 Welcome to the discussion series on free trade and liberalization as part of the 1991 project at the Mercator Center. I am Shruti Rajagopalan and in this conversation series, I will be talking trade with Professor Arvind Panagarya, who is the director of the Deepak and Meera Raj Center on Indian Economic Policies and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University. In the past, he has served as the first vice chairman of the Niti Ayog in Government of India and as chief economist of the Asian Development Bank. He is the author of a number of books, but today's conversation will primarily focus around Indian trade policy with some insights from his recent book Free Trade and Prosperity. We've covered some very basic insights on what kind of trade models exist, what they inform us about the world and economic policy more generally. What we can learn in terms of insights for developing countries and how developing countries can prosper. And if at all there are any valid arguments against trade and in favour of protectionist policies. But now I want to zoom in a little bit more on India specifically I know we've sort of, you know, brought the conversations and talked about some Indian examples but I really want to dig into Indian trade policy. And I want to start rather at the beginning. So one of the things that I have observed when I read about you know the post colonial period in India in fact I would start maybe even pre independence in the late 1930s and early 1940s. And it was very clear that socialism as an ideology and also socialist planning as an economic policy framework was gaining a lot of momentum and prominence. And you know this we can see through throughout the Indian nationalist movement, but in particular you know the socialist Congress socialist party was brought to sort of prominence in 1934 by 1938 and just a matter of four years. So then Congress President Subhash Chandra Bose created the National Planning Committee, and you know this was the committee that was tasked with forming an economic plan for India. And, you know, we know now that this committee met so frequently that its secretary Katie sharp produced about 20 volumes of papers. And this was simultaneously also going on with the war effort. You know a lot of the socialist price controls quantity controls that you know were left as a legacy in India they really started with the scarcity problems in World War Two. And those sort of war controls were a new kind of you know socialist planning that was taking place in India at the time. And this was really the sort of precursor to the new Indian government under the leadership of Nehru. And to me it seems like Nehru along with most of the nationalist leaders in the 40s, conflated British mercantilism with a different economic system, which is free trade and capitalism. And the Indian nationalist movement had always blamed you know British rule for the impoverishment of India. This starts with Dadabhai Naoroji talking about the extractive policies of the British. But the conflation that took place in the 1940s in the Indian nationalist movement was that the impoverishment of India was now blamed on British capitalism as opposed to extractive mercantilism. Now, my big question to you is what were the consequences of this kind of conflation, right? What did it mean for you know the economic thinking at the time and the economic policy that was being hatched under a new government which was in this case led by Nehru while writing the constitution and while being in transition from a colonial state to an independent one. Shruti, this is a very good starting point. So let me pick up where you have brought me already. You know as far as Nehru is concerned and his own view of Great Britain. In some ways, at least particularly you know this around the time that the National Panic Committee is appointed. He actually sees capitalism as the evil, the fundamental evil. And the way he sees evil, what you're calling the mercantilist policies is a necessary outcome of capitalism. He really very much it's not just mercantilism. He associates capitalism with the emergence of imperialism says that you know capitalism creates these factories and these factories generate a lot of output. You need market for output. Where are you going to get that. So you need that you get them in the colonies and then the factories also need raw materials. Where are you going to get raw materials. You need raw materials from the colonies. So he had this very direct kind of association of capitalism with imperialism. And so around this time certainly Nehru believed that the only way to combat this imperialism was to combat capitalism and therefore socialism was the way to go. And of course within the Congress there was a lot of consensus, you know, Suvarshan Bose himself actually was very much aligned to the same view. I mean, Suvarshan Bose was very much of a strong socialist in this respect and Nehru also like, so both of them really believed also that industrialization was very important. So really the mandate actually to the planning committee was to think in terms of you know how India was going to industrialize what will be the plan for industrialization. In any case, and then you also rightly pointed out that the committee really did a lot of hard work and the end actually the committee's work ended only abruptly only because Nehru got picked up by the British and put it to J. And then he wanted to complete the final volume of the work and the British would not let him do that. Anyway, so that's the history. But let's come to, you know, I really come to what happens after independence. So the Nehruvian view and here, you know, before we get to trade policy, we need to lay down a bit of background of the overall domestic economic policy framework, because that in a way drives the trade policy as well. As we'll see, you know, if you look at 1950s, there is no active trade policy happening at the time, but we'll come to that. But first, you know, what was the basic framework. So Nehru's basic framework was that because capital because imperialism necessarily followed from capitalism. And this was done through international trade. So therefore international trade was itself actually to be kind of kept at a distance and therefore followed the idea of self-sufficiency. So it was, you know, and he writes that in the discovery of India saying that, you know, in the context of the self-sufficiency objective that we don't want to be the victims of imperialism, nor do we want to develop similar tendencies ourselves. Yeah. And therefore, you know, why we are not against trade, but we want to minimize that. So self-sufficiency became a very important centerpiece of the entire policy framework that got adopted. And Melonobis, of course, had started interacting with Nehru beginning in 1940. There's not a continuous kind of interaction because Nehru spent a large part of his 1940s in jails prior to independence. But nevertheless, you know, they had begun to understand each other. And so later on, Nehru appointed Melonobis as the statistical advisor to the cabinet. So then Melonobis came centrally. And so basically, you know, we all, academically, we think of the basic planning framework is coming from Melonobis model, which at some level is correct, but it really is a rationalization of what Nehru thought. I mean, Melonobis was completely aligned to Nehru's view. And so what do you see? And then he interacted even quite closely with Nehru while he was preparing the plan frame and the draft plan frame as it is known in the document. So, all right, so here where it self sufficiency is the central, but then there are different ways, even Nehru knew and Melonobis knew that you can't become self sufficient overnight. Yeah. You know, so they knew that it'll take a little while. So there are multiple paths to achieving self sufficiency. But the very closely associated big mistake that also happens around this time, which to me I think continues to haunt us till today. It's not a problem we were able to solve because the hysteresis is so deep. Which was the focus on the heavy industries. Yeah. In Nehru felt that, you know, unless we learn how to do heavy industries to learn to make machines, learn to make steel, we would not be self sufficient. And for self sufficiency, it was essential. And he talks about machines that make machines. Not just machines that would make parts of bicycles or automobiles or boilers or air conditioners, whatever, but machines that also will make the machines that make these parts and so forth. So that was the conception. And that I think was really practically I should say fatal and ensure that success was not going to happen in any near future. For the simple reason that you know you started off with very limited capital. Capital. It was a poor country, so small GDP. And the savings rate was about 7% around the time second five year plan was being written. The savings were very small. And if you are going to put that in making steel and making machines that make machines that sort of investment, very highly capital intensive. Then you knew that, you know, most of the capital will basically get absorbed there. They knew that. And so they said, well, you know, what is happening going to happen to the consumers. Well, consumers will consumer goods will be produced by this, this small village industries. At the time the Gandhian kind of view of, you know, promoting the village industries, cottage industries, household industries. And it's called the hand industries, meaning, you know, that's the labor. They refer to these industries as hand industries and many of the documents contemporarily written during the second plan formulation. So this, so they said the consumer goods we leave for the hand industries. And so in a way, you see the, that is the setup that setup. Now you know what is going to happen as a result of this. First of all, the heavy industry is never going to achieve the kind of scale because your capital is limited. And you're trying to diversify very rapidly. So it's not that, you know, you are going to go for a big scale. And diversification was not just in terms of product but also in terms of geographical diversification. So, you know, rather than put a very large scale steel mill, you're going to put up three of them so that you can put them in three different places. So you don't get scaled there. And then you do cottage industry for consumer goods, goods in which you actually got a comparative advantage. Well, you don't can't get scaled there. And then to mobilize resources. The government also use the instrument of printing money. So that of course also meant that inflation happened. And the exchange rate now this is the big factor which nobody seems to see or bother with at the time. I think this all reflects the prevailing thinking at the time. So it's not as though there is any disagreements on this, you know, most people are agreeing and all it is a whole lot of agreement actually on what was being done at the time including this famous panel of economists which had 20 economists selected from universities at in eight different states and all. So, you know, eminent economists collected they were all there and largely, you know, except, we are making it sort of descent note, and from the Bombay school, see and we're writing something to the contrary, although still not dissenting formally, but the rest of the panel actually is an agreement and all so it's not as though what was being done was was contested at the time by almost anybody. But you know the fact of the matter is that if your nominal exchange rate is fixed inflation is higher, then you know that domestic prices are way more lucrative on everything, then the foreign prices are so exports will suffer you know that. Also, imports will want to come in because imports are a lot cheaper with the fixed nominal exchange rate and domestic prices rising. Now, on top of that, what you're doing is, you haven't got really serious scale of production, either in the heavy industries, or in the consumer light industries. So you your cost of production therefore are high everywhere. And because the exchange rate is fixed. They are high in repeat terms in almost everything. Yeah, yeah. So so your competitiveness you know so so you see this transformation that happens in most developing countries where they become exporters of developed of labor intensive products. This didn't happen in India. And that is the sort of background to the whole system. But against that background, you know, perhaps we can come to come to the discussion of the how the policy itself, the trade policy itself. Before I get into the mechanics of the trade policy, I would actually highlight two or three more unintended consequences of going in the direction of heavy industry. So you know one part of one of the unintended consequences was to actually have these heavy industries perform and hire from within India. And it needed to produce engineers, right and and you know, sort of, you know, scientists engineers applied work to set up these industries and run these industries, which meant that a lot of the government focus in education went towards higher education, right, and it went towards necessarily setting up IITs and engineering colleges and things like that. And the vision was this is the modern way to go because it's science at its highest level. But we know that, you know, in a country a fraction is going to be, you know, engineers right so if your education policy is entirely designed for as an input for heavy industry, you are in trouble already right so you become very good at producing engineers and not very good at producing other kinds of human capital. And that was one unintended consequence. The other you know partially unintended partially intended is because the government is going to invest in heavy industry, and they want to acquire a certain kind of scale. When it comes to you know what they're calling hand industries or cottage industry. The second fatal blow is the small scale industry reservation list. So this is basically a list of you know sectors or industries, which are supposed to remain small they cannot exceed an investment of more than a certain amount of money. And that means that anyone who wants to be an entrepreneur and eventually achieve scale that is you know if you want to be in the government business and you want to supply garments to Zara across the world or something like that. You are necessarily not going to be doing that in a labor intensive way because you're going to fall in the category of one of those industries right whether it's making shoes or whether it's making handicraft. So, there is this really complicated relationship that the government seems to have with scale, right aware scale is thought of as one of the achievable goals and not as an output of really successful or a really productive enterprise in the first place. No, I mean, you know, long term effects really go a lot deeper, you know, so not only what you have just mentioned, but just think of what you said about cottage industries or hand industries. A lot of the low level skills are developed precisely in these industries. This is where the skill formation begins. But once you say that the hand industry is no capital allowed. Other than the household capital, whatever you know, get your needles and get your, you know, threads and so forth, but, you know, so, but, but the industrial skills will simply not not be developed if in those industries where you don't allow. On the other hand, you know, you are developing these engineers and very high level technical expertise on the other in terms of low level skills from which vast population begins to kind of rise up. It's not happening. You know, so you still see and the impact today remains you know that our workforce is the least skill workforce today after 75 years of near 75 years of independence. So much deeper, you know, and the impact that this leaves because you see there is also this inheritance in terms of thinking. So the socialist thinking doesn't end with narrow means inherited. So, you know, all the major actors, politicians, journalists, intellectuals, bureaucracy. In every one of these influential classes of people. Socialism has its inheritance. And this is where, you know, there's a book I'm working on right now. I'm going to bring all this. But, but you know, this is where democracy and socialism is, is, is, is sort of cocktail. That is lethal. That's lethal. You know, in contrast, remember that China had more or less the same model. But because it was authoritarian, then shopping could come along and tell everybody, okay, old game is over. Yeah, new game is beginning. Yeah, in a democracy that doesn't happen. I mean, even think 1991 when Nassim Raab begins to kind of make changes, he never says that I'm changing. He says, no, it's a continuation. I mean, read, you know, if you read the speech by my own saying in some ways it's a fantastic speech. But in other ways, he's also, you know, saying we are connected to what Rajiv Gandhi did, we are connected to what they did. Yeah, that is that connection drawn because in democracy, that's how you have to move very slowly, gradually and all. And even you see the way this ideology left the impact comes along 2009 to 14 right up to socialist policies, reassert themselves right you know right to education act very much a socialist act, and the land acquisition act very much a socialist act. You see, and remember who is running the finance ministry around this time, you've got Pranab Mukherjee, pretty much a committed socialist. So the impact of what they did remains still a long time through all these inheritances, these inheritances that happened, you know, I mean it's like you inherit ethics from your family. But the new new IS officers who come in, learn from the senior ones that are in existence. And so they then take their mental and carry the work forward. And so this, you know, you can see it till today, journalists, intellectuals, bureaucrats, politicians, still kind of you know. So the damage you know long term damage is significantly, significantly wider and deeper and long lasting. In one sense self sufficiency as you discussed is going in the direction of heavy industry home grown home cultivated heavy industry. But another way that self sufficiency eventually emerges in India is some kind of you know autarkic trade model. But before we get to the later years of autarky, can you tell us a little bit about sort of you know the domestic trade policy in the 40s and 50s at this at this point, what was being taught through, you know what were the models being used what were the ideas being debated. So, yeah, that's a good good way to begin the discussion on trade policy. So you know, as you know, originally of course, the British had imposed on India free trade policy, meaning that goods in India could enter without any custom duties and whatever little custom duties that got imposed were like to raise revenues. You know, they'll be two and a half percent five percent something like that. It's only in a real sense that they what we trade, you know what we would call the protective trade policy that which is different from the revenue raising you know revenue is a different because you can't you know at the time commodity internal commodity taxation is harder. So, at the border it is easier to collect taxes. So for every purpose is you do that so that little bit of that was perhaps done earlier, but but really it's in 1920s that at the, at the, you know, lobbying by the Indian some bit of tariffs got introduced in the 1920s. These were in iron and steel and textile. Those are the two kind of major industries that had evolved in India, and the other than to textiles of course also. So some custom duties got introduced that remained in place that were inherited, then came the war. So during the Second World War is when, you know, you begin to put in place the control kind of system. And initially kind of 1940s you started with some import controls on the consumer goods. This was as early as 1940. Then by 1942 this was extended to practically all goods. So you put in these import controls, meaning licensing on imports. But, you know, there was no specific quantities that were fixed up for these quantities, you know, you just needed a license, which could be given to you if foreign exchange was available and so forth. And during this period also they begin to evolve the principle of essentiality. Now later it plays very important role of course, you know, the entire import policy regime as we will see, but the principle of essentiality is evolved during this period, although imports and sterling area were regulated mainly because of the shipping restrictions, because, you know, anything that had to do with war had priority in terms of the usage of availability of shipping capacity. Subject to shipping capacity availability, I think still products were allowed to be traded, imported and exported. So that's a rough kind of regime that we inherit after independence. Towards the end, you know, of the British era 1945-1946, the idea of open general licensing had been evolved already also. This also later on in the 1980s plays a very important role in India's liberalization, early liberalization prior to the 1991 liberalization. So we got to know that, so basic machinery as you see the import licensing, the principle of essentiality, open general licensing, this is already kind of evolved from the British period before we became independent. And some expansion of the open general licensing list was done in 1948. But at the same time, you know, this was a period, we had a very hyperactive joint secretary in finance ministry, B.K. Nehru, he was very worried about the foreign exchange and all. So temporarily he had introduced foreign exchange budgeting, but then B.K. Nehru got transferred to become the executive director of India at the international monetary fund. So the minister then issued an order saying, I mentioned this historical fact, which is quite important, you know, because later on, B.K. Nehru returns and so does foreign exchange budgeting during his period. And once again, it's his initiative that of course introduces the foreign exchange budgeting. So we'll come to that, but this is the very early history. Now, the first, you know, planning period, 1950s, that is generally a liberal period as licensing existed, but you know, licenses were issued with relative ease. And, you know, two major categories of licenses were one was the established importer. And the other was actual user licenses on all these things continue, you know, and become very, very important later on as the licensing regime tightens up later on. So now what happens is that in the 1950s, because of India's war effort, India had earned a lot of sterling balances from Great Britain. Now there was some restrictions on how much you could draw these sterling balances every year. So the British will not release the entire part of the sterling balances at once, but you know, every year they will release that. That fact, plus the fact that during the 1950s the food situation luckily remain pretty reasonable, and we didn't have to import food on a large scale. So some imports had happened, but largely we were able to meet our needs during the 1950s. So both of those factors left sufficient amount of foreign exchange to allow relatively freely imports. So import license, so even, you know, during this is a period during which you see that consumer goods imports are also coming in. And according to the third five year plan gives the data, at least aggregate data, so it says during first five year plan about 32% of total imports were consumer goods. So they declined from 32 to 23% in the second plan. But by the end of the second plan of course, the trade regime really gets very much tighter and the share of the consumer goods and therefore share of the established license holders declines very dramatically to, you know, 10% or below. So that is the kind of history. Now what changes? What changes the regime? Why does it become so restrictive as we will discuss? I think, you know, we will come to discuss in great detail. I think, you know, for particularly the younger generation, it is good to follow how Kafka's or Valiant this trade regime was in those years, so we can come to discuss that in detail, but very quickly the origins of it. How did we end up with this kind of system? So what happened is that sterling balances were gradually being depleted. And you knew that this was a fixed spot ultimately which the British were releasing in different countries every year, but they were going to run out. So it also happens that we can ever return in 1954 and he's very upset that this foreign exchange budget is gone. And he also writes these memos to the secretary at the time that look, you know, and the minister, Stevie Deshmukh, that look, you know, there is a problem here. So he gets no replies. So this is all from his autobiography, you know. So he gets no replies. Eventually, Stevie Deshmukh resigns. Ramachari becomes the finance minister and he promotes BK Naru to become the secretary of Department of Economic Affairs. And around 1957-58, that's the year in which BK Naru is alarmed that, you know, sterling balances and if we look at the numbers actually you can see that in 1957, the foreign exchange reserve really declines quite dramatically. And that scares him as to what's to come. And so he quickly on his own authority as the secretary DEA issues the order for the return of foreign exchange budgeting. The foreign exchange budgeting is nothing but the foreign exchange control. It simply says that, well, anybody who needs foreign exchange now, any transaction that will require foreign exchange, they have to get the clearance of some authority, which to begin with was of course nobody, no other than Mr. BK Naru that that so he would be begin to draw up this foreign exchange budget every six months. And that of course, you know, then we see that a whole kind of bureaucratic system has to be evolved because, you know, there are lots of clements of foreign exchange and how are you going to allocate them, how are you going to give them. And also this obviously also begins to lead to the tightening of the import licensing and ZIM as well. And so we can sort of come to that. And the one thing I want to say here, one thing I want to say here very, very important is that it was very significant at this time. There was no discussion. What were the possible solutions? You know, if some discussion had happened and if they had even considered the possibility of devaluation. Yeah, at this time, economy was doing well. You know, it was not, you know, like growing 789% or anything but you know it was decent 4% growth had been achieved, which was decent for the time. And food situation was generally comfortable. So inflation was not so completely out of hand. So generally, it was good economic conditions. If a proper devaluation had been done, we would have seen some response, some favorable response, you know, I think later actually when he writes his thesis in 1964, that famous book, India's Exports, he actually said at the time does say that you know what we should do is to devalue. But you see then the devaluation happens in June 66 when economic conditions are totally different, you know, there have been back to droughts happen and so politically, you know, so it doesn't generate the kind of response that was required. So maybe 758 if they had devalued, history could have been a little different. Not dramatically different, I should say, because still business of, you know, being in heavy industry and consumer goods being done in cottage or hand industries, that would have continued to haunt us nevertheless, you know, but still things could have been a little better. I completely agree with you. In fact, I wanted to delve into this 1958 as one of the, you know, important structural points in Indian economic history. In one sense, this is sort of the first post independence balance of payments crisis that India is facing. So almost on the brink. So, you know, that's part one. But I think what, what is the, the really important lesson I mean one of course I completely agree with you that you know in 1966, the economic situation was worse and also the egos were quite different. T T Krishna Machari just simply did not get along well with the American administration at the time. And that led to there was a lot of personal conflict involved in that devaluation not succeeding other than the economic problems at hand. In fact, we have a lovely timeline of why the 90 of what happened during the 1966 devaluation and why it failed in our 1991 project website. But you know in 1958 had we devalued none of the control systems, whether it is you know talking about foreign exchange controls, or talking about the later industrial licensing controls which are a natural consequence of an autarkic system. None of that would have happened and therefore none of that would have had to be rolled back either. In a sense the 1958 devaluation had it happened would have been a rather clean and simple affair. Right, it's not, you know, having to roll out this massive, as you mentioned Kafka a system of controls, and then having to roll all of it back as we started doing in 1991 and in some sense, we've still not managed to do it would have been a shift in priorities. So what happens in 1958 given that we don't devalue. One one consequences is that the trade policies or trade priorities dramatically shift right and because the trade policy dramatically shifts, there is also a major shift in what is domestic production and consumption policy. Can you walk us through this like what what are these trade priorities and what are the adverse impacts that follow you already hinted that you know they were outside economists like Bhagwati and Desai, who eventually criticize the system that followed and you know even, even Cian Vakil and Brahmananda but but what is the system conceptually post 58. Okay, so so we come to that but just, you know, 58 itself. As I said, probably dramatic changes would not have happened as a result because of the domestic regime being what it is, it was, unless you know, but having said said that. Just imagine, you know, suppose it, the rupee was devalued significantly I think you would have required significant devaluation. If it was done. Some export response would have happened. There's no doubt. It would have happened because economy generally was otherwise on the upstream. So, so you would have got some export response that would have changed the minds a bit. What I'm saying is that one time devaluation probably would not have been enough to escape the kind of regime that eventually came to rule on import protection. But if it would have also led to a more favorable view in the administration in the government of devaluation that yes devaluation is an instrument that can deliver exports. And therefore solve our foreign exchange problem. Then I think you know, a second time around we would not have had the kind of episode you are describing happened in 1966 that he goes etc they come in because he goes are building on some, you know, fears that everybody else is expressing also that you know devaluation or inflationary and it's, you know, that old elasticity pessimism that prevails and all. So it became bit, you know, the failure of the successive devaluation became self fulfilling. And that put God's fear in us to devalue in the future right there. For a long time till we come to 1980s, you know, 70, 70 per dollar exchange rate remains. And remember that in this intervening period is very high rates of inflation that we suffered from that of course continue to make the domestic products less and less competitive. And so the exports continue to look poorly. So, so it is more the psychological impact I think you know which which might have helped if devaluation had been tried in 1958. So, anyway, so that doesn't, that's not what happens at the end of the day. It's just one secretary's decision. So you can't really suppose it seems, you know, you can't find very much discussion of this anywhere except in, at least I've found it, except we can lose autobiography. He does that, and that's that. And that of course then now begins to build this entire control regime. And that already investment licensing was of course being done. But 50s you see the 1950s, even investment licensing is relatively liberal. Because you don't expect your foreign exchange situation is comfortable because they're selling balances. So machinery etc that needs to be imported is, is can be imported and so it is not a big issue. So licenses were being issued. Only thing was that you know it was understood by the businessman and the industry in Bombay that consumer goods industry licenses will not be issued. There is no point even for in applying. So usually they knew the chemical industry, engineering industry, you will get the license and so, and so you know you don't see you don't hear much complaints about the licensing system, not working being clogged and so forth. That only starts in the 1960s, early to mid 1960s and then a number of committees get appointed and all. But so what what we can do here. So by the way, you know, also the 1980 1950s, nobody is paying attention to exports. So that we will discuss later on when we come to the export policy. But basic point to note here currently at the present moment is that because sterling balances have run out, because exports are not doing well, and nobody is paying attention you know there is practically. It's a policy of benign neglect on the export front. And then we also suffer right. In an obscure place you know the wakila and Raman and say this, they say that look, don't let go of these consumer goods industries in which we have actually done the expertise over four to five decades. We have the expertise, and they could survey the export industries. So they in fact make that pitch in their paper, which was submitted to the planning commission as a part of the panel of economists discussions. But I don't think anybody paid attention to it. They said that you know, but if and then if you look at the industrial structure, how it evolved. Then apparently you see this that you know, like cotton textiles. There is hardly any expansion that happens, you know, between the 1955 56 and 6061 five year period, the index of of cotton textiles production rises from 128 233 not, you know, it's just a place and 4% increase. Compared to that if you look at the general industry index that rose from 139 294. So that's about you know almost 40% increase. So whereas, so it's the industries that are expanding allowed being allowed to expand are things like iron and steel machinery chemicals these are the industries that are flourishing flourishing by you know the standards of the day. Cotton textiles, it's not allowed to you know, expand and this is where we had the advantage they could turn into export industries revenues would have been coming, but no, it was not allowed and it's pretty in a way because you know, India had a very large share you know 10 to 11% in exports of cotton textiles around this time in the 1950s that advantages allowed to wither away. And then alternative industries you know they try to get machine engineering goods and chemicals to become exporters, some exports emerge. But you know these are small that's also happens begins to happen in 1960s not not in the 50s. So 50s are big exports are like do textiles T. You know, what you'll call primary products. And at that time we are actually, you know, either imposing export restrictions, meaning quantitative restrictions no more than this, or we are even taxing in some cases export taxes are being levied. There is no, you know, desire. It is also skepticism that you know that you know they are trying to export more of it will result in decline in prices, also shared by the economist you know this elasticity pessimism that existed at the time and So, so on the one hand you let you know where elasticity was high, both price elasticity as well as the entire elasticity was high which is context size. There we let it kind of decline for totally wrong reasons meaning you know we are trying to do only heavy industry. So the capital has to be saved for the heavy industry. So context I'll get neglected. And where we were exporting, rather than still try to double up those industries, we let them decline also through these controls and exports and export taxes. So overall situation on the foreign exchange is bad. And that's why the crisis and so forth. So now, of course, the import policy, how it looks, right. You know, before the import policy to me it seems like whatever we see later, you know, at an economy wide scale in India, which is the problem of command and control policies. We see it as a microcosm with foreign exchange budgeting under became a right the same kind of adverse consequences. So what you basically have is you have a bureaucrat who's in control of all the resources. And it's the job of the bureaucrat to pick winners and losers as opposed to the market, you know, the discipline of a competitive market, picking winners and losers. And the bureaucrat has already decided that the winner is heavy industry. Right. And it's not going to be some of the consumer goods like garments and textiles that you know that you were talking about. And now you almost have a self fulfilling prophecy, because all the capital is only going to go to heavy industry. You further have a situation where all these consumer good manufacturers no longer get the kind of investment they need, and they're going to be less competitive, which means they're going to export less, which means you're going to earn less foreign exchange, which means that the demands of the bureaucrat who's controlling foreign exchange in the first place become worse. And now you do this over three or four or five cycles. And you end up in a very dire situation by, you know, let's say the mid 1960s. Is that a good way of thinking about what happened post foreign exchange budgeting. No, I think so. Absolutely. I mean, it's very interesting. There is a there is a quote somewhere and we can use autobiography, you mean because you mentioned the fact of the bureaucrat making the decision. At that time he was a junior. You know, the first time when he did this in 1948 I think you know he doesn't mention the date exactly so one has to guess a little bit, but my from reading in between lines probably was around 1940 or maybe 47. So he was the junior most joint secretary in the ministry. And he issues the order that henceforth, and then very time friendly rights you know in his autobiography saying that now you know every ministry had to come to the junior most joint secretary Mr. To get the clearance and Mr. B. Canary had the power to now cut anybody's foreign exchange demands to whatever he thought was appropriate. But then of course, as I said, you know, was was gutted after he let return back to the event to IMF executive director but then when he came back, you know, but it was very much of a bureaucratic decision. So as you say, India has in a sense, doubled down on its heavy industry policy. It has doubled down on, you know, disincentivising small industries or, you know, hand industries and so on so forth. But it is also doubled down on the role of the bureaucrat as the center for, or you know, sort of as the coordinating node for all economic activity in the country right so these three things these were bets that were made by Nehru. In the late 40s and by the late 50s we've doubled down on all three bets, even though you know at the end of the second plan, there is some minor criticism about what's happening. Now, how does this play out exactly in terms of, you know, the import and export system and in particular I want to talk about the controls and tariff system. You know, from what I understand, tariffs even at this point in time played a fairly small part in India's trade policy. India's trade policy was really about import and export controls at that time. So can you walk us through this because this is an area not too many people are familiar with, and it's a little bit extraordinary once we hear about just how deep the control system went. I mean, there's nothing like this that exists in India today, even though we are still a relatively restrictive trade regime, but this is just something that you read in sci-fi novels or something like that. Yeah, so I think you know, even though it's a bit tedious discussion, I think we ought to look at it in some detail. Because you know, today, they're very often their casual kind of remarks get made that, oh, we are returning to 1970s. No, no, we are not returning to 1970s because anybody who makes that remarks just doesn't know what 1970s and 60s were. I mean, so it is worthwhile from that perspective to flesh it out a bit. So as you said, tariffs, yes, tariffs were not used as the predictive instrument. No, they were used in a serious way as revenue instruments. Because either way, you would have actually tried to take out all the quota rents that got created, licenses created a lot of premium on the imported products. They did not, you know. So on average tariffs, you know, like the highest tariff around this is 1965, 66, we have the data from Bhagwati and Desai. And, you know, consumer goods were the highest, which is 100%. But anyway, that didn't matter much because licenses were so tough to get for consumer goods basically by 65, 66, you know, except for rare commodities you would not get. So these were not even permissible commodities. They were permissible commodities and they were non permissible commodities and consumer goods largely largely were non permissible. So plant and machinery 35%, agricultural machinery 15%, basic industrial raw material 40%. So, you know, they were not particularly high. Collection wise also if you look at, you know, 62, 63 import revenues, tariff revenues as a percent of the dutyable goods. Not even of all as a percentage of all imports but only goods that were subject to positive duty 25 or 26% and 62, 63. It rises steadily to about 65% by 65, 66. But this is really nothing compared to what we would call the import premium. Now, you know, I'll give you some examples, you'll have a good laugh at some of these numbers. So on some consumer goods, for example, Nagathil Desai, really very good documentation by the way anybody who's interested should really read that book. It's a hard work to read, but it's absolutely a goldmine of information. On entire Indian, I mean, it's not just trade policy, you know, trade policy is fleshed out in detail also but also industrial policy, politics, private versus public sector, everything. Anybody interested in that part of the history really should read that book. Absolute landmark. So here some numbers, pens, you know, pens were not generally not allowed to be imported. So it was very difficult to, you know, so they provide for three different kinds of pens. You know, there's Goldwing, Beverly, and Hindu, H-I-N-D-O-O. So on Goldwing, so this is the premium over the world price, so border price, CIF delivered price. So what you're looking at is what is the domestic price minus the CIF price from imported as a percentage of the CIF price. So by what percent the domestic price exceeds the CIF import price? Yeah. For Goldwing, 380% for Beverly, 291%. So, you know, there are pencils, right, you think lead pencils. So Taj Mahal lead pencil was the desired commodity in those days because the premium on that was 602%. You've got, you know, writing paper. There is some conqueror writing paper, 610% premium on it. Wow. You know, and these are the more kind of final products, but then there are also on intermediate inputs. Intermediate. Yeah, massive, you know, so the engineering goods like shock absorbers for G. So, in fact, in this case, the numbers are giving you the percentage by which the domestic price exceeded the tariff inclusive price. Okay, so in this case, tariff inclusive, so even that's taken out and on top of the tariff, this is the amount of profit you can make. Proportionate tariff you can make if you got the license. So, shock absorbers for G, 146%. This is 1962. Shock absorbers, landmaster, 150%. So, you know, this is incredibly high premiums that are there. And that's because tariff policy is not what is determining what your domestic price is. It is the import restriction which is so tight. And the demand and the need for it is so intense. Yeah. That people are willing to pay that kind of price. Yeah, you know, one of the things is also paper in your list, right? If I can find printing paper, Solex, which is the amount, the premium is 265. And it reminds me of the, you know, anecdote you told me about Bhagwati writing to his friends abroad. That's true. It is a good one. Maybe you can tell us that anecdote again. Yeah, so obviously, you know, this paper being so expensive, everybody would use the Indian paper, right? So Bhagwati sort of came from Cambridge where, and was very nationalist at the time. The whole family was, you know, I think apparently one of his brothers was also participant in the underground movement and all of the time. So, like, you know, to his teacher, Harry Johnson, who is a trade economist and great repute actually, he died relatively young, you know, so somewhere around 76, 77. So he would have certainly been probably Jagdish Johnson would have been jointly awarded a Nobel Prize if he had been alive. But anyway, so let me show to him saying that, you know, I had to be a Harry, I find it so repulsive or something, not quite those words, but you know that it's really disappointing that there is such a craze for foreign goods in India. So Harry being also a very quick wit, wrote back saying that, you know, be a Jagdish if I go by the quality of the paper on which your letter was written, the craze for the foreign goods seems quite justified to me. And, you know, just to connect it back to some of the previous, you know, discussions we've had in the last three episodes. This is classic right there is this huge premium for imported goods, which means there's this huge demand and you basically you have this huge demand because you want to make sure that the goods are not imported and some domestic substitute is used. Because there is such a big premium the domestic competitors don't have to really compete, which means that their product quality ends up being relatively low they're not competing with the best paper abroad or the best you know pens abroad or any of the you know shock because any of the examples that you gave, and that bears out perfectly in this, you know, lovely anecdote of letters between two trade economists, which is everything we've learned about trade. It's in this one table in Bhagavati and this side. There is this one paper and now, now this is where we're going. And you'll see you know as we as we go. Obviously, when you say that you know they're not competing with the best in the world, they don't need to. Because it doesn't matter that the way the import regime is going to evolve now, or has evolved by mid 1960s is that if anything is produced at home. Yeah, whatever the quality of it doesn't matter whatever the price at which you are going to get it doesn't matter. The protection will be provided imports will automatically you know if you say that I'm going to produce something. Imports will not be permitted anyway of it so so so they didn't have to compete. Absolutely. So anyway, so what we what we can do is for the listeners, you know, try to walk through what exactly this this import system system is like. So, all right. Now, here, the, the, there are two parallel bureaucracies at work. One bureaucracy has to take care of the foreign exchange issue, right, that how the foreign exchange is going to be allocated. So there has to be a bureaucracy to do that. In parallel, there is another bureaucracy, which has to make decisions on what goods will be allowed to be imported. And so import licensing authority. So there is an important licensing bureaucracy and there is a foreign exchange bureaucracy. And at some point of course the two have to come together. But what what the two bureaucracies mean is that your first job, if you are an if you want to import something, your first job is to get an important license. And then you have to get the foreign exchange. So, getting the important license is necessary but not the sufficient condition that you'll be eventually able to import, because or when you will be able to import. So, so ultimately, for an exchange will have to become available as well. So you may have to wait a little longer. So that's the first broad point that there are these two bureaucracies with which you have to be. So first of all, there were three main kind of authorities that had the power to issue licenses. They were not overlapping. These were started these are formed out that. So, most of the license were issued by the chief controller of imports and exports. So there was a chief controller of imports and exports, who issued most of the licenses, most of the import licenses, except the ones that are issued by the other two authorities. The iron and steel controller. So you can see industry and steel who's very kind of favorite industry that was always supreme. So we had a separate iron and steel controller. So any licenses that had to do with the imports of iron and steel iron and steel controller would issue those licenses. So you have to deal with that. And then the third one, which is the development officer tools. So this is where some technical stuff goes on within the development wing of the Ministry of Commerce. So, so anything that had to do with technical stuff, then the development officer and so what licenses that authority, the development officer in Commerce Ministry issued was also stated that this is their territory. All right, so that was the division. So, so the most of the licenses therefore were issued by the, by the chief controller of imports and exports, and known by the acronym CCI and in those days, you know, you never use the full form control errors on CCI and CCI and CCI and E. Okay, now, what were the import licenses themselves were like. So there is a whole classification of different import licenses. And these are terms we have already discussed earlier. So there were the established importers. These were the importers who could import and then sell it to others. As opposed to the next category, which was actual users, actual users license were issued only to the actual users as it's what it says. So these are largely for raw material and, you know, intermediate inputs. So all the inputs that have to be imported would be go as actual users. And then there is established importers. Then they had a separate category called capital goods. So any capital goods to be imported, which were also usually issued only to the actual users, no established importer will get a license that. So that was another very important category. So if you're starting a new enterprise. So, and obviously there's interface there with the industry licensing authority, ultimately, because the industry licensing authority will not give you the industry license, unless you had the clearance first from the Capital Goods Committee of the CCI and E. So, so that's how it worked for the industry licensing was connected also to this for licensing. It's not just the import licensing and for an exchange authority but but also there's a link to the to the industry licenses. Then there were some others like you know heavy electrical plants had a separate category for itself. But you know, electricity generation plants, if you're going to, going to bring it. And there were license for newcomers established versus newcomers. So I don't think there were many in those days, you know, but but if somebody found a way, you know, some connection or whatever you then under newcomers, you would be also, there's a new there was some export promotion. This was also done, particularly in the 60s they had started off so there was some export promotion license as well. And then there was a miscellaneous categories and all but but really the main ones is actual user for inputs and capital goods for capital machinery. So those were the licenses to be issued now how the system work. So the first thing that was that you know what what we can do, basically, they've got the and decide kind of give the illustration that you look at, you know how the actual user licenses were issued for these inputs, let's say illustration So they're first the important to me to basic conditions. So if you're an important first thing you need to do is get clearances for two conditions. One is essentiality that we have already seen before that was introduced in the second world war, but now it becomes very critical. Now the implication of essentiality condition is simply that you know that it gives bureaucrats some power, right, you know, if the if the bureaucrats decides that this is not an essential import, or whatever reason, then you're done for so so it does give you Then the second condition that had to be offered even if it was essential. It was also had to be something that was domestically not available. So there was a domestic non availability condition. And that condition was regardless of cost or quality. It doesn't matter how much it is going to cost to get from domestic source. It doesn't matter what quality product you're going to get. So much so that I remember you know and Kruger has this example. One time, you know, for India's tea exports were suffering to Germany. And they were suffering they were losing out to the competitors because they, you know, tea bags. Yeah, they had to use local paper, they had to use local paper, and that quality of the paper was so poor that their exports are getting rejected. But the government of India would not allow the because they were domestically available. So you fail the condition of domestic non availability. So anybody who can sense is yeah I can provide it doesn't matter how good or how bad you know the quality didn't matter price didn't matter. So you could easily also be driven. I mean, so for both reasons you could be driven out of your export markets right you know if the quality is poor you will get driven out if prices if the cost is very high domestically then also you will be driven out. But that was a condition. So then, who was the authority to give these certifications. So that's where there is a sponsoring agency that comes into play. You had to have some so they will be designated for different sector imports, there will be different ministries, you know, or different directorates who would be authorized to be the sponsoring agencies who would normally give the non availability certification. And many times there's a sponsoring authority will also give the domestic non availability certification although that two agencies were not always the same, you know, for sometimes your essential to certification maybe from one authority and your non availability may come from another authority. These are designated so you have to go and get those now actual user licenses for input imports. How did it work. So now the CCI and a this. So, so there is, you know, these are divided actual user licenses themselves then get divided into several groups. Yeah. So for example they get divided into small scale sector. So there is some licenses which are the small scale sector actual user. Then there is second which is organized sector schedule industries that are assigned to the direct rate general of technical development in the ministry of commerce. Yeah, so there are some industries for so so there is small scale sector, then the large scale sector is divided into two. One is the set of industries and these are more kind of technically sophisticated industries, which are for which you have the directorate, you know organized sector schedule industries assigned to the directorate general of technical development. And then you got the other organized sector schedule industries or whatever you call the other large scale industries, right so small and then large large divided into into these two. So the directorate general of technical development certified the importer for both essentiality and domestic non availability condition for industries that were assigned to that. So then directorate was assigned that number of industries, and they would give both the essentiality, essentiality certification and non availability certification. So for small scale, they were the state directors of industries who gave the same clearances for small scale importers entrepreneurs. And then for remaining schedule industries, there are a number of different agencies, depending on the type of import. Right, so you had the, there was a central silk board. They certified the essentiality and non availability for the silk industry. There was cold commissioner who would do it for Polaris. There was textile commissioner who would do for textiles. Yeah, so like that. So there were these different designated agencies. So this is a natural consequence of what the the original problem right so if you don't have a tariff system and you instead opt for a control system, you know as part of your trade policy, then you know you say okay now we need some kind of rational mechanism by which we can allocate right which is not the market rational mechanism we need to substitute it with something. And then they come up with this essentiality and non availability, but both essentiality and non availability completely depend on the sector in question. Right, and now you've created a situation where you need about seven different bureaucracies the ones that you've mentioned, because a random person sitting in commerce ministry may not know much about silk or textile or T or you know the DGTD which you know is for you know chemical fertilizer or something like that, which means now you need to house these new bureaucracies you need to hire chemical engineers who will become engineers turned bureaucrat who then have to you know go through a particular protocol and say this is essential or not or this can be produced at home or not. So the whole system in a way creates itself right it's not like someone messed up and made a hack jog of it it's if you start with import controls this is the only logical place you will end up and there's nowhere else to go, you know, really, in fact I'm surprised it was this limited I would have imagined even further proliferation which probably happens, you know would have happened if you had gone past. Don't underestimate here, you know, by the list here because list is partial. Yeah, because you know all the ministries will chip in and later on as it evolves groups of ministers created and by the way, I don't think they're hiring engineers to do this. You know, except maybe in DGTB maybe you know there was a but but largely these are operations run by the IS bureaucrats because remember that there are big ranks associated with these decisions, they're big ranks associated, you know, so, so we are at every single point, you're creating ranks and therefore potential for bribes. And, you know, this is why also the files, the movement of files, right, you know that file begins with the lowest level officer within any ministry. Yeah, for anything. So the sensuality or non availability and all, you know, final start at the bottom and until you put some weight on the file, you know, you have to put some weight on the file before it moves. Absolutely. So you have to bribe the fellow, you have to bribe the fellow often, you know, so. And you know, I remember T. N. Srinivasan had said somewhere that you have all these different controls, right, you have capital controls and you have import controls you have, you know, industrial licensing controls and price and quantity controls. And then he said, all the controls taken together were far more restrictive than each of them individually. Right. For instance, if you get the industrial license, it doesn't automatically imply that you have a capital goods import license. Then you have to go and stand in front of a different bureaucracy altogether. And it's only when you get all the licenses, can you even start that's the starting point for production for a domestic entrepreneur. So there is something really quite crazy going on in the way the Indian economy started running, you know, starting in the 60s and then goes on. Yeah, not only multiple points but they also interact you see because once foreign exchange became became limited. Then, if you needed a machinery for example. Previously in the 1950s, it was enough to, to give the broad category within which the machinery import would fall, meaning broad category of the industrial classification. Yeah, but now, now you know once this happened, you have to give a very detailed description of the machinery. Of your raw materials, everything they had to be very specific very detailed description, because it had to be then assessed by the essentiality authority. Exactly. You know, otherwise it's a how do you even assess. So you have to give very detailed specification so even that the best sort of thing you know, cracked in so so yes, the sum of the restrictions actually amount to hell of a lot more than the individual restrictions taken in isolation. Absolutely. Yeah, now this licensing, you know, this is just the import licensing part of the story right, but there is also an entire system of controls related to foreign exchange. Yeah, right, right. So there is a separate separate bureaucracy that runs on on how the foreign exchange is to be allocated. So that starts with the, with the, there was eventually they created by 1965 it existed already. It started at the top with the foreign exchange budget branch in the DEA Department of Economic Affairs and Finance Ministry. So they had a whole separate foreign exchange budget branch. And so what they would do is first they will estimate what the foreign exchange availability from exports and other sources is going to be over the next six months or a year. And periods you know when they were doing. So there used to be something called the red book that came out of the Commerce Ministry every six months or sometimes every year. And the red book spelled out in great detail, you know, what is allowed what's disallowed, what is permissible what's not permissible in what quantity from where it is an incredible documentation, you know, so, so that's that's how it started there. So what happened then. Firstly, they what they would do is there were some priority items, which they would take out at the source within the finance ministry itself. So any debt service charges that payment that any interest and principle that had to be paid back on India's foreign debt that was deducted first embassy expenditures got deducted first. Anything that's related to food fertilizer and petroleum oil and lubricants POL defense expenditures that also got taken out. So, all this taken out, then what is left over is what is available for the allocation to show other importers. So now we come to the foreign exchange, which is not to be divided. So there was, we start with three categories here, which is at the level of the finance ministry that the so called foreign exchange budget branch of the DEA. So there will be one allocation or a number of allocations for public sector undertakings. So what would happen is that the ministry itself finance ministry itself DEA would allocate each public sector undertaking certain amount of foreign exchange, both for inputs and for capital inputs. So these are for public sector undertakings or public sector enterprises, and it will then assign that foreign exchange to the ministry that is relevant. So, you know that particular enterprise belongs to heavy industries, it will go to heavy industries, it belongs to textile ministry then goes to textile ministry like that. So that's the allocation, you know, now it's up to the ministry how it because remember now the allocation problem, both for license as well as as well as for foreign exchange particularly foreign exchange is not just at the level of the industry. Then it has to be to the level of the enterprise, which enterprises are going to get, which enterprise are not going to get so there is also that allocation, which we have to deal with. So now, first off, the public sector enterprises, they for them goes to their relevant ministry, foreign exchange allocation is communicated. So this is a bulk allocation for inputs and capital goods that went to the iron and steel controller. That is the, you know, favored child of the government of the day. So there is iron and steel controller. So remember that iron steel controller also issues the licenses in this case the foreign exchange decision as well as licensing decision, and also the essentiality and non availability condition issuance all that is in this iron steel controller. The remainder of the foreign exchange was allocated to the economic advisor in the Ministry of Commerce. And largely this was for the private sector enterprises who wanted to import inputs or machinery. So for the bulk actually, you know, once you took out the public sector enterprises you took out iron steel, the bulk of the remaining foreign exchange now is about for the private sector people and that authority that at least the allocation is now sent out to the economic advisor in the Ministry of Commerce. And now it's up to the Ministry of Commerce advisor, economic advisor in the Ministry of Commerce, who has to figure out the allocation across industries first and then from industries it has to be figured out to the individual enterprises. So you can see it's not a simple bureaucracy, you know, I'll give you some numbers you'll find, you know, it's mind boggling actually once you begin to see what you know the numbers that are involved here. So each of these entities then got their allocation of foreign exchange. They had to, as I said divide among the industries and enterprises. Now, how did the economic advisor allocate. Now economic advisor created a lot of the groups of entities to which it will then allocate the foreign exchange. Right. So, there were some groups created by commodities. So examples, Bhagwati and Desai gave like copper and caustic soda, these are like commodities, commodity groups. Then there were groups of industries, such as the, such as bulk allocations to direct general or technical development. Remember DGTD is the authority for many organized sector industries to issue the essentiality and non availability certification. So for that group of industries, the economic advisor, Ministry of Commerce will make an allocation to the DGTD, the same authority, right. So, for a lot of these industries, you know, iron and steel heads on for both licenses as well as for an exchange allocation. Likewise, DGTD had the jurisdiction over both functions in a large number of industries, particularly the chemical and engineering industries. Then by size of enterprises, the advisor will make another allocation, meaning small scale. So it's for small scale sector, another bulk allocation gets made. Then there were schemes such as export promotion schemes under which exporters were given entitlement to import some entitlement to import under some license, under an entitlement license. So for that there is a separate allocation made. So, these different categories are identified by the economic advisor and there is this allocation done of the bulk allocation that the advisor receives, right. And now it has to be then further at the enterprise level, there has to be separate allocation, right. And the advisor also has to decide about how much to allocate for the input guys, raw materials and intermediate inputs, how much for the capital goods, right. That allocation has to be done. In most of these cases, there were different administrative agencies such as the DGTD Textiles Commissioner, etc. involved. And it was not unusual for an enterprise to get foreign exchange from multiple agencies, right. So if you need steel, if you need steel, then it's the steel, iron and steel controller. If you need non-ferrous metals, right, if they're non-ferrous metals, you have to go to another agency. If you need capital goods imports, you have to deal with another agency. So any importer in principle would be dealing with multiple sources of foreign exchange. You know, it's not like, you know, well, this is my total need and you know, this is what, no, you have to have separate applications made for every one of these separate category of imports. So it was really kind of a very, very elaborate system, but this is just a process, right. Now comes the question, how do you allocate? And, you know, the question is not just how do you allocate, right, it can't just be any random allocation. It is, is this allocation rational? And what we mean by that is, is it the best use of scarce resources, right, our resources going to their highest valued use within this system, the way they would have done in a competitive market process, right. So there is a standard for comparison. So we're not just saying, oh, you have 100 rupees and let's make sure that the different sectors are all happy with like a small share of the 100 rupees. The claim in the socialist system and this autarkic system is that it is an improvement upon the market system, right, and that is something we mustn't forget at the back of our mind, right. So the job is not, yeah, it's not just that it has to be done, but the claim is that it's done better. But you know, I want to go back to an earlier point that you mentioned and I have a personal anecdote here, where you said that you know at that time journalists and public intellectuals and everyone was socialist and there was no real criticism coming from any quarter. And my, my grandfather and his younger brother my great uncle both were journalists, and by great uncle in particular you know at that time for a long time he was with Hindustan times and then with the Hindu he was based in New Delhi. And he's told me so many stories of how newspaper like national newspapers right so we're talking about Hindustan times or the Hindu or these really big papers, you have to go and stand in commerce ministry, or iron and steel or any one of the departments that you're talking about to get allocation for a printing machine, right, to get foreign exchange allocation for newsprint. And of course we know the newsprint orders were used in a particularly, you know malevolent way by Mrs Gandhi and then you know it went on to the Bennett Coleman case and then the Supreme Court said this is an actual infringement you know the newsprint order which is essentially an import allocation policy, right, it's a trade policy question, said that it's an infringement on free speech, you know in that particular Supreme Court case. But you have a situation where if you need, you know RK Lakshman has written in his biography that if you needed to make a trip abroad as a journalist, you needed to get you know your allocation of dollars. And how do you get that so every single so when we when we're thinking about this and you know we say iron and steel or we say paper or we say call our natural tendency is to only think about a particular type of industry and we're thinking about, you know like this rich greedy capitalist standing in front of a really malevolent bureaucrat, but in fact it seeps into everything right it seeps into schools it seeps into hospitals it seeps into newspapers, and before you know it, especially in the case of newspapers and schools, you can't have any opposition to the the current dispensation and its economic regime, because you are all waiting in line to get your allocation which can be taken away at any point, you know by one arbitrary move of someone saying this is doesn't fulfill No absolutely it's a perfect system for extracting bribes. Abuse absolutely. Abuse and extracting bribes you know and the pity is that the cake is so small so you know bribes that are being expected are also small. You know sometimes all you're doing is to treat the fellow to a cup of tea or something you know or samosa maybe. Yeah, so you know because the incomes are so low, I mean I remember you know when we were growing up we would complain that oh such and such you know he's an irrigation engineer and he's such a corrupt fellow and all, but then when we grew up we found out that nobody you know became rich taking bribes because ultimately it was a cake was so small. And it was more a favor and you know it was more like a favor exchange system right so you would you know bribe the bribe for the bureaucrat was that the sun and law will be given a job in the in the company that you know was requesting the foreign exchange or something like that. Right, it really became a favor and crony economy, you know, in addition to a corrupt and discretionary economy. It really started enforcing these networks of you know you need to know who is who and that's how you get things done. So, you know, even when you look at all these old 1970s movies right like these amul palika movies and all, hey, it keeps popping up how you can't get a job without sifar ish right without without someone calling from above. Right, so it really became like this favor exchange economy in a really strange. So it has implications even for human capital allocation right you mess with this trade and capital control system and eventually all the downstream effects are that that it infects everything. So, just, you know, to, to take this further. You know, in addition to what you said, Bhagwati and they say there's, of course, Aaron sure is excellent work is doctoral dissertation on this kind of foreign exchange allocation it's very readable. But what are the economic effects, you know, like beyond this corrupt immediate corrupt political economy that has been created for foreign exchange. Right, right. So, so let's come to the effects but first, you know, just the basic idea to just to complete our discussion of how difficult the system was and and the whole idea that ultimately alright so this was the process. But how was the process implemented what were the priorities you know precisely how did the Americans decide. So that Bhagwati and that's why I write this, you know, beautiful sentence they say that look you know this was the problem of the rebellion. All industries had priority and how was each sponsoring authority to argue that some industries had more priority than others. So, so as a result, there was no rational way. And so this is where I don't sure is thesis also comes in, because he precisely groups that particular question. How about you deciding the priorities. Yeah, so even some people tell him that oh yeah I know some particular industry, which is doing it, or some ministry doing it. Say that no no we have the established priorities you know we have high, medium and low priorities. So then of course I don't should be being around sure he goes and further probes that those who are actually doing the allocation. So these priorities, but nobody's using, there is no use of the priorities. So, so this is about what they decided to say that look it up. It is not surprising that the agencies involved in determining industry wide industry wise allocation fell back on vague notions of fairness, implying pro rata allocations with reference to the capacity of, or employment or shares defined by past important locations and similar other rules of thumb without any clear rationale. Right so ultimately when you can't figure out a set of priorities then, and you know the reason you can't figure out the priorities is that the list of industries and this is where the system gets really hearing list of industries over which you have to decide priorities is so long. So actually, in fact going just to impress upon the reader, how difficult the problem is, they give a list of 123 industries, they have listed every single industry. And then they say that each of these industries is subdivided into another dozen dozen and a half industries. So for one or two they even give the sub industries. So what about in 123 if each one has another 10. It's 130 industries. How are you decide who has priority over which it's just impossible there's no rational way for a beloved to see the whole picture, and then also see you know what the industry license authority is doing and all. Okay, it is completely so the Orwellian kind of characterization by but the end is absolutely very at characterization. And this is where then they say that look you know, ultimately they will say some notion of fairness, you know, they've got this much capacity so we should allow that, or they will take these rules that okay this particular six months or this particular year for next changes in short supply. So we'll give everybody. Let's say 60% of the capacity. Well, why why everybody 60% they're not all equally productive or their products are not all equally desirable and so forth so everybody gets because that's fair. Yeah, so this is how you know, or well last year how much did we allocate. So, yeah, that was a typical. Yeah, so so you know you've well on that. So it's not being decided based on either efficiency or the desirability of the particular product, you know where excess capacity is less valuable where excess capacity is more, more valuable. So basically, it's basically these these decisions you know so so surey for example, very good quote, which appears you know from his. So you're right, his thesis was written in 1966 at Syracuse University. This is a run surey as quoted in the side, saying that the extensive interviews with development officers, industrial advisors, the deputy director general engineering, and the director general revealed that in fact, no formal and detail priorities of industries between high, medium and low priorities, nor of the principle on which priorities should be assessed is in use. A list was compiled by the deputy director generally 1962 in English with these industries and priorities, but it was never used, and it has never been brought up to date. You know, but you know one part of it is that it's very complicated and there is no criteria but the other part of it is you know that whole nieces higher impossibility of socialist calculation. Right, it's not just that it is difficult to do it's that it simply can't be done the nature of the problem that they are trying to solve which is to substitute rational allocation through market forces with a bureaucratic calculation, you're simply not going to be able to calculate your way out of it, because now you've said that prices and profit and loss are irrelevant to your allocation. Yeah, exactly. Yeah. Right. So if you have price controls, and you don't allow for profits and you know so all that is happening through the industrial licenses and control system and price and quantity controls which already exist in the market. Because you don't rely on prices and profits. Right. What is the rational basis for allocation. I mean, there simply isn't one. So then you, you have to replace it with something. And in some sense, you know some of the more honest bureaucrats they did their best. They poured over the 123 categories and said, you know, a little bit uper Nietzsche from last year's allocation scenes about fairs, you know you're doing and some of the less honest bureaucrats are just going to make something up and give it to the people that they favor and everyone can now indulge in their biases, but still the problem I don't think is with the people involved. I think the problem is just the system they place you and me in the system, and all our collective economics knowledge is going to collapse. Yeah. Yeah. No, no, absolutely. There is no doubt that it couldn't be done. It just couldn't be done. So on that, you know, so when ultimately it go to the firm level. Right. I mean, yeah. So, punch him okay. The old trade economist, you know, he had this wonderful study that he got some firm level import data. And then try to correlate it to profitability. And in many cases he found the correlation to be negative, you know, it's the guys who are least profitable were managing to get the foreign exchange. And the ones who are profitable were not getting much lower allocation. Which is not surprising. I mean, you know, it could go any of anyway, you know, maybe there would be no correlation also. But that was how it was, you know, it was basically a problem which could not be solved. So therefore you had to seek ad hoc solutions. And for the bureaucrat, you know, what is most worrisome is that somebody will raise the question. Yeah, and so you have to be there. You have to have your criterion, you know, which is transparent, at least you can answer. So this is so so you say to me, I whatever I did last year is what I did this year. So that is defensible. Apparently, there was, you know, during the China war. They had to, because foreign exchange was required for defense related inputs. So, so all the regular imports had to be cut. So they did a proportionate, largely proportionate cut across all industries. I mean that tells you that they were using the rule of thumb, you know, that's an evidence that Arun Shuri sites that they were using basically the, the rules of thumb. Yeah, and you know, I have to say there are two things I've read by Arun Shuri, which are which I recommend everyone reads this dissertation, you know, the one he wrote in 1966, and a later book that he wrote called Governance, you know, which is about his experience as a Disinvestment Minister. The lovely thing about Shuri is he's, he does exactly what you have been doing in the last hour, right. So not just saying we had this import control policy or something, but actually walking through the details and weeds of who are the people involved, you know, who are the bureaucrats involved, how did a file move from here to there. And that is when we are really able to put some actual visual to what, you know, Bhagwati and this I have been calling Orwellian or Kafka as that, you know, really comes to life in a way that it doesn't come to life and we just look at aggregate numbers or productivity numbers or firm numbers, right. Like the movement of this system, like within government and how it tightly controls everything I think it's worth knowing more. Arun, this was absolutely fascinating. I mean, I know this was a tedious job for you to prepare and tell us this kind of detail about how, you know, India dealt with the external sector, foreign exchange allocations, you know, import controls. So many interesting things are coming out of this, and it's sort of almost like a nightmarish view of what was going on within the Indian economy at that time. So I think we will wrap it up here. There is a lot more tedious detail and more scary conversation coming when we talk about exports and many other areas in the external sector. But, you know, hopefully that will lead up to a happy ending like liberalization. But, you know, if you don't mind, we will carry on the conversation about tariffs and exports and continue this next time. Perfect. Let's do that. And we'll meet again. Thank you so much, Arun.