 Welcome to the discussion series on free trade and liberalization as part of the 1991 project at the Mercator Centre. I'm Shruti Rajagopalan and in this conversation series, I will be talking trade with Professor Arvind Panagarya, who's the director of the Deepak and Neera Raj Centre 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 Neeti Ayog in Government of India and as the chief economist of the Asian Development Bank. He's the author of a number of books, but for today's conversation in particular, we will focus on his recent books Free Trade and Prosperity and India the Emerging Giant. Arvind, welcome back. Thank you Shruti. Glad to be with you. So taking off from our previous episode, Arvind, you told us in detail about the import licensing system. Can you walk us through what were the subsequent economic effects of the system, especially the long lasting impact? Excellent Shruti. This is a very good place to start. The licensing system undermined both the productivity at the firm and industry level and the allocation of resources across industries. The effect was all around. As regards the productivity at the firm and industry level, there were delays in obtaining imported machinery and inputs. It would take five to seven months for enforcement and a half years for capital goods and so forth so that clearly impacted the productivity. There was unproductive use of resources. You had a big bureaucracy that had to be created to do the allocation. Entrepreneurs had to line up, wait outside the offices, wait for products to arrive and so forth. So there was these delays and unproductive use of resources themselves. Then there was inflexibility because of the unused capacity, you know, if there are not enough inputs that require to be imported but are not allowed to be imported when the excess capacity arises. Investment goes unused. Then there were also rules of thumb used to make uniform allocations across firms and industries. And you can imagine that that is going to create a lot of inefficiency. Some firms are more productive or less productive. Some industries are more capable or less capable. And when you use these allocative rules which are across the board, obviously you are not allocating in the most efficient sort of way. There was also funny things that happened. Equipment would get imported. But if there are some components in the equipment which have only short life, like in the photograph equipment, the bulbs that are required for photography. They have a limited life, they go off. Well, if you don't have the bulbs, the entire equipment becomes unused. So you've got that sort of problem. So that's one set of things that happened. Then competition of course got impacted as well. Because import competition was automatically shut off if you're going to produce anything domestically. So there was pretty much protection on demand provided, but domestic competition was also strangulated because if you can't get foreign exchange for machinery, then competitor cannot enter the market. So you do that, you kill that competition as well. And finally misaligned resources, because at a broad level, if you look at the, you know, full picture, obviously there was a huge NPH board bias created here. Both because of nominal exchange rate, because the price levels domestically rose much more. Therefore, you know, domestic market obviously becomes more lucrative than the foreign market, real exchange rate appreciates. So all that created a discrimination against exports as well. And then also in terms of the allocation efficient and inefficient firms got treated pretty much equally. So there was no way for more efficient firms to out to the inefficient ones because they both get equal access to inputs and so that clearly allows the inefficient firms to survive as well. So these are various ways in which you know, inefficiencies caught up productivity falling resources being misallocated. Normally people think that this kind of restrictive import licensing system only impacts imports and you know, many of the economic effects that you talked about. But it also actually impacts exports and not just in a positive way but adversely. So can you walk us through how India's restrictive import licensing system actually also impacted India's both exports and therefore the export policy regime. Correct. So you know this is all the giant impact of many interventions that that we were doing. But in a very simple sort of way you see what happens is that inevitably when you're restricting imports. That means that you are you do not need as much foreign exchange as as you would if imports are open. What that does is it causes the domestic currency to appreciate right that that you know this this reduces the value of the foreign currency increases the value of the domestic currency. And that's one kind of mechanism through which this happens, typically import restrictions cause the domestic currency to appreciate in real terms. And of course, an appreciated currency in real terms means that your returns to exports are low. Your returns to domestic sales are high. So automatically products get channeled to the domestic sales domestic markets. Now this got reinforced by the way, by the very fixed nominal exchange rate. This was a time you know when when the national monetary system had adopted fixed exchange rates. For the developing countries it was it would have been prudent as for example you know South Korea in the early 1960s, very quickly undertook very large devaluations of its currency one. And that actually you know because also South Korea didn't have our kind of licensing and the focus on heavy industries and so forth. So there was internal flexibility as well. So that devaluation really made the exports very lucrative and very quickly you know you see in the early 60s Korea's light manufacturing exports take off in a very big way. And then you see the composition of the export shifting away from agriculture towards these manufacturers. But you know in our system. We tend to value for one thing we discussed earlier the 1958 episode when there was the kind of balance of payments crisis but we try to deal with it through this foreign exchange budgeting. So that clearly put a break to the to the exchange rate. And once again we come to the 60s and all also same issue remains that you know, remember that even if inflation is 5% a year in 15% in 15 years prices double at home. Yeah, right. And if you're an exchange rate nominal exchange rate is fixed. And for a dollar's worth of exports if you're previously getting our exchange rate was for rupees 76 paisa. You're still going to get for four rupees 76 paisa for each dollar's worth of exports. Yeah, but the domestic prices of double your profitability domestically has double. So you sell at home. So you see this this import restriction automatically turns into an export restriction in a technical terms of course you know we also have you would know that this theorem we call the learner symmetry theorem. Yeah, which effectively it says that look, if you impose 10% across the board tariff on every product that will have the effect which is exactly identical to a 10% export tax. And what where this theorem comes from is the fact that you know when you impose this 10% across the board import tariff, you're importing less. Well then there is a need for export declines correspondingly. So, correspondingly your exports decline also. So basically, there are so many things which are entangled here, but all of it comes down to the principle point of the original problem of an autarchic regime. And the moment you decide to close yourself up to trade. It becomes very difficult to pick and choose that you know these are the areas where we'll participate and benefit from the gains of trade. And these are the areas where you know we won't participate and we'll protect us from the problems of trade or competition or something like that. If you engage in one you get the other right and that seems to be the more universal principle and no matter which country seems to have tried this highly restrictive autarchic regime. They kill their domestic economy exactly because of what you said you know and some of this is because of import licensing restrictions. Some of it is because of the way the foreign exchange is back, but eventually the entire system has to make sense and exports and domestic production seems to be the sacrifice that is made to keep the system intact. Yes, and in our case of course it also got entangled by the domestic interventions, because the government was trying to also achieve a particular mix of production, very, you know, focused into heavy industries. So, so you know which could not be competitive for sure. We just didn't have the comparative advantage in those industries. So our cost of production domestically was much higher than what it was of the other producers abroad. So we couldn't compete there at the same time, you know, where we did have comparative advantages for labor intensive products that we then were forced to kind of push into these cottage industries, very tiny units. So we couldn't compete there either. So, so it really kind of interventions at multiple points. And so, and at all points, you know, ultimately, inefficiencies arose. So, you know, this may be a good point for you to tell us how a country can simultaneously have an anti export bias, but also have export subsidies as a very large part of its, you know, policy program, you know, which benefits certain groups. Now, the two seem antithetical, it doesn't seem reasonable. But in fact, both of them, if I understand correctly from your work are unintended consequences of the same restrictive import system and the autarkic system. So how do both of these exist at the same time in a country like India in the 50s and 60s. So, yeah, so so that I think you know this is a good point at which we can try to shift a little bit to look at the export policy, as it was practiced during the 50s and at least you know, parts of 60s. So, you know, first and foremost, I think you know what we need to recognize is the fact that by now we know actually that the exports that suffer suffered during these years. And one kind of measure of that is that India's share in the global economy, which was a little about two and a half percent. India's exports as a proportion of the total world exports was a little more than two and a half percent in about 1947. And by 1966, it had dropped to below 1%, about 0.9%. So, clearly, relative to the global economy we did very badly in terms of exports. And you know, that share never recovered for very long time. Even today, even after 1991, we liberalized and all, but even today our share in the merchandise exports still about 1.7%. So we are better than 0.9%, but we haven't gone back to the 2.5. Now, large part of it, of course, happened because the exports in the global economy rose much more rapidly. You know, these are years, you know, from 1948 to 1960, the global exports were rising at 7% a year. India's exports rose only 1.6% a year during that 20-year period, so share naturally declined. And that more or less continued into the 60s as well, you know, from 1961 to 1966, global exports rose 8.2%, India's rose only 3.4%. So the share largely kind of declined because, I mean, it's not like in absolute terms, India's exports were declining. But they were declining related to the global exports. And by the way, that poor performance of exports evidently fed back into the import policy because then you don't have foreign exchange, you got fixed exchange rate. Only way you can then deal with your balance of payments is through restricting imports. So that was the feedback that was happening. Now, on the export side, you know, in the 50s, actually, we not only were actually indifferent towards exports, you know, the attitude generally was one of indifference. If you look at all the debates that happened in 1955, you know, around the second five-year plan, melanobases, model, all that. You know, there's basically an attitude of benign neglect. Nobody is paying any attention. The assumption is that we are in an autarkic economy, that there's no trade, even melanobase model itself strictly assumes that the economy is completely closed. So that was but actually, in terms of policy wise, we did even worse because it was not pure benign neglect. It was actually one of abuse of export policy because we actually imposed restrictions, both physical restrictions on exports, and we used export taxes. Now here, you know, this book that everybody refers to by Dr. Manmohan Singh, our former prime minister and also the finance minister from 1991 to 1996, he had written his PhD thesis on India's exports in 1962 at Cambridge which later on came out in 1964 as a book. And it's very, very nice analysis. He doesn't talk much or almost, he doesn't talk at all about imports, only focuses on the exports. So the book's title also reflects that, you know, I have it here. It's titled India's Export Trends. So he only talks about exports. But very documents that, you know, most of our exports are very traditional. Things like jute manufacturers, tea, cotton piece goods, iron ore, manganese ore, largely, you know, very, very little of manufacturers, only cotton, you know, that was our long standing industry which which had acquired some efficiency and so it had acquired export markets. But we were neglecting it at the time, but you know, it's still because of its history was surviving. Now, you know, what we did, however, during this period was also to use these export restrictions and Manmohan Singh really describes that look, this is, this is even the medium run, this is everything. Because when you, even when you have very large share, what happens is that when you restrict, it opens the door to the competitors, you know, because obviously when you restrict, you are using your market power to raise the price at which price that you can get for your exports. Yeah. Right. I mean, this is what a monopolist always does. But that rise in the price also served as an incentive to other competitors were previously inefficient, but now they are able to compete. So they enter the market and so you know, within a few years they beat you. Likewise, he said export taxes have a kind of similar kind of impact same thing, you know, export taxes are also restricting exports. Countries also the importing countries, when they are faced with, you know, restrictions on exports by the exporting country, they begin to look for alternatives. Both ways they look for alternative suppliers of the same product, but they also begin looking for substitute products. Right. So, you know, eventually plastics, etc came to replace the jute manufacturers, right. I mean, you know, a lot of the things on which for which jute was being used, then plastic bags came in and they replaced. So, so, so that these substitutes that come in. So there's a very nice rendition of this in his book saying that look you know these export restrictions are self defeating harmful. Now, because of this, by early 16 we began to see that there's a problem on the export side export, exports are declining, something needs to be done. So what do we do. Well, we go back and introduce export subsidies to some products, but that also what we are trying to do is particularly things like chemicals and engineering goods. That is what we are, you know, we say well, this is what we are going to, you know, this is what we want to export. And of course, you know with high enough subsidy you can become an exporter of the products to some degree. And so engineering goods did begin to emerge as export as export items, but actually if you look at the whole, you know, composition of exports, even till as late as 1965 66. The traditional exports three top three, you'd many factors was your top export tea was the next, and then cotton piece goods. So these are clothing, etc. You know, and probably they also include the fabrics, they mean, you know, in the Indian classification we often also in the past used to club both clothing and and and other textiles into the one category. So if you take those three, they accounted for more than 50% of the exports till at least 6061, even as you get to 6566 when the engineering goods have begun to emerge. You have almost like about over 40% of the products, 40% of the exports are accounted for by these three traditional ones. And so subsidy export subsidies in the end, you know, could only do so much. Ultimately the nominal exchange rate was so overvalued that in some cases the subsidies are very large. But the end decide book gives you the estimate, you know, what what these subsidies were as a proportion of the price of the product. And in some cases these subsidies really rise well above 50%, which is not surprising given the fact that you know the nominal exchange rate was so so so was fixed and therefore the real exchange rate was so so overvalued. So, you know, various kinds of instruments were so you know some, but what happened over this time you know that in the world market we lost share. I mean we thought that we will you know, but even in value terms, right, because you're trying to like things like do 10p you're trying to get market power right to market power is effective at least in value terms. Your export share should be rising, but it actually fell. So, you know, in jute we went from something like 86% in 1951 to 73% by 1960 in TV at almost 49% around 48 to 50 fell to 43% 58 to 60. So, you know the shares actually even where we were so large shrink began to shrink context also we lost the market so something interesting is also going on in the rest of the world right so one is of course as you talk about the our shares are declining as a as a share of global trade. But the size of global trade itself is increasing in post war years right so post war the developed countries see for maybe two and a half to three decades, the longest, you know peacetime growth that has probably ever been seen in the world. So, those countries are growing. Now, a lot of the goods that were diverted in terms of demand for war goods, right and I can imagine jute being one of those, you know, between between the two world wars, and in the immediate post colonial period I can imagine a lot of packaging material moving material, being a requirement, but you see that after 1950 in the developed world, most of the trade starts shifting more and more towards demand for goods, which is something India is simply not making whether it is for its domestic consumers, or for people abroad right it is still very much going along as if you know there's a colonial government extracting you know I know and manganese or or, you know, you're basically sending out raw materials or tea, it just hasn't somehow adapted to the to where the new world is going and what people seem to want to spend their money on. No this was kind of foretold right because the other development is telling you that you know primary products have these low income and price elasticities that as incomes rise there, the demand will automatically shift towards manufacturers, partly these consumer goods, but also price elasticity is high on those products, but very low on these traditional primary products. So even if you try to export a lot and this is where you know the famous paper on and it's rising growth comes in, I think that you know even if you raise productivity even if you do investments, and you try to export a lot more of these primary products, the price will drop so much, and we by the way also face it today, we are in agriculture continuously trying to raise the output. But you know, where can you sell this agricultural output price elasticity extremely low, so at the end of the day you can't do a whole lot of good by raising the output of these food grains etc through MSP. You raise the price, I mean you raise the output through MSP but in the market the price will drop, so you know for those who have farmers who have to sell their product produce in the market basically will be wiped out. So it is you know, and what we were doing was you know trying to go into heavy industry where we could not succeed in the global market place. And so therefore, and we haven't got the consumer goods manufacturers with South Korea, Taiwan, Singapore are succeeding big time, Hong Kong, they're all succeeding big time, you know in the 60s. But we are not because you know those are not the products we are doing. So very much self defeating, but you know at the time, I mean now this is all hindsight we can go back and do the analysis. But at the time there was no, you know, this preoccupation that we are going to be powerhouses of engineering goods and chemical and products and so forth is so strong at the time you know this that nobody's thinking actually of the like many vectors in India, you know, even when it comes to subsidies, it's not the export subsidies, it's not the clothing and the excise that are getting the subsidy, it's engineering goods and chemical products which are getting the subsidy. But you know very limited success, and that of course, eventually gets us into a problem, you know, you would remember you know the crisis balance of payments crisis that we had finally in the mid 60s. That's actually a good you know this is the first balance of payments crisis we spoke about last time you know this was going on in 1958 which led to this foreign exchange budgeting sort of system. Now the crisis in the mid 60s is a little bit different. So first can you just walk us through what led to this balance of payments crisis in the 60s. Yeah, certainly. So look, you know, first of all, we might want to ask a question here that good things have been different. Right, I mean, yeah, you know, as I mentioned, Dr. Manon Singh's book really did recommend that the evaluation and he then said, look, you know, there was a lot of concerns still because to be fair, in the academic literature there was a lot of the elasticity pessimism, which was that you know if you have the value if you have a lot of market power and certain in products, which arguably was there in the Indian case in things like jute and T etc. Then your terms of trade in those products will really get worse, right that that you know when you devalue said exchange rate goes from five rupees to eight rupees per dollar. There will be an incentive for these export to export more. And that will simply because the load demand elasticity. Depress the prices. So he said that okay you know, in whatever commodities you have that problem, put a modest export tax, but otherwise you devalue, and you don't need to do any substance. That was his recommendation. The other thing did happen later in 1966 will come to that. But but a good question at this point is that, you know, suppose this devaluation had been done earlier or something you know good things have been very different. And my kind of conclusion here is that you know, some difference we could have made and I said before that in 1958 was a good time at that time would have changed. But unless we were willing to change the industrial structure itself, unless we were willing to go back to kind of doing consumer goods industries, light manufacturers and move away from this heavy industry approach. In the end you couldn't have succeeded. You know, so so the failure as we will discuss in 1966 to some degree was related to the fact that you know, ultimately we were not willing to change the industry structure. If industry structure remains in that you're trying to go into products in which you don't have a comparative advantage. Then this problem, the fundamental problem really remains that that your production structure is out of whack with your endowment factor endowment. You know you are a very labor abundant country that you're trying to do highly capital intensive industries, and that kind of always creates a tension. So in a big way we couldn't have solved the problem and as you can see, you know, we are still struggling with that problem after 30 years of reforms. We are still struggling with that problem. But that seems to me, but that seems to me not just a problem of, you know, import policy or export policy or industrial policy as specifics. That to me seems a problem of the government simply cannot have such a large imprint on the economic system, because it won't be able to calculate effectively, and mimic what the market would do in terms of sending resources to their highest productive sectors. So the problem is even more fundamental right like what you're saying is not only is there no simple fix and it has to fix the way it looks at industry, I would take two steps back and say it has to relook entirely at the way it thinks about the economy, and the way it thinks about people and whether a mixed economic system under socialist planning with the Planning Commission is actually the correct way to go or they just need to abandon that whole sale. Right, but this is all connected. This is all connected that you know, if you are willing to accept that look, you know, my comparative advantages and labor intensive industries and I should let this structure shift back to towards those industries. Then what you're saying will follow. I mean this is where, you know, but within the site 1970 books says that look you know you did not need to have this licensing across the board on everything. You did not need to have these import controls through licensing, is it you know, use tariffs, if you wish to on import but otherwise let them come in. Use the exchange rate. And if there are certain products which are absolutely desirable for the economy to produce just do some bit of investment licensing on those products and leave the rest free. Don't, you know, so so that, you know, so if you think if you really look at that book, it's very much written during the political economy context of the time. It's not they're not saying that you know, let the markets rip or something you know it's not it is not written at all in that kind of spirit. They see the political economy and so forth. So, so what you're saying is it roughly what what faculty and disciple kind of it says that look you know this intervention anywhere and everywhere is the problem. So if, if there was a willingness to let the industry structure shift towards consumer goods then what you are saying in terms of reduce interventions in the system would have followed me then you would not have needed to you know plan every single industry that way. Yeah, I mean you're precisely trying to produce things that market will not tell you to produce which forces then your hand to impose investment licensing. Yeah, no, no. So now that you know the systemic solution was not a possibility. And that was simply not at the time being discussed as something to be done like, you know, even globally, even within India though there were specific questions like the one Dr. Manmohan said gave. Of course, you know, in later years, Bhagwati and they say come come up with a much much clearer stronger critique of the system. But at the time of say the early 60s, other than devaluation. You know, what were the possibilities and second, what actually was the crisis that led to a point of devaluation that had to be done in 66. What was going on then. Yeah, you see so now by 60s, dissatisfaction emerges from the industry, because you see 50s was easier period. Number one foreign exchange control was not there, you know till 58 at least licensing system, you know the bureaucracy deal with it, because relatively few projects capital was limited anyway. So, you know in the signals went out that look you know chemical industry is what the government is trying to develop heavy industries, steel etc. Industry is also know what to apply for in terms of the license and things have, but after this foreign exchange budgeting was adopted. Then the system began to become began to become complex and by 60s 63 64 you begin to see a proliferation of these committees you know about licensing that what to do you know because big backlog comes in also the economy has grown a little larger. More applications are coming. And the numbers are some of these numbers are given in my book India the emerging giant. Yeah, you know that license applications that rise in numbers and all. And the bureaucracy is not able to deal with it, at least expeditiously for delays become endemic. And that leads the government to a point number of countries there was a saw me nothing committee there was a Zari committee there's four or five of these committees the reports coming. But the tragedy of course is that none of those reports is saying, do away with licensing or do away with substantial part of licensing, you know, put licensing in certain sectors and leave the rest. They're not saying they're just focusing on how I can improve the processes so that the licensing can licenses can be issued more rapidly. These committee reports all focus on and they, you know, painstakingly, even record all the all the delays that are happening and all you know, but within this I work reports many of these, you know, in what sector what how much delay was happening in terms of it was happening where, how was, you know, so it's all documented now, you know, but, but the point was that the system was not thinking in terms of giving up the basic structure, either in terms of production, or in terms of the policy regime. This is not willing to get that up. And so the crisis began, kept growing up. A number of things happened, you know, number of things happened. First of all, you know, the agricultural performance, which was kind of at least flat from 6061 to 6364. These are the first four years of the 1960s, but there was then a bumper crop for one year 6465. There was drought. There were two back to back big droughts 65666667. So those droughts actually plays a very, very critical role, you know, 6566 drought particularly, you know, and so remember this 6566 financial year is fully ending at the end of March 1966. And the devaluation happened in June 1966. So, so this, this drought really played a very important role because trade being so little. The industrial economy was also very tied into the agricultural economy. So the drought automatically impacted the industrial economy also. Alongside the export performance was getting worse and worse in terms of the, you know, the proportion of exports in GDP. That was 3.7% in 1966-61 already low, which went to 2.9% by 6566. So exports, your export revenues are declining badly. Rising public expenditures were being financed by foreign borrowing and money creation. So you're borrowing abroad. Your debt servicing ratios are rising, you know, exports, a large part of the exports is being taken away by debt servicing the interest and principle that you have to pay back. Exports themselves are declining, you know, they fall to 2.9% of the GDP by 6566. So that puts the pressure. Then partly you're doing money creation. Money creation is raising domestic prices. So again, domestic market is becoming more lucrative. So you want to stay away from exports, sell in the domestic market. You know, public investment was rising here as well. You know, it was 11.2% annually from 61-62 to 6566. And by 1965-66, public fixed investment alone was close to 10% of the GDP, very large, you know, the public sector was taking, sucking up these resources. And current expenditures were rising of the government. China war happened, which led to the defense expenditures to rise. You know, it's unthinkable today to get to that level, but it used to be 2% of GDP in 1966-61 became 4% by 1965-66. So today we are still not at 4%, you know, we are well below. So consolidated fiscal deficit rose from 5.6% of the GDP in 60-61 to 6.7% in 65-66. Loans abroad, even exclude your PL-480, that was kind of like an A. So even excluding that, yes, excluding that the loans that you are taking, moreing abroad, increased from 1.4% of the GDP in 60-61 to 2.4% in 65-66. That service ratio, this is what I mentioned, you know, exports as a proportion, sorry, the debt service meaning interest principle paid on foreign debt as a proportion of your total export earnings were already 21% in 66-67. Now, you know, one-fifth of such small export earnings are being taken away there, what do you do for imports? So you're clearly moving, this is exactly the kind of thing that was happening, you know, very similar in 90, which led to 91 balance of payments prices. So it was very classic kind of, you know, the balance of payments prices that you observe with fixed exchange rate systems which don't respond by devaluation and continue to domestically inflate the economy. I mean, this is a perfect kind of medicine for, or you can call it poison for the balance of payments prices. And you know, this was being seen and you remember all the episodes about India having to live ship to mouth policy of Lyndon B. Johnson at that time. And so the US is also getting impatient and has got some power because India is having a problem, you know, it has to get food grade from him. So they were seeing that the crisis is brewing and the US was very kind of also by this time realizing that heavy industry was the wrong thing to do. They wanted India to pay much greater attention to agriculture. And so it got the World Bank to come in here. And in September, September 64, the Indian consortium, you know, was very alarmed, and they appointed this man called Bernard Bell. Yeah, the Bell Mission. The Bell Mission. They came, studied on, you know, from the World Bank, they studied the situation and asked, as asked, they made policy recommendations. And so they went and said, look, you know, you're just away from heavy industry to agriculture. And of course, a very integral part of their package was just the evaluation of the rupee. And they said, you know, put an end to licensing of imports of at least intermediate inputs. So they said, you can keep the licensing on the, on the capital goods and consumer goods, but the intermediate inputs and sensible because you know, if you got this capacity that is under and you can utilize. It makes because you're not allowing enough intermediate inputs to be imported. That's a loss to the economy. So in principle, there's a correct correct kind of recommendation. They, but then a part of the package was also a substantial non project aid for maintenance imports. Now, part of the failure also happened by the way, because that aid actually never came. And, you know, Vijay Joshi and Ian let me wrote a thick book in 1994 on India's macro where they cover this crisis in in great detail. It's a very nice history actually of India's macro economy up to about 91. And the reforms and post 91 they pick up at the next book that they wrote together. It was a shorter book, but but that book they said that according to their sources, the government of India was expecting about $900 million of non project aid for maintenance imports for several years. Yeah, but that never materialized. And that really infuriated the Indian government and this is why they then also felt free to reverse some of the measures that they had initially taken at the recommendation of the bell commission. So the commission also had said, you know, put an end to export subsidies. And to import licensing on intermediate inputs and substantial devaluation. Sorry, go ahead. Absolutely. And in our 1991 project, you know, my colleague Rakharmesh Rahi has done a really detailed timeline of the 1966 devaluation. It's almost sort of like a mirror, right. The crisis is very similar to the one in 1991 what happened in 1966 but not with the same results. So he has a lovely paper and you know the book that you're talking about the the Vijay Joshi book we featured it on our website and our newsletter and so on. So, you know, everyone can we'll put in a link and everyone can refer to it. But I want to also go back to the political situation within India, including sort of you know the liberal voices technical voices of economists and so on. When there was an attempt to devalue the rupee in 1966, most politicians, especially, you know, important members in the cabinet, they were actually against it, of course, you know the most staunch opposite of this was Titi Krishnamachari. But, you know, there were a lot of people who were who were against the move, and even staunch liberals like from the Swatantra party were not particularly in favor. And so what were the conditions under which this devaluation was implemented, though it was not exactly supported by the politics of the day. Yeah, so this was there was no alternative. You know, you could say Tina factor at work. Because at the end of the day, you know, India was at this time, very dependent on food imports from the United States I think that was very critical factor in the whole thing. And the US really wanted this shift to happen, both towards agriculture and towards a more liberal regime and movement away from this heavy industry. Now by the US was also playing a very simple head played a very similar role earlier in South Korea, you know, South Korea also when they wrote their first plan in early 1960s. So there was some bit of shift proposals for shift to heavy industry in South Korea. It never happened, but US also was kind of advising them against that, and US. So, so there was some bit of that earlier, although in fairness, you know, as far as India was concerned, at that time, they were giving it to India. And I think that, you know, the heavy industry is not the way to go. They actually supported at that time. And so it's not, it's not the case that their opposition to heavy industry in India had been there before. This is much later, you know. But anyway, you know, I think politically, you're absolutely right that there was no consequence whatsoever in favor of devaluation. And I doubt actually, you know, one thing by the time was within the systems or we don't know but what his view was. In a way he has never said anything, at least to my knowledge as to where, although his book really was was quite favorable so I would imagine that that at least internally, he was voicing support for devaluation but you know, politically, nothing, you know, right, because they had to bring Sachin Chaudhary was the was brought in right at the time, and he did the devaluation because TTK wouldn't go along with it. And a lot of you know, opposition was there. Now, again, to be fair, one must also acknowledge the fact that economists were not in favor either, you know, it's not that economists were in any way supporting it. I mean, you know, Jagdish Bhagwati certainly spoke positively and I think Mrs Gandhi. So he did, and certainly he was supportive. But the fact is that that political support was simply not there. And economists were at that time very much into this elasticity pessimism that devaluation because the exports are so price in elastic devaluation might end up hurting rather than helping. And there is a lot of that academic literature from that period that when is devaluation effective, and we learned all about these martial and the conditions right that you know, some of the important elasticity should be bigger than one for for the devaluation to be effective. And we felt that our products that we were actually exporting were not so price elastic and also therefore will not get the balance of payments improvement. So, to some degree, the economics was also helping the political class which was opposed to it. And above all, I think you know, in India, this was really seen as externally imposed on India. And that never goes well in India, you know, anything that is seen as externally imposed simply gets rejected by the public. And this is why, you know, 1991 reform was sold very carefully as India's own decision. I'm grown in that, you know, this was India's decision not and even in the way it was handled with the IMF and the World Bank was that, you know, we would send from our side the letter that this is our plan. This is what we plan to do. Yeah. And as though this is what we do plan to do ourselves, if it fits into yours, then you give us the assistance. But you know, so it says it chronologically we are the ones taking action not rather than the IMF saying that if you do this then we will, you know, so, so it was, but but 66 was very clear. Well, mission had come in report was given the recommendation came clearly from outside and also credit where credit is due to Prime Minister Indra Gandhi, right in a in a sea of opinion, where almost everyone was against the move. She was the one who had to you know decide whether or not they're going ahead with the devaluation and you know she was in favor. See if there was a meeting between Professor Jagdish Bhagwati and Prime Minister Indra Gandhi and also can Raj was consulted. And apparently Professor Bhagwati gave details on you know not only must India devalue but how much it should devalue. Are you privy to the details of this discussion at all. No, I don't think the discussion was that I doubt it. The discussion was more about you know she was asking, what do you think will happen to think this this will get the export response. That's my recollection from conversations with Jagdish. But I should take back with you know one of the things he always says while telling the story is that Mrs Gandhi, you know had the habit of keeping her head down asking question and then doodling and on her. But, but my recollection generally is that she was trying to fill out you know what what the impact will be, which was not easily predictable frankly speaking. So, so, but we can check I'll check. That must be such a nice thing to have to to pop into the next office and ask Professor Bhagwati exactly what happened in 1966, which is lovely. But you know it's again when we look back at that story, it's the usual suspects right it's be our Shenoy and TN Trinivasan Jagdish Bhagwati, who've written extensively about this episode of devaluation before and after. But aside from that you're right you know the general view of the economists is not in support the general view of the politicians is not in support. It seems to be some compromise, you know, sort of like a peanut factor, which this this whole devaluation is pushed through. But one of, is this perhaps the reason that after the devaluation the sort of liberalization one would have expected, never really happened in India in 1966. Like in 1991, after the two step devaluation in early July, there were a series of trade reforms and industrial licensing reforms and so on that were announced. This was that opportunity for India in the mid 60s but it never quite worked out. You see the problem is, you know, there are multiple problems here why it could not have worked out. First and foremost again, are we willing to let the industry structure be determined a lot more by the market forces. That was the most crucial thing. Without that there was no play, you know, I mean, you'll run into the same problems going forward, you know. So either you continuously keep tightening your import regime so that your balance of payments remain manageable. Or the other alternative is to actually, you know, let go of the investment licensing, let the market decide what the people want. What are the products for which the actual demand exists. Without that, I don't think you could have succeeded. You see, this is why I also think that 1991 reform, lip trade liberalization could not have succeeded unless we had, you know, because we also gave up all the licensing and investment licensing at that time. Yeah. So multiple steps got taken which were essential. But if we were not prepared to do that. Now, there's an extra problem actually in this in the mid 60s, which is the exchange rate, you have to be prepared to devalue more. And Shenoy, as you know, actually has written that that in his view the failure was because the evolution was too little. And that larger devaluation was needed. And I think he's right, because just think about it. The exchange rate nominal exchange rate had been fixed since what 48 or 49 somewhere there had for rupees 76 paisa per dollar until 1966, you got practically almost you know, a 15 year period. Yeah. And if if your prices have more than double during that period domestically in similar inflation has not happened abroad. Yeah. Then you have to, you know, devalue by much larger volume, you know, you have to go to something like at least 10 1112 rupees to the dollar. We went to only 7.5 rupees to the dollar. And I sort of broadly speaking, I agree with Shenoy's analysis that the devaluation itself was was too little. But then I think my question should also point out that, you know, so this was like, in terms of the value of the rupee in terms of the dollar fell by devaluation meant that the value declined by 36 and a half percent. The extent of devaluation value of rupee, you know, when you do the calculation going from 4.676 rupees to the dollar to 7.5 rupees to the dollar. That is a decline of 36 and a half percent of rupees value in terms of the dollar. So the actual devaluation was even less because many of the export subsidies were cut out and import tariffs or import premium got reduced. Right. So both of those factors also contributed to the devaluation being less than this 36 and a half percent. Actually, but what they say, they give a calculation. And they say that effective devaluation turned out to be only 17 and a half percent for exports. Because, you know, if you were getting, you know, previously for each dollar's worth of exports, you are getting some subsidies also, which got taken out. So now for dollars worth, you are actually getting seven and a half rupees instead of 4.76 rupees. But then on top, whatever it would subsidy, you were getting on 4.76 rupees. Let's say another two rupees. If that's taken out, then on net, you've not got seven and a half rupees. You know, the difference between seven and a half rupees to four rupees 76 per se to two rupees in between have also gone away. So, so whatever the extra is much less. That is their point that so, you know, the actual devaluation for exports on average was only seven and seven point 17.8% instead of 36.5%. And for imports, it was 29.7% instead of 36 and a half percent. So, Shana, I would say that you needed to be anywhere much more devaluation much larger. But what you got actually was not even 36 and a half percent. So it was insufficient. Then the two back to back droughts. Further complicated this right because June 66, the devaluation happens, but the drought is continuing. The entire year 6667 which means still March of 67. This drought is continuing and so the prices are rising domestic prices are rising. And that rising domestic prices, what are undermining the devaluation, meaning, you know, the domestic goods are becoming more competitive now, even within a year of this. So, it was a kind of you could say that was a death foretold, meaning, you know, that you could have expected that this is this is how it will turn out. At least, that's how it looks in hindsight, you know. And in, you know, the immediate aftermath, the cash subsidies, the import replenishments, all of these were brought back, reducing, you know, the effective devaluation. But how does this inform what is the trade policy that will follow. So, you know, you've devalued, you've obviously not devalued sufficiently. Now, what is a good way to think about how the policy makers at that time were thinking about trade policy post devaluation without implementing any liberalization reforms. Right. So, so now you know they begin to see the failure, right, so which is that the exports have not responded. Now, it's not failure actually because it's failure because exports don't do better. It doesn't mean devaluation failed, because the exports would have done even worse. But you know that counterfactual nobody looks at nobody worries about the counterfactual. You only look at well you know here is what was the exports before. And here are what the exports are after. And you say oh devaluation has failed. But of course we have not devalued the crisis would have been even bigger. So devaluation didn't quite fail, but it's simply that you know, it did not deliver the outcome that was that we need it. And that was because not because the devaluation failed but because devaluation was not large enough. And, you know, this withdrawal of export subsidies and import areas further undermine the effectiveness of the devaluation. So that's what exactly what happened, which of course meant that any support that that valid package, permission package had disappeared very quickly. Yeah. And so export subsidies did return as you just mentioned. So we did not continue on the path to liberalization, because you know they said well you know what do we do we got to now do something else to get more exports. So export subsidies do come back. By 1971, the import controls were back in full swing. And even more stringent, even more stringent. And then they were prior to devaluation. So this is, you know, this is the conclusion of the ocean little who say that look, you know, import controls by 7071 were far more stringent now than they were even before, in terms of its implementation. And, but with the entry in the boss and kind of say that the combined export subsidy as a result of these measures on some selected items, including engineering goods, chemical plastics and other new products. So they give these numbers and say that they were ranged something like between 50 to 90% on the effective at will or on basis. You know, it was on selected items. Of course, you know, they were trying to subsidize traditional ones they would always, you know, elasticity pessimism always kept them more on the side of restraining the exports other than stimulating, but on products like sports products, processed foods, they try to give subsidies and these are between 50 to 90% of the effective at will or value of the products. So that's that's where we came back. And you know, at the same time, earlier you had talked about how until there was a shift in industrial policy at home. There's only so much that all this devaluation and you know the external sector reforms can can work out or succeed. And what you see after 1967 is Mrs Gandhi's government is now doubling down on socialism at home in a whole new way. Right, so it's doubling down on heavy industry they're talking about commanding heights of the Indian economy. They're nationalizing general insurance they're nationalizing coal mines copper mines. You know, there is there is a big wave, further cementing India's heavy industry policy, which is at play simultaneously because of you know all the union problems there are hundreds of cotton textile mills which are now going broke, and not allowed to exit right so at that time you have all these you know sick textile mills, you know legislation which is passed these are all nationalized by the government the mills become defunct. So there is that problem going on simultaneously. And it seems like the Indian domestic economy is more restrictive than ever before, which means you know all your, your import restrictions and export restrictions can't be that far behind. When, when the situation at home has now doubled down even more on the bets that narrow made. Yeah. Now, you know, so, as we move forward in time. You might ask a good question you know that if it was around said 70 1970 or a little later. If the similar crisis, what to happen, not in 66 but a little later would Mrs Gandhi have devalued, and my guess is that she won't have the 6667 she is a very new Prime Minister. Right, it's January 1966 one of the shots we died and she became the Prime Minister. And so, you know, at that time she's still very weak Prime Minister if you will, you know, her own position is not so secure and all. But then by 70, of course, you know she is the she's in incredibly commanding position. Probably, you know, at that point she would have dealt with Lyndon Johnson very differently. She would have dealt with Lyndon Johnson differently but you know on the other hand, this is kind of it's a little bit strange when people became become very dictatorial. And you know they may also take make bolder moves. So it's very difficult to predict the counterfactual when when you have people in full dictatorial mode, and have consolidated all power within their party and you know, they're kind of ruling their cabinet there's not too much opposition from the cabinet. So I feel like, you know, with Mrs Gandhi it could have easily gone the other way also, I'm never able to predict. The reason I say is that, you know, she was on very heavy socialist bench. Yeah, so everything she was doing was moving towards more and more control. Yeah, and Piyan Huxer is right now her chief advisor and he really is following the Soviet Union playbook at this point. Exactly, exactly. So this is why I think, you know, that is the direction she would have taken. You know, the economy's direction is very clear around this time, you know, so and so that clearly the consistent thing to do would be to then absolutely refuse to devalue and just double down on the controls and double down on the controls. Yeah, which they did, you know, which they did. And FARA, MRTP, everything becomes more restrictive, right? All these are also being amended simultaneously as the controls get heavier and heavier, more of the areas of activity are getting criminalized. It's becoming very difficult to do business internally and with players abroad if you're an Indian businessman around that time. And then of course, emergency happens and that's sort of the wildcard event that no one predicts. I imagine that, you know, until the mid-1975, as the restrictions get more and more severe, and then the emergency when, you know, like the economy is almost in suspended play for a while, right, all major policy is not being thought out carefully. So then we get to the late 70s and you've talked about how starting in the late 70s up to 1991, there is definitely a period where India starts thinking about relaxing restrictions. And then of course, you know, post-1991 we have like the really very bold sort of reforms. So I think this is a nice place to end now. Next time you can walk us through the late 70s, early 80s period of what's happening in India, how are we thinking about relaxing these very severe restrictions, what is the impact that leads us up to the 1991 reforms? I think so. Yeah, but let me just, you know, say one final thing that this kind of controls the very severe controlled regime that seemed to be had a major impact, you know, so one measure that we conventionally use the imports to GDP ratio. Yeah, that really declined steadily, you know, and, you know, one way to think of it is that in the 1950s, you know, imports never fell below 5.5% of the GDP, right, and in fact at peak in 57, 58, they were 9.3% of the GDP. So, you know, roughly you can say between 5% and 10%. But by 1969-70, imports as a proportional GDP had fallen to 4%. Yeah. And a good part of it was probably also being spent at the time on food imports. So for the rest of it, you know, so you can imagine how industry had to function because, you know, there's so many raw materials and rigid imports, etc. But nothing doing, you know, so even, you know, till almost mid-70s, imports don't rise even to 5%. You know, it's forced mid-70s that some expansion happens. And that, of course, is what we can discuss in the next episode. You know, what are the factors that led to some relaxation of the balance of payments constraint and so forth, which allowed for some bit of liberalization that happened, beginning roughly the mid-70s. Yeah. No, I think that's a great plan and I'm excited because as we get closer and closer to the liberalization episode and also more recent in time, I think it starts becoming visible that everything happening in India today is so tightly linked to, you know, some of the measures that were taken in the 80s and 90s. So I'm really looking forward to that discussion. But thank you so much, Arvind. It's always a pleasure. Likewise. Good. Thank you, Shruti.