Date: 21/07/2016    Platform: Economic Times

25 years of reforms: Why 1991 is a turning point of similar importance as 1947

It is likely that future Indian school-children will be made to learn two important dates from the 20th century: 1947 and 1991. The importance of 1947 is obvious, but why is 1991 a turning point of similar importance?

One could argue that 1947 saw political power shift from a foreign-born elite to an Indian-born elite. This was undoubtedly an important change, but it carried forward a top-down mindset that a tiny group of ‘wise men’ knew what was best for the rest of the population. This thinking was embodied in every level of national life — economic, social and cultural.

Thus, a tiny group of planners led by PC Mahalanobis could decide how to allocate all economic resources. A handful of business conglomerates cornered all industrial licences. Encouraged by the thinking of Le Corbusier, urban planners could encode rigid masterplans that decided how people led their lives into perpetuity. A small clique of intellectuals and editors, supported by state-controlled media and academia, could tell people what to think.

For all the socialist rhetoric, this system perpetuated the power of a small elite — political dynasties, business dynasties, even entertainment dynasties flourished. It should be no surprise that, with the exception of the Ambanis, the top business families of the 1990s were the same as those of the 1940s.

Defenders of the Nehruvian project will argue that the failures of the system were not apparent for decades. Far from it. The term ‘License Raj’ was coined in the 1950s by C Rajagopalachari, who predicted the corruption and inefficiency that was to follow. LIC was nationalised in 1956 and within months its resources were being plundered by politically linked groups. This resulted in the Mundhra Scandal of 1958 that was exposed by Feroze Gandhi. Rather than acknowledge the problem, Jawaharlal Nehru cut off links with his son-in-law.

It was more than obvious by the 1970s that the Nehruvian model had failed. However, establishment economist Raj Krishna dubbed the poor economic performance as the ‘Hindu rate of growth’. In other words, India’s cultural and religious traditions were at fault and not economic policies. India had failed Nehru and not the other way around.

Enormous resources were used to bolster intellectual justification for the failing system. Institutions like JNU were created explicitly for this purpose and an elaborate system of national awards and positions was built to promote loyalists as public expense.

Thus, when reforms finally came in 1991, it was due to economic collapse and not a change in mindset. With a few notable exceptions, the leading Indian intellectuals of that time were unanimous that liberalisation was a bad thing.

So, when finance minister Manmohan Singh presented the Budget in February 1992, he felt it was necessary to say, “Our nation will remain eternally grateful to Jawaharlal Nehru for his vision….” He concluded the speech with “Tonight I feel like I am going to the theatre. Let the assassins be informed, I am prepared for the onslaught.”

Only when one re-reads these words that one recognises the political risks Prime Minister Narasimha Rao was taking by liberalising the economy. He was not just unwinding industrial licensing but a quasi-feudal oligarchy that pervaded every sphere of life in India — a process that is still not complete.

It is now 25 years since the liberalisation process was initiated. New business leaders, writers, sports stars, and more broadly a new middle class has emerged who are not beholden to public sector largesse. What is extraordinary is that despite obvious improvement in economic and social indicators, reformers still struggle to make a case for basic changes.

The reason for this is that the intellectual and institutional framework of the Nehruvian project was not systematically replaced. It was only in 2014 that the Planning Commission was finally abolished.

Academia remains in the firm grip of the old mindset.

Although remnants of the Nehruvian apparatus need to be unwound, the next 25 years should focus on building a new system. The alternative to the top-down, allpervasive Nehruvian State is not necessarily a minimalist, libertarian one. India needs a strong but limited State that focuses on creating an open framework that allows bottom-up innovation, risk-taking and social mobility.

The creation of such a State still needs political leadership, but one that addresses framework issues: basic infrastructure, internal/external security, simple tax system and so on. Most importantly, the State must be able to enforce laws and contracts.

Abottom-up economic and social structure is all about how various entities interact independently with each other. Such a system cannot function with 34 million cases stuck in courts. This is why the next generation of reforms must be about transparent laws, quick judicial process and reliable policing.

Just as 1947 gave us independence from colonial rule, 1991 started the process that gave Indians freedom from a self-defeating mindset. The next big turning point in Indian history will be the year when we finally get serious about reforming the legal system. I hope 2017 will be that year.