for these enterprises to put them right.

So this is like a management contract, giving it to private enterprise. It is not really privatisation, they are still State-owned but privately managed. First you do this, so that the market value of the shares will go up, then sell the shares. In the case of, let us say, Maruti41 where you have no problems,

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sell the shares immediately. But in the case of heavy electricals, what can you do? You have got to get the wretched corporations running and making some pro®t before you sell them, until then, their value is zero or less than zero.

So your diagnosis of the problem of public enterprises is really bad management, corrupt bureaucracy and politicians, nothing wrong with the choice of the industry, nothing wrong with technology. No, no; that's in the past, isn't it?

Yes, but your diagnosis is based on that kind of an analysis. But the economists should never look to the past, they ask themselves what can be done now. Okay, 30 years ago all the wrong industries were chosen, but so what? What can you do about it?

Another thing that is being talked about quite a lot, we have been talking about it for the last 30 years I suppose, is China versus India. It is said that China started ®rst with economic reforms, and then they launched political reforms and therefore the success. In India, we have gone the other way round. What are your views generally about India versus China? I think this debate about ®rst and second is utterly futile. I don't really see why you should not improve education and health at the same time as you are doing something about public sector enterprises. I see no reason for arguing for any sequencing. The point is, when you are doing reforms, you do what is politically possible. Only an economist can say do this ®rst, do this next because he doesn't really have to do anything.

So in a sense, what you are saying is that the debate between India and China is futile, we shouldn't even bother about it. Well, the point about looking at any other country is to expand one's options. You see, one has to work out policy options on the basis of one's own ground circumstances. But when one is working them out, one might possibly get more ideas about what to do by looking at other countries. Other countries are not useful as models, but they are useful as mind-joggers.

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But you would single out one country, you have written quite a bit on Japan, you would hold out Japan as a model. Japan is a model in some things, not in everything. Japan is a model in having had extremely low tariffs, it has had the lowest tariffs amongst OECD countries for almost 30 years now. It is a model in having used the exchange rate actively to keep its industry competitive. It is a model in making its industry go out and compete, but it is not a model in everything.

So it is on the exports side you would look to Japan. That's so; also balance of payments management.

But it is said that there is a lot of administrative protection in Japan though not tariffs. I simply do not believe this. I think this is pure American propaganda. I have been to Japan a number of times, especially in recent years. You ®nd all sorts of western consumer goods in Japanese markets, all sorts of useless consumer goods. I don't think that the Japanese market is closed. What I do think is that the Japanese mind is closed. The Japanese don't really see why they should consume western goods when better goods are available within their country.

And you have written a lot on technology, and technology absorption. You published the ®rst of several books on technology imports into India. Recently, you have written on foreign direct investment. What are your views on foreign direct investment? It seems to be a very touchy subject here. We have never had much foreign investment in recent years, China has attracted a lot more foreign investment than India. Why is it that there is so little foreign investment in India, compared with say China or East Asian countries, or Latin American countries? Well, China has such a lot of foreign investment for two reasons. One is that foreign investments there have risen on the back of foreign trade, because Chinese exports have been rising very fast. Foreign investment has been going into export industries where there is no exchange risk, and what China has done basically is to keep export industries extremely pro®table. Secondly, China has used Hong Kong as a conduit for in¯ows of foreign investment. Non-resident Chinese are far more signi®cant

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businessmen than non-resident Indians. I would also add that another reason why China has attracted so much foreign investment, rather foreign business, is that China has no indigenous capitalist class and therefore has no one to resist foreign businessmen coming in. That's the greatest advantage it ever had.

Could it be a disadvantage in a sense if you have an indigenous business class? Yes, our businessmen are a great disadvantage in some respects.

They are worried about foreign investments coming in. Oh yes.

Foreign competition could be healthy. Foreign ®rms may also collaborate with Indian ®rms. Why is it that Indian businessmen see them as some kind of threat? Is this because 40 years of import-substitution has provided them with a closed market, and anything coming in is a problem? I think Indian businessmen welcomed foreign investment as long as the boom lasted. As long as demand was growing, output was growing, they saw great advantages in foreign investment as a carrier of foreign technology, foreign management. It's only because of this industrial slow down in recent years that they have become so hostile.

In the 1960s, you wrote about foreign collaboration and licensing agreements. In those days, India encouraged technology licensing, but not foreign investment. But now we seem to have gone the other way round. Don't you think we are doing the wrong thing at the right time, or the right thing at the wrong time? We should have allowed foreign investment then when our absorptive capacity was low, and now we should encourage licensing, because 30 years of industrialisation has taught us something, our education system has improved, there are more scientists and engineers, our technology absorptive capacity has improved. No one is forced to take in equity; if they ®nd licensing more pro®table, then they will still take a licence. What we are doing now is to give the

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businessmen the choice, if they want investment they can take it. And I don't see anything wrong with that.

All that I am saying is that there were some reasons for going in for licensing earlier, less foreign control, nationalism and all that. Maybe it was cheaper to import technology through licensing. So I am just wondering whether we are not better placed to do that now, instead of allowing foreign ®rms to come in. No, I think that our entire strategy was extremely malign. It worked like this. When a businessman saw a new product coming into India, he would go to the Commerce Ministry and get its imports banned. Then he would go to the original supplier of that product and say, `Look! You can't export to India any more, I have stopped you. But you can still make some pro®t if you give me a licence.' And that is how he went and got a licence. Then for the ®rst three or four years, he would have a monopoly of the domestic market, and he would make a lot of money. Then other people would catch on to it; they would also go and get licences and start producing. So the pro®ts of all of them would fall, and they would all go out and start the cycle with another product. This was the product cycle. I think it was extremely evil, that was what prevented India from developing technological depth in anything.

So we have ended up with a very unsophisticated and diversi®ed industrial base. That's right. Whereas now business changes so fast, competition is so intense that technology is a much more powerful tool in competition. It doesn't matter any more whether that technology is foreign or Indian. Both of them will ®nd application.

Now even after liberalisation, India has imposed tariffs and quotas on imports of consumer goods. But then we are letting in foreign investment, behind tariff walls. Are we not shooting ourselves in the foot with this sort of a policy? Well, that is what has led to this industrial slow down. What happened was, because imports of consumer goods were banned, there was a big investment boom in consumer goods. There were shortages of certain consumer durables, especially of cars, and as a result, companies, ®nance companies, grew up which would make block bookings of cars, create a

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shortage and sell cars on the condition that the buyer took a loan from them. That was the business at that time with cars and trucks, and it led to a great boom in consumer durables and in metal-based industry. That led to over-investment and over-capacity and ®nally, to the present slowdown. So it was the bias in liberalisation which was responsible for the present slow-down.

So foreign companies were making money behind tariff walls, because we let them in. Not just foreign companies, mostly Indian companies. In the case of trucks, they were all Indian companies, it does not matter who. But it was a pro®t cycle.

Yes, the foreign companies were mostly in food, drink and services. Foreign companies came into those industries because there were no imports.

Why did you go along with this policy? I think it was Chidambaram's decision. It was not our decision.

But you did advise him to take off tariffs. We advised him to take off everything. But you know how these Congressmen think, `Why should we import inessential consumer goods, wasting national resources?' and so on. So quite possibly, he believed that himself, or quite possibly he did that to please people in his party, and in business.

And ®nally there is the whole debate about foreign aid. The World Bank has recently published a report, which I am sure you will have seen. Maybe you have already written a column about it. It says aid has gone to the wrong places. What are your views on aid? Well I don't think so. What I do think is that aid programmes are in¯uenced as much by the fashions and agendas in industrial countries as

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they are by our own needs. In particular, while I was in the government, my experience was that the World Bank was greatly in¯uenced by lobbies in western countries. Aid is really a bargain between the lender and the borrower; if it has been misapplied, the misapplication is as much the responsibility of the borrower as of the lender. It is not possible for aid to be given to India unless the Indian government wants it. So mistakes, if any, are those of both the lenders and the borrowers.

Another issue talked about now has to do with regional disparities. Hence Kerala is an interesting case. In Kerala literacy rates are very high, women's participation in the labour force is high. But the growth rate in Kerala seems to be low, and to an extent Kerala seems to be sustained by repatriated earnings. What do you think about Kerala being a model for other regions in India? I think Kerala is a model of geography. For one thing, Kerala is a tropical, almost equatorial region, with extremely high rainfall, extremely fertile soil, and so part of it is good fortune, good fortune of being where it is. It is right on the coast and therefore has enormous supplies of ®sh. Secondly, because of this high soil fertility and this ease of making a living, its population is extremely dense; this high population density reduces the cost of social services especially education and health. So it is much cheaper to achieve full literacy in Kerala than it is in Rajasthan. It is quite all right for economists to keep patting Kerala on the back, but it is not simply a great achievement of the people of Kerala, it is also partly God's achievement.

I see, the same kind of comparison is made between Bengal, Bangladesh in particular and Punjab. It is suggested that it is all about how people respond to the market and the Punjabis respond better, the Bengalis don't. Why Punjab has prospered has a lot to do with the fact that it was an extremely sparsely occupied land which got canal irrigation and suddenly became much more fertile and, therefore, the average income of the farmer rose considerably. Secondly, partition led to the driving out of all the Muslims from Punjab; it actually reduced the population of Punjab, and raised the size of the farms. Thirdly, in the 1950s, all the agricultural land in Punjab was consolidated and therefore the farms are much larger entities. The land of the farmer is not distributed in 20 different parcels;

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this saves a lot of resources and time. So I think it is an extremely partial view to say that Punjab succeeded because of markets.

It responded better to markets, that's the argument, but maybe there is something more to it than that. You say it is all to do with geography. Well no, if a farmer is rich enough to have a tractor, a motor cycle, a proper house, a fridge, air conditioning, silos, etc., etc., he is likely to get himself a better education; he is more likely to act as a businessman than a farmer who has half an acre to make his living.

So to sum up, could I describe you as a liberal economist, not of the left wing, not of the right wing. You are somewhere in the middle, because you advocate exchange rate management, you advocate asset management and not privatisation, you advocate proportional representation, and you advocate virtually free foreign direct investment. On aid, you think it is all up to the borrowers not the lenders, so that makes quite a philosophy doesn't it, which comes through in your book My Economic Affair. You could call me an extremist economist. I see that in this country, people are always trimming their sails, they are always not saying what they mean because they think that what they really mean would offend someone or would harm their prospects. People are always thinking of their surroundings and their future, they are thinking of where they want to get next. In the interest of their future, they never say what they mean, and they are so used to not saying what they mean that they have forgotten how to think. Now I am in a very very lucky position, I don't want to go anywhere. I am where I want to be. I am perfectly happy where I am, I have no expectations from anyone, and therefore I can say whatever I think. I am using that privilege.

I appreciate your candid views. Thank you for talking to me.

10 K.L. Krishna Leela Krishna, one of India's reputable econometricians, is a perfectionist, as his vast number of research students would vouch. A renowned teacher of econometrics and industrial economics, widely admired for his indefatigable devotion to his research students, Krishna has been the inspiration for a large number of doctoral dissertations on a variety of issues, many of which have resulted in books and journal articles. He has been Professor of Economics at the Delhi School of Economics for more than two decades. He was Director of the School in the mid-1980s and again in the mid-1990s. As the ®rst managing editor of the Journal of Quantitative Economics for ten years, from 1985 to 1994, Krishna contributed immensely to the success of the journal. He was also President of the Indian Econometric Society for the year 1996±97. He has served as a consultant to the Planning Commission, Government of India, ESCAP (Economic and Social Council for Asia and the Paci®c) and HIID (Harvard Institute of International Development) and has sat on several committees of the Government of India as chairman, convenor or member. Krishna studied Mathematics at Andhra University and the Indian Statistical Institute, Calcutta. He obtained his doctorate in economics from the University of Chicago, in 1967.

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You were the ®rst managing editor of the Journal of Quantitative Economics. Would you like to share your experiences as the editor of the journal? The idea of starting the journal as a replacement for Sankhya, Series DQuantitative Economics came from Professors C.R. Rao and Sukhamoy Chakravarty, who were at that time the Chairman and President of the Indian Econometric Society respectively. I received much encouragement from them and Prof. A.L. Nagar who was the Editor-in-Chief of the journal. I was very happy to work with them and Prof. Kaushik Basu, who was the joint-managing editor. 174

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The Editorial Board included several eminent economists and econometricians drawn from all parts of the world. I devoted considerable time and attention to the journal for ten long years. Within a couple of years of its establishment, the journal made a mark. More than 50 per cent of the articles published in the journal were contributed by authors from advanced English-speaking countries. The journal has become an important activity of the Indian Econometrics Society. I completed my term as managing editor with a sense of achievement and satisfaction.

What are your views on econometric research in India? During the last 30 years, the quality of applied econometric research in India has improved considerably. Now a majority of the PhD theses written at the leading institutions in the country involve extensive use of econometric tools. There is an increasing use of econometric tools at halfa-dozen leading research institutes which are engaged in applied economic research and policy analysis. The Indian Econometric Society has played a signi®cant role by organising annual conferences and periodic seminars on speci®c themes, such as poverty alleviation, ®nancial sector modelling and data bases, thereby providing opportunities for young scholars to present their research ®ndings. It must be noted, however, that progress in the use of econometric tools across universities is very uneven. Concerted steps have to be taken to improve facilities in the universities and colleges for imparting instruction in quantitative methods and econometrics at the undergraduate and postgraduate levels. Libraries in Indian universities and colleges are not able to afford books and journals published abroad. Computing facilities too need to be provided to facilitate econometric work.

How good and reliable are the data? India is known to have a good statistical system. However, there is much scope for improvement, especially on data relating to the unorganised sector. Much of the work in the macroeconomics area is based on national income accounts data. This data series has some limitations, but a continuous series on a comparable basis for the post-independence period is available. A large number of macroeconometric models have been estimated for India using this data base. The models have become

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increasingly sophisticated over the years, One such recent model, the Institute of Economic Growth and Delhi School of Economics model, built by Professor. K. Krishnamurti and Professor. V. Pandit, is the largest of its kind with considerable sectoral disaggregation. Nobel laureate, Lawrence Klein, has been associated with this model right from the beginning. For organised industry, we have fairly reliable data from the Annual Survey of Industries for the last 40 years. Much of the analysis on industrial productivity is based on this data source. There are other databases for organised industry. The data for unorganised industry is much less comprehensive. Two censuses of small-scale industrial units were conducted, the ®rst in 1973 and the second in 1992±93. The data from these censuses have proved very useful for the analysis of the problems of the small-scale sector. Micro-level data for individual units have been made available to researchers for the analysis of issues such as technical ef®ciency. These data have enabled researchers to estimate deterministic and stochastic frontier models for speci®c industries. However, of®cial agencies have been reluctant to furnish micro-level data to researchers. For example, until recently, researchers could not obtain access to household survey data collected by the National Sample Survey Organisation (NSSO). A more helpful attitude in this regard is now discernible. Researchers in many universities and colleges encounter dif®culties owing to the non-availability of computer hardware and software. Much needs to be done to improve research facilities at higher educational institutions.

Have we produced too many PhDs? Is it likely that we have a PhD disease, similar to what Ronald Dore of Sussex referred to as the `diploma disease' in India? Yes, in India as a whole, we have produced a large number of PhDs. To be promoted in academia to say a Readership, you need a PhD. The University Grants Commission insists on a PhD for high level academic posts. But institutions such as the Delhi School of Economics have a reputation for quality, and high standards are sustained. For that reason, we do not get a large number of applications to read for a doctorate here at the School. It takes seven to eight years on a part-time basis and three to ®ve years on a full-time basis to complete a doctorate.

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PhD programmes in economics and even sciences like physics are not attracting students of high calibre. The pecuniary rewards are not commensurate with the effort and time involved in obtaining a good PhD degree.

What sort of training is provided at the School? The MA in economics programme at the School is the best of its kind. We have been able not only to maintain, but also improve standards. Ten to 15 per cent of our MA graduates go to the US or UK every year for higher studies. Most students, when they arrive here, have inadequate training in quantitative methods and writing skills. Majority of the theses we work on require quantitative methods. It takes time to learn and apply these techniques. Until ®ve or six years ago, computer software was a problem. What could be done in a month with adequate software used to take a year. Even now, most Indian universities remain backward with regard to quantitative skills and computational facilities. Those who come to us with only an MA degree have to do a course on research methodology. They have to write a review paper on the literature in the area of their study and in the process, they get trained in quantitative methods.

There is also a scheme of training for those who have completed a PhD programme. Yes, until recently, three or four students were selected every year and given an opportunity to study abroad for a year in universities in the US and the UK. This scheme has helped a number of young scholars. I was a member of the selection committee. The programme was reviewed by Dr I.G. Patel and he spoke highly of it. The programme, funded by the Ford Foundation, provided an opportunity for young Indian economists to keep up with recent developments in their ®eld and widen their intellectual horizons.

How much of academic research is taken seriously by policy makers? Is there a rapport between the Delhi School of Economics and policy-makers? Delhi School has had a tradition of participating in policy debates and policy making since the days of V.K.R.V. Rao and K.N. Raj. Their

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contributions are widely known. In later years, some of my erstwhile colleagues such as Sukhamoy Chakravarty and Raj Krishna were members of the planning commission. Chakravarty played an important advisory role for nearly two decades until his untimely demise in 1990. In recent years, Suresh Tendulkar has been a member of policy formulation bodies. Several former students of the School are now heading research institutions which undertake policy research sponsored by the central and state governments, and international agencies. Thus the direct or indirect involvement of the School in policy analysis has been quite substantial .

There seems to be a lot more econometric work on agricultural economics than industrial economics by economists based in India. At the time of independence, agriculture was the dominant sector in the Indian economy in terms of its share in GDP and total employment. A large proportion of Indian economists worked on problems of India's agriculture and the Indian Society of Agricultural Economics played an important role in promoting research in that area. In the last 15 years or so, considerable work in the area of industrial economics has been undertaken and several books/monographs dealing with industrial economics and industrialisation experience have been published. However, there is no Association or Society of industrial economists, as yet.

You are well known as a teacher of econometrics and supervisor of research students. Can we talk about your experience as a teacher and research guide? The excellent training I received at the Indian Statistical Institute and the University of Chicago has enabled me to be an effective teacher of econometrics and research supervisor. By focusing my attention on the methodological developments in econometrics, and econometric applications in different areas of economics, I have been able to keep myself upto-date in teaching year after year and also help a large number of research students working for MPhil and PhD degrees. I have taught a variety of courses in statistics and econometrics at the Delhi School of Economics since 1967. I have also taught industrial economics for nine to ten years. I could handle courses in statistics and econometrics with considerable ease and continually add new topics in econometrics keeping abreast of the developments in the ®eld. Our

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students who have gone to the US or the UK for higher studies after obtaining MA in economics here have felt quite comfortable while pursuing graduate courses in Econometrics abroad. However, lack of training in computer applications was a major de®ciency until recently. Thanks to the efforts of my younger colleagues, this de®ciency is being made good now. The atmosphere in the School has been very congenial for purposeful teaching. Of the 100 odd research students with whom I have interacted intimately, only about 40 per cent worked under my formal supervision, 40 per cent were under the formal supervision of my colleagues, and 20 per cent were registered with universities other than Delhi. My students have worked in a variety of areas including macroeconomics, industrial economics, international economics, consumer economics and regional economics. In research supervision, I collaborated with stalwarts such as Dr Manmohan Singh, Professor A.M. Khusro, Professor. S. Chakravarty and Professor. M. Datta Chaudhuri. In the 1980s and 1990s, I lectured in a number of all-India level refresher courses for college teachers conducted in different parts of India. These courses were sponsored by the University Grants Commission or the US Educational Foundation in India. Several of the teachers who attended these courses sought my guidance later in their research work. I have learnt a great deal through my interactions with young scholars from different parts of India and I have derived immense satisfaction from helping them. I am also a perfectionist as far as the quality of my own research is concerned.

You have been associated with several studies of industrial productivity in India. What do we know on this subject? As you know, productivity growth contributes to improvement in standard of living. For this reason, it has become the object of government policy around the world. Measurement of productivity growth in organised manufacturing has been the subject of many studies in India. Pioneering work in this area was done by my students Asit Banerji and Bishwanath Goldar. Subsequently, Isher Ahluwalia carried out a comprehensive study which has become very in¯uential. Apart from these three studies, several other papers have been published. Professor Brahmananda's book published in 1980 is very comprehensive and covers all the major sectors of the Indian Economy. I attempted a critical review of the methodologies and empirical results in 1987. Recently in 1998, Balakrishnan and Pushpangadan critically

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examined the studies undertaken after my review article. They note that the results based on production function methodology are not in agreement with those based on growth accounting methodology. Comparison of productivity growth estimates for the pre- and postliberalisation periods should be of particular interest. Ahluwalia's estimates for aggregate organised manufacturing suggest a substantial improvement in productivity growth after early 1980s. The ®ndings of more recent studies are at variance with those of Ahluwalia. We have learnt a great deal from the productivity literature. But our knowledge about productivity growth in organised manufacturing in India is far from de®nitive, notwithstanding the large body of empirical work done by a good number of economists during the last 15 to 20 years. Productivity measurement is inherently a dif®cult task and productivity estimates are very sensitive to measurement errors and underlying assumptions.

How about employment growth in manufacturing? Employment growth in organised manufacturing during the decade 1983±84 to 1993±94 was only 11 per cent compared to growth of around 24 per cent in the Indian workforce. Manufacturing employment in the unorganised manufacturing sector too registered a modest growth of only 15 per cent during this decade. In the decade preceding this, growth rates of employment in both the subsectors of manufacturing were higher, at about 31 per cent and 63 per cent. Thus, employment growth in Indian industry has decelerated over time.

Is it not also curious that we hear a lot more about India's industrial policy debates, in any case outside of India, but not so much about agriculture? This is because of India's bold bid for industrialisation and her unique experiment with the import-substitution strategy of development, at that time. India embarked on a drive towards industrialisation in the 1950s under the Mahalanobis strategy. Considerable emphasis was placed on import-substitution. Many other developing countries adopted similar strategies. The ®rst comprehensive evaluation of these strategies and policies in seven countries including India was published by Little, Scitovsky and Scott in 1970. The main conclusion of this comparative study was that industry was encouraged at the expense of agriculture and government policies discouraged both industrial and agricultural exports

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resulting in high-cost inward-looking development. India was very slow in acknowledging its policy mistakes and adopting export-oriented strategy which proved successful in several other developing countries in the 1970s and 1980s. Attempts at partial liberalisation started in the late 1970s and continued in the 1980s, with some encouraging results. Major reforms of industrial and trade policies were introduced in 1991. All this is now a familiar story and it need not be retold.

You have taken some interest in the problem of industrial sickness. What are you views? I was appointed `Special Director' for some sick companies by the Board for Industrial and Financial Reconstruction (BIFR). I have come to realise that special Directors have a very limited role to play. In my view, BIFR has not served its purpose of bringing sick companies back to health. It is very slow in decision-making and not very effective in ensuring the implementation of the rehabilitation packages. Its policies and procedures have resulted in obstructing banks and ®nancial institutions from recovering their loans from companies that have been referred to it. The Sick Industries Companies Act (SICA) should be amended to remove provisions in the Act that provide shelter for `sick' companies from creditors and tax authorities. It is heartening to note that the Government of India is planning to amend these provisions and plug the loopholes. Promoters are mainly responsible for `sickness' and under the garb of sickness, they should not be allowed to siphon off funds.

Who are the promoters? Promoters are those who initially bring in a little bit of capital and then raise money from public issue of shares on the stock market. Despite all the auditing and monitoring, much is hidden by the companies and the promoters prosper at the expense of shareholders.

But these companies surely are responsible to shareholders. Their stock can be sold. Yes, they can sell if they are prepared to incur heavy capital loss. The shareholders are helpless and wait in the hope that the companies will

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recover. When the companies are declared sick by BIFR, they are entitled to relief from public ®nancial institutions.

What are your views on the 1991 reforms and liberalisation? In 1991, I felt somewhat sceptical about the reforms because the policies suggested by the Washington Consensus had not produced the expected favourable outcome in a number of countries in the 1980s. However, the Indian experience between ®scal years 1991±92 and 1976±97 was encouraging: GDP growth during 1994±95 to 1996±97 was above 7.5 per cent per annum; in¯ation was brought under control; foreign trade expanded substantially; there was a relatively large in¯ow of foreign capital and technology. Manmohan Singh and his team managed the reforms very well. However, subsequently, the economy slowed down and the growth process has not been sustained, especially in the industrial and infrastructure sectors. Much remains to be done with regard to foreign direct investment, public sector enterprise reforms, revamping of labour laws and domestic technology development.

Has the present government persisted with the reforms? Due to political instability during the last three years or so, the reform process has been at a standstill. The present government of the National Democratic Alliance appears to be keen to accelerate the pace of reforms. There is much discussion about second-generation reforms. The major opposition party, the Congress, too is committed to the pursuit of further reform measures in the ®nancial and other sectors. Progress may be slow because of resistance from special interest groups.

What is the impact of liberalisation on poverty? We have liberalised partially and selectively. The reform measures have been directed at industry, trade, banking, capital markets, exchange rate, public ®nance and infrastructure. Agriculture has been affected indirectly. As a result of increases in the administered prices of food grains, terms of trade have changed in favour of agriculture. Over the period 1991±97, urban poverty seems to have declined, but there is little change in rural poverty, in as much as, about three-fourths of the poor live in rural areas. The decline in overall poverty appears to be

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marginal. Available evidence shows that poverty ratios declined steeply in the 1980s, but the decline in the 1990s is limited to the urban sector. A distinction between poverty and hunger is sometimes made. National Sample Survey (NSS) data give the proportion of households which report that they cannot obtain two square meals a day. This proportion dropped from 19 per cent in 1983 to less than 5 per cent in 1994. Accurate measurement of poverty is still a challenge. There are wide inter-regional variations in poverty. Over the years, a wide variety of direct anti-poverty programmes have been implemented. The public distributions system (PDS) is rather inef®cient in that only a small proportion of the programme outlay goes to the poor. Programmes based on employment seem to be more effective. In the Employment Guarantee Scheme (EGS), 90 per cent of participants are poor. Wage employment schemes seem to be more effective at targeting the poor than programmes such as the Integrated Rural Development Programme (IRDP) under which productive assets are given to the poor. Programmes run by NGOs have been more successful in terms of use of credit, repayment and empowerment of women. High rates of sustained economic growth appears to be the best povertyalleviation strategy for the long run.

Thank you for sharing your views with me on higher education in economics and productivity and employment in Indian industry.

11 Bimal Jalan Business World, a leading economic and ®nancial magazine in India, describes Bimal Jalan as a pragmatic economist, who doesn't believe in the paradigm of the right or the left, but in a mix of policies to cope with the complexities of the real world. This is a philosophy which he practises much to the despair of the Indian ®nancial press, which would like to brand him as either a Monetarist or a Keynesian. Bimal Jalan has held a number of senior civil service positions in the Indian government, including Chief Economic Advisor to the Government, Finance Secretary, Chairman of the Economic Advisory Council to the Prime Minister and member of the Planning Commission. He was also India's Executive Director at the World Bank and the IMF. Currently, he is the Governor of the Reserve Bank of India. Bimal Jalan was educated at Calcutta, Cambridge and Oxford Universities. He has been associated with several academic institutions engaged in research and teaching, and is Chairman of the Indian Statistical Institute and the Institute of Economic Growth, Delhi.

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You were educated at Cambridge. Yes, and at some other places also.

Most of India's eminent economists who in¯uenced India's economic policy in the early years were trained at Cambridge. Did Cambridge in¯uence India's inward-looking import-substitution strategy? I don't see it that way. Cambridge had a lot of in¯uence in the postKeynesian period throughout the world. It was more the prevailing economic philosophy of the time, which in¯uenced our policies. If you look at the development economics philosophy at that time whether it be at the World Bank, MIT or Cambridge, they all advocated industrialisation. 184

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Nehru was much in¯uenced by this philosophy and economists who were his advisors helped him shape speci®c policies. I don't think Nehru sort of plucked the philosophy from somewhere in the air and said I want import-substitution. India's ®ght against colonialism and the Swadeshi Movement was based around substitution of British imports with local production. There was discrimination against India's manufacturing, we were exporting cotton and importing cotton textiles. Economic deprivation in India was attributed to political power which tilted the balance of advantage in favour of Britain. The postindependence consensus was shaped by the colonial experience and the pre-war realities of trade between developed and developing countries. Both these factors ± the colonial experience and pre-war trade patterns ± strongly favoured an inward-looking and State-dominated strategy of development. The neglect of economic development during the colonial period was too deep, and had persisted for too long, to permit any other outcome other than State-managed industrialisation. You should remember that India was the ®rst developing country to consciously adopt a development strategy, which sought to break the historical and colonial patterns of trade and production through democratic means. The strategy was supported by a strong national consensus. It was also consistent with the economic thought that was then internationally dominant.

This strategy was blessed by a number of western economists at that time. Yes, as I say in the introduction to the book The Indian Economy42 that I edited, the interventionist strategy had the sanction of not only economists here, but also of leading economists in the industrial countries. The list of economists who visited India at that time is like a `who's who' of the economics profession at that time. Malenbaum, Rosenstein-Rodan, Galbraith, Oscar Lange, Ian Little, Paul Streeten, Reddaway and several others visited India. The Indian development strategy was not conceived in isolation, but it represented a fairly widespread intellectual consensus of the time.

Why did we persist with the strategy for 40 years, long after it had been discredited? First of all, there was this export pessimism phase, which lasted until 1972±73. In¯uenced by the writings of Raul Prebisch, Hans Singer and

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Ragnar Nurkse, it was believed that exports would not grow because of the limitations on the size of external markets. Coupled with this was the belief that the terms of trade of developing countries were destined to deteriorate over time regardless of the policies of developing countries. Second, once you get into the groove of a particular policy framework, as public choice theorists will tell you, it develops a momentum of its own and it is very dif®cult to break out of it. By the late 1960s, it was clear that the consequences of our trade isolation for the domestic economy would be severe. But an overhaul of the trade policy was not possible, as we were by then trapped in a low-level equilibrium trap. Third, by the mid-1960s, a powerful industry lobby had emerged. Also, there were strong labour interests in favour of protection. And vested interests grew.

You mean extensive controls led to widespread corruption? Yes, there is growing evidence of corruption. As I say in my book, in any given society, corruption is likely to grow over time if the authority of the State is weak and public sector intervention is large. This is particularly true of societies where personal relations play an overriding role in in¯uencing the behaviour of government servants towards the citizens. Civil servants and politicians who begin bending the rules for friends and relatives progress towards breaking them for personal gain. As the practice spreads and the stigma attached to corruption disappears, it gets generalised.

You argue in your book that the import-substitution strategy was successful in the initial years. How do we identify this success? Yes, if you look at economic performance between 1950 and 1965, import-substitution was the engine of growth. The results were good by historical standards. Industrial growth in the 1950s and the early 1960s was close to 8 per cent per annum. The overall growth rate was 3.5 per cent per annum, which was considerably higher than that registered by the country during the previous hundred years. Also, remember this was all ®nanced mostly from domestic savings. But then the economy went through a very negative phase between 1965 and 1980. In terms of growth, agricultural production and much else, we missed the boat. According to Rakesh Mohan, who was in the past Economic Advisor to the Ministry of Industry, the period 1965±80 was the dark age for Indian

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industry. Looking back, it was not clear to those who were in power at that time what was wrong. A number of policy initiatives were taken in the early 1970s. But at that particular point in time, the Indian policy-maker regarded exports as something separate from the domestic economy. No one had the idea that exports could be an engine of growth, to use that famous phrase. It was the belief that we needed exports only in order to balance our trade, or pay for imports. With hindsight, I can now say that the problem was that command-type planning of the Soviet variety would not work in a society which was substantially privately run and one in which producers and consumers had freedom of choice.

Was liberalisation in 1991 forced upon us or was it the culmination of a debate which was going on since the 1980s? It was a result of several factors. Re-examination of policies began with the oil crisis. There was much debate and discussion within the government. The whole process during the 1980s was a sort of self-examination, but there was no radical departure from the inward-looking strategy at that time. It was though realised that the heavy hand of government should be removed and the licensing procedures should be given up. So the rivets were being loosened.

Has the recent liberalisation increased income inequalities as some have argued? No, there is no evidence to suggest that. Most studies have, in fact, come to a more positive conclusion on this issue.

You have written on health and education. The current fashion seems to be that we should accord priority to health and education and not growth. China is often cited as an example of a country which has successfully undertaken these reforms before liberalising trade and investment. Amartya Sen has written and lectured extensively on the issue. What are your views? The link I see between liberalisation and the provision of social goods is through government ®nances. If you do not have money, what can you do? You can't have teachers, open schools or hospitals. You see, a low rate of growth, around 3.5 per cent per annum, with the industrial stagnation we had for a prolonged period, created a lot of problems for public ®nances.

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Sen is, of course, right in drawing attention to the role of public policy in improving our lives. With the help of good policies, it is possible for a poor country to do more for its people, even if its income is growing slowly, than a rich state. However, the fact remains that while the example of states both rich and poor, which have not done the right thing by their people are many, there are very few cases of poor countries that have successfully alleviated poverty without an adequate increase in national income.

The debate on growth and development is not new, but it seems to have resurfaced. The debate is about public policy, not instruments of policy. The debate is valid. You can't have high growth without literacy. There are examples from Latin America. You also have the example of Kerala, which everyone cites, of high social development without a high growth rate. But those cases are getting fewer and fewer. Both Sri Lanka and Kerala in the 1970s had revenue surpluses. They had a different culture, different ethos and they did a magni®cent job. But I do see a problem here. Now if you look at the latest data on Kerala, they have a resource problem. A recent study has concluded that there is now a need to accelerate growth rates in Kerala so that poverty alleviation programmes can be enhanced and sustained. It is just that your task becomes easier if you have high growth rather than low growth. We know enough about literacy and its impact on development. The question is how to get there.

Here, there are issues related to the opportunity costs of education, the quality of education, and access to education. We do have several institutions of higher education, especially in the South, but one worries about the quality of education. There are several questions here. One is about drop-out rates. A lot of work has been done on this issue. The feeling that the rural poor need children to help with farm work is not really valid. I have visited a number of rural areas and discussed the problems with poor people face to face. You would be surprised to see that the drop-out rates in primary schools is close to zero, because the whole village is involved in education programmes. They are constructing schools, they are totally involved, they have an interest in the future of their children. You are, though, right to be concerned about the quality of higher education. Degrees have become a status symbol. Every district wants a

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college. Salaries of college lecturers are high, they are government servants with security of tenure. Salaries amount to 80±85 per cent of the various education budgets, and what is worse, there is no accountability.

That seems to be the problem. What is the solution? The kind of subsidies we have given to higher education is unwarranted. Most colleges in the major cities are government-owned. The fees in these colleges is one-tenth of what your child would pay at the school level.

You can't privatise these institutions. You could require these colleges to charge fees, with subsidies for the poorer students. I don't know if privatisation is feasible, but I think the ®rst step is that you at least charge the same amount of fees that the schools charge. Then you can make them accountable.

The higher-income groups do not seem to have a problem. They can afford to send their children abroad to the US and England. Overseas students including students from India is big business in British universities. What can the poor do? There is one point I should put to you. The premium on education Indian society now places is not con®ned to the high-income groups. Middleclass values concerning education is remarkable. If you have an attractive school, a school which the child enjoys going to, the poorest families make ®nancial sacri®ces and send their children to school. I have met many of these parents, you would be surprised by the reaction you get.

Yes, this is all encouraging. But the problem is with providing access to education for the poor. The rich and the middle classes seem to be doing well. That is not the heart of the problem. When you talk about access for the rich, you are talking about the minority. I am all for excellent facilities for those who can afford them. There are the IITs43 and IIMs;44 this is all very well and good. If you look at the pro®le of the people who are going into schools and institutions of higher learning, it has changed dramatically. Parents of these students are not all from the civil service and the high-

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income groups. They are agriculturists, small farmers, small traders, the local doctors. The composition of students has changed.

Now I would like to talk about banking and ®nance, which you now oversee as the Governor of the Reserve Bank. What should be the principal concern for the Bank ± stabilisation or structural change or broadly put, development? No, no. I don't see this dichotomy. Look at the Federal Reserve in America. Its charter involves employment and price stability. You look at what has happened in this bastion of conservatism that is the European Central Bank, after having made all kinds of noises, they came around to the view that they should reduce interest rates because they are worried about recession, while all the monetary indicators point in a different direction. So you can't view the job of the Central Bank as one which is divorced from the rest of society. You can say that I have a job, which is different from the job say of the Planning Commission, of the Ministry of Finance, but they all have to work in concert. You can't go in opposite directions. It is possible that at some point in time, you see a con¯ict; the government wants to spend, and there are in¯ationary pressures and the Central Bank wants to restrict expenditures. So that has to be resolved. The ideal way is to prevent the government from spending, so I don't see this dichotomy. In this country, a ®rst step towards limiting the ®scal de®cit was taken in 1994, when the central government entered into a formal agreement with the Reserve Bank to limit its borrowing through the issue of ad hoc treasury bills.

But the con¯ict becomes sharper, when you are charged explicitly with the development objective, such as extending banking to the rural areas and promoting agriculture and small-scale industries. The fact that this is happening cannot be denied. But it is not happening for the reason that people see good in it. The Finance Minister talks about restraining the ®scal de®cit as much as anybody else. So there is a comity of interest, now the question is how to get it done. How to get the fertiliser subsidy reduced in the face of a strong farm lobby, that is the political task. Supposing there are ®scal worries, and you say that I am going to tighten money in order to reduce prices, and it may have to be done at some point

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in time. But it would be something which you would do reluctantly. Ideally, you should go to the source of the problem which is the ®scal de®cit. So the task of managing this whole contradiction, such as it is, can become more dif®cult in our country.

Whenever the government makes a bold move or something happens in East Asia, ®nancial markets go on the blink, and you have to step in, in the sense that The Reserve Bank has to defend the exchange rate. Isn't this rather frustrating? Would you be happier with just stabilisation rather than the wider development objective? I don't think so. It may not be sustainable. You see, one must be happy only with the state of being that is sustainable. Now even if I look at the UK debate, over the last year, when things have been going reasonably well, it is ®ne to say you do your job, I do mine. But when there is a con¯ict, then you have the whole debate. For example, when last time round the Bank of England raised the interest rate which was in, I think, last June or July, many said that they had gone mad.

Now they have reduced the rate. So now they are reversing it, and why not? I am not saying that this is wrong. So once you see a con¯ict, which can be between the blind pursuit of 2.5 per cent or 2 per cent in¯ation and people losing their jobs, you have to resolve it in some way. So what I am saying is that if there is a con¯ict between the growth objective and the monetary policy objective, it has to be reconciled at the level of the government, together with the Reserve Bank. But if we say that you are there, and I am here and you do what you want, but I will do something else, then it is not sustainable in our system of government. And I dare say it may not be sustainable in the United States, where there is as much debate about the economy and the role of the Federal Reserve as anywhere else. You remember when the Chief of the Federal Reserve did not raise the interest rate, everyone said that he had lost his touch. So I don't think there can be universal guidelines about division of work. The Reserve Bank has to worry more about monetary and price stability, and the government has to worry more about ®scal de®cit and growth. And the Reserve Bank cannot be the source of growth through printing money! That I think everybody agrees.

192 Conversations with Indian Economists

Do you agree that there should be a ceiling on how much the government can borrow from the Bank? Yes. In a multi-party democracy, a parliamentary directive on government borrowing irrespective of the party in power, is desirable to reduce populist pressures.

You have written on ®nancial dualism, you say that there are markets in India that do work and this is also true of ®nancial markets. Don't you think ®nancial dualism exists only because the formal sector is distorted? The informal sector is a response to these distortions in the formal sector, both the real and the ®nancial sectors. Again, this has to be put into a historical context. The so-called informal sector pre-dates the organised banking system and the Indian banking system was an informal system, it was not the British kind of system. If you look at the 1850s, Indians didn't have access to banks. Borrowings were from landlords, they were the moneylenders, people knew each other and you borrowed from someone you worked for. Now if you look at the old opium trade, or any other trade, it was all not based on documentation. So this was the way in which India's trade, India's external trade, was ®nanced in the past. India was a major manufacturing country and it had a higher manufacturing output than either Britain or the United States in 1830, according to Paul Kennedy. So there was a ®nancial system working. It was ®nancing trade, ®nancing economic activity, and manufacturing, including handlooms, textiles and all kinds of activity. This sort of an informal system still survives, although there has been a transfer of a lot of it to the formal sector. But for most smallscale local industries, the informal system, combined with the nonbanking ®nancial institutions, is an important source of ®nance. The problem is that trade and commerce in India are not well documented. There is the individual family based trade, the chap knows what he is buying, what he is selling, what he is doing with his shop, but the amount of writing and documentation is very little. Part of the reason is the low level of education and literacy. So I think that the fact that the informal system exists is a strength. But how do you integrate the two systems, that's the challenge. Part of the problem is the tax laws. The second part of the problem is ease of transaction, and responsibility for, say, cheque clearance and so on. In India, you can give dud cheques and disappear, although the law says you can't. But you don't have an

Bimal Jalan 193

elaborate machinery to catch the crooks; so I am not worried about it, it is part of the development of the whole system. We are developing the formal sector and integrating it with the informal sector. Now you see the convergence of rates of interest is occurring.

Don't you think the informal sector, which is not subject to regulation, has grown because of all the regulations in the formal sector? There must be a massive misallocation of resources in the informal sector. There is a strong case for ®nancial liberalisation, and that's why we removed all ceilings on interest rates, and so on, in the formal sector. So there is integration taking place. And as we integrate the system, you would see that the informal market shrinks, the formal market increases, because the returns on deposits increase. But we have a long way to go, and as the society improves and literacy levels increase, our laws become a little more sort of what we might call commerce-oriented, all this will happen.

But the informal sector has a role to play in its own right. I think so, for another 50, 60, 70 years.

Of course, some would argue that we have only just begun to liberalise. No, it has de®nitely begun. It has gone some distance. It has continued after Manmohan Singh, but the progress is somewhat slow in areas such as insurance and disinvestment of public enterprises. Political consensus on this issue has not developed. So to answer your question, de®nitely liberalisation and reform have begun. It has taken place for example in the ®nancial sector, there is substantial evidence of it in the real economy. Licensing is gone, trade is freer, current account convertibility is there.

I would like to ask you about sequencing. It has been said that the ®nancial sector liberalisation should follow the real sector liberalisation fully, otherwise there may be a danger of the East Asian kind of a meltdown. You see, the ®nancial sector cannot lead, it must follow the real sector. You can say that Indian nationals can have free convertibility, own assets

194 Conversations with Indian Economists

wherever they are. Saying all this is ®ne, but if you have too much money, which is outside of the system, which you don't know about, and the markets are underdeveloped, segmented, where a small change makes the system very volatile, then you are in trouble.

So you would advocate gradualism. Yes, I always advocate gradualism on these matters, guidelines will have to be ®rm. But the direction, the pace of change, has to be such that it is sustainable, and does not expose the country to too much risk. This risky part, I mean anybody making any investment anywhere and everywhere, is not on. So in discussing various alternatives, pace of change, etc., we have to analyse the risks involved and the alternatives or what ®nancial analysts call `value at risk'.

Is it likely that we might face a meltdown like the East Asian countries if we stepped up the growth rate? Krugman in a recent interview in Business Standard says it could occur and argues that you have to have a strong ®scal policy. You see, if you ask me in the abstract, what are the chances of this happening, of course it can happen. It could happen in Korea, it could happen in Japan, of course it could happen anywhere, it can happen here. And the US exchange rate can change from 145 to 115 vis-a -vis the yen in a period of a fortnight. Anything can happen in these markets. But the probability of an Asian kind of meltdown or whatever you call it happening here is low, as per current indications. However, if policies change, something else happens, it can, of course, change the course of events.

Mainly because we have already got controls. Not only that, it is not only a question of controls, it is also one of management, I think we shouldn't underestimate it. We have had responsible management here.

Bimal Jalan 195

Talking about management, in your book you make the point that there are more Indian managers abroad in the United States and the United Kingdom than American and British Managers in Bombay. What does this imply? Is it the implication that we have high quality managers and most of our managers are abroad because we do not allow enterprise to ¯ourish here? No. The point that I was making essentially is that this whole concept of Swadeshi and self-reliance has changed. In some subtle ways, comparative advantage has changed. It is no longer a question of Indians not being able to manage ®rms and so on, but we have arrived at a point where we are actually exporting talented people. In the past, we had traders going out, we now have managerial talent going out. It is not that we have shortage of managers, we won't have a problem recruiting Indians. In fact, most Americans or most British ®rms or even German ®rms have Indian personnel.

Ashok Desai had a column in the Business Standard saying enterprise ¯ourishes in Britain because they have got a stable government and a stable bureaucracy, which we don't have here. So I was relating to your comment to Desai's view. No, I don't agree, because we don't have a shortage of managers here.

Turning to public enterprises in India, you say in your book that it is not overmanning, but managerial incompetence which is the problem. But the managers of enterprises say overmanning is the problem. Indian Airlines yesterday put out a bulletin saying we have too many people, we cannot sack anybody, because of labour laws. The point I was making was that overmanning can be taken care of. For example, in the electricity boards, you have a plant load factor of say 50 per cent. The losses associated with low plant load factor are substantially higher than the losses associated with overmanning. Now, if we could argue that staf®ng is the problem, it can be suggested that you have a scheme whereby you keep them employed, you pay them normal wages, without the personnel having to go to work. You do this if your electricity boards function at high levels. The problem associated with overmanning will disappear. So the ®nancial bankruptcy of the public sector has little to do with overmanning. Overmanning is a problem, there is surplus labour in public enterprises. Even so, if these enterprises are operated ef®ciently, millions of new jobs could be created.

196 Conversations with Indian Economists

How are we going to get rid of this problem? There is talk about disinvestment and privatisation schemes. Privatisation may be dif®cult because the shares may not sell. There are also other approaches such as asking the private sector to manage the enterprises though the state continues to own them. What are your views? I think this is a political question. Whatever is feasible, we should do. Ideally speaking, there is no case anymore for public enterprises, except in sectors like the railways. The railways are too big, there is need for coordination. It would be dif®cult to manage the kind of railway system we have, in different areas, in different parts of the country. Similarly, certain social goods have to be in the state sector. One can also argue for state control of several other very special sectors, where there are externalities of a kind that cannot be captured by private industry. I would say that ideally, it is time for the system to wind down, partly because of ®scal reasons. We have very large investments in these areas and the returns are nil or very low, 1 per cent or so. And the government is paying 16 to 17 per cent by way of interest. India's debt pro®le has changed dramatically over the last few years. In 1989±90, interest payments by the central government were Rs 18,000 crores on a public debt of Rs 270,000 crores.45 By 1995±96, interest payments had tripled and public debt had doubled. Nearly one-third of interest payments are on account of past investments in the public sector. Apart from the ®scal costs of these enterprises, we have not succeeded in creating an `arm's length' relationship between the government and public enterprises, that is why I now advocate a more aggressive policy of disinvestment.

By an aggressive policy you mean privatisation. There are various methods of reducing public sector involvement in these enterprises. Greater use could be made of non-government organisations, private corporations and individuals for the supply of services now rendered by public enterprises. You can contract out services or grant franchises; one such example of this practice in India is the franchise granted by telecommunication authorities to private individuals for establishing public telephone booths. It has created employment and you can call England from one of the booths with no problem.

Bimal Jalan 197

But how do we do it? For example, take the Indian Airlines, can we just sell it off on the stock market? It is not a question of can we, it is a political issue. It is not an economic question. Those who ¯y on private airlines here, and on Indian Airlines, can see the difference. So the whole purpose of state enterprise is to serve the people. There is no basis such as externalities for the Indian Airlines to be in the state sector. There is no economic logic here, it is political logic.

The other issue I wanted to talk about was democracy and development. Some people say we have not got a democracy at all. Others will say that is the main achievement of India, for which we may have sacri®ced some growth, but it is a worthwhile sacri®ce. It is a large issue, but I think all of us are frustrated by something or the other which goes on in our society. And our young politicians have not been most effective. One is also quite often exasperated by the slowness of our processes, con¯icts, corruption. But to my mind, if we didn't have a democratic system, I doubt if India would have survived, as a country, as a nation, as a participatory system. Those of us who have had the privilege of working here know that ours is a multicultural diverse society which Amartya Sen talks about. But it comes together, in that hall of the Lok Sabha. I think democracy is not only a major achievement, but there is no other way for India as far as I can see. One can get frustrated with the slowness with which things move, one can ask for some changes in our whole procedures, laws and so on, but I don't think India would have progressed faster with development by adopting any other political process other than democracy.

Thank you for giving me the opportunity to talk to you.

12 B.V. Krishnamurti The late B.V. Krishnamurti, popularly known as BVK, was an economist with a ¯air for utilising the economist's tool-kit for the analysis of a wide variety of socio-economic problems. His book on Pricing in a Planned Economy, based on his doctoral thesis at the Bombay School, was the ®rst of its kind on theoretical analysis of pricing problems in a planned economy. He was the forerunner of many a theme which is now fashionable in development economics. As early as the 1960s, he identi®ed the af¯uent rent-seekers in the Indian economy, whom he referred to as the `U-sector' after the huge U-shaped frontage of their houses. He also produced a powerful case for investment in education during the 1950s, when the policy-makers were preoccupied with investments in heavy industry. He had an abiding interest in issues relating to the environment, and economic development. BVK was Professor of Economics at the Bombay School (1944±58), Professor of Economics at the Delhi School of Economics (1958±64). From 1964 until the early 1980s he was Economic Advisor to the Government of Saudi Arabia and the Government of Tunisia on behalf of the UN. BVK died in 1991. * It is dif®cult to exaggerate the importance of education in the investment pattern of an underdeveloped country aiming at rapid development. The Grand Old Man of Industrial India, Sir M. Visvesvarayya is famous for his statement that education should be given the ®rst priority in any plan for development of this country. The First Five-Year Plan itself recognised that `the provision of a certain minimum of education to all citizens within a reasonably short period of time is an essential pre-requisite, next only to food, for the successful implementation of development programmes and survival of democracy in India'. In fact, the directive of our constitution is that free and compulsory education should be provided for all children up to the age of 14 within ten years from the commencement of the Constitution (that is by 1960±61). And yet, the progress under the First Five-Year Plan and the emphasis laid in the Second Five-Year Plan with regard to this subject are woefully disappointing. 198

B.V. Krishnamurti 199

While a sum of Rs 165 crores was allotted in the First Five-Year Plan for expenditure on education, only Rs 68.7 crores were actually spent over the ®rst three years of the Plan. While the Five-Year target was 38,059 new primary schools and teaching of 40 lakhs46 additional pupils, only 16,276 new primary schools were built and only 9 lakhs additional pupils taught over the ®rst three years. Besides, even the remodelling and conversion of existing primary schools into basic schools has been very slow. In the light of this actual performance, it is indeed surprising that Prof. Mahalanobis could presume that by 1955±56, 49 lakh additional pupils would be taught in the age-group 6±11 (that is, from 187 lakhs in 1950±51 to 236 lakhs in 1955±6). What is even more surprising is the meagre outlays proposed for education. The investment expenditure allotted to education and other social services put together (and construction in the public sector) in the Mahalanobis Plan is only of the order of Rs 250 crores. The increase in current expenditure provided for on this account is Rs 500 crores over the Five Year period, that is, annually Rs 100 crores, once again for education and social services put together (that is, salaries of school teachers, doctors and nurses, etc.). And yet the physical target in education in the Mahalanobis Plan is to provide education for another 144 lakh pupils (from 236 lakhs in 1955±56 to 380 lakhs in 1960±61), with the number of pupils in the age group 11±14 going up from 51 lakhs to 80 lakhs. It is frankly beyond comprehension how this can be achieved with such meagre sums of expenditure, both investment and current, on education. In this context, it is interesting to note that at the time the First FiveYear Plan was initiated, the Committee on the Ways and Means of Financing Educational Development in India estimated that a national system of education, when it comes into operation, will require an annual expenditure of nearly Rs.400 crores. In addition, for basic and high schools only, approximately Rs 200 crores will be necessary to train 27 lakhs of teachers that will be required and Rs 272 crores for buildings. The total number of teachers in 1949±50 in primary and secondary schools was only 7 lakhs and the total annual educational expenditure only about Rs 100 crores. In the light of all this, it is apparent how absurdly low are the sums allotted for education in the Mahalanobis Plan. There is no need to dwell on other items of social services. The conclusion once again emerges that the Mahalanobis Plan is lopsided. There is very little importance given to education and other social services. A balanced investment pattern would call for a substantial increase in expenditure on this account, and an appropriate curtailment in the outlay on heavy industries.

200 Conversations with Indian Economists

It is worthwhile digressing a bit and going a little deeper into the economics of education in an underdeveloped country. The investment expenditure on primary and secondary education consists of the cost of building schools and the cost of furnishing them with benches, desks, black boards, etc. In the case of basic education, another major source of investment expenditure is the training of teachers. The current expenditure consists of salaries to the teachers, clerks and servants, and provision of a few articles such as chalk, dusters, sports equipment, and so on. It is easy to realise that neither the investment expenditure nor the current expenditure on education demands a draft on the precious resources of the country, such as foreign exchange and steel. One could put up a school building by utilising the locally available materials and labour force. In the Community Project Areas, this has been done with great success. One could also make locally benches, desks, and so on. And if the region is short of timber and talent to an extent that it cannot afford even this, it does not matter. One could squat on the ¯oor. Now the current expenditure on education consists, by and large, of the emoluments that are necessary to attract a suf®cient number of schoolteachers. In the present set-up, the schoolteacher's profession is by no means attractive. It is ill paid and carries little social prestige. Suppose the salary of a primary school teacher is raised to a level very near that of a college teacher. Suppose a schoolteacher is paid Rs 100 per month. There is little doubt that this is handsome enough to attract quite a large number of university graduates. Suppose in addition to the ®nancial incentive, there is also an exhortation by the State and the leaders of the community to the intellectuals of the country to take up this profession as a noble service to the nation. The two put together should de®nitely work. A concerted effort on these lines to educate the mass of the population, specially in the rural areas, would undoubtedly have far-reaching bene®ts of a cumulative expansionist character. This would greatly lighten the task of the Government in bringing about rapid economic development. For in a reasonable time, one could expect that the ignorance and inertia of the people would crumble and an urge to improve one's material conditions by utilising the available opportunities would develop. If this were to happen, the employment problem would take care of itself. The people of the country would begin to move along the lines of those in the advanced democratic countries such as Great Britain and Switzerland. All this is evident enough. Yet why is it that the Mahalanobis Plan does not give education the priority it deserves? Is it because such large distribution of incomes to the schoolteachers results in in¯ation? Or is it because the Government cannot mobilise the necessary ®nance for this purpose?

B.V. Krishnamurti 201

Now by paying a salary of Rs 100 per month to a primary school teacher and by employing about 30 lakhs of teachers (as against about 7 lakhs at present), no doubt there will be a big increase in the annual expenditure on education. But why should this increase in schoolteachers' incomes create any in¯ationary pressure? The schoolteacher obviously is not going to demand French perfumes for his wife or Swiss chocolates for his children just because he has a higher income. He would be quite happy if he could feed and clothe himself and his family better and have a little margin left for a few extras. The Mahalanobis Plan assures that this much increase in consumption will be provided for. And we have already pointed out above that it is vital for the success of a democratic plan that there should be an adequate expansion in the supply of a few consumer goods to provide the necessary incentives to the individual to contribute his best. It follows that the low level of spending on education cannot be justi®ed on the grounds of preventing in¯ation. The only explanation perhaps lies in the so-called lack of ®nance. Being brought up in the traditions of mid-Victorian ®nance, the Government has long been accustomed to apply the calculus of the private grocery merchant to a matter like education. This is indeed surprising since the Government has given up, and rightly too, the pre-eminent midVictorian virtue, namely the balanced budget and resorted to the unorthodox venture of de®cit-®nancing. Having done this, still the old habit persists in some form or other. De®cit ®nancing for heavy industries or river valley projects is deemed to be desirable. Not so the de®cit ®nancing of education, even when it is shown that it is not in¯ationary. Nothing can be more illogical than this. For the fact that the parents of the children to be educated do not contribute to the expenditure on education only indicates their ignorance and poverty. The purpose of education, and more so basic education, is to remove this ignorance and poverty. This de®nitely takes time; and results would be quicker, greater the vigour and enthusiasm with which the drive for education is launched. Therefore, in the initial stages, it is absurd to apply the balance-sheet criteria for opening up new schools and appointing a larger number of quali®ed teachers. Any amount of de®cit ®nancing for this purpose is both desirable and permissible as long as the moneys are properly spent. It is needless to say that the need for de®cit ®nancing will taper off with time as more and more voluntary contributions start pouring in. In this respect again, the reports of the Community Projects and the National Extension Service are highly encouraging. 10 October, 1955

Notes

1 J.M. Keynes (1930) `Economic Possibilities for our Grandchildren', reprinted in Essays in Persuasion (New York: W.W. Norton and Company, 1963) p. 373. 2 Sarvepalli Gopal, Jawaharlal Nehru, A Biography (Delhi: Oxford University Press, 1993). 3 Sunil Khilnani, The Idea of India (London: Hamish Hamilton, 1997). 4 I.G. Patel, Economic Reform and Global Change (New Delhi: Macmillan, 1998). 5 I.M.D. Little, Economic Development: Theory, Policy and International Relations (New York: Basic Books, 1982). 6 Jagdish Bhagwati, India in Transition, Freeing the Economy (Delhi: Oxford University Press, 1994). 7 Jagdish Bhagwati and Padma Desai, India: Planning for Industrialisation (Oxford: Oxford University Press, 1970). 8 Ashok Desai, My Economic Affair (New Delhi: Wiley Eastern Ltd, 1993). 9 Bhagwati and Desai, India: Planning for Industrialisation, and J. Bhagwati and T.N. Srinivasan, India (New York: Columbia University Press, 1975). 10 Rakesh Mohan, `Industrial Policy and Controls', in Bimal Jalan (ed.), The Indian Economy: Problems and Prospects (New Delhi: Penguin Books, 1992). 11 World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership (Washington D.C.: Oxford University Press for the World Bank, 1995). 12 Stefan Wagstyl, Financial Times (1994). 13 Shashi Tharoor, India: from Midnight to Millennium (New York: Harper Perennial, 1997). 14 Francine R. Frankel, India's Political Economy, 1947±1977: The Gradual Revolution (New Jersey: Princeton University Press, 1978). 15 Pranab Bardhan, `Country Experience: India', in H.B. CheneryeÂtal (ed.), Redistribution with Growth (London: Oxford University Press, 1974). 16 V. Balasuabramanyam, India (London, Weidenfeld and Nicolson, 1982). 17 Dre'ze and Gazdar, `Uttar Pradesh, The Burden of Inertia', in Jean Dre'ze and Amartya Sen (eds.), Indian Development: Selected Regional Perspectives (Delhi: Oxford University Press, 1996). 18 Cited in B.R. Nanda, Gokhale, The Indian Moderates and the British Raj (Delhi: Oxford University Press, 1998). 19 Amartya Sen, `Radical Needs and Moderate Reforms', in Dre'ze and Sen, Indian Development. 20 Chapter 13 in this volume. 21 P.R. Brahmananda, Planning for a Wage-Goods Economy (Himalaya Publishing House, 1995) p. 8. 22 P.R. Brahmananda, Productivity in the Indian Economy ± Rising Inputs for Falling Outputs (Bombay: Himalaya Publishing House, 1982). 23 P.R. Brahmananda, Planning for a Wage-Goods Economy: A Super-Growth Model and its Implications (Bombay: Himalaya Publishing House, 1995).

202

Notes 203 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

T.T. Krishnamachari, who was Finance Minister at that time. I.G. Patel, Economic Reform and Global Change (Delhi: Macmillan, 1998). BJP: Bharathiya Janatha Party. Wiley Eastern, 1996. IDBI: Industrial Development Bank of India. NABARD: National Bank for Agricultural and Rural Development. UTI: Unit Trust of India. C. Rangarajan, Indian Economy ± Essays on Money and Finance (New Delhi: UBS Publishers and Distributors, 1998). J.N. Bhagwati, The Theory and Practice of Commercial Policy: Departures from Uni®ed Exchange Rates, International Finance section (Princeton University, 1968). J.N. Bhagwati, A Stream of Windows: Unsettling Re¯ections on Trade, Immigration and Democracy (Cambridge, Mass: MIT Press, 1998). J.N. Bhagwati, Protectionism (Cambridge, Mass: MIT Press, 1988). J.N. Bhagwati and Padma Desai, India: Planning for Industrialisation, Industrialisation and Trade Policies since 1951 (Oxford University Press, 1970). J.N. Bhagwati and T.N. Srinivasan, India (New York: Columbia University Press, 1975). J.N. Bhagwati, India in Transition, Freeing the Economy (Oxford: Clarendon, 1993). MRTP: Monopolies and Restrictive Trade Practices Act. Dewett and Varma's book on economics is a popular textbook on the Indian economy in Indian colleges. A.V. Desai, My Economic Affair (New Delhi: Wiley Eastern Ltd, 1993). Maruti is the Indian State-owned automobile joint venture with Suzuki. Bimal Jalan (ed.), The Indian Economy: Problems and Prospects (New Delhi: Penguin Books, 1992). IIT: Indian Institute of Technology. IIM: Indian Institute of Management. 1 crore ˆ 10 million. 1 lakh ˆ 100,000.