MONTEK SINGH AHLUWALIA PLANNING COMMISSION OF INDIA
Interview by Tom Leander

Nowhere else on Earth can you taxi to a drab government office to meet a deputy in planning only to have the driver regale you about how that official is changing the country. Known simply as “Montek” in newspaper headlines, Montek Singh Ahluwalia has long been India’s poster sage reformer. He has a distinguished track record as a development banker and long ties to India’s Congress party and Prime Minister Manmohan Singh. In fact, he answers only to Singh, who is the chairman of India’s Planning Commission. His job as deputy chairman is to coordinate the flow of money between the finance ministry and the bodies that enact government projects. As such, Ahluwalia has an eagle-eye view of reform initiatives, from rural development to building better roads and airports. Is progress moving fast enough? Read on.

With the exception of China, socialist-style planning commissions are a bit of an anachronism. What is the role of India’s planning commission?

We’re more of a consultative mechanism. I’m not an economic czar.

Development, as it works in our system, takes a lot of management. There’s no pie in which the government doesn’t stick a finger. In our most apparent role, we’re a conduit for development money between finance and other ministries. We advise the government as to the best way to divide it up, and coach the ministries on how to push for a good sum. We do a lot of inter-ministerial resolutions. We provide an internal critique of policy. We can do all of this because my boss is the prime minister of India, not the ministries.

What’s the biggest challenge facing the nation, in terms of social welfare?

Performance in agriculture has decelerated since the middle of the 1990s. We’ve got to move agricultural development to a much more market-oriented phase, and reorient technology, marketing, and logistics to the requirements of agriculture that go beyond just trying to produce gains in food production.

Agriculture comprises 20% of GDP, and as a sector is growing at 2% a year. We think the best we can do is get 4% growth. If you weigh those two percentage points of difference by 1/5 [representing 20% of GDP], you arrive at a figure of 0.4% added to the GDP growth rate. Better agricultural growth will stimulate services and other activities in rural areas, so it could add a lot more than 0.4%, perhaps up to 0.8%.

Still, that’s less than one percentage point to GDP growth. It doesn’t seem like a lot, but from the point of view of inclusiveness of growth it’s very important.

What about plans to move people from farms to other parts of the economy? How is this working?

There’s a hell of a lot of people out there. I don’t believe that in the next twenty years we can absorb all of these people into the non-agricultural portion of the economy. So we need to concentrate on agricultural growth, and develop a more diversified kind of agriculture to create productive jobs both in farming and with second-round effects in services in rural areas.

Twenty percent of GDP is produced in agriculture, but some 50% of the population derives the majority of its living from farming. Most of them are doing some other stuff as well, but we don’t have the exact numbers. The number of people that would be affected by growth in agriculture is huge. A few other sectors can contribute 0.4% to GDP growth, including IT, but the number of people that would be directly affected would be much smaller. That’s why agriculture has to be a priority.

The problems of infrastructure development in India are familiar. One critique has it that development fails because public-private cooperation isn’t happening quickly or smoothly enough. What’s your response?

There’s absolutely no doubt in my mind that the ability to expand the scale and quality of infrastructure is a crucial constraint in achieving [consistent] 9% growth. To say that we’re going to achieve 9% means that we’re going to have a big expansion in high quality roads, airports, rail, and so forth. Most countries have historically done this through the public sector. The world’s changed. Capital is available, and there are ways of financing these things through the private sector if you can get the policy framework right.

But I do think that the models are there – and working. We do construction with a lot of public and private partnerships. Wherever possible, we let the private sector do it by itself. If the private sector is robust, but the revenue model is inadequate, we provide a public subsidy based on competitive bidding. That way you leverage limited government money by bringing in private funding. Take roadways as an example. Given that we own the land on both sides of the road in most areas, we can introduce a 30-year build-operate-transfer (BOT) project with a combination of tolls and private money. In certain cases we have to provide a subsidy. We have very well-documented contractual conditions for the BOT in which we’re willing to subsidize up to 40% of the estimated capital cost.

About 1,500 kilometers in the last year have been bid out on this basis. Against a maximum allowable subsidy of 40%, the actual subsidy required on average has amounted to only 10%. If the average came out to about 10% or so, what it means that for every rupee we’ve spent, some private sector guy brought in 9 rupees worth of debt or equity or both. So we’re able to do more with limited government money.

Still, there are complaints about progress.

In every one of the infrastructure areas, the good news is that it’s happening. But is there enough of a flow of projects that matches up with what needs to be done? We can’t claim that. We need to build momentum.

Are you in favor of using foreign exchange reserves to build infrastructure?

I’m in favor. The financing of it and how it works and all its implications are complicated. When I took up office in 2004, there was very little support. Now there’s more. The finance ministry is looking to invest about US$5 bn. This is too small. We should be planning in the next two or three years to use up to US$50 bn of our reserves to improve our infrastructure.

Privatization of the state banks has been slow. Why is privatization such a sensitive issue?

That’s one respect in which our reforms have differed from the reforms of other developing countries. Solid support for privatization doesn’t actually exist. A lot of people say that’s because of the left’s power in government, but it’s the public that opposes privatization. This is ironic, because there’s no ideological support for the public sector. If you ask the public at large, ‘Do you think that the public sector is a paragon of virtue whereas the private sector is the embodiment of vice?’ they would say no – in fact, the public sector is inefficient and corrupt. But if you then say are you in favor of privatizing the public sector, somehow they’re not. The public probably still retains the belief that large privatization means the undervaluation of assets in some funny kind of way and that someone – robber barons – will make a lot of money.

So it’s an impasse?

We’re trying to couch it in other terms. We can say to them that the private sector should compete with the public sector. Let the public sector try to survive. The private sector will expand its share if the public is not efficient. The public would probably say, ‘We’re OK with that.’

This principle has been operating in the banking sector. Thirty years ago 5% of the banking system was in the private sector. Today, it’s 25%, and 15 years down the road it could be 50%. We haven’t privatized the public sector banks. It’s possible that over time people won’t mind dilution of government equity as long as the government remains there. My personal feeling is that we ought to get out of being majority owners of public sector banks.

Is the pace of reform going too slowly? Someone said to me that governments never reform when the economy is growing at 9% per annum.

There’s validity in that argument. But if the economy is doing well, that doesn’t mean that thoughtful people shouldn’t be anticipating all the things they need to do to sustain it. It’s a challenge – I can say that much. There are many areas where there isn’t an opposition to reform, and two major areas in which opposition is significant.

Besides privatization of banks, labor market reform faces resistance. The labor market is too rigid in India. That’s not to say that the labor market environment isn’t changing. In the old days, if you were really running your business badly domestically, you could persuade the government to nationalize employment. Today, protection is low, imports will swamp you, and you don’t succeed if you kill the firm. It wasn’t the case in the ‘70s. It was almost a logical labor strategy to drive the firm to bankruptcy then lobby the government to nationalize it and then everyone would become civil servants with permanent tenure. Today you know if you shut down a plant, there’s always another plant in a neighboring state that can pick up the share.

How is the labor market changing?

Indian labor laws are so rigid that, until a short time ago, if I hired a guy to work a certain type of machine, and then the industry changes, I couldn’t retrain him to work a new job. The unions blocked multi-skilling even when you want to retain someone. They said, hire another person. But now, you can say, we’ll die out as a firm, and someone else will grab the market share, so you’d better let us do it. Also, there are laws that won’t allow women to work after 8:00 p.m. We always said this was anti-women, because this is a ridiculous rule in the age of 24-hour call centers. Employers eventually got around the law by providing transportation for women working after-hours. There are lots of such examples of case-by-case improvement, but we need to do better.

How would you describe India’s greatest comparative advantage in the global economy if you were talking to a multinational CFO?

India has more of a genuine private sector atmosphere. There is a true, generalized distance between the government and the private sector. You can actually compete. A foreign company that pays its corporate dues eventually gets regarded as Indian. No one thinks of GE as a foreign company. Also, our workforce is very keen on, and good at, acquiring skills. It takes to learning different cultural forms quite well.

And then we have a viable, independent court system. I’ve had occasions where multinationals have come to me complaining that regulators are treating them unfairly. Surely the government could help. I said, ‘If you think so, sue them. I’m not going to call up a regulator and try to influence the situation.’ I told them that there wouldn’t be repercussions because they sued a regulator. One company, which had a good case, followed the advice. It won, and was surprised that there was no negative feeling. Our court system is a strong protector of independence.