During his distinguished career in public service, C Rangarajan has served in various capacities — as RBI Governor during the momentous post-1991 reforms phase, Finance Commission Chairman, Planning Commission member, Andhra Pradesh Governor, and as Chairman of the Economic Advisory Council to Prime Minister Manmohan Singh. With that breadth of perspective, Rangarajan, currently Chairman of the Madras School of Economics, provides an up-close, insider’s account of India’s economic journey in the 70 years since Independence. Excerpts:
How would you assess India’s journey in these 70 years?
In the first half of the 20th century, the Indian economy hardly grew, and per-capita income growth rate was negative. At the time of Independence, the objective was to kickstart the economy and achieve a reasonable rate of growth. In the 1950s, there was no clear development model to emulate. The only striking experience was that of the Soviet Union, which over four or five decades almost achieved the status of a superpower. Jawaharlal Nehru was attracted to this model.
The adoption of the Soviet model meant that policymakers moved in the direction of centralised planning, with a dominant role for the state. The decision to move in this direction in the 1950s cannot be faulted. But by the end of the 1960s, it became clear that we were not achieving the kind of progress we wanted. By the end of the 1970s, the average annual growth rate was only about 3.3 per cent.
The change (in the development model) could have occurred in the 1970s, but it did not. The early signals of change came in the 1980s, when an attempt was made to provide more incentives for the private sector. But even in the 1980s, we were operating in a largely controlled framework. It was the enormity of the 1991 crisis that led to a regime shift.
In what areas have we succeeded — and failed?
From a stagnant economy in the pre-Independence period, we moved to an economy that grows; more recently, we have seen a significant rise in the growth rate. The performance of the Indian economy in terms of the growth rate, particularly in the recent period, is one of the brightest elements of the post-Independence period. And this has percolated to improvements in the social sector as well. But at the same time, some of the social indicators have fallen well below what is desirable.
How has the experience of entrepreneurs, in an era when “profit” was a “dirty word”, shaped the business landscape?
Entrepreneurs knew that the scope for private enterprise was limited. In those days, therefore, companies did not focus on marketing, but only on setting up liaison offices in Delhi. It led to crony capitalism. Whoever got a licence got a protected market, and there was no incentive to improve efficiency.
Even in 1991, when we were attempting to open up, some businessmen felt we were doing it too fast. But that is because they had to learn to come out of the swimming pools and swim in the ocean. That transition was difficult, but the basic business instinct of wanting to compete helped them move in a new direction.
What would the Indian economic landscape have been like today if policymakers had opened up the economy sooner than in 1991?
We would have gained another decade and a half at least in terms of higher growth. And given the social orientation of our policymakers, that would have allowed them to move faster to reduce the drawbacks on the social side.
How robust and forward-looking are the institutions that shape India’s economic destiny, including the RBI?
There are some institutions — such as the judiciary or the Auditor-General — that are Constitutionally mandated. The only way to ensure their independence is to allow them to perform their constitutional functions without interference.
There are other equally important institutions, which I would classify as regulators, such as the RBI or Sebi. In their case, the objectives of regulation must be spelt out clearly.
Have they not been?
Sometimes there is ambiguity. Even in respect of the RBI, what are its objectives? The RBI Act talks only of “stability”. There is no clarity on what that means. Over a period of time, certain conventions have been established. There is a continuing debate on the objectives of monetary policy: what weightage should be given to growth, price stability and so on.
Recently, a new monetary policy framework has been put in place — with which I agree. It is a clear statement of what is expected of the RBI. When there is no clarity, there is always a problem.
Once the objectives are clarified, operational freedom must be given to the regulators.
Raghuram Rajan’s experience points to a friction between the political establishment and monetary policy managers. A similar tension exists in the US as well. Why does this happen?
It goes back to the point I made: what is the role of the institution? There needs to be a proper definition and delineation of the role of the institution and the objectives before it.
In conclusion, how would you sum up these 70 years?
From where we started, we have come a long way. And even in terms of growth, one can legitimately be proud of our achievements. But it is also clear that we could have done even better in terms of faster growth if we had made certain shifts in policy earlier than we did.
The failure on the social front side is not so much in relation to our own past but in relation to what other countries have done, and what our potential was.
But growth and equity should not be posed as opposing considerations. They must be viewed together to produce an acceptable pattern of development. Therein lies — if I may say so — economic statesmanship.