Chidambaram Says India Has Lost Competition, Slams Modi Government's Reforms

In an interview with Asit Ranjan Misra and Gireesh Chandra Prasad of Business Standard, Chidambaram, who later served as finance and home minister during the Congress-led United Progressive Alliance's tenure, said he did not believe the prime minister had the conviction that India needed economic reforms.

"I don't think the prime minister has the conviction that India needs economic reforms," Chidambaram said. He said Modi, as chief minister, like many other chief ministers, had believed in a closed and regulated economy.

Chidambaram said Modi may have changed his position over the past 12 years and understood the need to open up the economy, but questioned which sectors had been opened up during the last five or six years. He argued that competition had actually declined in several sectors.

"Lack of competition is the enemy of a free economy," he said, stressing the need for a free and competitive economy. He questioned which sectors in India remained genuinely competitive and said foreign investors would not come to India if they feared they could eventually be driven out.

Referring to the telecom sector, Chidambaram said several international telecom companies were much larger than Airtel and Reliance Jio and questioned why such companies were not more prominently present in India. He specifically asked why Vodafone, a large global telecom company, was not operating in India in a more visible and dominant way.

On India's failure to significantly increase the share of manufacturing in GDP despite 35 years of reforms, while China's manufacturing sector had experienced a meteoric rise, Chidambaram said the country had no successor to former prime minister Manmohan Singh.

"We have no successor to Manmohan Singh," he said, arguing that for 12 years the National Democratic Alliance government had not had a technical and economic expert of Singh's calibre.

Asked whether the Congress-led UPA government, which remained in power for 10 years until 2014, should also accept responsibility, Chidambaram rejected the comparison.

"Why don't you go to 1947?" he said, calling that the BJP's language of asking how many years a party had ruled. He said the discussion should focus on the period since 1991.

Chidambaram said substantial reforms were undertaken between 1991 and 1996, putting India on the path of liberalisation and an open economy and bringing significant benefits.

He pointed to the six-year gap that followed and said the Congress returned to power in 2004 with Singh as prime minister and Chidambaram as finance minister. His tenure as finance minister was interrupted for three-and-a-half years by Pranab Mukherjee.

Chidambaram said the UPA government undertook numerous reforms and that he had written a column listing the measures introduced during that period.

He argued that reforms had to be implemented sequentially and could not all be completed on the first day of a government. He cited the expansion of the stock market, which required the establishment of depositories and legislation for the Securities and Exchange Board of India.

Sebi then had to introduce several regulations for different segments of the stock market. Chidambaram asked who had undertaken those reforms and pointed to the fact that a share transfer could now take place in 10 seconds because of dematerialisation.

He also cited the insurance sector, saying it had witnessed explosive growth after private players were allowed and foreign insurers were permitted to enter the market.

Chidambaram said the UPA had proposed 24 per cent foreign direct investment in insurance, but the BJP had strongly opposed it. He said the government then offered to begin with 10 per cent FDI, which the BJP also rejected, before the sector was subsequently opened up.

He noted that 100 per cent FDI had now been allowed in insurance and said there had been political resistance to every instance of economic opening.

Asked to identify five structural reforms India needs immediately, Chidambaram declined to advise the present government.

"I am not advising this government because this government will reject it," he said. "Let the people elect a non-BJP government and I will advise."

On the global shift from multilateralism towards aggressive tariffs, protectionism and bilateral trade agreements, Chidambaram said the world was moving backwards towards protectionism and India had also followed that direction.

He cited India's anti-dumping duties, tariffs and quality control orders as examples of protectionist measures.

"We should open up more, but then we can't open up unilaterally," he said, stressing that if other countries did not open their markets, India would be constrained.

Chidambaram said India should work with other countries to revive the World Trade Organization and its dispute-resolution mechanism, which he described as practically dead. He said countries should put pressure on one another to restore the WTO so that it could function again.

He argued that India could not unilaterally open its economy unless there was a rules-based international order, but said that was the direction India and the world should pursue.

On why private capital expenditure had not picked up despite numerous government incentives, Chidambaram blamed the government and said private capital was trapped between four barriers: regulation, investigation and enforcement, crony capitalism and bureaucratic hurdles.

He questioned the number of new regulations and rules introduced every day by various ministries and asked who would bring money into India under such conditions.

He also criticised what he described as investigation at the drop of a hat and bureaucratic hurdles. Citing anecdotal evidence, he said no minister was effectively in charge of his ministry because everybody looked to the Prime Minister's Office for signals and acted only after receiving them.

"Centralism dominates this government," Chidambaram said, arguing that decision-making was centralised in the PMO.

He also criticised what he called crony capitalism. While acknowledging that capitalism itself had drawbacks and saying that a fully capitalist economy was not supported, he argued that crony capitalism was worse.

Chidambaram said several sectors had either become monopolies or oligopolies. He cited telecom as an oligopoly and said cement was becoming an oligopoly. He also included airlines, ports and petroleum among sectors where competition had narrowed.

He said the space for competition had shrunk and criticised the Competition Commission of India, saying it had lost its teeth. He asked for an example of a merger or takeover in recent years that the CCI had stopped.

"There is less competition in this country than there was 10 years ago and it is becoming lesser and lesser," he said.

Chidambaram also highlighted income inequality and wage growth. He said the bottom 50 per cent of the population held 10 per cent of India's income, while the top 1 per cent held 10 per cent and the top 10 per cent held 25 per cent.

He said income inequality had increased and wages had not risen. Rural wages, he said, had stagnated, with growth at 0.7 per cent last year. For casual and irregular labour, wage growth was negative, while regular salaried employees recorded wage growth of 0.4 per cent.

"If the economy is growing at 6.5-7 per cent, why don't wages increase?" he asked.

Recalling his role in the 1991 reforms, Chidambaram described how the trade reform package was assembled shortly after the Narasimha Rao government took charge on June 21.

He said he presented a small package on July 4, while the Union Budget was presented on July 24. The process had begun earlier with the rupee devaluation on July 3.

Chidambaram said Rao told him about strong opposition within the Congress to the proposed two-step devaluation and the demand to stop the second step.

Chidambaram said he replied that Rao must have discussed the move with Finance Minister Manmohan Singh and approved the devaluation. Rao did not deny this but said there was considerable opposition.

According to Chidambaram, Rao asked whether the second step could be stopped and asked him to speak to Singh. The first step had been completed the previous day, with the second scheduled for the following day.

Chidambaram went to the finance minister's office and told Singh that there was concern within the party about the devaluation and that the prime minister was also concerned. He asked whether the second step could be postponed.

Singh, Chidambaram recalled, said he did not know and had left the matter to the Reserve Bank of India. He said he would find out from the RBI.

By the time Chidambaram returned to Rao, the second step had already been implemented. Chidambaram said Singh apparently told Rao that he had called C Rangarajan, then deputy governor of the RBI, and asked about the position. Rangarajan reportedly said that he had "jumped", which was a code word indicating that the devaluation had been carried out.

Chidambaram said he then told Rao that the second step had been completed and that they had to move on.

After the devaluation, Singh called Chidambaram and, according to him, must have discussed the matter with Montek Singh Ahluwalia, with whom Singh was very close. Singh told Chidambaram that the cash compensatory support for exports should now be withdrawn.

Chidambaram said he agreed with the economic logic but argued that no commerce minister could begin his tenure by withdrawing the only support available to exporters, as it would lead to accusations that he was anti-exporter.

He said the measure had to be included in a wider package.

Montek Singh Ahluwalia agreed with the logic, according to Chidambaram. The two then went to Rao, whom Chidambaram knew more closely from his Youth Congress days.

Chidambaram told Rao that the finance minister wanted the cash compensatory support withdrawn and that he understood the reasoning but believed it would be politically difficult.

"It can be done, but it has to be done as a package," Chidambaram told Rao. The prime minister agreed.

Chidambaram said he and Montek Singh drafted the package, which included withdrawal of the cash compensatory support, the dual exchange rate and EXIM scrips, a government document issued to exporters.

The package was then taken to Singh, who read it and accepted it. Chidambaram and Singh returned to Rao, who came to the drawing room.

Rao had just taken a shower and was wearing a lungi and a vest, Chidambaram recalled. Rao asked whether Chidambaram had signed the document. Chidambaram said yes.

Rao then asked Singh whether he had signed it. Singh said yes. Rao took the file and signed it.

"That's how the trade reforms were done," Chidambaram said.

He said there was no bulky file, no notes, no under-secretary or deputy secretary. The three principals decided on the policy and made the trade policy.

Chidambaram said that was how policy should be made, with advisers and IAS officers providing inputs to the principals, who should decide the policy before it was sent down.

He argued that policy-making should not involve writing innumerable notes because that was where policy could fumble and be derailed.

Asked whether the previous government had already done some groundwork, Chidambaram referred to an "M document" and said Montek had coined the phrase "exim scrips".

He said what mattered was the final policy package, its economic validity and its political saleability.

Chidambaram said the economic validity of the package was obvious, while its political saleability came from the way it was packaged.

On why the trade reform package was presented first, followed by the Industrial Policy Resolution on July 24 forenoon and the Budget that evening, Chidambaram said the sequence was driven by the devaluation.

The cash compensatory support had to be withdrawn, leading to the mini-trade policy package being announced on July 4. The Industrial Policy Resolution followed, then the Budget, and finally the longer statement on the 13-point trade reforms was presented to Parliament on August 13.

Asked whether there was anything he wanted to do but could not accomplish at the time, Chidambaram said the government had done whatever it wanted to do.

He said the entire EXIM policy had to be rewritten and was rewritten. The government also had to abolish the Coffee Board's monopoly in coffee procurement, which it did.

"Whatever agenda came up, we fulfilled it by and large in the first year," he said.

On the debate over whether Manmohan Singh received undue credit for the 1991 reforms when Rao's political management was crucial, Chidambaram said Singh was the technical brain behind the reforms and the economist who had reflected deeply on the issues for several years, particularly during his time in the South-South Commission.

He said Rao was the person most competent and suitable to politically steer the reforms responsibly.

"Without Rao, Singh could not have done these reforms," Chidambaram said. "And without Singh, Rao could not have conceived of these reforms."

Responding to Yashwant Sinha, who presented the interim Budget in 1991 and said most of the groundwork had been completed before the July Budget, Chidambaram said it may have been ready.

He questioned why the earlier government had not implemented it and said everything was arguably ready in petroleum, energy and roads.

"But somebody must have the courage to implement it and the political strength to own it," Chidambaram said.