Madras School of Economics Chairman Dr Raja Jesudas Chelliah is considered an expert on economic reforms, poverty studies, public finance, and taxation. In an interview to Contributing Special Correspondent Shobha Warrier, he spoke about India's economic reforms, the performance of the National Democratic Alliance government, and what is expected of the United Progressive Alliance.

Thirteen years after economic reforms were launched, politicians are now talking about reforms with a human face. Did we go wrong somewhere?

When we started economic reforms in 1991, we concentrated on the most urgent things that anyhow had to be done, like de-licensing, reform of the exchange control system, financial market reforms, and banking reforms. We didn't have the time to sit down and think exactly what kind of a development model we needed. Thereafter, in 1994-19, the reforms slowed down a bit.

Then, the United Front government came to power and it also did not have a clear idea about what model it wanted. It only knew that the (economic) opening up had to be there and that we had to be a part of the world. We couldn't continue in the old model of a closed economy. But further on, there was no thinking on what kind of an economic and political society we would see, and perhaps there was no agreement.

Then came the National Democratic Alliance government (in 1999) and originally they had some problems because they also had, in the Sangh Parivar (a collective term for parties affiliated to the Bharatiya Janata Party, the largest party in the NDA) and the Swadeshi Jagran Manch, some strong elements of economic nationalism. But I believe the thinking elements led by Prime Minister Vajpayee felt we had to continue with reforms though it seems they also didn't have a clear idea as to how we should balance the interests of the different sections of society.

They (the NDA) were clear about cutting down the size of the public sector, reforms in the telecom sector, giving a push to the IT sector, and getting more foreign investment. But the impression seems to have gained ground that they were adopting a totally capitalistic model or the Washington model. This is not true but that was the impression.

The Left criticises that India has become a slave of the IMF, the World Bank, etc.

There are three groups in India. One, the social activists led by Arundhati Roy and Company who say this neo-liberalisation is leading to the impoverishment of the poor, and helping only the rich.

Then there are the pure Leftists who often don't think clearly, who say we are dictated to by the IMF and the World Bank. All that is not true. The truth is that we don't have to borrow money from the IMF or the World Bank. We have enough reserves. We don't have any balance of payment problems. Nobody mentions this except Vajpayee. Maybe now Manmohan Singh too will. We have achieved self-reliance and can grow on our own. The ADB (Asian Development Bank) is going to borrow from the Indian market. This is an aspect of self-reliance: growth on the basis of your own exports and the capital you attract on commercial terms and not on charitable terms. The rupee has not become a convertible currency because we don't want to make it. Otherwise, it has all the characteristics of a convertible currency. Everybody will accept it now.

The third group is a group of economists who say these reforms do not have a human face. But not one of them has sat down and clearly examined what is wrong, where it is going.  It is obviously wrong to say that reforms have not helped because per capita income is growing in many states and patterns of consumptions are changing. If you look at the NSO (National Statistical Organisation) consumption data, you find that in 2002-2003, there is clearly a spread of higher consumption to the lower classes.

That again is criticised by many who say that reforms are creating a consumerist society.

The fellow who criticises already has a refrigerator. Of course, I want to make this a consumer society. I don't want a Gandhian society. We want everybody to have at least the most essential goods. But if you give freedom to people, they are not using that freedom. If you are free to consume and free to produce, people will produce goods that people want. If they don't want to be a consumerist society, they will not buy and they will not produce. 

You said even the NDA while going ahead with the reforms didn't have a proper idea how to go about it. Why was it that there were no debates during that period? Why was it that at least economists did not sit together and come out with a plan that would benefit all sections of society in some way or the other?

I wouldn't say there was no thinking on it. Yes, there was no systematic attempt to see two things; one, how have the benefits of reforms distributed, and two, ultimately what kind of society we want to have, what model of development should we have? Only now the present prime minister has talked about the model of development. He has said our model of development will be the model for the rest of the world.

At present, is there a tested model to fall back upon?

At the moment, many people feel we are just going along with the globalisation pattern laid down by America and its allies. It may not be true. The fear is that this may become a society dominated by the rich and the powerful and by business interests; that they will dominate to the level of dictating to the government, which they are doing in America, but not so much here.

The Left has now brought in the question whether all public sector enterprises should be got rid of. We did not want the monopoly of the public sector. This was the idea of the Narasimha Rao-Manmohan Singh (of the Congress government in 1991-1996) reform package. Even then the Left was saying it do not want privatisation beyond 49 percent. We were then saying competition is essential, so we must have private banks, private insurance companies, etc, all of which the Left totally opposed. I think they have a mixed economy in mind, where the private sector would compete with the public sector and keep it on its toes so that the private sector would not become the only dominant force. They also might have felt that the public sector banks are important in a poor country like ours. I also agree that we must have strong public sector banks not so many but a good number.

When the Indian economy was opened up and the reform process started, economist talked about the 'trickling down' effect but the criticism is that 'trickling down' has not taken place. After the defeat of the NDA, the argument has gained momentum. What do you say?

That is only the feeling. The 'trickling down' effect has taken place but not enough. The poor are angry because their conditions have not improved sufficiently.  If you look at the consumption data, you will see that trickling down has taken place. Also, I do not completely trust our employment data. Our employment data seems to show there is not much improvement in employment but I don't know whether that is true.

It is also not correct to say that if you have only information technology, there is no benefit. If I employ 1,000 IT people now, they in turn improve the lives of many connected with them because they spend on many, many things which will have secondary, tertiary effect and so on. BPO companies, apart from the salaries they pay, incur expenditure.  We also have increased our population in the past, which now increases the labour force. That is why there is this unemployment problem. That is because we did not grow fast enough earlier, did not control population efficiently. So it will take another 20 to 25 years to give employment to all.

It may also be true that distribution has shifted a little more in favour of the richer classes because of the nature of the industries with which we are moving. If there was greater thrust on the agricultural sector, may be there would have been more spread. So, two major things have to be examined now.

First, ultimately, what kind of a society you want to have and what kind of a model you want to follow. Should we have permanent public sector and make it efficient? If it's not efficient, we should be able to chuck out the man running it. Is that the idea?

Second, how far we should go along with WTO and what the areas are, in which we will offer resistance along with other developing countries. We want to be a part of the world economy but we want the WTO rules in such a way that they protect the weaker sections of our society. We have to think about this seriously. We also have to think about what kind of federal system we should have and how we should improve governance. The change of government has given us an opportunity for us to re-examine all these.

The re-examination by the new government has resulted in them talking about subsidies, free power, etc once again. It is like going back to the old days.

If they are going back, it is not good. If they indulge in populism in the name of 'reforms with a human face', they will lead the country to ruin. It will not benefit either the rich or the poor. Subsidies have two different important aspects. One is the redistribution aspect, that is, I am giving something at a price lower than its cost to the poorer sections. To meet that difference, I tax the richer section. That is the idea.

The second aspect is, whenever you subsidies something, its consumption goes up, and it is expected to go up. But if you subsidise it in an unlimited way, the consumption will be pushed up too much. So, if you give free power without limit, then they will misuse power. One has to say as an economist, that absolutely free power without limit is out of the question but that was what we had in Tamil Nadu earlier.

As an economist, are you happy with the reform process India has followed?

Some reforms have been very good, substantial. We have become self-sufficient externally. [Former Reserve Bank of India Governor] Bimal Jalan wrote a book on Indian economy in which he said that for so many years before 1991, every year we had some problem or other with our Balance of Payments. We had the Aid India Consortium in Paris where so many countries would come together under the aegis of the World Bank and talk about how much each country would contribute to help India. We are now independent of all that kind of aid. We have gone to a slightly higher rate of growth.

The second important thing is that we can now cope with a serious drought. In 2002-2003 we had a severe drought, still there was no great disturbance to the economy. People did not even have lack of food except for those whose crops failed (that issue is there). It was not like 1987-1988 when everything was disturbed: rush for food from outside, prices going up and growth getting affected.

We have reached a stage where there is only moderate inflation. Low rate of inflation and higher rate of growth are some of the achievements.

The reforms are intended ultimately to benefit the majority of the people. Maybe that has not been achieved. My own feeling is that a good bit of trickling down has taken place, if we analyse the consumption pattern.

Are you happy with the way the NDA went ahead with the reforms? The criticism against the previous government is that they accelerated the reforms in such a way that it helped only the rich.

I don't think so. I feel we should not blame them too much. It is not as though the earlier reformers had clear idea of the limits of globalisation. The NDA has done some very good things. Take, for instance, the reform in the telecom sector. During their regime, foreign investors increased. Some people would say they opened up too much but that is a political idea. I don't think they were opening up recklessly.

One thing I disagree with them is in disinvesting big profit-making public enterprises. They did not listen to the opposition in their own party. There was no reason to disinvest profit-making PSUs. Would it have accelerated the rate of growth? No. I disagree with Arun Shourie in that matter. When ONGC and IOC (Oil and Natural Gas Corporation and Indian Oil Corporation respectively, two of India's largest companies) are doing well, why do you disinvest them? Arun Shourie should not have wasted time on such controversies. Other than that, disinvesting a small portion was a good idea.

The moment the Left became a part of the central government and started their criticism against disinvesting or privatising profit-making PSUs, the market started going down.

Let the market go to hell! We need not worry about the market at all. Ultimately, they will have to come up. We don't have to bother about the market behaviour at all. If we do the right things, the market will come around. It is true that some people will be very upset about this and therefore, they are nervous. They may wrongly conclude that the rate of growth will go down. So the government will have to reassure them. If they say they will increase subsidies, they will give free power, they will bring ruin and they will be thrown out.

Do you feel the NDA government neglected the agricultural sector?

It is partly true. I think the weakness of the NDA government was that nobody really knew the economy except the prime minister. (Deputy Prime Minister L K) Advani had no knowledge, so he did not interfere. The finance minister, poor fellow, he was an army man (Jaswant Singh, who retired as a major from the army and who was finance minister from 2002 to 2004), what did he know about economy? He is a good, intelligent, honest man but didn't know much about economy.

One mistake the NDA government made, mainly because of opposition from the lower rungs of the BJP and the Rashtriya Swayamsevak Sangh, was to throw out Yashwant Sinha [who was finance minister from 1999 to 2002]. He was following the correct policies, exactly the policies that are opposite to what the Communists want. The BJP thought they lost some by-elections because of him, but that is not true.  So there was no one knowledgeable about agriculture. They didn't put enough investment in agriculture.

Then, you must in all fairness also say that it has to be done by the state governments. It is the deterioration at the level of the state governance that was partly responsible for the rural people not getting enough. We should not blame the Centre too much.

As an economist, I would say the NDA did not lose because they carried out reforms. Maybe reforms did not benefit the poor or the ordinary person sufficiently; maybe it is true. But it certainly improved his position because of the lower rate in inflation, food availability, etc.

When will the poor really benefit from reforms? When will the real trickling down take place?

Definitely, we have to change in terms of governance. We have to spend more on rural areas and agriculture. Agricultural reforms mean not just spending money, but also research, diversifying crops, looking more carefully at the questions relating to foreign trade and WTO. I don't think the NDA neglected it. But more work was needed. The government had to clarify to the people also about the advantages and disadvantages.

As an economist, when do you feel we will cross the developing status?

Production wise, we have reached the developed status but not living standard wise or social development-wise. I think people as a whole have to participate more. They should not keep away. Non-governmental organisations have a very important role to play. They can supplement. I also have hope in the younger generation who have modern ideas. They will give up many of these older ideas and will work more sincerely. We have to wait for them to come to power. I feel the next 25 years are very crucial.

Dr Chelliah's photograph: Sreeram Selvaraj

Image: Uday Kuckian