Rakesh Mohan Reflects on Dismantling the License Permit Raj

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Rakesh Mohan, the is President Emeritus and Distinguished Fellow at Center for Social and Economic Progress in New Delhi. He has also served as Executive Director on the Board of the International Monetary Fund, Deputy Governor of the Reserve Bank of India

We talked about his work with the Government of India since the 1980s, especially dismantling the infamous License Permit Raj during the 1991 reforms, his work on urbanization and infrastructure, the kinds of structural reforms India still needs to undertake, and much more. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

Rakesh Mohan, welcome to the show.

RAKESH MOHAN: Thank you very much to invite me, and I’m glad to be here.

Labyrinth of Control

RAJAGOPALAN: Yeah, so I want to so…You are the person who famously dismantled the domestic end of the License Permit Raj. Before I ask you more about that, just for especially our younger listeners, I would love if you could describe the labyrinth of control. The way I think about it, we have the industrial licensing system, which determines the size, location, technology, output, employment, investment of firms. We had a price and quantity control system through laws like the Essential Commodities Act.

We had an exchange control system which was specifically to do with foreign exchange and how much people could hold and how much they could use per day when they went abroad or use for buying various inputs. In addition to that, there were import substitution policies which had its own permit system on what kind of inputs could be imported for various outputs that were produced. Outside of all this, there were a number of factor market controls, especially in agriculture.

You have everything from land ceiling laws to tenancy laws to land redistribution consolidation, and so on. Finally, nothing works if the government can’t control the credit system. The banking system was almost entirely state-owned, and credit was strongly controlled. The way I understand it, the controls combined were worse than just adding them up individually. Can you describe some of the details of this system for our listeners, and then we can talk about how you managed to get that out of the way?

MOHAN: Difficult for me to improve on what you just said in terms of description of all the controls, but let me try. Interestingly enough, many of these controls originated in the Defense of India rules, which were done under the Defense of India Act in 1939 when the Second World War erupted. That’s when the government got all these powers effectively. Then, also interestingly enough, many of these rules, regulations, and restrictions got translated into new laws and acts soon after independence, around 1948, ’49, ’51, ’52, and so on.

Now, since everyone is now talking about deregulation, it’s also worth putting these in context. You talked about like agriculture, which I don’t know as much, but the fact is that because there was a great degree of inequality in the holding of land in rural areas, there were lots of farmers who were landless, and particularly the Dalits, the lower castes. There was a very good argument for doing land reform. In fact, one of the things that economists talk about in terms of success of Korea and Taiwan is the land reform that was done there. Those limits on land holdings, land redistribution wasn’t done as much as perhaps it could have been done. There were good reasons for that.

Second, because of the terrible experience with the Bengal famine in the ’40s, there was a great concern with distribution of food. That led to all kinds of limits in terms of holdings and how much stocks traders could have, et cetera. Many of these laws and restrictions had origins in a certain view of what the problems in India were and what needed to be done. Coming to the industrial sector is analogous in that the country had very low manufacturing industrialization levels. It was felt at the time that given the very low level of technology and capacity, et cetera, there was no way that industry could come up in India without restricting imports from advanced countries. That was the general philosophy of the day, or economic development theories, and everything else. 

However, what I do feel is also that something that is not talked about enough and not analyzed enough—I’m just giving an observation—which is that when we started on this journey in the early 1950s with the first five-year plan, ’1951 to ’56, we had inherited a civil service system and system of administration which is essentially control-oriented because that was the job of the British colonizers.

The whole system, obviously, they were not that much interested in development, if at all, but they had to control the very, very large country. Actually, it is a miracle that such a small number of Britishers controlled this large territory. The system of control was embedded in how the civil service functioned. Apart from whatever economic theories there may have been, any economic views, any economic philosophy and so on for development, this is what they knew how to do.

We passed acts between 1948 and ’52, I guess, the Imports and Exports Control Act, the Industrial Development Regulation Act, the control of capital issues so that any company that needed to raise money in the market had to get permission from the Ministry of Finance to the so-called control of capital issues, who also fixed the price of the IPO, et cetera. There are many others, actually.

The Essential Commodities Act still exists. As I said, that is very much to do with the fact that you want to make sure that essential commodities are available to the mass of the people. You can argue about how effective or efficient it is, but that still exists for that reason. All these acts were passed. Then, much later in 1969, the MRTP Act was passed. That is Monopolies and Restrictive Trade Practices Act, and that came as a response to some economists having done some research and documented the domination of certain family business groups. 

Today, the act is called the Competition Act. Of course, it doesn’t have the same characteristics. The point is once again that the rationale or the motivation was that you need to control excessive domination of certain families. After 1969, these listed large families were restricted from investing in a number of different sectors. The number of sectors were defined only in which they would invest. Through this system, if you wanted to set up an industry, you had to get an industrial license from the Ministry of Industry because to produce anything, you needed a lot of imports.

Consistent with that, you then got import licenses for your inputs, both for machinery, that is, capital goods, to begin with, and then licenses for importing all the raw materials, intermediate goods, et cetera. This was all consistent because the idea was you wanted to set up in an industry. In many of these permissions was embedded the idea that suppose you start with 80% of inputs being imported, you then had to embed in your license, in your plan that, within five years, seven years, or whatever, that the use of imports would come down.

That was then associated with setting up upstream industries so that you could substitute for those imports, or to have them produced in your own factory because in those days there wasn’t as much of outsourcing for components all over the world. Like, say, in Detroit, almost everything to do with the car was manufactured in the same plant, and that continued till the Japanese came in much later.

Anyway, the point is that you had a sort of interconnected system where, one, you got industrial license, but before you got industrial license the industry ministry had set up something called the Directorate General of Technical Development, DGTD, and they had to look into what technology you were to use. They had to look into what imports you would have for machinery as well as intermediate goods. Then they would set up a program on how that would be substituted over the next five years, seven years or whatever. All that had to be done. Then, that was again connected with getting import licenses.

It is interesting how people conjured up the system, which was indeed interconnected. One can argue about how efficient it was, how well it did, et cetera, along with the conceptual part, but what is true is that before setting up anything, you had to do all this. Then, of course, as I said, there was control of capital issues. Again, what was connected was you got an industrial license, so you said, “Now I need to raise money in the market,” so you went to control capital issues in the Ministry of Finance.

The MRTP clearance, as it was called later when it came 1969, was given by the Ministry of—now it’s called Corporate Affairs. I’m blanking out what it was called. Ministry of Company Affairs.

RAJAGOPALAN: Company Affairs.

MOHAN: Company Affairs. There was all the interconnected stuff that had to be done. These are all the components. Sorry, further, that most things needed foreign technology. It is called the FC Clearance, Foreign Collaboration Clearance. When we did the ’91 reforms, I can say that I changed the title of that to Foreign Technology Agreements because that’s what it really was. You had to get permission for that as well. Then, this was also connected with, that if you’re going to get so many imports, whether capital goods, payments for foreign technology, intermediate goods imports and so on, therefore you have to get corresponding foreign exchange.

It’s only armed with all these permissions, that you could then go to the reserve bank to get foreign exchange. In a sense, it is miracle, actually, that we had as much industrial growth as we did.

RAJAGOPALAN: As we did. Yes.

MOHAN: The fact that people forget, actually, is that the industrial growth in the ’50s till about mid-’60s or early ’60s—

RAJAGOPALAN: It was quite good.

MOHAN: —was about as much we ever had. About 78%.

RAJAGOPALAN: One thing which is hidden in everything that you’re saying is, because of this kind of control and because the market’s not allowed to adjust, everything was a shortage economy, right?

MOHAN: Yes. Absolutely.

RAJAGOPALAN: We have these controls that need to be issued for something as simple as foreign exchange, which we don’t have anymore. The system is so inefficient that we’re not competitive in exports, which means we don’t export enough, which means we don’t earn enough foreign exchange, which means there isn’t enough to go around for inputs, which means now we need to allocate this. Now, this is everything from industrial permits being allocated to Bajaj scooters, being allocated to inputs for Bajaj scooters being allocated to foreign transfers with Vespa, which they did for a little while. From start to finish, because it’s a shortage economy.

MOHAN: Yes. Another thing in terms of controls, you had mentioned price controls. There was, indeed, we set up something called the Bureau of Industrial Costs and Prices, BICP, and that controlled cement prices, steel prices—

later on almost all drug prices. Most things, actually.

RAJAGOPALAN: Yes. Sugar.

MOHAN: Sugar. Most things. Again, in principle, it was a technocratic activity in that they’re supposed to have looked at what are the costs of production, and they would control the price and so on. Also, as you mentioned, say if you built a house, you actually had to get a cement permit to get access to cement.

RAJAGOPALAN: This got decontrolled only as late as ’81, ’82.

MOHAN: Right. Then, you had to get a steel permit and so on.

RAJAGOPALAN: Permit, yes.

MOHAN: These controls were absolutely pervasive.

Also, what is interesting is that the dysfunction of the system started quite early, like late ’50s, early ’60s. There’s a whole bunch of committees within the government that performed. Each one of them actually documented very well—

RAJAGOPALAN: Yes. Absolutely.

MOHAN: —on the problems in the system, but most of them after having documented the problems, they would then recommend a tightening to say that, “Look, yes, these are problems, but we should function much better and more efficiently in doing these things.” That was very interesting. They documented very well, actually.

RAJAGOPALAN: I think that goes to core problem, which was the idea that, “The market will not produce the distributive outcomes we want it to produce. Allocative efficiency is a privilege of only the developed world. It is not a privilege that the developing world can have.” On this, they weren’t that far apart from the economic orthodoxy in the rest of the world at that time.

MOHAN: Yes. Absolutely.

RAJAGOPALAN: It really comes from there.

MOHAN: What is also interesting is that to the extent that, say, if you’re sitting in the 1990s or late ’80s, what model do you have at that time? It was Southeast Asia. If you’re sitting in the ’50s, ’60s, what model did you have? The fastest-growing economies had been the socialist countries, including the Soviet Union. In that sense, you really have to think back, “What was it that we were reading? What was it that we were observing? What are the models available?” It is certainly true that the socialist economies grew fast at that time before they got sclerotic.

RAJAGOPALAN: They had all kinds of shortages, which was never visible on the outside.

MOHAN: Yes. Of course, there were shortages.

RAJAGOPALAN: What was visible on the outside is that they sent someone into space, or the moon, or they win all these Olympics medals and so on, but the inside, even the press junkets and people who went, they were never allowed to go beyond Moscow, so you never—

MOHAN: In fact, what was interesting is—

RAJAGOPALAN: —knew the extreme shortages.

MOHAN: —that after 1991 when the Soviet system collapsed, I was in Europe, 1993, ’94 for a year, and see, we drove around East Germany at that time, which is not East Germany anymore. It was very interesting that as we drove around, went through various cities, you go through a city and the main road looked very nice. You just went one block in.

RAJAGOPALAN: Block in, yes, and it was all falling apart.

MOHAN: It was falling apart.

RAJAGOPALAN: Absolutely.

MOHAN: It was incredible, actually.

RAJAGOPALAN: I have the same memory. I was in Berlin in 1992, and East Berlin just looked so different from West Berlin.

MOHAN: The main streets looked fine.

RAJAGOPALAN: The main streets looked great.

MOHAN: What I also thought about at that time was, given our close relations with the Soviet Union and the other socialist eastern countries, and people went there all the time as students, also government officials went, I never heard anyone say that this is what they had seen.

RAJAGOPALAN: Yes. My grandfather and his younger brother both were journalists. They’d go to Moscow on these press junkets or something. It’s tightly controlled. The government officials take you everywhere. They told me much later, well into the ’90s, they told me that in hindsight we should have figured it out. Because our friends in Moscow would ask us to bring soap, toothpaste, some really simple things that you can’t understand why they don’t have access to that. Now in hindsight, we completely understand the shortages were just pervasive across the board, even for the elites. We didn’t put it together because everything looked so good.

MOHAN: They would have said, yes, for the elite, of course, they had shortages for the elite. 

RAJAGOPALAN: In India it really turned into, like you said, you start with one system and then each time you want to clamp down on the market, it means another set of permits and another set of permits. Then MRTP comes in because if you’re not giving people permits to expand, then of course supply won’t keep up.

MOHAN: Another control, of course, was that when you got an industrial license, your capacity was controlled. You got a license, say, to produce 10,000 cars. Remember that as late as 1980 or thereabouts, only 30,000 cars were produced in a year. It was a crime—

RAJAGOPALAN: To produce more.

MOHAN: —to produce more than your licensed capacity. In fact, some of those so-called scandals of Reliance, in particular, in the ’80s, late ’80s—

RAJAGOPALAN: Were going past their capacity permits, yes.

MOHAN: —were going past their capacity. That was regarded as a crime, which is ridiculous.

RAJAGOPALAN: That’s the interesting thing. Now if you can’t go past capacity, it means it’s a shortage economy, which means prices will rise, especially in the black market but you can’t be seen to be profiting in a socialist system. Now there will be price controls and then there will be MRTP controls.

MOHAN: Some of these things were figured out. In the ’80s, in terms of some of the so-called liberalizations they did, they did then go to a system of doing minimum economic size in a number of industries. Because they figured, “Oh, it’s ridiculous to have this capacity control.” Then you say, no, there are economies of scale. In certain industries, we must have a minimum economic size. One control that is very important, which I missed, basically came, if I remember correctly, in the mid-to-late ’60s, and that was a reservation for small-scale industries. By the late ’80s, when we did the liberalization in mid-’91, there were 836 items reserved for small-scale industries.

RAJAGOPALAN: Sorry to interrupt. When you say reserved, I just want the listeners to know this means that only someone below a particular size is allowed to engage in the manufacturing of those goods.

MOHAN: Correct. It is interesting because this has I think really been a huge negative impact post-liberalization. The way that those items were identified, it was that low-technology items, low-technology industries which are also labor-intensive because they’re low-technology, that in order to enhance economic growth and employment growth, we should reserve these industries to small sizes and not let industries of larger sizes come up in these areas so that there’s higher employment growth.

RAJAGOPALAN: The logic was that the large firms will outcompete the small firms and the cottage industries as opposed to the logic being the small firms will eventually grow.

MOHAN: Cottage industries were another area. What is interesting is the way I sometimes put it is almost everything that you buy in Walmart was reserved for small-scale industries. Whether it is toys, whether it is furniture.

RAJAGOPALAN: Apparel, footwear.

MOHAN: Apparel, footwear, many plastic items, cutlery. Basically, almost anything you use in the home. I think anything that you look around here would have been reserved for small-scale industries. One big omission and failure in the ’91 reforms was indeed that we couldn’t de-reserve or release those industries from those controls.

RAJAGOPALAN: But it did happen. That’s the good news. Eventually.

MOHAN: It happened 20 years later.

RAJAGOPALAN: Yes, much later.

MOHAN: One of the wrong things that was done was that whereas we liberalized imports over a period of time, lower and lower tariffs and removal of quantity controls, NTBs, and so on, what happened in those 20 years before they were released of de-reserved was that it was totally inconsistent in that we allowed, say, apparel to come in or toys to come in or shoes to come in and so on manufactured by large industries abroad, when we were not allowing our own large industry to produce those items, which doesn’t make any sense whatsoever.

RAJAGOPALAN: We just hobbled our own domestic industry.

MOHAN: As it happened in ’97, ’98, if I remember correctly, a committee was appointed under Mr. Abid Hussain, who later became ambassador to the US also. He was among the civil servants who was really in favor of all the economic reforms that were done. A committee was appointed under him on small-scale industry, of which I was a member secretary while I was at the National Council of Applied Economic Research. We got a lot of research done, and we did come out with a report which said unqualifiedly this must be de-reserved.

In fact, the inspiration behind reforms, the late Dr. Manmohan Singh, I remember him asking me, “Can you prove that this will be beneficial?” I said, “No, I can’t prove these things.” What is interesting is that the lobbies for small-scale industry didn’t argue for de-reservation. They were arguing for stopping the imports.

RAJAGOPALAN: They were arguing for protectionism.

MOHAN: Protectionism. Now from that point of view, yes, that’s correct, but at the same time, it is interesting, they didn’t say, “Look, I would like to grow.”

RAJAGOPALAN: Even today—

MOHAN: Even today that’s a problem.

RAJAGOPALAN: —our industries CII, FICCI, none of them say we want to grow, they all want more protection.

MOHAN: Exactly. That I think in terms of one of the big issues, which is why has India not after the reforms of ’91, when the exchange rate got deregulated, the financial sector got deregulated, et cetera, why have we not had a great export record?

Dismantling the Licensing System

RAJAGOPALAN: Before we get into that, I first want you to tell everyone how you dismantled the industrial licensing system, which was just bananas, to be honest. First, you have papers written before you actually manage to dismantle. Can you just walk us through how did you get into that business? How did you make the list and then finally what happened?

MOHAN: Let me first say it was a miracle. Miracles don’t happen very often. However, what is very interesting is right from the time that Mrs. Gandhi came back to power in 1980, right through the early ’80s until she was assassinated, there were a number of committees that were set up for economic reform, whatever you call it. One was on this committee under Dr. Arjun Sengupta.

RAJAGOPALAN: Yes, Sukhamoy Chakravarty, Abid Hussain so many of them. We’ve linked to all of them on the 1991 Project, all the committee reports.

MOHAN: Excellent. Each of them recommended a certain degree of reform, liberalization, deregulation, et cetera, but relatively conservatively. In that sense, there was this movement going on towards deregulation, liberalization. Two, people had observed, obviously, on what is happening successfully in Southeast Asia and Japan earlier. Three, because of this movement going on and realization going on intellectually, a number of economists, civil servants started thinking this way. What is interesting was that there wasn’t enough academic pressure actually.

Of course very early it was Bhagwati and Desai. Also, I can remember that I was economic adviser, Ministry of Industry, from 1988 onwards. When all this was going on I would have the key lobbyists of the larger firms coming with lists of things that ought to be done, and quite frankly, all Mickey Mouse things. Okay. When we were cooking this stuff up in 1990, actually, they would come and say, “Don’t worry, you’ll see that something more will happen than what you’re asking for.” 

We used to have, I mentioned earlier that you had a steel permit. There was a steel controller. There was a coal controller. There was a cement controller. Okay? All those under the Ministry of Industry and respective line ministries. All that also had to be dismantled. As I mentioned earlier, there was Bureau of National Costs and Prices. It was also interesting as part of this movement, the BICP earlier under Lovraj Kumar, later under Vijay Kelkar and Yoginder Alagh, they’re also over the 1980s, been recommending certain kinds of decontrol of these prices. Again, relatively conservative, but that all that stuff was there.

The point I’m making is that this was building up in the ’80s. One of the things that was done in the ’80s was liberalization of imports of capital goods, which got us much higher growth in the second half of the 1980s. Along with that, because the import bill went up, came the balance of payments crisis.

RAJAGOPALAN: No, but before that, they also did broadbanding, like small, small things which gave us some more capacity.

MOHAN: Yes, so when you got an industrial license—I’m just exaggerating—they say it was women’s clothing. It’s not that you’re being given license for skirts or shirts. Okay? You were broadbanding in the sense of bringing together a number of items that obviously have the same technology, the same factory, et cetera.

RAJAGOPALAN: Earlier if you had like permit to make spoons and forks, they also said you can make knives.

MOHAN: Yes, quite right.

RAJAGOPALAN: That kind of thing.

MOHAN: Almost all these things reserved for small-scale industries. The other thing of course was that from 1956 onwards, Industrial Policy Resolution 1956, that so many industries, large industries were reserved for the public sector. Reserved meaning that only the public sector can produce them, like heavy electrical equipment, steel, many items. That was actually quite miraculous that we were able to do that in 1991. To come back to how this happened. First, as I said, there was a buildup of thought and also government committee recommendations. It was all in the system.

Then, as you said, some industries were being delicensed. There were some industries that would be licensed for exports, things like that. This was going on. When I reached the Ministry of Industry in 1988, some things that happened: One, that the Rajiv Gandhi government got outvoted in late 1989. New government came in, V. P. Singh government. Mr. Ajit Singh became the industry minister. Also, the secretary industry changed. Because in the Indian system you have a civil servant who comes in from some other ministry, then he or she has to be briefed on what the ministry does. Usually in the civil service, this is seen as a thankless task because it’s not giving you any power.

The power comes from giving permissions, giving permits, people coming to lobby you, et cetera. This thankless task or some presentation has to be given to the incoming secretary or minister will go to the economic adviser because you had nothing better to do.

RAJAGOPALAN: This is a time when we had economic advisers within specific ministries. You were the economic adviser for industry.

MOHAN: For Industry Ministry. Yes. That task came to me, and to do that, therefore I had to compile everything that existed in the Ministry of Industry and existed under what we did. That’s when I discovered there’s this license system, there’s this license system, there’s this license system. That is how the whole thing got compiled. Otherwise, it is difficult to know what’s going on.

RAJAGOPALAN: Yes. Out of curiosity, how did you make that list? Were you asking your colleagues to tell you what is it that you do on a daily basis? Because this is impossible to put together, and you’re the first person who put it together.

MOHAN: That was a very interesting discovery for me. Of course, one had read the Bhagwati and Desai book and various other things. 

RAJAGOPALAN: Arun Shourie he had written something by then. There were a number of people.

MOHAN: All these things one had read. You had all these permitting committees. There was the committee for licensing, committee for MRTP, clearance, committee for foreign collaboration, foreign technology agreements, the input licensing committees, and so on. Quite a few of them. The economic adviser was not a member of any of them, which was good. I was curious enough that I asked the secretary said, “Look, I want to sit in these.”

RAJAGOPALAN: You went and attended them.

MOHAN: I went and attended them.

RAJAGOPALAN: That’s when you really got the extent of it.

MOHAN: Then I would see, how does it actually work? Then I had an excellent assistant economic adviser whose name was Vandana Aggarwal.

RAJAGOPALAN: Yes. You’ve co-authored that paper together.

MOHAN: Co-authored the paper, “Commands and Controls.” All that went into that. That just as it happened, just my curiosity, things that was going on because I prepared these briefs and so on that we were able to write that paper which basically covered everything. It also made me realize that everything had gone on before in terms of different government committees on licensing, on controls, and so on. There was also an earlier committee called Controls and Subsidies, the Dagli Committee report, which I came across.

That was an excellent report, by the way. So there was all this stuff available. I put that together in these presentations and in the paper. Then what happened is that because there was a non-Congress government after 13 years in 1980, they were keen to do something different. That is go away from the License Control Raj. V. P. Singh also as prime minister—

RAJAGOPALAN: 1990, you mean?

MOHAN: 1990.

RAJAGOPALAN: Yes.

MOHAN: V. P. Singh, as the new prime minister, had been the finance minister under Rajiv Gandhi before they got into trouble. He had become known as a liberalizing finance minister. Ajit Singh was what you might call computerized Jat, if I can put it that way. He had just come back from the United States maybe a year or two earlier. He’d worked for IBM here. He actually was a very smart fellow, very quick. He wanted to get a lot of these things done.

I had to do again the presentation for him in terms of what we did. The other thing that happened coincidentally was that in January 1990, used to be an Indian delegation that went to Davos. Some minister used to lead it. He was nominated. Also again part of the control raj, that because all foreign exchange was controlled, all the industrialists who went to the World Economic Forum had to be approved by the Ministry of Industry so that they could get foreign exchange to go there, and they could buy an air ticket.

By the way air ticket also, for example, there’s something called the P-form we had to get to be able to get an air ticket that involved effectively foreign exchange if we were traveling out of India. As an aside, when I first went to England as a schoolboy in 1964 on a scholarship, the big thing was that we get a P-form and then the corresponding foreign exchange permit. The power of these permits was such that when my father got the P-form and the foreign exchange permit to buy the ticket, we were so excited. He was so excited that we went off to the travel agent of Air India, and he forgot that he had to actually have money to buy the ticket. Because he got the permit. I had an uncle with us. He happened to have the cash with him.

RAJAGOPALAN: No, but the permit was harder to arrange than the cash.

MOHAN: Exactly. You got to have money. Anyway, so to come back, because of this concatenation of circumstances that they wanted to do something different. We then had to prepare the minister to go to Davos. We said, “what are you going to say in Davos to the assembled business elite of the world?” We said, “You have got to say all these good things. Liberalized foreign direct investment and the rest of it.” That became part of the briefing for that. That helped in doing this.

One thing I forgot is that Rajiv Gandhi’s last year, in 1989, Mr. Seshan who later became a very effective, excellent chief election commissioner, had become the cabinet secretary. And so he wanted each of the ministries to give a presentation of that they did. Again, that was actually the origin of what I had to prepare for Mr. Seshan.

RAJAGOPALAN: He was a tough guy, so you really have to prepare.

MOHAN: A very tough guy. I had to really prepare. I think that presentation never got done, but I don’t fully remember, but I’ll say the presentation was prepared and that again I could then therefore easily do this presentation to the new minister. The point is that all this has been happening, I put all that together, presented it to Ajit Singh to present in Davos. Again, as a side or part of it, there was a very strong delegation that went to Davos that year, January 1990, headed by the minister Mr. A. N. Verma was secretary of industry, later on became secretary for the prime minister, Narasimha Rao; Montek from the Ministry of Finance; Nitin Desai was then the chief economic adviser, and someone else who I’m not remembering right now. 

We went off to Davos. When we landed in Zurich, the Indian ambassador who had come to receive us, without the minister—the bureaucrat delegation—he said, “I have some news for you that the industry minister, Mr. Ajit Singh, is not coming because the prime minster decided not to send him, so now the civil aviation minister Arif Mohammad Khan is coming.” I said, “Oh.”

Obviously, Arif was the civil aviation minister, had nothing to do with it, but he came and of course, then he couldn’t make any announcement because he had no idea, he had no briefings, nothing. That preparation went there but nothing happened in Davos. Then we came back, Mr. A. N. Verma, who I said was secretary. We then started working with the blessings of the minister Ajit Singh to put together this industrial policy reform package.

That we did, huge amount of work, Mr. A. N. Verma was a big taskmaster, we had to do everything that we said had to be backed by evidence, so we prepared a new industrial policy which was approved by the cabinet and it was announced in parliament. There’s something that surprised me where the political people don’t talk about. I’ve not seen it anywhere actually. That was among the key things on which Chandra Shekhar rebelled against V. P. Singh and Janata led National Front.

RAJAGOPALAN: On this issue?

MOHAN: Yes. Because he was shortly against industrial policy liberalization. There were other political differences. This is one of the key things actually. Then the V. P. Singh government fell. Ajit Singh went as industry minister and Chandra Shekhar become the prime minister. He made himself the industry minister. He came to the ministry of industry, which a prime minister almost never did. He came and said, “As you know, I oppose this, but I want your free and frank advice what you think is correct. Forget the fact that I oppose this.”

I went to the industry secretary that Suresh Mathur I said, “What do I do?” He said, “You see, you do what he’s told you, to give free and frank advice.” We kept working on this. Of course Chandra Shekhar didn’t last very long and Narasimha Rao government came in. To some extent, Chandra Shekhar had become the industry minister, so Narasimha Rao made him still the industry minister. Coincidentally A. N. Verma became his principal secretary. You’re asking how these things happened that people don’t forget in some sense. I keep on going on some tangents, but this is all related.

RAJAGOPALAN: Yes, because there’s one part which is the ideas continuity and policy continuity, but the people being continued is also very important.

MOHAN: What this meant was that because of all these controls and licensing, the minister of industry was a very powerful person politically and, of course, otherwise. It is unlikely in my view that had he been industry minister, that he would have agreed to give up all these powers because Narasimha Rao became the prime minister and he’d been the industry minister, this was much easier to do. And, of course, because all these had been prepared under Mr. A. N. Verma, that he had fully internalized knowledge, this was the right thing to do.

These constellation of circumstances from a change in thinking, certain input in the government for about 10 years, the lessons from East Asia, and then what I’ve not mentioned is 1991, the Soviet Union collapsing, and China doing very well. All these things combined and these personnel things happening. That’s a long answer to your short question. How did it actually happen?

Final thing on that is that Manmohan Singh became finance minister and also very interesting that Manmohan Singh had not been associated with liberalized economic policies even though his own PhD dissertation in late ’50s was to do with exports. He was very much a votary of exports. After he went to South Commission and I think he went around the world much more,  had changed his mind and so he provided the whole intellectual framework, so this combination of Narasimha Rao, Manmohan Singh, A. N. Verma which I call the triumvirate.

RAJAGOPALAN: Then all of you supported.

MOHAN: The funny thing also I must mention is that interestingly enough there was a great degree of bhaichaara—I don’t the English word; in Hindi [Hindi language]—among civil servants, IAS people, secretary of commerce, secretary of industry, Planning Commission, secretaries in Ministry of Finance, and so on. We, the economic advisers, who from outside Ministry of Foreign Bodies in the system that somehow because we had grown up in the system for sometime—some people like much longer like Montek, Bimal Jalan, I was only there for few years by then—but we got on very well and so that also helped in doing all this in one shot.

RAJAGOPALAN: There are two more aspects of the one-shot thing. Until the industrial policy got dismantled by your team, we were usually just chomping on the edges, so it was like, “Okay, let’s tweak a little bit of this and let’s tweak a little bit of that.” One, this was quite audacious. What made you think that you could just get this done wholesale as opposed to the old way of, “Let’s do it gradually”? What was that thinking? Because what you did was quite bizarre.

MOHAN: As I said all this had been developing that a different committee to do with controls, a different committee to do with decontrol of prices and then of course the breakdown of the Soviet Union, but also our own major things which our own balance of payments crisis which I should have mentioned much earlier. That was something that really focused everyone’s mind.

RAJAGOPALAN: That something has to be done.

MOHAN: Yes. Many people think this happened only because the World Bank and IMF forced us to do it. That’s not correct because as I described this was all building up. Yes, it is true that because we had a crisis, we had taken an IMF loan, we had to put all this together and give this as a program. They also then themselves gave whatever conditions they had, but those conditions were not really different from what we wanted to do anyway. But yes, so the point is that in terms of doing everything together that all this had built up that we, at some time, seized the crisis. It got done.

This combination of senior personnel, between Manmohan Singh, A. N. Verma, and Narasimha Rao. Narasimha Rao, of course, being that obviously these were politically contentious moves like dereserving the public sector that is opening public sector industry to private investment, et cetera. I would say that it was partly because Rajiv Gandhi’s assassination that in some sense there was more muted opposition. Two, that all these people, I’m talking about the politicians now, had been together in parliament for a long time.

Despite being politically opposed to each other, again same thing, bhaichara among them—Narasimha Rao, Vajpayee, Advani, and all the others including the CPI and so on—they’d been together in parliament, parliamentarians, and in some sense relatively very civilized debates, discussions. They may not have been good friends, I don’t know, but they certainly respected each other.

RAJAGOPALAN: Came together in a crisis moment.

MOHAN: Yes, come together in a crisis moment. In fact, I was reading this new book by Gopal Gandhi, he quotes Vajpayee’s speech on Nehru, and it is quite something actually. What I’m saying is that the political cover that is provided by Narasimha Rao which, as I said, he got help in some way because Rajiv Gandhi had been assassinated and, of course, because of his relationships with all the other senior leaders that this could be done. Of course, Manmohan Singh is very important actually. You see when there’s what you might call a standard politician minister, however smart he may be, which most of them are, still had to be briefed by the civil servants or the technocrats on this is the right thing to do.

Now he then has to make his mind up, do I trust these guys? Are they ideologically motivated? Do they have some other interests? Do I trust these guys to do these big things? Can I take this risk? The great advantage of Manmohan Singh being there as finance minister that this was all internalized both because, one, being an economist a very smart one at that; two, he had worked in the Commerce Ministry, had worked in the Finance Ministry.

RAJAGOPALAN: RBI.

MOHAN: RBI.

RAJAGOPALAN: Chief economic adviser.

MOHAN: Chief economic adviser.

RAJAGOPALAN: Planning Commission.

MOHAN: Planning Commission. Does first as member secretary, then as deputy chairman. All this was totally internalized so, in some sense, I may give him advice but he knows it anyway. It is that he can understand what I’m saying and also, as I said, with a very senior civil servant like Amarnath Verma endorsing it he is then also encouraged by the fact that this is administratively feasible and he’s got an enforcer in the—

RAJAGOPALAN: In the prime minister’s office.

MOHAN: —prime minister’s office.

RAJAGOPALAN: No, and he handpicked all of you. That’s the other part of it. Of course, he trusted you because he knew all of you for many years and had brought you back to India. 

MOHAN: Yes and no, and I’ll tell you why I say yes and no. Montek, certainly, who came back in 1978 and that was under the previous Morarji Desai government when H. M. Patel was a finance minister. Manmohan Singh was secretary economic affairs at that time when Montek came. I came originally in 1980, that’s again an aside, that I had come to work in urban development. I had been called first to come, and I went on leave from here at the World Bank for three years to work on urban development.

I’ve been called by Raj Krishna who had come to know me when I was young, a new economist in the World Bank. I went back, he became member Planning Commission under Morarji Desai and he called me. Interesting thing is it took me one and a half to two years to actually finish what I was doing here to be able to go back. That time two governments have changed from Morarji Desai to Charan Singh to Indira Gandhi. When I got there no one knew me. I didn’t know anyone either but the appointment held across three governments. I got to know Manmohan Singh then, because he was member secretary of Planning Commission. I had a tough very first year in terms of just being able to function. I’ve been out for 16 years, half my life from the country, but that’s when I got to know Manmohan Singh.

He then did call me back 1986 when he became deputy chairman of Planning Commission. Shankar Acharya, as it happened, first came back by himself. He was for two years at the National Institute to Public Finance and Policy. He and Montek had known each other very well when he had been the economic adviser Ministry of Finance. Arvind Virmani also Manmohan Singh had called but he didn’t know us from before except for Montek.

RAJAGOPALAN: He trusted all—

MOHAN: He trusted all of us because he’d seen us work. We were rummaging around, struggling around in the government. He saw that we were struggling around, we were doing what our work was, and so yes he trusted us absolutely.

Regrets

RAJAGOPALAN: You mentioned that one of the things that you wish had been done that time was the reservation list and then these were de-reserving those industries. What else do you regret leaving behind in ’91 that may still not be done?

MOHAN: One big thing which has not been done yet and this goes to the issue of factor market reform which I’ve not mentioned at all. We did almost nothing in terms of factor market reforms, that is, land and labor. We did a lot in some sense on the capital. On labor, as it happened, finance minister Manmohan Singh mentioned the National Renewal Fund in his very first budget speech, which we picked up. He didn’t elaborate it, we just picked up.

As we did the reforms, I did think that because of all these changes that is delicensing, that is, therefore much greater domestic competition, two, opening of trade, therefore much greater import competition. Three, opening of FDI, therefore much greater competition from foreign companies investing in India. I did think to myself that logically this would mean a lot of industrial distress. We had a very inefficient system of—in fact a bankruptcy system that is ranked as among the most inefficient in the world. I’ll come back to that in a second.

The point was that if you’re going to have all the industrial distress, what’s going to happen to the whole bankruptcy system?, one. Two, to do labor market reform which is to make it easier for labor market flexibility in terms of the employment that it made logical for some of us to say, “Look you can’t do labor market reform unless you provide some social security and confidence to the labor that if industries or the employees get into trouble, and they have to get fired or laid off temporarily they have to have confidence if labor market reform is to be done that they would be looked after.”

This National Renewal Fund, having been announced in the first budget, Suresh Mathur was industry secretary and myself as economic adviser, A. N. Verma was the principal secretary in the prime minister’s office, we cooked up a whole policy for this and, of course, National Renewal Fund. The idea was that you need to set up a fund so that if a company gets into difficulty, then the labor are looked after. You take out one problem in the bankruptcy process, give confidence to labor as a whole that they are being looked after and then you can do the changes in the system.

Under the Industrial Disputes Act, if a company got into trouble you could not fire anyone without government approval. On the one hand, you could say, “Actually there was no problem, you just have to get government approval,” it was never given. We devised this program, it was a multifaceted program, one was just setting up a fund which then would provide wages depending on how many years or months they worked, based on that you would get a certain kind of golden handshake.

Two, we also thought, look, that’s not enough. You need to retrain them. Associated with that also that we would provide retraining facilities. We tied up with the main industry associations, CII, FICCI, et cetera, that they would help in doing that. Three we looked at some concentrations of what were called sick industries. One was Ahmedabad—

RAJAGOPALAN: Textiles.

MOHAN: —textiles. I think 28 textile mills that were closed, and were closed for quite some time and the irony was that they were completely closed so the labor was not getting any wages because there was no money, but they couldn’t be fired legally.

RAJAGOPALAN: Nor could they shut it down because you needed the closure permits and everything. In the earlier comments, you described the problem with entry. There is also a problem with exit.

MOHAN: Exit, yes. One major error we made, that this got labeled as exit policy. That’s a very threatening word. That was very wrong actually. There was a whole bunch of textile mills in Bombay, and old engineering industry in Calcutta, Kanpur, et cetera. We thought that because Gujarat had a long history of amicable business labor relations, then we could start with that. Under the National Renewal Fund, we cooked up a whole project. The idea was conceptually that the government takes over temporarily and nationalizes all the textile mills put together who are not working. Not to operate them, to warehouse them—

RAJAGOPALAN: Then close them—

MOHAN: —and close them.

RAJAGOPALAN: —and sell the different parts and so on.

MOHAN: Then the idea was let’s do a planned rejuvenation so that—I don’t remember now the whole area under 28 textile mills—that whole area would then be redeveloped with a mix of uses, some nonpolluting industries, some trade, some shopping, some hotels, residences, et cetera. There was a professor in CEPT, in Ahmedabad for urban planning, his name is Barjor Mehta, who did the whole urban plan actually for that whole area. He later, because of that plan, his work was recognized, then he spent most of his life at the World Bank. He’s now gone back as head of CEPT now, just last year.

There was a very progressive minister, Congress government, in Ahmedabad and Gujarat, it was Sanat Mehta. I’d got to know him because of my textiles work earlier with Abid Hussain. I talked to him, he was totally for it. Even more important, Ahmedabad has this Textile Labor Association, basically the textile union, which had been started by Mahatma Gandhi. That’s one of the reasons why there was very good history of very healthy relations between industry and labor.

There was a man called Arvindbhai Buch who had been the head of this TLA, who’d retired actually. I’d got to know him again from textiles work earlier. I went to see him and he was very excited with it. He came out of retirement and he endorsed this idea, and he gave in writing that if we did all this, that the labor would not object. Now, is a long background in terms of asking what was not done. This was passed by the cabinet, we came here to Washington to get a World Bank loan to fund it.

We’d also calculated that if you pay 4% of wages of all industrial workers into the National Renewal Fund, and that 4% could be divided between the government, the employer, and the employee in whichever proportions you want, one-one-two, two-one-one, whatever, we had calculated that if you do that for 10 years with no payout, that after 10 years, it’ll get self-sustaining.

With obvious hundreds of assumptions. The idea was for these 10 years, the government puts in money in the National Renewal Fund and they provide all the compensation and for the rebuilding. We also calculated that if the National Renewal Fund provides all the funding for the workers in textile industry in Ahmedabad, that ex ante, the redevelopment of that area—

RAJAGOPALAN: Will give you the growth that’s required.

MOHAN: —will give you all the growth but also you got the money back.

RAJAGOPALAN: Money back, yes.

MOHAN: More than you ever spent.

RAJAGOPALAN: This was supposed to be proof of concept of how to make the transition.

MOHAN: We can say further that, unfortunately, for something I’ve never understood, is that this was then shot down by Ministry of Finance, even though they had given the idea originally. My guru, Dr. Manmohan Singh, my friend, Montek never explained to me why this was shot down. The important point I’m making in that is that if we had done that, one can never be sure, but there’s been much higher likelihood of doing the labor market reform, which is yet to be done.

RAJAGOPALAN: The labor market reform—

MOHAN: That is the reason for the whole convoluted history.

RAJAGOPALAN: —completely understand, and it’s super helpful. What you’re telling us is a very important aspect of reforms, which is when you go from system A to system B, let’s say we all agree system A is inefficient, even then the transition from system A to system B, there are going to be winners and losers. And we can only make the transition if we overcome what Gordon Tullock called the transitional gains trap. You basically devised a very nice plan on how we overcome that transitional gains trap. We figured out a way to pay out the losers by increasing the size of the pie and making more winners.

MOHAN: That and also providing facilities for them—

RAJAGOPALAN: Exactly.

MOHAN: —so that they get confidence.

RAJAGOPALAN: They get confidence, and then hopefully this replicates in different states. Today, we’re in a weird world where we have—now they’ve compiled it into four codes or something and it’s not been notified yet. But before that, we had about 40 to 45 union-level labor laws and about 200 state-level laws. This is not just hiring and firing, and retasking. This is everything from the height of the urinals to how your font size on the wage slip, to your uniform color.

MOHAN: Those things, I don’t regard as important, Shruti.

RAJAGOPALAN: I know, but we’ve not removed anything. How do we get rid of all of that?

MOHAN: You see, the thing is that I have not looked in detail at those things so I can’t say that confidence, but my basic point there is that you need to engender trust and confidence from the workers. Now, the people will say, “Look, but the organized sector, labor is so small, you’re just pampering them. When 90% labor is informal, you couldn’t get any facilities.” My view on that, look, if you want to get ahead, you’ve got to get the trust of these guys. Another interesting thing that was done, I guess 2004, yes, 2004, or ’03 or ’04, when we switched the pension system in the government.

RAJAGOPALAN: Now once again.

MOHAN: From defined benefits—

RAJAGOPALAN: —to defined contributions.

MOHAN: Defined contributions. Quite right. That is very smart in the sense that—

RAJAGOPALAN: And fiscally prudent.

MOHAN: Fiscally prudent. I’m making different point. That you don’t affect the existing employees, that they would continue the defined benefit system. Only new employees would get the defined contributor system. This is very interesting. Which is why there was no objection with the fellows who would object, was not there at that time. I remember as secretary of economic affairs, I had to hold a meeting with the unions. This is interesting because this was on a Saturday. The finance minister Mr. Chidambaram was supposed to hold that meeting. He very smartly calls me on Friday night saying, “I have to go to my constituency tomorrow, so you hold this meeting.” I held this meeting with the unions, obviously government unions.

RAJAGOPALAN: What year was this?

MOHAN: 2004 after I became secretary. Must have been late 2004 or early 2005. They’d known me because of the work on National Renewal Fund, they’d known me because of my work on the railways, they’d known me because my work on textiles. They all smile.

RAJAGOPALAN: They trusted you.

MOHAN: Yes, they trusted me. They all smile and say, “We know you, but you can’t fool us. We know what the government is doing.” That was what they said, it was done. See, what is interesting is that it is now 20 years hence. Obviously, people now have had 20 years of service, so they’ve started thinking about their pensions. It’s a huge pressure on the government to revert—

RAJAGOPALAN: Old system.

MOHAN: —to the old system. Again, I think the government has done a very smart thing. By the way, although there’s no connection, when I met the finance minister two years ago, when she asked me to come and just have a chat before the budget, this is one thing I suggested was that you need to go to a mixed system where you continue with the new pension system, but you provide a floor. What I suggested was you say that you will get at least half of what you’ll get on the defined benefit system while you continue with this new pension system so that there’s again, confidence and people feel we’re being looked after.

The government, of course, has gone much further and they have given assurance, “Oh, you’ll get at least what you would’ve got under the defined benefit system.” I’m just mentioning this, that these are very interesting ways. What has the government done now? It has reduced its unlimited liability. That you’re continuing with the new pension system, the contributory system, you’re going to calculate what you would get in a defined benefit system, and any year that there’s a shortfall, we’ll plug it in.

RAJAGOPALAN: Plug it in.

MOHAN: It’s a very limited liability system. Again, the opposition to this and criticism that has come is saying the government is pampering all this lot, retired civil servants. The point is that to go ahead, you got to have confidence and trust.

RAJAGOPALAN: You need to eclipse things slowly.

MOHAN: Yes, and that you need to give people the trusted confidence that we the government are looking after you where we need to look after you.

RAJAGOPALAN: Even if you don’t truly believe in the “looking after” part, you at least need to buy out the opposition at the very least. Whether you look at it pragmatically or cynically.

MOHAN: I don’t look at it that way. I often say that, look, many of us who argue for these things, we’re sitting happy with the defined benefit system, so what right do I have to say to others? Another good thing the government has done—again, I’m not sure this government has done. I’m not sure how well it’s being administered. This, I’ve written about, that among our biggest failures is health. I certainly believe we should have socialized health, a public health system covering everyone. The reality in India is that the private health system is completely widespread. Whether you now talk about the high-specialty hospitals or you talk about primary health, your little doctors, little clinics—

RAJAGOPALAN: They’re everywhere.

MOHAN: —all over the country. You cannot wish it away. Conceptually, they’ve come with a damn good idea, which is Ayushman Bharat system.

It’s a payment system, not insurance, because there’s no contribution from the people. They’ve said, look, people above half the population or something, that you can go to any of the licensed places and get free healthcare up to some limit. I think that’s, again, how it works. I still have no idea actually. One thing I do see is that there’s no change in the budget.

RAJAGOPALAN: One thing I’ll tell you, now we have NREGA, which is for the poorest people there is backstopping if they are out of work in a transition system. We have this Ayush Bharat system. It seems like at least now, we should be able to pass the labor reforms, but there’s no movement anywhere.

MOHAN: I agree with you, but, of course, we haven’t done the social security part.

RAJAGOPALAN: This is not enough?

MOHAN: No. You don’t want to be sick.

RAJAGOPALAN: You don’t want to be sick.

MOHAN: You want to be just going out working and—

RAJAGOPALAN: While all of that is true, you also don’t want to be unemployed, and we have masses of people who can’t find a job.

MOHAN: Precisely, but the thing is that you need to provide this trust and confidence. Again, after all, many people in the high-income levels have all kind of protections.

RAJAGOPALAN: Here, I want to challenge you a little bit. See, we are no longer in the ’70s and the ’80s where the unions were super powerful.

MOHAN: The unions are not powerful at all now.

RAJAGOPALAN: Who is opposing labor reforms today?

MOHAN: I don’t know, quite frankly.

RAJAGOPALAN: That’s my question.

MOHAN: It will come through politically, through the members of parliament, members of legislative assemblies, et cetera, political parties, but I don’t know enough, quite frankly. All I’m saying is that you need to keep thinking of innovative—

RAJAGOPALAN: There, I completely agree with you.

MOHAN: —solutions, so that you can do what you want to do.

RAJAGOPALAN: I agree. I think I would very much agree with you that we need a better plan for agriculture, let’s say, to phase out MSP. We can’t do it overnight. We’ll get the protests the kinds that we saw. On labor, at this point, I am searching the bottom of the barrel. I think genuinely it’s just the lack of courage and imagination because I don’t see an organized constituency of the kind you faced.

MOHAN: You see, if you take the agriculture reforms, many of which were good, basically, you didn’t foresee that organized stuff coming up, but it did.

RAJAGOPALAN: How did they not foresee it?

MOHAN: Farmers all —

RAJAGOPALAN: Farmers are incredibly well organized.

MOHAN: Yes, but still, they came up together when there was an issue, whether right or wrong. All I’m saying is you need to think about how to get things done.

RAJAGOPALAN: Fair, but I’ll be very surprised if we have the Bharat bandh, the strikes we used to; I don’t see that happening anymore.

MOHAN: The other thing I would mention what was not done and took 30 years is the bankruptcy law, the IBC.

RAJAGOPALAN: IBC.

MOHAN: IBC. Again, it’s something we worked on in the mid to late ’90s, but there was huge opposition from business, what would’ve been MRTP companies. They were very happy that nothing would happen to them if they went bankrupt. They’d lose nothing. I think that’s another thing that we should have done.

RAJAGOPALAN: Which came too late.

MOHAN: In fact, I would say that if you did the IBC and the NRF together, you would have probably made much more progress on factor market reforms, both combined.

RAJAGOPALAN: One set of factor markets, yes.

MOHAN: No, both combined. That is, you are finding a system to get the business owners out through bankruptcy, more efficient system and you’re—

RAJAGOPALAN: Managing the labor transition.

MOHAN: —managing labor transition at the same time. In some sense, you’ve got a system both for capital and for labor—

RAJAGOPALAN: For labor.

MOHAN: —to be able to do restructuring, revival, and greater growth. Because then, what happens is that when bankruptcy systems are clearer, people, they perceive less risk in investing, banks perceive less risk in financing. I think that is when the two combine, in my view, one of biggest failures of the ’91 reforms, and both were envisioned.

RAJAGOPALAN: Envisioned, and still not done, basically.

MOHAN: IBC has been done.

RAJAGOPALAN: Yes, IBC has been done, but it’s got its kinks and has been smoothened out.

MOHAN: It’s got its kinks, but it’s smoothened out. In fact,we have a new paper on that also.

The Infrastructure Report

RAJAGOPALAN: We’ll link to that. The next thing I want to talk about is you put together a phenomenal report, which was called the Infrastructure Report, which I honestly think is bad PR. Though it was about infrastructure, but it was about so many other things. This is a lot like your industrial licensing work where you look at every single roadblock within the system towards building infrastructure and urbanization.

A lot of that also deals with factor markets, in this case, land. One, can you walk us through what were those roadblocks? This is everything from land titling to land tribunals to taxation, to urbanization, to land ceiling, to FSI. It’s everything that you managed to capture in this very, very specific work. One, can you tell us what you were thinking? Then also walk us through those reforms, most of which are now land.

MOHAN: First, you don’t like the title Infrastructure Report.

RAJAGOPALAN: Yes.

MOHAN: I’ll tell you how it came about. In 1994, one of the best world development reports put out by the World Bank was in infrastructure, the WDR, World Development Report on infrastructure in 1994. That had been led by my friend, Gregory Ingram, with whom I had worked very closely for the Urban Development City Study Project in Colombia. We’d joined the World Bank at the same time. Didn’t continue on. I’d left, gone off. Was an excellent report, actually. Among the contributors in that, by the way, was Ashoka Mody also in that World Development Report—

RAJAGOPALAN: Wonderful.

MOHAN: —on the finance part of it. This is part on why we called it the Infrastructure Report. As it happened, I had spent a year abroad. Mainly, I had got angry because of the failure of the National Renewal Fund. I took leave from the government for a year—

RAJAGOPALAN: You went away.

MOHAN: —and went off to Maastricht in the Netherlands to work on European industrial policy, which ironically 30 years later has become very important. I went back, and that’s when this report came out. This is really excellent, actually. It covered everything on infrastructure policy. When I came back, as the still the economic advisor industry, I went to Dr. Manhoman Singh, then finance minister. I said, “Look, this excellent report has come out. You should do something.” He said, “You head it.” That’s just the background of why I call it infrastructure.

RAJAGOPALAN: By the way, it had a gorgeous cover. I know this because my dad was at the national housing bank He had this report. I read this report in the ’90s because it was at home, and he told me this is one of the best things written.

MOHAN: There was another thing, that it was the first glossy report, the first glossy government report, again, taking inspiration from the World Development Report.

RAJAGOPALAN: Had skyscrapers on the cover, which I had never seen on any Indian anything.

MOHAN: Also because I was at NCAER at that time, I could do it independently. I just got funding from the government to get all the data. Anyway, but on the substance of it, there was one chapter on urban infrastructure, but quite frankly, we didn’t do too much on that in that report. Many things to do with urbanization, many things actually. Very difficult to encapsulate in a short period, but I’ll try. One is that the whole Indian administrative system, which is that now we have something like—if we had had a census in 2021, there would probably have been at least 65 cities with population over 1 million. Delhi may now be the largest city in the world. It is 20 million, the Delhi metropolitan area. It is more than 20 million people. Anyway, the point is that with these large cities, which have population more than many countries in the world, you don’t really have effective city governments. Essentially, administered by the state governments, you do have municipal operations, but the elected mayor has no powers. The municipal corporation also has limited powers. The person who really runs the municipal corporations is the municipal commissioner, who is an IAS officer or some other functional state government.

You see, they have no connection with the cities, that have to be appointed there, some are very good to do good jobs, and are there for three years or something. The point there essentially is that for good urban development, you really need to empower these city governments at different levels and different ways. One of the reasons being that you have to have people interested in the city. That is, it’s their city. I’m really doing something for my city, as opposed to a board of passage who comes in administratively, maybe good, which you can do something, whatever you’re going to do. 

RAJAGOPALAN: The feedback has to look below to the citizens and not above to their boss, who’s in the IAS service.

MOHAN: Quite right. The criticism of this kind of idea is they’ll be very corrupt. My response to that is you think the top people are not corrupt?

Are you telling me central government is not corrupt, or state government is not corrupt? Two, if you do this, this may be just idealistic, you may get better people incentivized to come in. As an aside, back in 2006 or something like that, I was at a panel in Bombay. There were a couple of other people. One was Narayana Murthy. There were at least 1,000 students in this huge auditorium somewhere in Bombay. It was on urbanization, that particular session. I asked the audience, 1,000 people, lots of students, I said, “Raise your hand if you would like to work in the municipal corporation of Mumbai.”

Zero hands went up. Then of course, since Narayana Murthy was in the panel with me, I had to be provocative. I said, “Now tell me how many people want to work doing useless things with Narayana Murthy?” Half the hands went up. The point is that you want to enthuse the youth, because there are lots of interesting things to do. Say, for example, as a finance professional, it’ll be very exciting to do all the finances of the city. As an engineer, very exciting to do urban projects.

RAJAGOPALAN: Right now, we can’t even get a flyover to meet.

MOHAN: Yes. The other thing you mentioned, flyovers, there’s a sort of aspirational thing. What is urban development? Fancy flyovers.

RAJAGOPALAN: It should be better pedestrian—

MOHAN: You have pedestrians, you need clean water, sewerage—

RAJAGOPALAN: Clean air.

MOHAN: —clean air, all the rest of it.

RAJAGOPALAN: Public transit.

MOHAN: The middle-class aspiration, politician aspirations, et cetera, the more flyover, the more modern I am—or metros. I don’t want to go into those details, but my basic point is that we need to rethink how we run our cities. Get more expertise in and get more local accountability in. Now, these may be very idealistic thing, maybe it will not work that way, but one of the differences with China is that they have really empowered city governments. Of course, they’re appointed by the Communist Party, but they really empowered city governments actually.

RAJAGOPALAN: You say idealistic now, but when I read your work, you provided a very clear roadmap. You talked about being more fiscally federal such that you can raise revenue through property taxes and everything else, removing the urban land ceiling acts, rent controls. You have to remove it, but that’s still tweaking around the edges. 

MOHAN: Yes, but it’s mostly done, actually.

RAJAGOPALAN: It’s mostly done now. Removing the setbacks, making building permits easier, the FSI. What I realized when I read your report, which is quite remarkable, is there is a cluster of constraints when it comes to urbanization. Different cities, whether it’s Gurugram, whether it’s Delhi, whether it’s Bangalore, what happens is they remove one constraint and then they say nothing happened.

What they don’t realize is when there is this cluster of constraints or this thicket of regulation, you remove something, something else becomes the binding constraint. What you pointed out is all the things that need to be done simultaneously, because if you just do one of them, then something else will be the binding constraint. That’s the aspect, in some way, if you can outline for us, I think it’ll be super useful for those listening.

MOHAN: First, thank you for reminding me what I said, because I didn’t remember.

RAJAGOPALAN: This report was written a long time ago, in your defense. 

MOHAN: Anyway, but the issue is the same, what I said earlier. You need a whole set of competent people who can visualize the thing together. In terms of the municipal finances or the urban finances, what goes into infrastructure? What goes into housing? What goes into transport? 

Just to give a sense of how difficult that is, when I came to the World Bank in 1976, as it happened—1974, if I remember correctly, the World Bank IMF meetings were held in Nairobi ’73 or ’74. Mr. McNamara had just discovered there’s something called urban poverty. He decided the World Bank has to focus much more on urban development. As a response in the research department, there was an urban economics division, which said we must study how cities work in developing countries.

RAJAGOPALAN: A lot of focus on slums, which were coming up that time.

MOHAN: Not so much. We have to do something to understand—

RAJAGOPALAN: Cities.

MOHAN: —cities in developing countries. All the work in urban homes was in developed countries. I’d just finished my dissertation. I got hired at the World Bank. Greg Ingram came from Harvard. This is relevant. First, I did a paper on urban economic and planning models, which then became my first book. What I learned from that was that, in those days, there was a lot of work on urban models in the US, in the whole urban planning, urban economic literature, and work in universities and so on. I perused all those and I came to the conclusion, that is not a good idea.

What would be a good idea is to do sectoral studies and put them together. All the things you mentioned: housing, transport, municipal finance, urban income distribution, urban labor market, urban employment, and so on. We put together this project, which we got different people in different parts to do this. All I’m saying, and these are all very highly qualified economists, some of whom had not worked in urban issues at all. I’m just giving this as an illustration, that it takes a lot of firepower to do these different things and then to combine them.

RAJAGOPALAN: Combine them. That, I agree.

MOHAN: I’m saying that doesn’t exist.

RAJAGOPALAN: You visualized it for us. If I remember your report, you went into a level of detail I have never seen. 

MOHAN: That’s because of my earlier background.

RAJAGOPALAN: No, but this is an actual example from your report. I might get some minor details wrong —you talked about how we can make our railway stations better if we monetize the hoardings, which is now being done. You said this in 1996, right? 

MOHAN: I don’t remember that at all.

RAJAGOPALAN: This is in your report. It’s a level of detail. What I’m asking, what prevents people from just using that now and putting it in as a plan?

MOHAN: That’s not the way things happened. It is different people thinking this in a similar direction, something happening for that to come together.

RAJAGOPALAN: This has to happen in every state then.

MOHAN: That’s my point. One of the interesting things to me is that our states are larger than most countries in the world, but you don’t have even one significant social science or economic research institute in any state. Actually, people thought about that back in the ’60s.

RAJAGOPALAN: Like an NCAER, but in each state.

MOHAN: Yes. In fact, that’s where the ICSSR was established. In the ‘60s, if I remember correctly, sometime ’60s or ’70s. The idea would be one in every state. All I’m saying is that it is ironic, it’s incredible to understand that with such huge populations, that you don’t have five of these in every state.

RAJAGOPALAN: You don’t have five of them in the country.

MOHAN: If you go to, say, Africa, there’s much smaller countries, and that certainly every country has some good, bad, whatever, there’s something. All I’m saying is that you don’t have this intellectual competence. Then of course, the bureaucrats keep moving around. They have no incentive; only some personal incentives. We have had some fantastic IAS people.

RAJAGOPALAN: Who are so personally motivated that they get some things done.

MOHAN: Exactly. I only work in urban development. Like KC Sivaramakrishnan in the old days. The number, even today actually.

RAJAGOPALAN: Someone work on titling, someone work on something, but it’s all little bits here and there.

MOHAN: Then you’re there for two, three years, move on. All I’m saying is that many of these things, in my view, the government should work very hard on setting up things like that.

RAJAGOPALAN: It’s an HR problem past a point.

MOHAN: I’ll give you another example, that when IDFC was established, I was on the first board because IDFC came out of the infrastructure report. I was on the first board. One of the things suggested in the board was that you should take up five or 10 cities a year. Maybe five to start with, even three to start with, and go into municipal corporations, and set up and transform the accounting systems, et cetera, so that they can become credit worthy. Just do this as part of your research activity or whatever you may call it. Then you will get projects to finance. Maybe five years from now. Just think of it.

RAJAGOPALAN: Eventually you’ll make the money up.

MOHAN: Yes. This started, say, 1998, ’99. The IDFC. I don’t remember the year exactly. It’s now minimum 25 years. Suppose you’d done five a year. It’ll be 125.

RAJAGOPALAN: Municipal corporations.

MOHAN: Corporations. Doesn’t cost very much to put in good accounting systems and other things. Once you start, suppose you’d done five, suppose you’d done 10, then state governments will do it—

RAJAGOPALAN: Other people would look at the model and replicate.

MOHAN: —and other people can do it. Of course, they didn’t do anything. It doesn’t cost very much. All I’m saying is that there isn’t this competence. Also, mainstream economists or mainstream policymakers don’t have this interest.

RAJAGOPALAN: They don’t look at the details. 

MOHAN: There hasn’t been a system.

RAJAGOPALAN: We do macro dev well, we do monetary well, but all this very specific—we don’t end up there.

MOHAN: One of the very good reports was the Isher Ahluwalia report on urban infrastructure—

RAJAGOPALAN: Oh, that’s a fantastic one.

MOHAN: Is a very good report, that has all the stuff actually. It wasn’t picked up.

RAJAGOPALAN: It’s so good on financing.

MOHAN: It’s very good.

RAJAGOPALAN: Both on the revenue side, how to create a bond market. Everything is laid out in that report.

MOHAN: Also it shows that among the biggest problems is urban water sanitation and sewerage. In the estimates that gave, they’re a very small portion. I’ve written about it, taking it from there. I said, look, you can improve—

RAJAGOPALAN: Things.

MOHAN: —health, all kinds of stuff, if we just concentrate on this. We just don’t build five flyovers, or don’t put it in a metro system too early.

RAJAGOPALAN: You can even cover it with user fees.

MOHAN: Exactly.

RAJAGOPALAN: The Indian poor are already paying for clean water and clean everything, so they’re willing to pay for it. You just need a system to hold it.

MOHAN: Another one of our many failures when I was adviser, Urban Development in the Planning Commission, ’86 to ’88, when Manmohan Singh was deputy chairman and I was in charge of urban development and urban water and so on. One of the ideas I put forward, of course, which never has been taken up, is that I then looked into the finances of urban water. What I found was that, I forget the percentages now, but the vast, say, 50% to 70% of the population, depending on the city, gets about 10%, 15% of the water.

I forget the numbers now, but basically small proportion. All the rest is richer people, plus, of course, businesses and so on. I’d done a lot of work in user charges at that time. You just mentioned. What I said was, look, a simple way of self-selection is that you say that anyone who has a tap in the house must pay the economic charges of water plus 10%. Anyone who’s willing to go to a public stand post gets free water. If Mr. Adani decides—

RAJAGOPALAN: Or even us.

MOHAN: —or even us, to go to public stand post, that’s terrific, because you’d get enough money. There are things like this, it has been a big puzzle.

RAJAGOPALAN: That was in ’88. Now lots of people have taps. We could still come up with a sensible user model where certain units are free and then we price.

MOHAN: No, don’t put any units free. My point is that as you’re saying, many more people have taps, so the finances get better and better and you can even reduce the tariffs, because there are fewer people to subsidize. You have to have self-selection. There’s to do with, again, urban planning, urban thinking. When you talk about urban developers, you talk about smart city, it means metros, flyovers.

RAJAGOPALAN: For me, a smart city, there’s clean water, and the garbage gets picked up. 

MOHAN: Precisely. Video cameras. Things like that. This somehow doesn’t inspire people’s imagination, just as health and education through our history.

RAJAGOPALAN: Imagination means every day the problem every single household faces is clean water, garbage, roads, public safety. It’s a little bit—

MOHAN: That’s what I’m saying.

RAJAGOPALAN: —astounding.

MOHAN: To come back to basic general point and all these things, whether it’s permits, whether it’s FSI, getting electrical permits, whatever it is, to improve that, you can’t do, as I say, things bit by bit.

RAJAGOPALAN: You got to do it together.

MOHAN: You have to have some kind of overall thinking, because then you understand that look, to have good urban water, you have to have user charges. If you have user charges, you can get financing from the capital market or from municipal bonds or whatever, or from banks, but to do that, you have to have a good accounting system, the municipal corporation and so on. All I’m saying is that people don’t understand this. All this you can’t do bit by bit.

RAJAGOPALAN: Another interesting thing that’s been floated is we have central and state GST, so they say redo the amounts so that now 5% from the center and 5% from the state is local GST.

MOHAN: Absolutely.

RAJAGOPALAN: You just rearrange the proportions and this way every municipal government has a pool of money to begin with and they’re highly accountable. This includes Panchayati Raj. This includes everyone.

MOHAN: All of it actually.

RAJAGOPALAN: Yes, because consumption taxes are raised out of the ground.

MOHAN: That’s right. Consumption taxes plus user dollars.

RAJAGOPALAN: This can actually get things moving. Now I’m switching gears a little bit, but I have one last big question for you. Now this is, again, something people don’t know about your work.

MOHAN: Maybe I don’t know either. 

Structural Transformation

RAJAGOPALAN: When you were working on urbanization, in the foreground and the background was structural transformation, which is still the biggest thing that we have. Urbanization is part of the structural transformation, though that’s about physical location from rural to urban, but the other aspect of that is sectoral, which is going from agriculture to industry or services.

Now, this is again, back in vogue in a big way, and economists the world over and in India especially are debating if India’s development path should be agriculture to manufacturing, low-skill manufacturing especially, to services, or India can bypass that to a certain extent and go straight to services or something else. Now, incidentally, I have read your doctoral work. You were talking about this in the ’70s.

MOHAN: Poor thing.

RAJAGOPALAN: You have no idea what I read now. It was a treat. You were talking about this structural transformation, both in the context of urbanization and outside, long before we liberalized. Can you, one, walk us through what it was like then? Not too many people were studying this structural transformation. How do you see the landscape today?

MOHAN: That’s a difficult one.

RAJAGOPALAN: You’re up to the task.

MOHAN: I don’t know. You see, back in the ’60s, ’70s, in development economics, you basically had two-sector models. There was a lot of work on that for a long time. Development meant structural transformation, from agriculture to industry or rural to urban. Almost no one talked about services, the tertiary sector at that time. This is just giving you background how I started thinking about it. 

At Princeton, there was a professor called Sherman Robinson, who I think is still working with IFPRI or something now, he’s here in DC now, and he’s still working in World Bank also, actually, in the modeling side. He had spawned this work on computable general equilibrium models. One of his best students was Kemal Derviş, who later became the World Bank senior vice president and so on, then became head of UNDP, and then at Brookings and so on. You should dig up his thesis and read that.

He had done an eight-sector model of Turkey, and one of the finest lucidly written technical pieces of work. I saw that. He was an assistant professor at Princeton also after his PhD. From that, I saw all the sectors, then you need to do three sectors. The model I did had greater endogeneity because you can do that more if you have fewer sectors, technically speaking. That’s how I got the idea. When you then look at the national accounts, et cetera, you see the service sector is much larger. Therefore, I did that. 

To just jump to the present for a second. What did I learn from that? That the transformation from agriculture to nonagriculture, from rural to urban, is simultaneously to industrial and service sectors or secondary and tertiary sectors. The debate often that is taking place today is one versus the other, which is totally wrong, misguided thinking. Second, and this is, again, coming to the—well, not the present—that the East Asia model, so to speak, I’ve often talked about it, many people talked about it. Look, the way the rural urban transformation took place was a huge increase in industrial employment, manufacturing employment.

RAJAGOPALAN: Especially low skill.

MOHAN: Especially low skill. Then if you actually look, which I’ve done really recently, in fact, I’d forgotten that I did earlier, that even there, there was a larger movement towards service employment. Of course, much higher manufacturing industrial employment than we have had in terms of growth and share. Even there, the service sector employment went much further. That’s, in some sense, when I did my dissertation, this was the whole point, that you’ve got to look at the overall structural transformation and then understand the economy better that way.

RAJAGOPALAN: Now, how do you see the structural transformation taking place today? We have a bigger pull from services these days than we do from low-end manufacturing. In particular, with all this digital public infrastructure and the gig economy work that’s taking place whether it’s Blinkit or Zomato and these sorts of things, earlier when we thought about low-skill migration it went from, say, agriculture to construction which was this big boom post liberalization. Now it’s all these services.

MOHAN: This is different. You’re right.

RAJAGOPALAN: Yes, this is just different. Now, how do you see this playing out?

MOHAN: Even earlier, there was a lot of movement of low-skilled service jobs.

RAJAGOPALAN: Services, yes.

MOHAN: This is different service jobs. The point essentially here, as far as India is concerned, and all over the world, this is a reality. At our level of income, it is a bit of a puzzle and is to do with a lot of stuff we were talking about earlier on why there isn’t much greater growth—

RAJAGOPALAN: In manufacturing.

MOHAN: —in manufacturing, both value-added, even more so in employment. It is partly to do with the legacy of the small-scale reservation, et cetera. There’s something more which I don’t fully understand, quite frankly. The standard thing in India to say is that you know it’s medium- and small-scale industries do exports. That’s not correct. 70%-plus of exports is done by the large-scale sector.

RAJAGOPALAN: You have economies of scale, you’re more competitive.

MOHAN: Pravin Krishna. He’s done good work on this. My point is that partly because of some of these misconceptions, that we don’t think of large enterprises as large low-skilled employers. That’s just not correct. In fact in some things that are happening today, partly because of PLI, is huge increase in electronics employment.

RAJAGOPALAN: Though there’s an increase in employment which I do appreciate, we somehow like to target the most capital-intensive stuff as opposed to apparel and footwear and all these other kinds of things.

MOHAN: That, I agree, 100%. What I was going to say is that even there in those assembly—

RAJAGOPALAN: Assembly units.

MOHAN: —units, it’s very low level of skills. They don’t get paid very much. About 50,000 rupees a month.

RAJAGOPALAN: The jobs are getting created at the very least.

MOHAN: The jobs are getting created, but still all my point is that even those things require very low-level skills, and you can do much more expansion.

RAJAGOPALAN: Much more of that.

MOHAN: Whereas of course, all the other, as I always say, the Walmart kind of products, I don’t understand why we don’t do much of that. The second thing I would say is that the idea that in the last, say from early to mid-’90s to early mid-2010s, that the demand generator was the United States, which brought up all these countries, including China in particular, but now there wouldn’t be such demand. That’s again, false.

RAJAGOPALAN: I think it’s false.

MOHAN: The way I look at it is that if you take China plus South Asia as a whole, plus ASEAN, that’s more than 4 billion people.

RAJAGOPALAN: They’re getting richer.

MOHAN: They’re getting richer. Average income with a lot of variation is $4,000, $5,000 a year. Most projections, including for China today, suggests at least for next 10 years it will be 4%, 5% growth. Maybe below, who knows, because of demographic changes, et cetera. The point is that also incremental GDP growth as a share of global GDP growth, about two-thirds or so will come from this region. There’s no shortage of demand.

RAJAGOPALAN: No. There’s an additional thing, which is on the other side, China is getting richer, which means its people are going to do fewer of these jobs.

MOHAN: Of course, and they’ll be demand from there.

RAJAGOPALAN: Exactly. Those jobs are now going to Vietnam and other places.

MOHAN: Absolutely.

RAJAGOPALAN: They’re even going to Africa, but they’re not coming to India. They went to Bangladesh before they came to India.

MOHAN: Absolutely. This is the point, actually, that there is no shortage of demand for goods and for consumer goods in particular. Of course, to manufacture consumer goods you need intermediaries and you get capital goods. 

RAJAGOPALAN: We just need export competitiveness, which we don’t have.

MOHAN: What is correct to say is that in each sector which we call labor-intensive, the capital-to-labor ratios will keep going up. Whether you take apparel, you have computer-aided design, at every stage of the process, there’s more capital. It is still true that relative to other industries, the capital-to-labor ratio is lower. One of the things that I find the most irritating in India is we just want AI. Of course, AI is happening, but look, you can’t give clean water. The loss of employment, clean water, there’s shortage of nurses, there’s shortage of carpenters—

RAJAGOPALAN: There’s shortage of every kind of skilled labor.

MOHAN: We have this sort of Brahminical view that we should only do AI. Let me give one more aside on this.

When I was doing electrical engineering as undergraduate in London at Imperial College—

RAJAGOPALAN: Down the hallway from Brian May of Queen.

MOHAN: Yes, quite right. That is in the residence, yes. There were 90 of us in the electrical engineering cohort in my class. At the end of the course or the degree, the last semester, that is summer semester, we had already done all the exams and stuff. We had to do a project, a graduating project. One of the things I always remember is, 90 students, I think there were only eight of us who are what I would call subcontinentals, that is people of Indian, Pakistani origin. I was the only one from India. There were two from Pakistan, someone from Trinidad, someone from East Africa, someone from Malaysia, and so on. There were eight of us out of 90.

What is interesting was that when we had to do the project, almost everyone did a physical project. Building some apparatus, engineering apparatus to do with electrical engineering, and then doing that, and showing it. Of us eight or so, everyone except for one did a software project. We just don’t like doing, even myself, just don’t like doing things with our hands. Somehow, there’s something from there which I can’t prove. I’m not a sociologist. There’s something there. Always remember that, that none of us wanted to do—

RAJAGOPALAN: Want to do something—

MOHAN: —physical apparatus project.

RAJAGOPALAN: There’s a second element which now is even more disturbing than that, with all these AI buzzwords. Earlier, we were just brainlessly importing best practices or solutions from the West. Now I’m worried we’re also importing their problems which we don’t have. It’s bad enough that we were importing the solutions, but now we’re importing problem. Our problem is clean water. Their problem is AI.

MOHAN: I’ll give you an example on the labor-intensive stuff. Shirt I’m wearing, I’m going to name a name. This is Raymond’s. When I went to buy it, it’s not cheap, it’s like 3,000, 4,000 rupees. I go home, see the label. This is made in China. You can’t tell me, and this is a vertically traded company—

RAJAGOPALAN: Has been around for—

MOHAN: Ages.

RAJAGOPALAN: —ages.

MOHAN: Raymond’s. You can’t tell me they can’t manufacture a shirt which you can sell for 3,000, 4,000 rupees, which is made in India. I don’t understand this. It’s cotton, it’s not synthetic. These are things that I don’t understand. To come back, the point basically is that, in essence, I don’t care if there’s greater growth of services or manufacturing, except to say that if you want, say, as our aspiration, 8% growth a year for the next 25 years or 20 years, then purely arithmetically, if the agriculture sector at best can grow at 4%, of course the weight is getting smaller and smaller but 14%, 15%, you can’t get 8% because you have to compensate with the agriculture sector. If you have, say, less than 8% in manufacturing, which means service sector has to go over 12%, something of that order. Purely arithmetically—

RAJAGOPALAN: You can’t do one or the other.

MOHAN: —you have to do both.

RAJAGOPALAN: All three, actually.

MOHAN: All three.

RAJAGOPALAN: You have to reform agriculture.

MOHAN: Reform agriculture. We have to get away from a self-perception of agriculture being cereals. Now, I hadn’t known this, but the value-added in dairy is greater than all cereals put together. The way the income’s increasing, the diet’s changing—see, in our meals, what proportion of food we eat is cereals? Dairy, fish, meat, poultry, et cetera, vegetables, fruits, and so on. We can have far more productivity growth there if we just get away from our focus on cereals. Also that in those areas, see, we succeeded in improving serial productivity after the green revolution, and the government actually had a huge role in that. All kinds of very interconnected programs.

RAJAGOPALAN: We had so many subsidies and benefits, and human support, and things—

MOHAN: Not just subsidies, but investments.

RAJAGOPALAN: —like investments.

MOHAN: Investment, availability of fertilizer, availability of water. The huge interconnected investments were done for the green revolution. That was easier because they are homogenized commodities. The problem with all the other things is that there are hundreds of varieties in everything.

RAJAGOPALAN: Which means it can’t be a lever that the government pushes. It has to be more broad based.

MOHAN: You are at George Mason, you are against government doing anything. This is something in the US also, by the way, the whole agriculture research system is amazing—government-sponsored.

RAJAGOPALAN: I’m not talking about the research. I’m saying we can’t do the kind of we give you minimum support price to switch your grain and yields, and all that stuff.

MOHAN: You have to set up a system, which includes government intervention. Whether it’s just to make sure that, how do you have refrigerated warehouses everywhere? How do you enable refrigerated transport of all these things?

RAJAGOPALAN: Better agricultural markets, more accessible—

MOHAN: Better agriculture marketing, more accessible, research on different varieties.

RAJAGOPALAN: Futures.

MOHAN: Yes, futures. There are hundreds of, say, apple varieties, hundreds of mango varieties. How to make all that much more productive needs R&D and systems.

RAJAGOPALAN: Systems, and infrastructure.

MOHAN: One of the things I learned, for example in dairy, the Amul example, it’s very interesting that you have all small producers, some five cows, 10 cows, 15 cows, 20 cows, 50 cows, whatever. What was the innovation that Amul did, Kheda district, whatever it’s called, Mr. Kurien , and so on, was that you have all these widespread small producers, you want to upgrade their technical quality. You have a centralized R&D system which then looks into how to improve all the inputs, that is the stuff that cattle eat, the medical, veterinary services, and all the rest of it. Process varieties of cows, which are the water, et cetera. Which the centralizing transmits.

RAJAGOPALAN: Then you can also homogenize or de-homogenize the outputs, and categorize it.

MOHAN: Again, centralized marketing. Same as Apple. When you buy Apple phone in this country, say about $1,000, you have all design in Silicon Valley, R&D design, everything. Then you go to China. 

RAJAGOPALAN: All sorts of places, manufacturing everywhere.

MOHAN: Now China and India, mostly still China, Foxconn. They get everything from this upstream designing activity. All there you do is you put things together. Then comes the marketing, which is also centralized in terms of how you brand them, what is the look, how do you market it, et cetera. It’s the same thing as Amul. What I’m saying is that there are lots of interventions here. There’s a private sector, some of these things they could be public sector or incentivized private sector, where you have to connect these agriculture—

RAJAGOPALAN: Large number of producers.

MOHAN: Agriculture in India will always be large producers. What you want to do is find ways and means of upgrading their quality. Some intermediary which collects everything, and then markets it.

RAJAGOPALAN: Then shares the benefits with them.

MOHAN: Then shares all the benefits with them. There are many things like this that need to be done.

RAJAGOPALAN: This is incredibly helpful. Thank you so much for—

MOHAN: Thank you.

RAJAGOPALAN: —your time. This was a pleasure. Hopefully you’ll come back and do more.

MOHAN: You’ll have to call me.