Having helped to put India’s economy on the right track, Montek Singh Ahluwalia has now changed focus, to addressing problems with the country’s infrastructure and financial and educational systems.
Adil S. Zainulbhai
October 2007
Montek Singh Ahluwalia has been deeply involved with India’s economic reforms since they were launched, in 1991. In those days, as secretary of the Department of Economic Affairs, he worked with then-finance minister Manmohan Singh to assemble a program that would deliver the country from “Hindu rates of growth”—the scathing label given to India’s seeming inability to sustain growth rates of more than 3 percent after its independence, in 1947.
Today Singh is prime minister and Ahluwalia, as deputy chairman of India’s Planning Commission, is the country’s chief economic planner and a close adviser to the administration. (The prime minister is the commission’s chairman.) While the country is basking in the success of economic reform (GDP growth hit 9.4 percent for the fiscal year that ended in March 2007), Ahluwalia is working to make sure that India can sustain these growth rates. The Planning Commission is targeting average annual growth of 9 percent in its 11th Five-Year Plan, which spans 2007 to 2012. The initial reforms, in the early 1990s, were “no-brainers,” the Oxford-educated economist says. They focused on dismantling the “license raj” (a tangle of regulations that gave bureaucrats too much control over too much of the economy and invited corruption) and on opening India’s tightly closed markets to imports and foreign investment. Strong growth followed. But Ahluwalia acknowledges that the next set of problems—infrastructure, education, and health care, for example—will be far more complex, and the pace of change hasn’t been as fast as he’d like.
Over tea in his office in Delhi, Ahluwalia recently talked with Adil Zainulbhai, a director in McKinsey’s Mumbai office, about Ahluwalia’s confidence in the country’s continued growth and the challenges that lie ahead.
The Quarterly: What was your reaction to India’s strong growth in 2006–07? Can it be sustained?
Montek Singh Ahluwalia: There is no doubt that we were very pleased, but I wouldn’t say we were entirely surprised. I’m not talking about the 9.4 percent growth in 2006–07 but about the fact that the economy has accelerated significantly in the past three years and looks set to continue robust growth in the current year.
Taking a longer perspective, the economy did very well in the first five years or so after the economic reforms of ’91. And then, after ’96 it slowed down a little. There were many reasons for this: the East Asian crisis, a downturn in the world economy, and later the collapse of the dot-com boom in 2001. There was some question as to when the economy would regain its bounce. Our perception was that the benefits of economic reform in India were going to be substantial but slow to surface simply because the reforms were introduced in a fairly gradual manner. We are now seeing the buildup of momentum with a tremendous surge of economic activity and investment in the private sector.
In the current fiscal year, 2007–08, the low estimate for growth is around 8.5 percent, and it could be closer to 9 percent. If you look at the four years from 2004 to 2007, you will see an average growth rate of 8.6 percent or so. I think that’s very good. I had expected an acceleration in growth, but I would say it’s better than I had expected.
We are currently projecting an average growth rate of 9 percent for the next five years. Many people think that’s a bit underambitious, given it was 9.4 percent last year. But I think an element of cyclical correction is going to take place.
Montek Singh Ahluwalia
Vital statistics Married with two children
Education Graduated with BA in economics in 1963 from St. Stephen’s College, Delhi
Received MA and MPhil in economics in 1968 from University of Oxford, where he was a Rhodes scholar
Career highlights Government of India
- Deputy chairman of planning commission (2004–present)
- Member of planning commission (1998–2001)
International Monetary Fund
- Director, Independent Evaluation Office (2001–04)
Department of Economic Affairs, Ministry of Finance, India
- Finance secretary (1993–98)
- Secretary, economic affairs (1991–93)
- Commerce secretary (1990–91)
World Bank
- Various roles, including chief of Income Distribution Division, Development Research Centre; deputy division chief, Public Finance Division (1968–79)
Fast facts Author of a number of publications on economics, including Reforming the Global Financial Architecture, published by Commonwealth Secretariat in 2000; coauthor of Redistribution with Growth: An Approach to Policy, published by Oxford University Press in 1974
The Quarterly: What are the critical challenges India faces in sustaining this growth?
Montek Singh Ahluwalia: In the short run it’s infrastructure; a little bit longer term than that is education. We can’t do much about education in the short term, but we can do a lot over a five- to ten-year period.
Political sustainability is another dimension. In a democratic environment, people have to be able to see benefits reach them. From that perspective, a better story on agriculture is absolutely vital. Agricultural growth was 3.6 percent per year from 1980 to 1996, then slowed down to less than 2 percent. We want to bring it up to 4 percent. Faster agricultural growth will also stimulate the nonagricultural part of the rural economy, so it’s kind of a double-whammy effect.
Health is also a major priority. We need to address our high levels of infant mortality, maternal mortality, and child malnutrition, as well as gender gaps in school. The good news is we don’t have to worry about industry: give them a competitive market, reasonable macroeconomics, and deliver the infrastructure, and our entrepreneurs know what to do.
The Quarterly: How are you addressing the infrastructure shortfall?
Montek Singh Ahluwalia: We have not invested as much in infrastructure as we should have in the past. When the economy was growing at 6 or 6.5 percent, this constraint was less evident. One of the major objectives of the 11th Five-Year Plan, which we’ve just begun, is to sharply increase investment in infrastructure as a percentage of GDP, from less than 5 percent in 2006–07 to about 9 percent by the end of the five-year period.
This expansion is not going to take place through the traditional public-sector expansion route. The public sector cannot mobilize resources on this scale, especially if we have to invest massively in education and health. We have, therefore, crafted a strategy for infrastructure development based on public-private partnership. That’s not an easy thing to achieve. We estimate that about three-quarters of the increase in infrastructure investment above the business-as-usual projections would have to be privately funded. The industrialized countries, historically, created their infrastructure through the public sector. China also built infrastructure through the public sector, funded by the public-sector banks. We also will rely substantially on public-sector investment in areas where private investment cannot be expected—for instance, rural infrastructure. However, we want to encourage infrastructure development with private-sector entrepreneurs taking some of the risk wherever possible.
The good news is that it is possible. Telecommunications is one area where infrastructure constraints have been visibly relaxed. A huge amount of money came in, and it’s been used very efficiently. We’re hoping to replicate that result in other areas, but of course conditions differ across sectors. In roads, for example, the revenue model cannot work based on tolls alone. Therefore, the policy provides for capital subsidies up to a stated level based on competitive bidding for the lowest subsidy. However, even in roads, since the land is provided by the government, there have been cases where bidding has resulted in a negative subsidy.
The Quarterly: Are you confident that current plans will fix India’s infrastructure?
Montek Singh Ahluwalia: I am optimistic, but it will take time for results to show, especially since rapid growth will strain existing capacities. Consider airports for a minute. We are engaged with the private sector in the major modernization of Mumbai International Airport and Delhi International Airport. Two new private-sector airports—1 in Bangalore and 1 in Hyderabad—are nearing completion. By 2010 all 4 of these airports are going to be fully operational; 35 airports are being modernized through the public sector. You will see much better airport infrastructure by 2010.
Urban infrastructure is a very difficult problem and has to be tackled by state governments and municipalities. The central government has introduced programs designed to give states financial assistance linked to their efforts to undertake urban reform. Many of the states are responding. I expect that you will see very significant changes in this area over the next five to ten years.
The Quarterly: How are bottlenecks at the state level affecting growth?
Montek Singh Ahluwalia: There is a cascade effect of reforms starting in the center and then spreading to the states. However, there are important differences across the states. There are many examples of state governments recognizing that economic growth is going to result from attracting private investment and responding to this perception by trying to create an investor-friendly atmosphere.
Industry organizations routinely prepare rankings of states indicating the ones that are more investor friendly and those that are less so. Once politicians recognize that their performance is going to be judged by whether they’ve actually attracted investment and created organized-sector jobs, the internal political motivation to get things moving will increase.
The Quarterly: Has today’s prosperity reached all levels of Indian society?
Montek Singh Ahluwalia: I wish I could say, “Yes, definitely,” but this is one area where there are many deficiencies, and democracy and a free media ensure that we can never forget them. Terrific growth is taking place in some places, but there are parts of the country that don’t seem to be seeing an acceleration. We definitely need to look at that. Agricultural growth was low for many years, but in the past three years there has been an upturn. Is inequality widening? Marginally perhaps, as often happens in a growth acceleration, but much less than what has happened in China. However, the toleration of gaps is shrinking massively.
People no longer ask, “Have I got a school in my rural area?” They ask, “Is the quality of the school such that my child has a good chance of getting into a good educational institution?” This is a totally different question. People are now aware that many diseases can be treated by modern medicine, and they expect the public-health system to deliver quality medicine.Increased expectations of what should be delivered have led to a greater intolerance to the existence of gaps. That puts pressure on the government to deliver faster, which is on the whole a good thing.
People today also want much greater assurance of upward social mobility. One of the most positive things about the IT revolution in this country is that virtually every single one of the icons of the IT world is a new entrepreneur. That implicit social mobility resonates extremely well with the growing number of people who are getting access to education. These expectations are now spread over a much broader range of people: the growing Indian middle class. However, rising personal incomes don’t solve all problems.
Many people who are above the poverty line don’t have access to clean drinking water and good sanitation. In the absence of those two—even if your income takes you above the poverty line—your children are likely to suffer from diarrhea and waterborne diseases, and that will lead to child malnourishment, which is a major problem in India.
The Quarterly: Are comparisons between India and China useful?
Montek Singh Ahluwalia: They’re very useful. China began with its economic reform sometime in the late 1970s and quickly transitioned to a very high growth rate. It has maintained a 9 percent growth rate for 30 years. This created a natural expectation in India that we ought to be doing something similar because we are similar in terms of many basic economic parameters: two very large—previously very poor—countries that should both be able to accelerate. For a period, the fact that China moved much faster than India did not have the impact that it should have had, primarily because everybody thought our political system was totally different.
As China began to integrate with the rest of the world, and also as East Asia began to develop, this benchmarking—if China can do it and East Asia can do it, then India should also be able to do it—became a very important positive factor. Of course, we can’t do it the way China does, because they have a totally different political system. The way it’s going to be done in India has to be firmly anchored in how a democratic and very diverse society functions. India is behind China in terms of the takeoff, but we are pretty much on the same trajectory from now on, possibly with the advantage of having learned to work in an environment where public debate is both encouraged and dealt with. [Indian economist] Amartya Sen called us the “argumentative Indian,” and it can be exhausting at times, but debate is the other side of this coin.
The Quarterly: Is enough being done to increase power capacity?
Montek Singh Ahluwalia: I have no doubt that our performance in power over the past several years is the weakest. This is a difficult area where most of the critical actions lie in the hands of state governments. The central government has to put in place an appropriate legal and regulatory framework, and the good news is that this is now in place. Performance, however, is lagging behind. In the 10th Plan, which ended a few months ago, we were supposed to add 40,000 megawatts in power capacity, and actually added only 21,000. A lot of power plants that were in the works have slipped somewhat, and for the next two years we expect to see a very large increase in generation capacity as these come onstream. We haven’t actually set the target yet for the 11th Plan, but we are hoping to be able to add about 78,000 megawatts of capacity over the next five years.
Adding generation capacity will not be a problem. The real weakness is in the distribution end. We are running a system which, at the moment, doesn’t collect revenues on something like 34 percent of power that’s pumped into it because of theft and transmission inefficiencies. Some of the revenues collected are at very low rates. The result is a system that is not financially viable, making it difficult to attract private-sector investment in generation, since the power companies are not sure they will be paid. We have to improve the efficiency of the distribution system, which includes investment in distribution, metering, and management to control theft.
The second, very important reform in distribution is open access. The Electricity Act mandates that open access to the distribution grid will be allowed for power generators starting January 1, 2009. Anybody investing in generation today knows that by the time their plant comes onstream, they can reach high-tension consumers who have a connected usage above one megawatt using the existing distribution system to transmit the electricity.
Many people say that the system would be more efficient if distribution were privatized. Very recently, the state government in Delhi did privatize the distribution system. If it turns out that Delhi has been enormously successful with this experiment, then I think maybe other states might do the same. However, that’s a politically controversial issue and not something that the central government decides.
The Quarterly: Are further reforms needed in the financial system to accelerate growth?
Montek Singh Ahluwalia: There is no question that further reforms in the financial sector are necessary. The amount of capital controls needed is one dimension of decision making. How efficient your financial system can be, given controls, is a second dimension. We’re clearly heading toward a more open capital account, but we’re not doing it in one go. There are people who argue that government should declare that it would remove all capital controls in a defined, relatively short period—say, one or two years. Others argue for steady movement over a more extended time frame, putting in place the necessary preconditions first. The government is considering these proposals but has not taken a firm view on the issue.
'We definitely need to take stock of what we have achieved over the past ten years and put it in the context of what is needed now'
The Quarterly: And the financial system?
Montek Singh Ahluwalia: We definitely need to take stock of what we have achieved over the past ten years—which by the way is considerable—and put it in the context of what is needed now, given the changes that have taken place and the much faster global integration of the economy. The Planning Commission has established a new committee under Professor Raghuram Rajan of the Chicago Business School to do some blue-sky thinking about what should be our road map over the next five to ten years or so. The idea is to take an integrated view of the financial system: looking at banks, capital markets, insurance, microfinance issues, and the whole issue of financial inclusion.
In short, financial-sector reform is not just about capital account convertibility and creating a system that ensures the corporate sector has access to the best financial services in a world of completely open capital. That is certainly a legitimate aspiration, provided it is done within a framework of manageable macroeconomic risk. But I think financial-sector reforms have to include things like: what’s the best financial system to make sure that farmers can get access to credit? What’s the best way of making health insurance readily available? What’s an environment in which different types of risks can be effectively countered? And how can you ensure inclusiveness in all this? So it’s a much larger issue.
One of the new issues we must address relates to venture capital. We want a financial system in which it’s not just the big corporations who can benefit from borrowing on the strength of their balance sheet. We want a system in which two bright guys coming out of an IIT1 should be able to attract some sort of venture capital funding to support them in pursuing new ideas.
The Quarterly: How difficult an issue is corruption?
Montek Singh Ahluwalia: Corruption is a huge problem—not just in India, but everywhere. However, India’s democratic, free-to-criticize atmosphere generates very strong incentives to hold the light up to any kind of wrongdoing. This is one of our strengths. If there’s any corruption in India, somebody will draw attention to it. As a result, we are focusing on ways of eliminating corruption in the functioning of the schemes that are supposed to reach ordinary people.
Take the state of Andhra Pradesh, for example: if you go to its Web site for the National Rural Employment Guarantee Act,2 you can click on whatever district you want. You can then go to whatever village you want, and it will tell you what projects are under way in that village and, for each project, the people who were paid. Payment of wages is made through postal-bank accounts, eliminating the scope for leakage. As we make such things transparent, the democratic process itself will throw off the wrongdoing.
As the process of economic reforms has unfolded, some of the big, concentrated sources of corruption have been systemically eliminated. The central government, for example, does not give any licenses for anyone who wants to produce something somewhere, nor does it give import licenses. You can import whatever you want, provided you can pay the import duty, which is now very moderate. This has eliminated major sources of corruption that existed earlier. But one does hear complaints about local hassles, “transaction costs,” whatever. This is where state government reforms become important.
The Quarterly: Is the task ahead more difficult or easier?
Montek Singh Ahluwalia: The initial task of undoing some visibly dysfunctional controls that had been introduced a long time ago and should’ve been abolished a long time ago was easy. The task we’re looking at now is in many ways more complex. It’s not easy to find out how others are doing it and learn from them. In the financial sector, for example, should we be learning from China? To my mind they too have a long way to go in financial-system reform. So we are dealing with areas where conventional wisdom on what is good policy is only now being established and is changing all the time.
Look at issues of common resources—water, for example. Water is a major, major issue. Should we use market solutions? Obviously, some element of market solution to create behavior incentives has a role. But there are basic property rights issues. Who owns the water? Is it a common-property resource or should anyone be able to pump whatever water they can from under their land. These things weren’t important 20 years ago, because per capita availability of water was high. But the total demand for water is shooting up, and available supply is declining because of environmental degradation. Addressing these problems is not easy, and there are no ready-made solutions. 
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