Reform NAtion

To India’s entrepreneurs, who refused to die.

Contents

Preface

PART I: INTRODUCTION

1. A Tale of Two Protests

2. The Philosophy of Economic Reforms

PART II: FROM REPRESSION TO REFORMS

3. How We Got Here

4. Prelude 1: The Bombay Plan: 1944–1945

5. Prelude 2: Statement of Industrial Policy 1945

6. Prelude 3: Resolution 1948

7. Prelude 4: Industrial Policy Resolution 1956

8. Prelude 5: Industrial Policy 1973

9. Prelude 6: Industrial Policy 1977

10. Prelude 7: Statement on Industrial Policy 1980

11. Prelude 8: Industrial Policy 1990

12. The Beginning of India’s Economic Reforms, 1991

PART III: THE JOURNEY OF REFORMS

13. The Journey of Reforms

Reform 1: Abolition of Licensing

Reform 2: Automatic Equity Clearances Expanded

Reform 3: Foreign Technology Agreements Eased

Reform 4: Disinvestment

Reform 5: Abolition of MRTP Houses

Reform 6: Securities and Exchange Board of India

Reform 7: Foreign Exchange Reserves, 1991 to 2021

Reform 8: Deregulating Interest Rates

Reform 9: Liberalizing Exchange Rate Management

Reform 10: Debt Recovery Tribunals

Reform 11: National Telecom Policy

Reform 12: India Joins WTO

Reform 13: Affordable Housing

Reform 14: Convertibility of the Rupee

Reform 15: Telecom Regulatory Authority of India

Reform 16: New Normal for Personal Income Tax Rates

Reform 17: Tariff Authority for Major Ports

Reform 18: New Exploration Licensing Policy

Reform 19: Voluntary Disclosure of Income Scheme

Reform 20: Autonomy to Public Sector Enterprises

Reform 21: Electricity Regulatory Commissions

Reform 22: Internet Policies

Reform 23: Kisan Credit Cards

Reform 24: Insurance Regulatory and Development Authority of India

Reform 25: Foreign Exchange Management Act

Reform 26: Pradhan Mantri Gram Sadak Yojana

Reform 27: Information Technology Act, 2000

Reform 28: Sarva Shiksha Abhiyan

Reform 29: Prevention of Money Laundering Act

Reform 30: Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act

Reform 31: Competition Commission of India

Reform 32: Tariff Reduction

Reform 33: Pension Fund Regulatory and Development Authority

Reform 34: PPP in Railways

Reform 35: Fiscal Responsibility and Budgetary Management

Reform 36: PPP in Infrastructure

Reform 37: Airports

Reform 38: Free Trade Agreements

Reform 39: Mahatma Gandhi National Rural Employment Guarantee Act

Reform 40: National Rural Health Mission

Reform 41: Bharat Nirman

Reform 42: Benami Amendment

Reform 43: Value Added Tax

Reform 44: Foreign Contribution (Regulation) Act

Reform 45: FDI in Retail

Reform 46: Fuel Price Deregulation, 2014

Reform 47: Companies Act, 2013

Reform 48: Land Acquisition

Reform 49: Jan Dhan Yojana

Reform 50: Arbitration

Reform 51: Skills Development

Reform 52: Hydrocarbons Exploration and Licensing Policy

Reform 53: Aadhaar

Reform 54: Insolvency and Bankruptcy Code

Reform 55: Demonetization

Reform 56: Real Estate Regulator

Reform 57: GST

Reform 58: Ayushman Bharat

Reform 59: Repeal of Obsolete Laws

Reform 60: Asset Monetization

Reform 61: Labour Reforms

Reform 62: Agricultural Reforms

Reform 63: Decriminalization of Economic Offences

Reform 64: Atmanirbhar Bharat—Crisis Reforms

Reform 65: Payments System

Reform 66: Direct Benefit Transfer

Reform 67: National Highways

Reform 68: Railways Dedicated Freight Corridors

Reform 69: Power Sector Revamp

Conclusion: Beyond Compulsions and Convictions

Acknowledgements

Notes

Index

About the Book

About the Author

Copyright

Preface

Largely a bystander.

Often a beneficiary.

Always a believer.

Driving on these three wheels, the journey of my career as a writer has run in parallel with India’s economic reforms. Many of us, who began our jobs in 1991 and 1992, call ourselves ‘children of liberalization’. Before our eyes, our country changed for the better, as did our fortunes.

As a bystander, I have witnessed India’s economic reforms, and engaged with innumerable stories about and around them. I have watched the expression ‘economic reforms’ itself come out of nowhere and become part of the virtuous vocabulary of India’s economic policy lexicon. I have seen companies emerge from thin air, create value, multiple jobs and build wealth. I have tracked global investors as they rediscovered India as the land of capital opportunity, set up bases here and grew—from a trickle in the early 1990s to the open floodgates today. Appended to them I have followed the related opportunities that reforms have offered Indian workers and entrepreneurs.

Who in 1991 would have imagined that Infosys Technologies Ltd, whose IPO was undersubscribed in 1994,¹ would be one of India’s top wealth creators within a decade? That companies would be offering packages of Rs 1 crore to B-school graduates.² That with 50,000 start-ups, India would have the third largest entrepreneurial ecosystem in the world.³ That India would see a stupendous growth in the number of cars produced, a rise of almost 13 times in the quarter century between 1994–95 and 2018–19, while that of two-wheelers would rise 9.6 times.⁴ Across sectors, industries and firms, economic reforms have delivered value, growth and prosperity.

As an analyst, I have tracked the impact of economic reforms through the flowering of the Indian economy. This change in the economy, from one that had been shackled by laws, rules and regulations to one where we see a far greater economic freedom, is not only in terms of reducing government control. To me, the bigger transformation is the breaking out of policy from the philosophical-ideological bars that had imprisoned wealth creation—an idea foreign to the modern history of independent India. Sector after sector has been opened up, policy after policy has supported entrepreneurs, process after process has been relaxed. This remains a work in progress.

From capital markets to pensions and competition to real estate, new regulators have become the institutional mechanism for regulatory oversight. Most of them have performed well—India today has one of the world’s lowest-cost mutual funds because of the Securities and Exchange Board of India (SEBI) and the lowest data tariffs thanks to the Telecom Regulatory Authority of India (TRAI), while the Competition Commission of India (CCI) has ensured that there is no abuse of dominant position. On the other side, real estate regulators in states are teetering on the edge, and the Insurance Regulatory and Development Authority of India needs to be freed from industry capture.

As a beneficiary, I have seen my salary rise at a rate that has exceeded India’s GDP growth over the past thirty years. India’s GDP has risen by ten times, at a rate of 8 per cent per annum. When I joined the workforce as a trainee, little did I know that writing and editing was a sustainable job, leave alone a career. My salary was Rs 1,650 per month; today, trainees in the same job function get more than twenty times that amount as starting pay. In hindsight, I marvel that even though I had joined a low-paying profession, I am financially comfortable while doing what I want to. Along with me, millions of other Indians saw their career trajectories evolve for the better and their and salaries rise. Managers, technicians, doctors, builders, drivers, accountants, government servants, teachers, judges … We were sitting in a boat that was rising with the high tide of reforms that nourished us.

Reforms also reduced poverty. From 63.1 per cent in 1977, poverty—defined by the World Bank⁵ as living on less than $1.90 a day (2011 Purchasing Power Parity)—in India stood at 47.6 per cent in 1993. This 15.5 percentage point fall was accomplished in sixteen years. Since then, it has continuously fallen, touching 39.9 per cent in 2004 (a fall of 7.7 percentage points in eleven years), 32.8 per cent over the next five years (2009), and 22.5 per cent over the next two years (2011).⁶ While poverty has fallen, the decline in inequality has lagged. In 1993, the income share of the highest earning 20 per cent of Indians was 41.1 per cent. At 44.4 per cent in 2011, it has remained more or less the same.⁷

For decades, India was home to the largest number of the world’s poor. That changed in 2018, when it fell below Nigeria; estimates suggest that in 2020, the number fell further, moving below the Democratic Republic of Congo. In absolute terms, the number of poor in India is estimated to be less than 60 million, half of that number in 2017, a third of what it was in 2015, and less than a quarter of what existed in 2012.⁸ Moving forward, in the pandemic year 2020–21 extreme poverty was at its lowest level ever—0.8 per cent of the population. Further, as early as 2016–17, extreme poverty had reached a low 2 per cent level.⁹

As a result, I am a believer in economic reforms. The pay, perks and pensions of government servants have risen exponentially. As have wages of workers, and returns to entrepreneurs. The minimum wage that was Rs 35 in 1995, for instance, stood at Rs 178 in 2020, a five-fold rise in twenty-five years.¹⁰ I would argue that there is not a single constituency in India that has not seen its economic well-being rise over the past three decades of reforms. And yet, there are some who remain blind to these spectacular changes. I call them data atheists.

The most high-profile statistic expressing economic reforms is the BSE (formerly known as the Bombay Stock Exchange) Sensex. While daily fluctuations can be taken in stride and can often mislead on a point-to-point analysis, when seen on an average annual basis, the Sensex has jumped by more than twenty-six times in the past thirty years, from below 2,000 to above 50,000, or a compounded annual growth rate of 11.5 per cent. Economic reforms have also created disruptions in the market. Of the thirty companies that comprised the Sensex in 1991, only six—Hindustan Unilever, ITC, L&T, Mahindra and Mahindra, Nestle, and Reliance Industries—remain today. ACC, Bombay Dyeing and Century Spinning are out; HDFC Bank, Sun Pharmaceuticals and TCS are in.¹¹

Structure of the Book

This book is a reference on India’s economic history since Independence. It is the story of India’s economic reforms, its rise as a regional power, its aspiration to rid itself of poverty, create wealth, jobs, healthcare, education, prosperity. It is a saga of independent India, viewed through the prism of economic policies.

The book opens with the contradictions of the party that should be taking credit for reforms but has turned into its biggest opposer. Of course, politics is at play here. But this U-turn shows that the essential DNA of the Indian National Congress (INC) remains steeped in the ‘povertarian’ policies designed by prime ministers Jawaharlal Nehru, Indira Gandhi (who was also her predecessor’s daughter) and Rajiv Gandhi (Indira’s son) between 1947 and 1989. Here, I also examine what reforms are and attempt a new definition that coalesces around power. Although I began the book keeping as base the thirtieth anniversary of India’s economic reforms that began in 1991, the book eventually began to take me along on a course that seemed to be of its own choosing. But exploring three decades of reforms did provide an intellectual anchor around which to carve out ideas, study actions and examine outcomes.

To see how important Prime Minister P.V. Narasimha Rao was to India’s economy, the book forced me to go through and endure the frustrations of reviewing how we reached that critical point when reforms were thrust upon the country, and the financial, regulatory and moral crises were fixed. As a result, the book goes on to talk about how, captured by the political narratives of ideological entrapment, India was boxed into a wealth-shunning economic policy regime. This is a story full of sadness and melancholy, of lost opportunities and wasted time, of seeing the rest of the world fly ahead, of millions of women and men being closeted in hutments of scarcity, of smothered aspirations, of an India condemned to abjectness.

The Left-dominated politics that had deeply captured the minds of India’s leaders, policymakers and even economists of the time, created a narrative that looked at all entrepreneurs and wealth creators with contempt, draining the creative energies of enterprises into blackholes of self-aggrandizement. It made me angry—still does. It may have the same effect on readers. But reading this part of the story is important so that in the future, no leader dares to travel on this path of entitlement, dynastic privileges and power-grabbing at the cost of citizens. There are many reforms that need to peel off these taxpayer-funded excesses, grabbed by individuals in the name of institutions of the state.

The economic decline of India can be traced back to Prime Minister Jawaharlal Nehru, whose first economic policy vehicle, Resolution 1948 (See Chapter 6), I argue, laid the policy foundations for the next forty-three years of keeping India poor. The lack of a strong opposition, both politically and individually, gave him even more confidence to abuse the system. He then further choked the economy, depriving it of jobs, wealth and economic freedom through the Industrial Policy Resolution 1956 (See Chapter 7). While part of the moral base of these policies was the intellectual direction of the Bombay Plan (See Chapter 4), picking the worst ideas from it was Nehru’s doing.

This smothering of private enterprise did not abate under his daughter Prime Minister Indira Gandhi. She continued with the 1956 policy and made tiny changes in her 1973 policy (See Chapter 8). By now, the economic repression had trickled down across the political landscape. So, when Prime Minister Morarji Desai unseated Indira Gandhi, the faces changed but the policies remained the same. Morarji Desai’s 1977 policy (See Chapter 9) too echoed the squalor of the policy prisons of the past. When Indira Gandhi returned to power three years later, she delivered the Statement on Industrial Policy 1980 (See Chapter 10), with insignificant changes functioning within the same paradigm of state control and the Licence–Permit–Quota Raj. There is a ridiculous policy vacuum in the data vaults of the government as far as the policies of Prime Minister Vishwanath Pratap Singh are concerned; his 1990 industrial policy (See Chapter 11), again, was more of the same; it changed the language but retained the repressive essence.

Nobody likes a financial crisis—not households, not companies, and certainly not nations. But when the macroeconomic crisis hit India between 1990 and 1991, the resultant reforms were worth the pain. Not only did the economy open up, it laid the foundations for the prosperity that today’s young, born after 1991, take for granted and often shun. The next chapter, therefore, lays out and celebrates the next Prime Minister P.V. Narasimha Rao’s opening of these prison doors, behind which the Indian economy lay imprisoned. It talks about the constraints on the Indian economy and the resultant policy compulsions placed on the establishment.

There are three policies (See Chapter 12) here that have been opened out. First, the Statement on Industrial Policy 1991. Second, the Union Budget 1991–92. And third, the policy measures for small- scale industries. The first two were unveiled on 24 July 1991, the last on 6 August 1991. While the last policy can be ignored as a necessary political appendage, the first two have decisively changed the face of India—economically of course, but also socially when we examine other indicators such as education or healthcare. I see them as the roads on which future policies have been rolled out—policies that have simultaneously driven on and widened the reforms road. In other words, 1991 created a policy infrastructure for subsequent reforms, even the ones being implemented today. The policies have brought reforms into India’s economic discourse permanently and, despite attempts to stop it, irreversibly.

Part III explores the specific reform journeys over the past thirty years. Crafted by six prime ministers, this is an analytical listing of sixty-nine most important policy reforms over thirty years, between 1991 and 2021. These include but are not restricted to trade (free trade agreements), finance (partial convertibility of the rupee), governance (the creation of several regulators), taxation (reduced rates of taxation on direct taxes and consolidation of indirect taxes into the Goods and Services Tax), foreign investment limits, poverty eradication schemes, education and healthcare.

The concluding part of the book throws up ideas for future reforms.

The Work Ahead

Stepping back, I see this book not merely as a text of independent India’s dramatic history of economic policies peppered with tragedies and victories, but as a precursor to several future scholarly works. It provides a view that challenges some of the extant ideas. For instance, it debunks the fake narratives that prime ministers Indira Gandhi and her son Rajiv Gandhi were reformers—what some scholars have argued as ‘reforms’ were, I argue, incremental tinkerings; the hard reforms came under Prime Minister P.V. Narasimha Rao. Of course, while the sources presented are etched in facts, the views expressed are mine alone.

There is enough scope to make counterarguments that use the same set of sources to reach the opposite conclusions. But those conclusions have been reached before already, and I believe that any addition to them would be extremely marginal to the wider debate.

This entire book rests on the use of data tributaries that emanate from policies. Every policy has outcomes and any scholar with a strong data sense can analyse the past seventy-five years of India through policies.

Then, there are entire themes to be explored. Poverty and its several solutions, of course. But equally, prosperity and its struggle. Or, deological traps and getting freedom from them. And the out of sync political capture of essential economic policy.

An entire series can be done on sectoral analyses and their policy intersections. For instance, it is interesting to consider why one sector would lag the foreign direct investment (FDI) curve, while another would flourish. Could it be that the philosophical restrictions of Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi continued partly through the tenures of P.V. Narasimha Rao and Atal Bihari Vajpayee, in their allowing foreign investments?

Infrastructure is another book. Every curious mind is sure to wonder if India could have grown faster had economic policy concentrated on it in the first forty-four years, between 1947 and 1991. Is it under constraints because the prices of land have multiplied? How can the digital infrastructure of the future that is well entrenched today be leveraged for a better tomorrow?

In all these and more, I see several opportunities, hundreds of papers, dozens of books. In that context of future research, I visualize this book as a baton passed from one scholar to another. How you take this work forward, at what pace and in which direction, are for you to decide.

While these scholarly debates will continue till eternity, the bigger beneficiaries of this book will be entrepreneurs. To them I say: Read it, understand what the three generations of entrepreneurs faced before you, construct your business plan, and take India forward. Create wealth, but also jobs; follow valuations, but also share them with employees; break barriers of innovation, but also stay green. The twenty-first century India offers all these opportunities and more.

Above all, I offer this book to our political leaders. They need to know the errors their predecessors made and not repeat them. They also ought to see what has worked, and what has failed. Economic history is as much a rear-view mirror that alerts as it is a springboard that helps conquer greater policy heights, offers new directions and crafts new prosperity.

In the writing of this book, I tried to speak to the leaders of the INC. I got no response. The office of former Prime Minister Manmohan Singh told me he was not keeping well and hence couldn’t speak. Senior INC leaders told me that INC President Sonia Gandhi ‘will never speak’, the general secretary who is Sonia Gandhi’s daughter was ‘unreachable’, and her brother, the current face and possibly the future president, Rahul Gandhi was ‘inaccessible’.

I thought it was something to do with me; meeting me, perhaps, was not worth the trouble. But when I saw the INC steer clear of the celebrations of the thirty years of economic reforms on 24 July 2021, I felt it had nothing to do with anything but with the INC party politics recaptured by a dying ideology. It is a disowning of a glorious past, and arguably the one crown of policies, the one huge and positive contribution of the INC, in an otherwise decaying economic policy junkyard.

The party that had done the heavy-lifting and authored the 1991 reforms was now stepping back from its ownership. I spoke to a few Congressmen I respect at a personal and intellectual level. But beyond that, there is an INC-sized hole in this book. I hope a future scholar will get access to the INC leadership so the country can get a clearer picture of their stance. Right now, keeping in mind the party’s opposition to the three recent farm laws, which were part of its own manifesto in the 2019 elections, India will need to look beyond the INC for continued reforms. Politically, perhaps, India will also need to search for an Opposition beyond the INC.

During the same time, I had also reached out to the serving Prime Minister Narendra Modi for his views on reforms. The dominant narratives told me that Narendra Modi is not open to criticism, that he is not a reformer, that for him everything is politics, not economics. I took my chances. It worked. And I got time from him.

In the two-hour-long conversation that followed, he held forth on several economic reforms, from the theory of reforms to their policy expression. He also made life very difficult for me as a writer. First, because I approached him from a position that stated he is not a reformer. And second, because in the few months that followed, he pushed the reforms accelerator so hard that it has been difficult to keep pace. Prime Minister Narendra Modi may not have authored an ‘industrial policy’ the way Prime Minister Jawaharlal Nehru (in 1948 and 1956), Prime Minister Indira Gandhi (in 1973 and 1980), Prime Minister Morarji Desai (in 1977), Prime Minister V.P. Singh (in 1990) or Prime Minister P.V. Narasimha Rao (in 1991) did. But in the several reforms since 2014, he has shown a strong conviction for, and ability to deliver, them.

I believe that just as the 1991 reforms have inspired and pushed subsequent leaders to deliver reforms, each powering the conviction of the next, the reforms between 2014 and 2024 too will influence the next government, irrespective of its leanings. There is no going back to bankruptcy, poverty and uncertainty.

Me: I remain a bystander–beneficiary–believer.

PART I

Introduction

1

A Tale of Two Protests

Challenges to India’s Economic Reforms

Circa 2021.

Weaponization of tractors.¹ A tragic death.² Farmers block Delhi.³ Police show restraint.⁴ Threats the precursor.⁵ Violence the currency.⁶ Playbooks of protests.⁷ A foreign hand.⁸ Globalization of anarchy.⁹ Self-appointed saviours: singer,¹⁰ activist,¹¹ former adult star¹² and activist.¹³ And amid all this, the desecration of the Tiranga,¹⁴ the Indian flag, on Red Fort and a ghastly display of brutality.¹⁵ And after standing firm for fifteen months, an unexpected policy reversal.¹⁶

Not a freedom movement, not a fight against fascism, no oppressed people. Violence has unfortunately become the overarching image of protest against, and opposition to, what is seen to be the biggest reforms initiative by India in three decades. Thirty years ago, the 1991 reforms powered industry and brought India close to becoming a #3 trillion economy. Enacted in September 2020, three new legislations had the potential to transform agriculture the way the three polices in 1991—Statement on Industrial Policy 1991, Union Budget 1991–92, and Policy Measures for Promoting and Strengthening Small, Tiny and Village Enterprises—had pushed industry to a new growth and innovation trajectory. It could have been a bigger reform because, at 54.6 per cent of India’s total workforce, agriculture impacts the maximum number of people.¹⁷ Instead, it backfired.

Circa 1991.

It is not that the 1991 reforms had a smooth sail. There were voices of dissent, just as there were in 2021. The opposing voices were of entrenched industrialists—few of them are industry leaders today—who functioned under excessive control and adapted themselves to make the best of those distortions. The entry of Foreign Direct Investment (FDI) into sectors had been protected until then. Allowing it meant not only greater competition for existing businesses but also potential loss of management control for the industrialists. To fight foreign companies in the marketplace, Indian firms would need to dilute their stakes in their family businesses. Which, in turn, meant the end of using inheritance as a tool to get the CEO’s job or management control.¹⁸ This resulted in protests from what was known as the Bombay Club.¹⁹

It is surprising that despite seeing the fruits of economic reforms—both as a requirement from the outside (as the 1991 industrial reforms were), or an expression of domestic aspirations (like the 2020 agricultural reforms were)—industrialists have been, are and will continue to be, opposed to them. The two ends of India’s thirty-year journey of the economic reforms story, the reforms of 1991 and 2021, have been the most opposed, because they are the most impactful.

But it isn’t these reforms alone that have run into opposition; every smaller reform in this sojourn has also left a small sliver of constituents unhappy. Some oppositions, such as those to the 1991 industrial reforms, did not have political clout and died behind the scenes; others, like the 2021 agricultural reforms, have significant political weight, and have wreaked havoc and worked to smother reforms. This chapter examines the nature of protests in the journey of India’s economic reforms.

First Pushback: The Bombay Club, 1993

Despite the overall prosperity that economic reforms have delivered, the underlying position is that they are good as long as they impact ‘them’, not ‘us’. The two biggest economic reforms in the history of India stand at two ends of its three-decade-long journey—industrial reforms of 1991 and agricultural reforms of 2020.

There are other important reforms that have been carved out in the middle. These include but are not restricted to the introduction of regulators such as the Securities and Exchange Board of India (SEBI, See Reform 6 in Chapter 13) in 1992, the Telecom Regulatory Authority of India (TRAI) in 1997 (See Reform 15 in Chapter 13) and the Competition Commission of India (CCI, See Reform 31 in Chapter 13) in 2002. The reimagined Companies Act of 2013 (See Reform 47 in Chapter 13) is another major rethink. A national identity tool, Aadhaar in 2016 (See Reform 53 in Chapter 13) is one more reform that has become a hugely enabling tool for state service delivery providers. Most important has been the introduction of the Goods and Services Tax (GST) in 2017 (See Reform 57 in Chapter 13) that has changed the face of indirect taxes.

All big reforms will hurt some incumbents—SEBI hit the opaque practices of stockbrokers, the GST plugged tax leakages and held evaders accountable, and the CCI is breaking business cartels. Most of all, they have adversely impacted the fortunes of rent-seeking government officials.

While most reforms do negatively impact some group or the other, nothing can match the shock and awe produced by the Statement on Industrial Policy 1991 (See Chapter 12) and the three farm laws of 2020.

As far as evidence goes, the 1991 economic reforms—through opening up the economy, deregulating sectors, cutting tariffs, reducing the licence-permit infrastructure and allowing FDI—have had the biggest impact on India’s prosperity. In hindsight, these reforms, brought into force on 24 July 1991, are the reason why India is the world’s sixth-largest economy today²⁰ and will be the third-largest within this decade.²¹

They have changed the texture of the economy. The share of agriculture to India’s value, added as a percentage of GDP, fell to 18.3 per cent in 2020 from 27.3 per cent in 1991. While this fall is in tune with global trends (the share of agriculture has come down to 5.5 per cent in 2020, from 9.8 per cent in 1994), the extent is lagging—with agriculture contributing less than 1 per cent to the GDP of the US, Germany and the UK, 7.7 per cent to China, and 1 per cent to Japan. The share of industry has fallen marginally, from 26.4 per cent in 1991 to 23.2 per cent in 2020.²²

The foresight of the authors who crafted these reforms was as bold as it was risky. It was bold because the Statement on Industrial Policy 1991 was not merely a change in the administrative stance of reforms choices and their economic governance. Its audacity lay in the fact that after decades of shunning entrepreneurs and wealth creators, it provided the first moral support for doing business. It followed the Industrial Policy Resolution of 1956 (See Chapter 7), the Industrial Policy of 1973 (Chapter 8), the Industrial Policy of 1977 (Chapter 9), and the Statement on Industrial Policy of 1980 (Chapter 10). It was risky because it contained within it the seeds of the destruction of those who had benefited from the infamous licence raj.

Prime among the adversely impacted was the world of incumbent businesses, especially those directly affected, through their associations—the Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), the Associated Chambers of Commerce of India (ASSOCHAM). Within two years of the Statement on Industrial Policy 1991 being drafted, a new and informal group that the press informally called the ‘Bombay Club’ came into being.

The Club sought protection through a ‘level playing field’. Their key arguments against the opening up were the potential destruction of India’s indigenous industry, particularly capital goods. As a result, tariffs should be brought down slowly and foreign investment should be limited, the Club argued.²³

The political weight of the Bombay Club was inadequate for several reasons. First, protectionism as an economic strategy was the norm rather than the exception. Sri Aurobindo:²⁴

I am not afraid of being thought a heretic with regard to economics, if I say that I think we need Protection to enable our industries to reach their growth. The economic history of Germany and America shows that there is a stage in the growth of a nation when Protection is necessary… A high wall of tariffs has secured to American manufactures the home market as an undisputed field for their own development; and India, maimed, and helpless as she has been, may expect that relief from her beneficent Government.

Second, though protectionism was part of the swadeshi politics of the largest Opposition party, the Bharatiya Janata Party (BJP), the number of seats were not enough to stall reforms. The BJP had 120 seats, against the INC’s 244. By tying up with smaller parties, the INC formed the government, with P.V. Narasimha Rao as prime minister.

Third, in the social atmosphere that saw wealth creation as evil and wealth creators as economic sinners, there was little public sympathy that could be galvanized politically. The only constituency that the Bombay Club could have harnessed, the labour force and trade unions, had an adversarial ideological relationship with capital and a class conflict. Dwijendra Tripathi:²⁵

The vigour of the multinational invasion alarmed not only isolated groups of politicians and intellectuals, too attached to the old swadeshi concept, but also some captains of the Indian industry, who until yesterday were crying hoarse against the excessive governmental control. The leaders of the group of industrialists, the so-called Bombay Club, wanted the government to create what they called a ‘level playing field’. They wanted the government to regulate the multinational entry in such a manner that they, with their vast resources, did not swamp the Indian producers of goods and services. Among them ironically was Ratan Tata, whose predecessor, J.R.D. Tata, had continued to lament the excessive presence of the government on the nation’s economic horizon throughout his life.

The argument for a level playing field had a strong basis. If Indian industry had been shackled for decades, how could it compete against global players overnight? Surely, an India-first policy should precede globalization. In other words, open the Indian market to Indian companies before allowing foreign companies in. This argument was economically logical but politically inconsequential. The high cost of power, the long turnaround time on ports, the harsh labour laws, an inefficient and scattered indirect taxes system, the high cost of money … all were barriers to Indian entrepreneurs. This is other than the licence-permit system, under which bureaucrats controlled what businesses could produce, in how much quantity, and to be sold at what price. How could economic actors functioning in a compressed regulatory system that thrived on and celebrated shortages be expected to fight those accustomed to open markets without a lead time?

The problem with the Bombay Club was that it was motivated by the practical impact on their businesses—it was not a principled stance. Selectivity underlined its philosophical signature, firm-level interests drove support of or objections to policy choices, and promoter interests reigned supreme. On deregulation and delicensing, for instance, there was wide support. The opening up of the economy had been something the industry had been seeking for more than a decade. On trade liberalization, there was selective support. The industry supported a lowering of tariffs on products that were inputs to industry; but when tariffs were lowered for competing products, the same Club opposed it. Finally, on the relaxation of FDI there was no support.

The lobbying by the Bombay Club was not heard and trade barriers were scaled down. Ajay Shah:²⁶

Customs collections as [the] per cent of merchandise imports dropped first from the worst value of 61.6% in 1987–88 to 37.5% in 1992–93, and stagnated to 30.85% in 1996–97 as lobbying by industry resurged. When a tariff goes from 100% to 30%, there is still a lot of fat for local producers; but progress from 30% to zero arouses greater opposition from local producers. In Yashwant Sinha’s period, the tactic of cutting the ‘peak