Montek Singh Ahluwalia is a key backroom player in pushing through reforms in India. Politicians like Finance Minister P. Chidambaram sell reforms to the people; Ahluwalia, the deputy chairman of the Planning Commission, talks to the economists, often providing the measured voice of reason.

Ahluwalia was among the participants at the recent meeting of the University of Pennsylvania’s Center for the Advanced Study of India (CASI). Both CASI and the set of reforms that brought about economic liberalization in India are celebrating their 20th anniversary. Ahluwalia spoke to CASI director Devesh Kapur via teleconference about recent developments and where India is headed.

The reforms, says Ahluwalia, have worked, though there are areas in which work remains to be done. There is some dissonance, too, because people’s expectations have gone up. But the dominant impression is that things are changing, and the changes are for the better, he tells Kapur.

An edited version of the transcript follows:

Devesh Kapur: This is the 20th year of CASI, which is roughly 20 years of India’s economic reform. As you look back, where do you see the biggest successes and the biggest weaknesses?

Montek Singh Ahluwalia: Well, l think the biggest success quite clearly was in getting rid of innumerable domestic industrial controls and also a lot of controls on external trade and external payments. That used to be the big description of what was wrong with India.

There was a huge amount of nervousness on the part of many people as to whether the economy would do well as a result of [economic reforms], and I think that’s been an outstanding success. We haven’t had the kind of stresses that people thought we would have.

On the other hand, expectations have exploded in this period. So, while on many dimensions, one can say that everybody has benefited or very large numbers of people have benefited, I think it’s also true that with greater media awareness, there’s much greater knowledge of what’s happening not only abroad but domestically within the country. [So] there is a much greater perception that while we may be better off than we were earlier, many others have benefited a lot more.

So I think there’s a combination of some sense of dissatisfaction of expectations not being met but, at the same time, an acknowledgement that the country looks a lot stronger than it did in the 1990s.

What are the weaknesses? In institutional terms, the economy was used to relatively slow rates of growth and it made the transition to higher rates of growth. But the supporting infrastructure needed to sustain those higher rates of growth took time for us to focus on as priority areas. For example, if you need a lot more energy, then you need a lot more coal. And if you need a lot more coal, then you’ve got to get your mining act together. These are areas where the policies were not very transparent. Awareness of how to do these things better is now much higher and so there is really a need to focus on how to get over these constraints.

Kapur: One of the transformations that one thinks might have happened is about the role of ideas. And if one thinks of India’s intellectual elites or policy elites, there seems to be some skepticism on the role of the price mechanism to allocate scarce resources. True?

Ahluwalia: That’s certainly true for critical things. For certain things — issues like energy pricing, and commodities like pharmaceuticals — there is a perception that the market mechanism may not work.

I want to emphasize that the skepticism about the market mechanism not being very effective in certain circumstances is really consistent with economics 101. We know that markets are highly imperfect and, in certain circumstances, markets do not really deliver the goods. Now there are some people who tend to use this as a general purpose indictment of virtually all markets. I think what you have seen in the U.S. is really a reaction to pretty evident market failure in the financial sector, which is being combined with a perception of a lot of greed in the financial sector, a lot of anger [about] banking fat cats doing quite well while unemployment is high, [and] this has led to a backlash. Interestingly enough, this is kind of spilling over to many other countries, and in my view, quite wrongly being interpreted in India beyond its relevance for the financial sector.

But you’re right when it has anything to do with the role of prices where they affect the poor. And I suspect [it applies to] key commodities like energy, where there is a very strong presumption that prices should be aligned with global prices. [But] we happen to be energy deficient. For a deficient country that is importing this stuff, to keep energy prices low and to have to subsidize them, you need an understanding that the subsidy is not a free lunch. I don’t think there’s adequate appreciation of what are the distortionary consequences of interfering with the market mechanism. That is an intellectual failure on our part. The debate just hasn’t focused on that adequately.

It is known that the diesel price is lower [in India] than it is in Pakistan, lower than it is in Sri Lanka, lower than it is in Bangladesh, and certainly lower than any sort of global benchmark. [Yet there are protests.] So that does suggest that there is a belief that you can keep subsidizing these things.

Kapur: One issue that comes up constantly when you compare China with India is the very stark differences in capacity to implement. The sort of thing you hear a lot is that the Indian state has the engine of a pull-cart and the brakes of a Rolls Royce. Why is it that, over the past 20 years, we have made so little progress on that front?

Ahluwalia: I think that a lot of it is connected with the fact that the rules under which the government has to operate are not being made very clear. But public scrutiny and public views on what’s the right thing to do have [increased].

I would say policy has moved, but not as a result of somebody sitting quietly and saying, ‘OK, we’re going to change.’ It has moved, if you like, in a typically Indian sort of way, with lots of public controversy and debate and dithering and so forth; then the government gets criticized for that also.

But I think the silent manner in which government functions — even the use of the file as an instrument of decision making — is completely outdated. What happens today is that an issue is first pronounced upon by a very junior person, and then pronounced upon by the next senior person, and the next senior person. And you can easily imagine the same decision taking place around a meeting, where a paper is prepared, everybody discusses it, and then you take a decision. In my view, the latter would be an infinitely better way of doing things. The former essentially forces each individual to express his views in sequence without the option to modify them in the light of the view expressed by someone else later. And the whole thing can later on become a basis for questioning bona fides, which of course makes everyone make very cautious decisions. Why are we not changing it? That’s a good question. I think we should. We should just scrap the system, but it would require a very major re-think on how the government functions.

The finance minister has made a very interesting suggestion, because we had raised this issue. And what was suggested was that in the case of infrastructure projects, we should set up something called the National Investment Approval Board. It would be chaired by the prime minister. At the moment, different permissions have to be given under different statutes. What he suggested is that we should change the rules of business for large projects, because large projects are the ones that need multiple clearances. The permission should be given by the cabinet secretariat based on a sort of decision taken by an inter-ministerial group headed by the prime minister. This in effect would mean that responsibility would move up. And the usual delays, where individuals are not quite happy to take responsibility, would disappear. Now that’s a very radical suggestion. I’m in favor of it. We’re putting it in the 12th plan document. Let’s see if we can actually move in that direction.

Kapur: When the reforms began India also introduced the 73rd and 74th constitutional amendments to give far greater power to local governments. Yet there seems to be very limited progress. Why is that the case? What are the constraints there and what can be done?

Ahluwalia: Opinions vary depending on whether you talk to the center or the states. Constitutionally, these amendments were meant to adopt the principle of subsidiarity, and make the relevant level of government responsible for the services which [it] actually delivered at that level. This meant the devolution of what is called functions, functionaries and finances. What actually happened is that the functions got devolved. In some states, functionaries also got devolved. [But] there’s been a great deal of resistance to actually devolving…

The worst has been finances. In the central government’s view, the structure of those constitutional amendments was that each state would appoint a state finance commissioner and the state finance commission would say that, given that functions have devolved, X% of the tax revenue of the state should now devolve.

I think this is a very crucial point because you can’t have decentralization if you don’t have financial autonomy. Part of the problem also is that at the lower levels of government, it seems as though they simply want to get money from the top. One part of being responsible is that you raise your own funds. For example, if land revenue was decentralized to a [local] level rather than a state level since the concentration of ownership of land is quite high, you could always have a legal limit to what the rate of land revenue would be. Politics would then work in favor of the majority. Most states just abolish land revenue [and] property taxes. It has just evolved to an entitlement approach. Some states have done devolution but [it] depends across states. Very little has been done for capacity building at the local level.

Kapur: You’ve been trying very hard to change things for three decades. One thing I think that was in the background in the 1991 reforms was that reducing the discretionary powers of the state would also reduce rent-seeking by the state. Yet I think it’s fair to say that in the past two decades there has been a widespread perception that rent-seeking has, if anything, increased — and increased massively — and has also become much more brazen. And this result is a contradiction. Liberalization was supposed to reduce rent-seeking by reducing the discretionary power of the state, but we seem to have got exactly the opposite.

Ahluwalia: It’s not true that there was no rent-seeking earlier. The entire system of allocating industrial licenses and import licenses was totally discretionary. It was something that was accepted. Government was assumed to know better. Nobody ever complained. It was all regarded as part of a caring state doing the best it could.

What has happened is that there are certain areas where the rent-seeking capacity remains — those areas are minerals, [telecom] spectrum, and also land. So I think what has happened is that a huge amount of rent-seeking [that was earlier] spread all over the place has gotten a lot more concentrated into these particular areas.

I [also] think you are underestimating the fact that we are operating much more like goldfish in a bowl. In 1991, the number of TV channels was very small. You didn’t have anything comparable to what you have today, both in terms of the right to information [and] in terms of a more active role on the part of regulators. [This] is a good thing. You know, it’s the demystification of the state. So if you want to take a potshot at the government, it’s open season. And we have a press that revels in bringing out the latest scandal. So all of these things are being hugely magnified.

I think this is a growing-up period. This is making people realize that, look, you just have to be more transparent. The system will come out of it stronger; there’s no doubt about that.

Kapur: Is there anything that gives you sleepless nights?

Ahluwalia: I tend to read a lot of boring history books to make sure I get to sleep. What makes me optimistic is the following: Number one, the sense of being caught in a logjam, of being constantly under attack by skeptics, is essentially a characteristic of the geographical area defined by a circle with a radius approximately 25 kilometers around Parliament House. Outside of that, there’s a tremendous amount of energy. People are seeing a tremendous set of opportunities. Not that they don’t have the same problems of rent-seeking and so on, but the dominant impression is that things are changing and the change is good.

We may have gone through some difficult twists and turns. Those who are caught in those twists and turns may take a dim view. But it’s totally clear now that the policy that’s been laid out is completely transparent. As long as you have states that are willing to move — and I think they will move, because they realize that delivering on economic growth is an election-winning strategy — I expect to see continuing debates on things [at] the national level.

We have ridiculous debates about letting FDI [foreign direct investment] come in and things that other countries have done 20 years ago, but that will happen in New Delhi.

I think one of the most interesting things that has happened is the success of the strategy of pushing for public-private partnership. The one thing that [the Planning Commission has] been trying to push in the past six or seven years is the recognition that the money of the central government has to go to the social sectors. But the other area that can’t just be left to the private sector is infrastructure development. You can bring in the private sector in various types of public-private partnership arrangements. And the success of that would be quite remarkable, not just in the center, [but] in the states also. Many states have taken the ball and run [with this idea]. Many states have delivered very good PPP [public-private partnership] projects. Every one of these projects is a lesson on how to do it better the next time around. I personally feel that the country is experimenting and the country is learning a lot more than people think.