M-Document for 2021
The M-document that Montek Singh Ahluwalia, former deputy chairman of the Planning Commission of India, drafted became the reference point for the economic reform of 1991, saving India's economy from collapsing. What would an M-document of 2021 comprise?
The following is an excerpt from a conversation with Dr Montek Singh Ahluwalia held on 21st June 2021, watch the full interview here.
Dr. Montek Singh Ahluwalia- If you are asking me what are the important things that we should focus on in the next three to four years or so, I would certainly say that the following are the most important-
Don’t be too worried about the fiscal deficit for the current year but have a credible strategy for the next four or five years for bringing it down. People will not lose confidence in India just because the deficit goes up this year. Biden has taken the US deficit to double-digit numbers so they can hardly say that India’s going down the tubes. Whatever we do this year, the important question is what India is going to do next year, and my view is that if you have a committee to make a thorough report of our tax system and get that committee to report by the end of December so that the entire discussion on taxation for the next year is conditioned by a publicly available report, it would increase confidence.
Custom duties & RCEP
The raising of custom duties and the refusal to join RCEP(Regional Comprehensive Economic Partnership) was a mistake. Even if we immediately do not lower custom duties, we need to give a clear signal that Atmanirbhar does not mean that in order to produce things domestically, we are going to keep raising duties. We have seen that problem, for example, in the solar sector. We are applauded by the rest of the world for having taken an initiative on solar energy which I think the government deserves credit for. At the same time, in order to indigenize the production of panels we have levied huge duties on solar cells and modules. This has created a lot of uncertainty on the part of private investors, who don’t want to bid for setting up new solar plants for two reasons- they really don’t know whether you are certainly going to slap duties on the import, and secondly that most of our DISCOMS are broke, and they have been reneging on power purchase agreements on the grounds that since prices are falling, they don’t want to pay earlier commitments. However, the current assumption is that today’s solar price will fall by thirty thirty-five percent or so for the next five to six years. Now, if we have a reputation that our DISCOMS will cancel whatever power purchase agreements that have been entered into now because technological change makes power cheaper a couple of years from now, it seriously discourages investment. So, I think on the duty front, we need a very clear signal and I think that we should have a signal which says that we will moderate our custom duties and bring them in line with one that exists in RCEP countries. I would go further and say that we should join RCEP. We have that option, the door is open; we should walk in and that would make a huge difference. The industry will object initially, saying you haven’t given us all the support we need, you have a lousy infrastructure and you’re doing nothing about it. Then we should work on giving them good infrastructural support, not give them protection. That really depends on political persuasion, political leadership, etc., and that we should give.
The present approach to banking sector reforms doesn’t work, and this is something I would blame not just the present government for but actually all of them in the past. We identified the need for financial sector, banking sector, reforms a long time ago but we were not willing to put public sector banks on the same basis as private sector banks. They remain privileged, they don’t have the same regulatory pressure, they don’t have the same pressure to improve efficiency- this is not workable. It was Yashwant Sinha who said under Vajpayee a long time ago that he is going to reduce the government’s share of public sector banks down to 33 percent. That was the right thing to do but he wasn’t able to do it because the Congress party was not in favour of giving up the government's control of the public sector banks, but even the BJP doesn’t seem to want to do it. Mergers are of little convenience- if you merge a good bank with a bad bank, you get an average type of bank. Sometimes what happens is that average performance is worse than the others taken together. But what you need to do is to get the governance of the public sector banks really improved. If you don’t want to give up the government ownership, the P J Nayak committee way back in 2015 had proposed that why don’t you set up a holding company, but all the government’s shares in the banks into the holding company, let the holding company be not run by the babus, but by finance professionals having international experience and domestic experiences. The key thing is that the top appointments in the banks should be made by the Board of the holding company, not by the cabinet so that it is not a political appointment. Cabinet appoints the guys who go to the holding company. But having given it to them, you are saying that now you appoint the top manager and the Finance Ministry should be taken completely out of the picture. Now, this is the only way that bank management will look to a new holding company management to get their signals. Today, if you happen to be a top manager in a public sector bank you better bow down to the joint secretary in the ministry of Finance. Now let me say I failed to get this done myself, because the PJ Nayak committee had not come in. But we were aware that government control over the public sector banks is not conducive to public sector banks behaving in an efficient manner, the way a good banking system should behave and I think we have not done anything in that area and quite honestly, we need to. Now one good thing that has happened in many years is that there is a private sector that is growing, and its share which was originally 5%, has now increased to a little less than 40%. Many people say that in another five years it might reach 50%. We are willing to privatize the banking sector, but we are not willing to privatize the public sector banks. That just means that they will keep on performing in this not very efficient manner. That is not because they do not have good management. They have excellent potential, but they are effectively under the control of the civil service and that is not the way to run a bank. So in my latest version of the M-document, that would be very high. To be honest with you, if you were to tell me that this is not going to happen, then I am not confident that you can go back to seven percent growth because even today what is happening is the government is unwilling within the public sector to let the weaker banks fade out. The theory of recapitalizing a bank is that you should recapitalize more efficient public sector banks and hold back the weaker ones. But, there is extreme reluctance to do that because the person in charge of the weaker bank always finds some other reason why the bank is weak, and if the government has people on the board, it really can’t blame the managing director for performance because they are there. Even the RBI has somebody on a bank board which is wrong. I think that it is not generally realized but the RBI does not have the same power over public sector banks as they have over the private sector banks. In the case of a private sector bank, it can remove the management if it feels that it is not doing a good job. In the case of public sector banks, it can't. It can write letters and tell the Finance Ministry that it isn’t doing a good job, but it cannot say that this person must be removed. If they had that power, that person would look at RBI with a lot more respect than they do now.
Privatization of the distribution companies
I have been talking about things the central government should do, but I honestly believe that the most important privatization we should attempt is the privatization of the distribution companies in the states. Frankly, if you are running a state, having a first-class electricity distribution system that will support greater industrialization, should have a very high priority, and it’s not going to happen if it remains in government’s control the way it is today. Some state governments-the Delhi government a very long time ago got rid of the public sector-run Delhi Distribution Company and put in two companies, the Tatas and the BSES, which is an Ambani company, and there is no doubt that since then, the electricity distribution system in Delhi has improved enormously. The electricity system in Mumbai is private, Calcutta is private, Ahmedabad I think is private. Why can’t we say that Bengaluru , Chennai , Nagpur, Jalandhar, Lucknow, and in two or three others, the city system would be privatized? I am not saying that privatize the whole system, but at least see what private enterprises can do to increase efficiency and that would be a test. There’s no question that in Delhi the privatization has led to huge improvements in efficiency and even NGOs that were very critical of privatization, what they now say is that the privatization was done in the wrong way but they agree that the performance of the system is much better.
So that would be my advice in the latest version of the M document.
Dr Montek Singh Ahluwalia is an Indian Economist, former Deputy Chairman of the Planning Commission of India, and a former finance secretary. He is currently associated with The Centre for Social and Economic Progress.