 Welcome to the discussion series on free trade and liberalisation as part of the 1991 project at the Maketa Centre. I am Shruti Rajagopalan and in this conversation series, I will be talking trade with Professor Arvind Panagaria, who is 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 Neeti Ayog in the Government of India and also as the Chief Economist of the Asian Development Bank. He is an 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. It is always such a pleasure to have you on the series. My pleasure as well Shruti, as always. In the last episode, which is episode 6, we were talking about the 1966 experience of devaluation and the reasons, you know, both political and circumstantial that led to its failure. But while we were discussing that, I had asked you about Professor Bhagwati who was consulted, you know, one among many other economists by Mrs. Gandhi on his views on devaluation. And of course, he had published on this. But I asked you about the in-person meetings and you said you will check. And it's lovely that you have Professor Bhagwati in the adjoining office. So did you actually manage to ask him? I did, Shruti. So I did speak with him. And so, you know, he has a very vivid memory. So he could tell me back the story as it happened. So apparently, you know, this was by his account about a week or so before the actual devaluation took place. And C. Subramaniam, who was the finance minister then, took him to Mrs. Gandhi. And Jagdish had already met C. Subramaniam and given him some notes and so forth. But as he arrived, he tells me to Mrs. Gandhi's office, you know, his secretary at the time was L. K. Jha. You know, this was just around the time, by the way, that, you know, as secretary, the demo had changed its character a bit, begun to change its character a bit. You know, most of the power used to be with the cabinet secretary, actually, in the pre-Indra Gandhi era, certainly under Prime Minister Nehru. But L. K. Jha had been then appointed as the... So there was no secretary originally, and there was no real PMO. You know, it used to be Small Office of the Prime Minister. But L. K. Jha was brought in for the first time as the secretary to the Prime Minister. And this idea of principal secretary, of course, that title came later. So anyway, L. K. Jha was now already there as the secretary to the Prime Minister. And he very quickly came and grabbed Jagdish and took him in because he was afraid that, you know, if there were a photo person took any pictures, that he was going to create a little bit of noise in the press and some speculation also that, you know, if Professor Bhagwati was seeing Mr. Gandhi, there might be something going on with the exchange rate and all. So he wanted to avoid that completely. He quickly kind of grabbed him, took him to the Prime Minister's office. And then the meeting between the two was very much a one-on-one meeting, nobody else present. And by his recollection, you know, Jagdish says that she was mainly asking for his opinion whether this would be a good thing to do to which Jagdish replied in the affirmative. Then she was also concerned what the other senior economists are going to think about it. So on that Jagdish was a bit circumspect, you know, that he couldn't speak on behalf of them. I think she was also trying to get particularly about K. N. Raj, who had been involved, you know, throughout from the first five-year plan with the government. And apparently, you know, K. N. Raj had later, Jagdish found out that K. N. Raj had been explicitly consulted about this. And what he advised was that, you know, devaluation would be a good idea, but don't liberalize the imports. But, you know, so Jagdish's account is that what he learned after this episode was that, you know, these nuanced advices don't work because, you know, the political leaders are interested in the big issue that is your answer to devaluation, yes or no. And the fact that K. N. Raj had qualified that don't liberalize imports meant not very much to her. So she saw it, also K. N. Raj's kind of giving his opinion as being, you know, fine, go ahead. Yes. No, what happened. So anyway, the meeting was relatively short between Jagdish and Mrs. Gandhi. And he says, you know, basically she kept her head down, doodling something on a piece of paper or something at the time. He came out and all. But then what happened was that after devaluation, K. N. Raj sort of repudiated that this was not a good thing to have done. In his mind, he sort of perhaps thought that, well, you know, he has said, don't liberalize imports, but liberalize imports. Therefore, his advice was not for it. But he said Mrs. Gandhi was very furious. That came to Jagdish from, you know, Rama Swami. At that time, Rama Swami was the economic advisor, I think, in the Ministry of Industry. And so Jagdish and Ramu told me this later on that she was furious that, you know, he, K. N. Raj had first advised for devaluation and then publicly kind of repudiated it. So anyway, that was roughly the episode. This is a great account. Actually, I mean, one, thank you so much for checking with Jagdish. The little bit that I know of him and him, he has just the most incredible memory and is a great storyteller of, you know, events like this. So I'm glad that we have that as part of this discussion. But also, you know, this tells us more broadly about the problem of politicizing economic decisions beyond a point, which is sort of what socialism requires, right? It requires a certain degree of control in every aspect of society. And once the politics has to be involved in every single economic decision making, politicians who don't have that kind of nuance or don't have technocratic knowledge like, say, Dr. Manmohan Singh, when he was Finance Minister or Prime Minister, then you run into a lot of trouble because you need to know enough at least to take advice from technocrats. If that is also missing, then, you know, things can start going on shaky ground. This is a good point to ask you about sort of the aftermath of what happened with the failed devaluation. In particular, Indira Gandhi's approach and the turn towards very highly restrictive imports regime, which happened after this. So can you talk us through the aftermath of this sort of failed or botched up devaluation, which just didn't make anyone happy in one sense? Yeah, you know, so a very critical factor in this was the fact that the valuation took place in the midst of two back to back droughts. So 65, 66 and 66, 67 were both drought years. And given the kind of very close nature of the Indian economy and the fact that agriculture was such a large contributor to the GDP, you know, it probably declined since 1950 was still, you know, it may, I haven't checked the figures, but possibly it was easily still 40% of the economy. And so even the industrial output kind of depended on what happened in agriculture because a lot of the raw material supply, etc. came from there. So the agricultural failure also led to the industrial recession and industrial recession meant that then you could really export very much either. And so, you know, therefore, and the failure on the export front was seen as a failure of devaluation. And so, you know, and also in the socialist environment, of course, from the beginning, virtually everybody was opposed to devaluation, it was seen as having been externally imposed. All those factors, you know, contributed to the immense unpopularity of that action. And so, there was no, you know, constituency defending it largely. I mean, you know, I think among economists, there were only two, right? Peshwa Guthi was supportive. And then you had Manmohan Singh had written about it, but he was not in the system yet, as far as I remember, you know. So, and he's in any case not very vocal about these things. He's not that kind of person. So, as a result, you know, very quickly, the reversals began to happen in the policy. Even either soon after devaluation, in fact, on the export front, the incentives which had been withdrawn as a part of the full package return. But before that I say, let me point out one thing that part of the reason also economically speaking, you know, part of the problem was that at least one other economist who was obviously in support of devaluation had been, I think, you know, the only economist who had been writing since the original balance of payments crisis in 1957. That was B. R. Shannoi. He had written back in 1958 advocating devaluation when actually, you know, it could have been successful because the economy was vibrant. There was no food crisis. There was no drought. The basics of the economy were in place. So, there actually devaluation could have succeeded, but of course, you know, Shannoi had nobody supporting him on that front, including Nehru himself actually made a very clear statement saying that it was unsensical to talk about devaluation of the rupee. Not his words probably, but, you know, basically what he said amounted to saying that this whole talk was of devaluation was nonsense. This was never in the cards. So, Shannoi in fact said that, look, you know, part of the problem of basic citizens devaluation was that it was not large enough. It needed to be significantly larger because Shannoi had been also arguing persistently that, you know, what has happened over the years is that your exchange rate is fixed nominally and your domestic inflation rate is much higher than the inflation of your competitor countries. So, as a result, you know, your domestic market is becoming over time more and more lucrative for sales and the foreign market is becoming less and less so. Also, your imports are becoming more and more attractive because in real terms, the rupee has got greatly overvalued because throughout it was appreciating in real terms. And so, and it was already, you know, 15, 16 years since the economic development process started and some of this deficit financing etc. had already was being done. So, his view was that, you know, what the devaluation was not large enough. On top of that, also some of the calculations by Bhagwati and Shrinivasan later on that were done concluded that the effective devaluation ended up being much less because of the withdrawal of the export subsidies and import liberalization. Those factors also and so they calculated apparently Bhagwati and Shrinivasan that about, you know, on the export side effective devaluation instead of, you know, the nominal devaluation was 36.5%. But they said on the export side, it was reduced to about 17.8%. And on the import side, it was reduced to about 29.7%. So, that sort of again reinforces the Shanayi argument as well that, you know, given that even the effective devaluation itself was less than 36.5% of the nominal devaluation. Overall, it was too little and too late. So, that was that factor droughts I already mentioned to you. Also, from the government of India's viewpoint, and this is something that two economists who have written also about this era, Joshi and Vijay Joshi and Ian Little, they have a good, you know, book on the macroeconomy of this entire area up to 1994, in which they sort of say that there was also the expectation of about 900 million dollars per year of aid towards a fair number of years on the part of the government of India as a part of the package of devaluation. But that aid, those expectations of aid did not actually materialize and that also became a sore point with the government and they said they were completely justified therefore in bringing back the export subsidies and the import restrictions. So, the export subsidies, export incentives as they were called, you know, they began very soon after the evaluation. In fact, you know, I checked this morning the economic survey of 1966-67 and it says that, you know, a new export incentives policy was already being designed starting in mid 1966, which is the timing of the devaluation. So, it was practically, you know, according to the survey, it is being done practically simultaneously and currently with devaluation. So, they described there, you know, and so many of those measures came out by 1967, according to Joshi and little import replenishment, cash subsidies, supply of domestic inputs to exporters at international prices, duty drawbacks, all that, you know, basically, they were backed by 1967. And by 1970-71, they also say that the import controls had returned with full force and they actually became even more stringent than before devaluation. And that, of course, import compression was automatic even if the policy itself doesn't announce when you don't have the foreign exchange because exports are not doing well, automatically import compression begins. And so even, you know, if the import restrictions themselves may have taken a little, you know, a few years to come in place, it didn't matter very much because the import licensing policy was in place and therefore you could easily, you know, accomplish import compression through slowdown in the issuance of the licenses. So, you'd see this, you know, very rapid, very sharp decline in the imports. So, you know, as a part of 60, so if you start, you know, 65-66, this is just the year prior to devaluation, the import to GDP ratio was 5.1%. In the year 66-67, which is the devaluation year, imports as a proportional GDP rose by 1.5% to 6.6%. But thereafter, steadily declined. You know, every single year in the following three years, imports as a proportion of the GDP, not just, you know, not an absolute term as a proportion of the GDP in the computer fact. And by 1969-70, they had reached 4%. Now, you know, given that these imports also include the food imports that were happening, oil imports that were happening, hardly, you know, you'd say that pretty much as far as the non-food, non-oil economy was concerned, we probably had gone into close to otarchy, not quite, but close. So, yeah. So, it was quite a serious compression by 1969-70. I would say there's one more thing happening simultaneously, which is the political crisis within the Congress that Mrs. Gandhi is dealing with, so she's trying to establish herself. And the opposition to her within the Congress is dubbed the syndicate. You know, this is, of course, K. Kamraj and Muraji Desai and so on. And they are more liberal-minded relative to her. I mean, I'm talking about this within, when I say liberal minded, I mean, in a 1960 Congress sort of way. But they started recognizing the failures of extreme command and control. They saw the foreign exchange sort of crisis. They thought they should move further outwards, right? And Mrs. Gandhi took this as an opportunity to establish herself as the other side and started turning firmly inwards, of course, assisted by P. N. Huxer and, you know, sort of the people she surrounded herself with, who were very, very socialist. And you see this also in other policies, you know, in by the late 60s, you have back nationalization, which is the really, really big one. And after that, you have, you know, all your sick textiles and coal mines and, you know, whatever wasn't included in general insurance in the Nehru regime starts getting nationalized. So you have this fate of nationalizations between, say, 67 and 75. So that has nothing to do directly with the external sector. But this sort of massive uncertainty that is imposed and also almost sort of an attack on the private sector, it's not surprising to me that given the lack of foreign exchange and exports being depressed, you have massive import compression because now who is demanding these imports? Forget that we don't have the currency to actually acquire them. The firms are just completely under attack at this point. Totally. I think, you know, totally. And one more important legislation I will mention there quite relevant to industry and therefore trade. And that was the monopolies and restrictive trade practices act that was brought in 1969. And actually that, you know, the one fall out of that act was that, you know, this act basically defined what were the MRTP firms, any firm which had investment, I think, you know, the assets worth something like 200 million rupees or something, but relatively low cap were defined as the MRTP firms that they were too large, they're big business houses. And so even if they were operating in different sectors, but the definition was in terms of total assets of the industry group taken together so any industry group or single firm or what have you, any entity which had assets worth, let's say something like, as I said, 200 million rupees worth got defined as an MRTP firm. And then their access to licensing was then limited to a list of core industries, though a list was drawn up of core industries, which are all highly capital intensive industries. And in effect, what it meant was that these MRTP firms could apply for licenses only within that core group of industries. So, you know, what you've done there is taken your most successful firms. I mean, the very fact that these industry groups or these enterprises had a large amount of assets by the standards of the day meant that they were successful enterprises. But then you say, ah, but I'm going to restrict you for that in terms of what you can do, what you can produce. And then you take them into the most labor intensive sectors. So what that also means that all capital will basically be absorbed by these enterprises in those sectors, thereby starving the rest of the economy of any capital whatsoever. So, you know, workers are working there in large part of the workforce, which is non-agricultural, you know, large part of the non-agricultural workforce basically has no capital, you know, they are sitting in these tiny little enterprises, cottage industries, household sector, you know, so the small was really very small at the time, even by definition, you know, when Mrs. Gandhi introduced this restriction of small scale industries or reservation, it had been practiced as a part of the 1951 IDRA, the Industrial Development and Regulation Act 1951. It was there in practice, a small scale industry regulation, but she formalized it as well, I think around 67, 68 somewhere there, you know, so there was another new development that had taken place by the before the 1960s were over that a list of industries was drawn up as a part of, I think IDRA 56 itself, IDRA 51, and formally any large enterprise where large was, you know, nothing more than a million dollars in investment, probably even less, was not permitted in those sectors. So, you know, and these are sectors where you have comparative advantage because of the preponderance of labor force, cheap labor, the kinds of sectors where Korea and Taiwan in parallel were becoming progressively more and more successful. That's exactly what was kind of denied. So, I think, you know, you're absolutely right that all these other developments were happening alongside Israel, which were, you know, basically strangulating the industry. I mean, there was a, you know, I think somewhere I recall in my India The Emerging Giant book, I refer to this, this period as saying, you know, that there is strangulation of the Indian industry. Absolutely. And, you know, when you talk about MRTP, the focus is largely on domestic firms. I want to actually go in a slightly different direction and talk to you a little bit about foreign firms, in particular, the foreign investment policy. You know, this is a policy that started in Nehruvian times and it was relatively liberal regime under Nehru. And then, of course, post devaluation under Mrs. Gandhi, this also takes an invert turn. But can you walk us through India's foreign investment policy, maybe, you know, go back to Nehru's time and describe what this policy was and then bring us back to the devaluation moment and talk about how it impacted foreign firms and so on. Yeah. Okay. So very interesting history there on foreign investment. You know, as we have discussed already, that Nehru era was relatively more liberal. And if you take, you know, I mean, Nehru really effectively became Prime Minister in 1946, even though the constitution was adopted in 1950 and elections happened afterwards. But certainly, you know, he was firmly the Prime Minister of the country much before the constitution was adopted. And so the era until about 1957-58, even on trade side, had been liberal. You know, and some of my own research, ongoing research on the Nehru period actually I find that, you know, publicly, as well as among the political class, there was a lot of support for liberal trade policies. You know, if anything kept them from, you know, opening completely, it was always the foreign exchange availability question. And but as long as, you know, the sterling balances which India had accumulated during the Second World War, because we were rather successful actually in exporting a lot more than we were importing. And so we had accumulated a lot of foreign exchange, which were known as the sterling balances. And these sterling balances later on became available to us. And using that actually, broadly speaking, until about 1956-57, we maintained a fairly liberal import regime. It was only then, you know, when sterling balances ran out and foreign exchange became very scarce and all. That is where the whole kind of restrictive import regime came into play. So also in 1947-48, as you said, you know, he was already Prime Minister, the provisional parliament and government was in place. But there were some debates in 1948-49 about the status of foreign firms, because as part of independence, there was also a question of, you know, there are all these foreign firms, especially British firms, European firms, can they continue to invest in India? Can they continue to repatriate profits? Will they be taxed in the same way? Will they have additional penalties or no penalties at all? So this is a hot button issue, you know, after 1947. So how does Nehru deal with this? And how does it inform his foreign investment policy, you know, at the beginning of his prime ministership? Right. So philosophically, by this time, you know, Nehru, I think there are two factors. One, of course, you know, Nehru himself was a bit of a changed man on this set of policies, socialism, so to say. The Nehru of, you know, late 1930s, particularly if you go, what was it, the Lucknow session where he was the president. He was a very fiery socialist, you know, I mean, bordering communist, sort of, you know, if you take that look at that speech, it's clearly not the Fabian socialist, this whole notion that somehow Nehru was Fabian socialist always since his days in Cambridge and London as a student. It's all wrong, actually. But anyway, that's a separate story. But it was the discussions in the National Planning Committee between 1938 and 1940, which really brought Nehru face to face with Indian industrialists who were sort of a call with the possibility that, you know, the socialism in India could turn into a complete kind of ouster of the private industry. So there's a lot of pushback at these meetings for the National Planning Committee. And that's where I think Nehru found that. Anyway, he's also a side of Nehru was always very pragmatic that, you know, what is feasible. So that's my reading that, you know, there's nothing to be tracked in Nehru's writings themselves to see, you know, how this transition in his own thinking happened. But it seems that, you know, so anyway, if you look at the constituent assembly debates, etc. Nehru is having to defend a more liberal policy against the attacks from the socialists and the communists, you know, and this is where you begin to see that there is a Fabian socialist Nehru kind of revealing himself. So he says, you know, the view he adopts here is that, look, ultimately, our objective is to increase output production. And if production can be increased by the government participating, we should have the government participate all the way. But, you know, where private sector can deliver, we should have the private sector, we should let them. And as a part of this whole objective that took, you know, ultimately, what we need to do is increase production. He was also very accommodative of the foreign investor foreign invested firms. And so in effect, you know, also, I should say that around this time, there is a counter factor because there are people like Sardar Patel, very much counterforce there. So they also kept the socialists a bit in check. And, you know, if you look at, for example, industry policy resolution of 1948, that actually is far more liberal. Now, once Patel had disappeared from the scene and he died in December 1950, a harder line socialist Nehru did emerge actually in the subsequent years. Not quite, you know, because he was also pragmatic, so he didn't want to disturb a private industry. But if you look at 1956, industry policy resolution, that moves much more towards socialism, because it is also preceded by this whole resolution on the socialistic pattern of society and all. And also the directive principles of policy are moving in the socialist direction. And all that gets reflected in the 1956 industry policy resolution, which is much more socialist than the 48 one was. So from which I conclude that, you know, there were counterforces which were keeping also to some degree Nehru in check on socialism, because once those counterforces were gone, a bit more kind of socialist Nehru did emerge in the subsequent years. So this is the kind of political equation as I read it from the various things that I have read. But coming to the actual policy stance, therefore, you know, first of all, Nehru in the industry policy resolution of the Congress 1948, a guarantee was given actually there for 10 years, we are not going to nationalize any industries. And that applied not to just domestic, but also foreign industry. All firms. So a clear assurance was given that there was going to be no nationalization. Nehru had also said that, you know, they'll bring the foreign investment policy, but rather than bring the policy, what he did was to in April 1949, give a foreign investment policy statement. So it didn't necessarily have the legal force, but it ended up basically becoming the framework for the policy that was then adopted pretty much throughout the Nehru era. So in this foreign investment policy statement, this is April 1949, the salient features I will describe what they were. So he accorded national treatment to the existing foreign investments, thereby ending any discrimination against them. So this is quite, you know, even today, we don't automatically extend national treatment to foreign investors you know, all these bilateral investment treaties, et cetera, you know, are what governs the status of the foreign investors. And often the national treatment is far from automatic today in the investment policy. But he granted that he promised policies to enable foreign investment that, you know, we will do everything to provide enabling environment for the foreign investors. Also, he permitted the remittances of profits and dividends of foreign companies abroad. So that was a big thing, right? You know, that foreign, in spite of foreign exchange issues, foreign exchange scarcity, et cetera, assurance was given that the foreign funds will be allowed to remit profits as well as dividends as necessary. And he provided for controlling foreign interest in companies for a limited period of time. So this was relatively given the state of politics at the time, it was a very liberal kind of foreign investment policy, which was largely maintained. 1949-50 budget implemented these promises. And in addition, it provided depreciation allowances and income tax exemptions to a wide range of foreign companies. It abolished capital gains tax on foreign companies. 50-51 budget went further. It reduced the business profit tax, personal income tax, and super tax as applied to foreign companies and their employees. 1957, the government gave a number of concessions to foreign firms, including reduced wealth tax and tax exemption to foreign personnel. So this process continued. 1959-61 budgets, the government lowered corporate taxes on income and royalties of foreign firms. India also signed these agreements to avoid double taxation to lower the tax burden of foreign investors with the major source countries, such as the United States, Sweden, Denmark, West Germany, Japan. And in 1967, the government established an Indian investment center with offices in the major sources of private foreign capital to disseminate information and advice on profitability of investing in Indian foreign in India to foreign investors. So a lot of good steps were taken. There is a famous book by Michael Kidron. Kidron is what you remember. That's a 1965 book. So according to him, Western multinationals were initially lukewarm to India in the early 50s. But in the period following 1957, quite a bit of foreign investment did come into the Indian industry, including in sectors that were regarded as non-essential. What is essential and what is not essential has been a part of policy thinking in India. It still remains. Yes, it still remains. There are still some people who think that, oh, there are these non-essential imports and why are we importing these? And particularly when it comes to China, they say, oh, these are not essential imports. So if they're coming from China, let's stop them. So this kind of still then baggage continues. But the Kidron estimates, Kidron estimates that between 57 and 63, as many as 45 percent approvals of new capital issues involved foreign investment. So you can see. Remember that there is investment licensing on the side. And there are very limited resources available for capital imports because the general sense is that for industries that have been established, raw material, intermediate inputs, components, any parts that may break down a lot, those should get priority because with limited foreign exchange, those should get priority. So capital investment often required actually the enterprises to find their sources of foreign exchange. So if the enterprise is going to invest in machinery, etc., and which has to be imported, find your own foreign exchange resources. And so the collaborations with the foreign firms became very important. And this is where Kidron's estimate that almost 45 percent approvals of new capital issues involved foreign investment. So that's a very large proportion. That Hathi committee sort of said that this was the time during which most foreign drug firms set up their manufacturing subsidiaries in India. So there was also an RBI survey of 1969, which Bhagwati and Desai book mentions. And according to that survey, there were 827 private sector firms with foreign participation of some kind. That's a very large number. So 591 had actually equity participation with 262 having majority foreign holdings. So you can see the liberalism of the time that out of the 591 firms with equity participation as many as 262, which is pretty close to half of the foreign invested firms had majority foreign holdings. And I remember a lot of the foreign and these products are available in those days. It's only after Mrs. Gandhi came in and then they began to be gradually phased out. They existed. So all evidence on policies and outcomes during the Nehru era really points to a very liberal regime compared to what was to come after Nehru. Yes. And a few things here. So one, of course, this tells us a lot about Nehru. I agree with you that there's a certain pragmatism in his socialism. And one thing I do admire about Nehru, I've been a critic of a lot of the economic policies. But one thing I admire is that the overall goal of economic growth and technological advancement, industrialization, this was front and center. Now the economic model of going about it was clearly wrong, right? But he went with whatever he believed and the orthodox he believed at the time. But the overall vision of the size of the pie must grow, India must grow each year, there must be new technology coming in and so on. That I think is something which is important to note because not all the socialism we've had has been of the same color. The second, I think this goes back to one of our earlier conversations when we talk about import substitution and protectionism. And you were talking about how foreign competition is not just about availability of foreign goods and widgets of some sort, right? It is also about availability of technology, of knowledge. And if you have foreign firms setting up in India, one way of thinking about it is they can bring maybe machinery from abroad. But the other thing they bring in is they function in other countries that are not autarkic or as closed as India. So they know what the global competition is, what the standards are and they are able to manufacture at those levels or those standards. And even something like there isn't enough foreign exchange to replace a machine, if you have foreign collaborations, you may be able to find collaborators who can repair the machine because they have the technological know how to do that. Whereas if you only have Indian firms and you're used to importing and now you can't import and the machine breaks down, which we saw lots of examples of that in the late 70s, where if a tiny part broke down, that's it, it's a huge chunk of the capital investment of that particular firm was lost waiting for the import license or waiting for the investment license. So there are many, many benefits other than just availability of foreign goods that comes from this kind of liberal regime, which we saw during that, you know, 50s era, roughly speaking, just a lot of technical expertise coming into the Indian economy, a lot of sort of know how you know, building a human capital without people necessarily leaving the country learning at the workplace and so on. Totally. Totally. I think, you know, and there is also a spillover across, you know, this is the time that India is setting up some of these IITs and IAMs, etc. And so that also provides a bit of a link, the existence of the foreign firms helps that, you know, in terms of the graduates being able to interact with those firms and also, you know, in their generation, the jobs in these multinationals for very coveted jobs, for good reason, for good reason. And so it also helped develop the skills of the Indian graduates, both on engineering side as well as on the management side. So undoubtedly, you know, as I said, ultimately, of course, you know, to me, everything is a bit endogenous that the fact that the choice of the model ended up being wrong, unleashed the forces eventually that gave growth also a bad name. You see, I mean, when the pie really doesn't grow fast enough, and your explicit objective is to grow the pie to combat poverty. So, you know, if the poverty did not decline, then there's alternative view that, oh, you know, growth can't really deliver, growth has failed, right? Growth did not fail, growth simply did not happen in enough volume. So it was not a failure of growth, but the failure of growth to actually happen in the desired volume. And that is why, you know, the poverty did not fall enough. But that unleashed forces, unfortunately, you know, which was also to some degree, sort of in line with the socialist philosophy, that ultimately, you know, a very important part of the socialist philosophy is to redistribute and to bring public sector control of the resources. So on both counts, I think, you know, the failure of growth to happen and therefore the wrong choice of the model ended up being at the heart of actually what was to come. So what happened subsequently under Mrs. Gandhi to a significant degree was was endogenous to the system. Of course, the leadership matters and the fact that, you know, P. N. Huxer was brought in by Mrs. Gandhi did make a big difference, you know, who serves in the Prime Minister's office makes all the difference. And Huxer was boy, you know, he was no liberal socialist, right? I mean, he was not just he was not a Fabian socialist, I mean, he was a hardcore kind of communist, if you would call it, you know, so he was much more and so the so therefore all the policies that that came after and then Mrs. I mean, by all accounts, Mrs. Gandhi did rely quite a bit on P. N. Huxer. Yes. And so, you know, so P. N. Huxer, I think was the successor actually of L. K. Jha. L. K. Jha, yes. Yes. And he's the one who really made that, you know, the principal secretary of the Prime Minister as the locus of control in the Indian economy. I think that happened under Huxer or at least it got, you know, really rigid under Huxer and to some extent continues still now. This is another legacy. Yes. No, no, no. I mean, very quickly, you know, and perhaps already under Huxer, the importance importance that the cabinet secretary had held declined. You know, today, today, the principal secretary of in the PMO wheels a lot more power than the cabinet secretary does. Absolutely. Yes. Because the principal secretary is manning the Prime Minister's office, right? Yes. Which is the locus of control. Yeah. And the cabinet secretary even physically is located in the Rashtrapati Bhavan. You know, he's at arm's length from the Prime Minister's office. Yeah. And, you know, this is another interesting point here is I was recently reading Nikhil Menon's book and he talks about how, you know, planning and democracy went side by side or they were attempting these two seemingly incompatible forces. And he talks about how Mahalanobis really creates the planning infrastructure in the early years of the Indian economy and, you know, creates planned consciousness and how five year plans were propagated and so on. So he's a historian. It's a lovely book. And in a conversation with him, one of the things that he pointed out was how after the second five year plan, which is Mahalanobis is vision, things are now so centralized that a lot of cabinet ministers were quite upset that everything is going through Mahalanobis and the Prime Minister and not necessarily through the ministry, minister for industry or commerce or the finance ministry and so on and so forth. So there was already this centralization that was taking place in the early 50s crystallized by the first and second five year plan where the cabinet was becoming less and less important. And then as you said, you know, once LKJH comes in and then of course PN Huxer, even how the files move within the Indian economy, right? And within North and South Block at Rashtrapati Bhavan, that sort of triangular area and who sits where starts becoming very, very important and who is controlling the final approvals. And it's clearly the principal secretary to the Prime Minister's office at this point and has been for a good 40, 50 years now. Yeah. And by the way, on the objections within the cabinet, I'm forgetting now the name, but one of the finance ministers had resigned actually. Yes. John Mathai. I think it's Mathai. Yeah. This brings us now, I want to come back to the devaluation moment and the failure of devaluation in 66. Now, how does that impact the foreign investment policy? Because you know, the Nehruvian time is a relatively liberal regime and, you know, foreign firms are happy to set up in India, partner in India. They're also growing, of course, within the limits of India's, you know, foreign exchange situation, but it seems to be going well. But now with the failed devaluation and the further invert on domestically and MRTP and so on, what is happening with the foreign investment policy and the impact on foreign firms under Mrs. Gandhi's regime? Yeah. So, you know, this tightening happens all around. And alongside the import policy, you also have tightening happening on foreign investment policy. So, you know, as an example, because of the shortage of foreign exchange, questions get asked, well, you know, why are we allowing these remittances of dividends and profits and royalties abroad? So, you start clamping down, you know. So, a lot of restrictive measures were introduced on foreign investment and technology imports. 1968, foreign investment board was appointed. Now, any of the big, anyway, foreign invested proposals, anyway, had to go through cabinet. But even for the smaller ones, you know, proposals that were 20 million or less, which did not have to go through this kind of scrutiny. It basically decisions got used to get made at the bureaucratic level under usual processes, meaning, you know, so there was no serious restrictions on that. And generally, as I said, you know, they had been looking earlier for foreign collaboration to cover the cost of capital goods imports. Now, you know, scrutiny became much closer, even for all any investments that were less than 20 million, with foreign equity below 40%, had to be approved by this newly appointed foreign investment board. And now, this is a new innovation, by the way, which often on keeps coming back. And it existed, actually, till recently, while I was at the NTIO and during that period is when Prime Minister Modi actually finally did away with the foreign investment board. It actually changed colour under A. N. Varma because, you know, A. N. Varma in Narsimha Rao's cabinet was using it to attract foreign investment, kind of the opposite of what they were doing in the 60s. But you're right, that it has continued as a legacy for a very, very, very long, long period of time. The scrutiny of who gets invited to the table. Yeah, right. Yeah. So, so, so there's one thing, then also they grew up three lists of products. Those in which no foreign collaboration would be permitted. Those in which technical collaboration would be permitted, but not foreign investment. Royalty payments were not to exceed 5% of total cost. And the terms of collaboration were reduced from 10 to 5 years. Now, you know, this is which means that complete indigenization should happen within five years. No, no, with that, you know, hardly any foreign investors would actually consider coming in. And the last list included only two types of products. Those whose production did not exist and those for which there was only one producer generally a foreign firm with no competitor. So, you know, you got, so, so this third list was, you know, the last one that I just talked about, those in which foreign investment and technical collaboration, both would be permitted. So there's a small list of products where both foreign investment and collaboration were permitted. But it was a short list. It included only these two types of products. Those whose production did not exist. So, you know, I mean, if domestic producers are not interested in producing those products, it's unlikely that, you know, foreign producers are going to come in and set up. So, so, so even though in principle, it was allowed, you know, this restriction really was such that hardly anyone would dare come in. And then there was also some concession there that if there was only one producer, which was essentially a foreign firm, then again, they were allowed. So that is about it. So, you know, either it has to be a product which is not produced or it has to be a product where there is only one producer. So, you can imagine, you know, so then, then beginning in 1972, approval of applications for capacity expansion became subject to a reduction in foreign equity also. That if you want to, you know, expand domestic, expand your production capacity, and you happen to have foreign invested partner and a partner who is a foreign investor, then you have to reduce the equity. You know, otherwise, otherwise you can't expand. I think this was something that was going, I think this was the reason the Bajaj, Vespa marriage broke up. I think this might have been one of the reasons because Bajaj wanted to expand capacity and they had a tie up with Vespa, which was the Italian collaborator, and then eventually that didn't quite work out. And then Bajaj tried to go in the different direction and market it as Bajaj Chetak and so on. Yeah, that may have been a little later though. A little later? Yeah, that may be a little later because I recall that maybe, you know, maybe Bajaj had, because Vespa was still there till the late 60s. I mean, I'm just trying to recall from my own memory because those are the years I was still in India. But that needs to be checked. It's possible. I mean, it's possible. So, but it needs to be checked. Yeah. Yeah. So there are 72. And then of course came the mother of all restrictions, the foreign exchange regulation act of 1973. This is the infamous FARA, you know, much dreaded in famous FARA. I mean, this was the act, you know, if you were an Indian national Indian resident, and you were caught even with five dollars in your possession, that would be grounds for jail. I mean, you simply were not allowed. And it was enforced, you know, so it's not pretty serious act. But it had obviously a lot of implications for foreign investment. I think, you know, that really restricted the space. I mean, it was already being restricted, given all the measures that I've described. But FARA in particular went yet further in terms of restricting the space for the foreign investors. So it came to require that all non-bank foreign branches and companies incorporated in India that had foreign equity share in excess of 40% to obtain permission from RBI to continue business in India. Now, you know, so anybody who had more than 40% equity, they were required and they were incorporated in India, they were required to reduce that. Well, they were required actually, I mean, the regulation of the FARA says that go and get the permission of the RBI to continue business. Now, of course, RBI is also part of the government really, and especially in those areas there is no independence of the RBI. Yeah, it's separate. I mean, it's also, of course, it should, today that sort of thing will never be the mandate of the RBI. I mean, who is RBI to give permission on foreign exchange. I mean, it really is a function of the government itself. It's not RBI. But anyway, that's how policy, I mean, that tells you about the extent to which the RBI was very much a part of the government in those days. Absolutely. So then RBI would grant this permission only if the foreign branches and companies diluted foreign equity share to 40% or less. So in effect, all the enterprises were told that reduce your equity, foreign equity to 40% or less. So with two main exceptions, non-bank branches or companies unwilling to dilute there for an equity share to 40% had to wind up their business. And as a part of that, of course, the two famous examples, IBM and Coca-Cola, they both left India and Coke returned many, many years later. Yeah, in the 90s. After 91 liberalization, after 91 liberalization, they came back. And of course, so there was a whole long period during which we all remember, you know, there's Kappa, Cola, Thumbs Up. Yeah, that's right. So, you know, the Indian made soft drinks that came. Although once Coca-Cola came, I think they basically absorbed all those. Yeah, they absorbed all those and Pepsi came just before liberalization, I think. So that was the other big move. But it's so strange. I mean, you're right in that is the requirement is that you have to reduce equity to 40%. What they're really saying to a foreign firm is they need to significantly give up control of the enterprise, right? And giving up control of the enterprise is not just about production and profits. It's also about quality and technology and standards and companies that are unwilling to give up that kind of control or reduce their standards to their Indian partners naturally they leave. So it's not surprising that firms like IBM and Coca-Cola left. And it might have been, you know, it had, the market was very large in India, but it had a lot more to do with control and quality than it had to do with, oh, this is 3% more equity or 10% less equity or something like that. Well, in the case of Coca-Cola, actually, the control was central because they've been keeping their formula secret. And Indian control would have meant that they would sharing it with the partner formula. So I think that was the reason for Coca-Cola to wind up in India. Yeah. And then IBM, of course, for, you know, again, quality reasons, right? And it's such a big loss in a sense because Indian computing industry, both hardware and software kind of goes, you know, shifts back 10 years because now the important partners have left. Yeah. I mean, IBM probably also had the same similar issues, I would imagine, you know, like Coca-Cola because it would mean giving up, you know, what was state-of-the-art technology at the time in computer industry. And so they probably have played a role in their departure as well. Yeah. And a number of smaller firms, of course, left. They're not as, you know, they're not in the folklore like IBM and Coca-Cola. But a lot of foreign firms wound up either because they were unwilling to live with the loss of control or because they saw it as sort of, you know, for boarding time that was coming, that, you know, if this is where we are today, then tomorrow something else will be introduced and it's probably best to pack up and leave. Correct. Yeah. So there was very few kind of, you know, enterprises left which could have more than 40% equity. Yeah. So they allowed, you know, with some exceptions where you could have up to 74%, nobody could have 100%, but except possibly bank branches which were owned. But so up to 74%, they allowed foreign equity in a number of types of enterprises, although, you know, not that many in any, either in any one of these categories existed. So there were, if there was some manufacturer who was producing a product in the core sector, you remember that this core sector was identified around 72 and 73, this list of highly capital intensive industries. So if there was a foreign invested enterprise, which was producing a product in the core sector, then they could keep up to 74% equity. Then there were enterprises engaged in manufacturing and exporting 60% or more of their output. So as long as you're earning foreign. You can earn foreign exchange. Yeah. And then they were kind of allowed. Tea sector, I think, you know, these are tea plantations which had been foreign owned and there was fear, obviously, again, that forcing the owners of those tea states might actually have adverse impact on tea exports. I imagine that was the motivation which allowed the government to allow tea states to stay in the foreign hands as well. Then there was an exception also granted to those creating skills and infrastructure that were not available indigenously and contributed to exports. This is a bit more vague. So I imagine that that category gave the bureaucrats a little bit of room for manipulation. And then there were the foreign branches of airlines and shipping companies that were also allowed up to 74%. So that was one set of exceptions. There was a second set of exceptions which was introduced later in 1976. And under that exception, they allowed a maximum of 51% foreign equity in two types of companies, those exporting 40% of the production. So this is a modification of the earlier provision which because probably, you know, they were not that many enterprises exporting 60%. So they reduced that to 40%. But then also said, you know, you can have up to 51%, not 74%. And then at least 60% of the output had to be in the core sector and export. Then if you export 10%, then also they were allowed. So this is just, you know, some concession. Some tinkering. Yeah, some tinkering small. Yeah. But this also meant that these companies became a different category of companies, right? So if you have the Nehru regime where you think about firms, foreign firms will be given the same treatment as domestic firms. Now this changes things because like MRTP firms are a special category. Now FEDA companies are a special category. Yes, absolutely. So these companies, you know, we took these exceptions and stayed in India. They came to be known as FEDA companies. Yeah. What was the differential treatment between these companies? Was it good to be a FEDA company or was it bad to be a FEDA company? Because these things can go both ways depending on what they are producing and what the relationship is. No, I mean, you know, if you feel that you're going to be profitable here, then you know, I mean, it's not as though there was a choice between being a FEDA company and being something else. Yes. Meaning that, you know, only other choice was to disinvest and reduce your equity below 40% then you can be in the other category and that will reduce some of the restrictions that FEDA companies face. But other than that, you know, if you wanted to be a company with 51% or more, up to 51% investment, controlling share, you had no choice. You had to be FEDA company. Yeah. Yeah. And you know, it's aside from the fact that there were FEDA companies versus non-FEDA companies, every individual who wanted to have any foreign exchange was a FEDA individual in the sense that it applied to virtually everyone. And sometimes, you know, foreign exchange balances as low as $5 and $10 were regulated. Any company, even a 100% domestically owned company, if they had to go abroad, they needed to go to the RBI and the Commerce Ministry request special permissions for foreign exchange and, you know, give them a clean plan of what they intended to do with that foreign exchange. So I think Narayan Murthy has an example where he talks about traveling to Germany and they had to go to multiple cities. But when they request the permission, they say we will first go to, you know, Berlin, then Frankfurt and then Munich. I'm just making this up. I can't remember the exact detail. So, you know, they have these three cities and then some meeting gets changed and now they no longer have to go to Frankfurt. They have to go to Paris instead. But when they come back, they have to explain to the RBI why they changed their plan and why they went to Paris instead of Frankfurt and, you know, what foreign exchange balances were spent and how much came back. So, you know, in some sense, we think, oh, this is a FEDA company, this applies to these foreigners or these, you know, these suits who are coming from Atlanta like Coca-Cola. But actually, FEDA just impacted every single person who wished to have anything to do, you know, outside the country in terms of foreign exchange. You know, I'm sure you experienced it. You must have some stories of trying to go abroad and have some cash balances as a student, right? So what was your experience? Yeah. So I think there used to be something called the P-Form. Yes. And so I remember I got about $200 from the RBI and there was some provision that at the airport, you could get another $7. So I don't know why. Why was there that provision of no, I can't remember. But I remember this that there was a provision to get another $7. So that's all the money I had. $107 and you landed in America. $107. Yeah. Yeah. That was it. That was it. We're not allowed anything else, you know. So that is extraordinary. It significantly impedes, you know, other kinds of human capital development, right? Just the ability to go abroad and get a law degree or a PhD. So in a sense, it impacts everything that is happening in India, knowledge building, capital formation, foreign investment. I mean, this kind of foreign exchange draconian law is just crazy. There is no way I could have come without the fellowship I had from Princeton, you know. It's just not within the realm of possible. Let me anyway, you know, you also needed, even if the Phara was not there, you needed some domestic currency resources, which also I liked. So yeah, but the Phara makes it complicated even after you got the fellowship. Let's put it back. Yeah, I think, you know, I mean, it makes the logistics very difficult, you know, that you are worried that you are going out with $207 in your pocket, you know. I mean, what if you, I mean, I'll tell you, actually, I remember this, that my fear in the first year was that what if I fail, I, you know, I got to have at least enough money for to be able to pay my airfare back to return to India, right? So that was my worry because, you know, going in, my father paid the airfare, but coming back, I did not want to ask him for the return fare also. So I tell you, I was so relieved 1975. So 74 I came in, after one year, I got a job at the World Bank in the summer. So I got three months and the salary was $900 some dollars. And so I figured, okay, you know, with three months, you got close to $3,000, you saved about $2,000 out of there. So you have enough money to catch a fight back? Yeah, yeah. Oh wow. That's extraordinary. You know, so this of course continues for a while, this kind of invert turn, but post-emergency or at least actually not even post-emergency, even with the announcement of the emergency starting in 1975, some adjustment and tinkering starts happening in the other direction, you know, there are some concessions given, there is some, I mean, many call it liberalization, you've called it phased liberalization, or at least, you know, a step by step move in certain sectors to increase capacity or to allow, you know, more participation in the market. Can you walk us through that because there is a period between 75 and 90 where there are some moves in the opposite direction away from this kind of invert turn before we get to the big moment of liberalization in 91? Yeah. Okay. So there is now, you know, not on foreign investment, by the way, foreign investment may be under Rajiv Gandhi, there is some. Yeah. Those are also relatively piecemeal, but at least, you know, and there are numbers, you know, about how many companies actually got the permission from RBI and how many were denied and so forth, you know, but very little. So foreign investment largely doesn't get a serious reprieve in any way till 91 reforms. Yes. But on trade side, I think, you know, some changes do begin to happen beginning mid-70s, let's say, you know, roughly mid-70s. So we had sort of, you know, talked about how the import to GDP ratio by 1969-70 was 4%. Yeah, may as well drop to 4% in 69-70, right? So and during this period, export performance remained relatively flat and big gap between, you know, the imports and exports. So export is a percent of GDP during these years until about until 1968-69 are about 4% and 69-70 they fall further to 3.6%. So not much action, you know, at least until 69-70 and exports remain low. Only reason actually the imports are maintaining still a bit above, right? You know, exports are bringing revenue up to 4% of GDP, but imports during this period are more up to, you know, before they drop to 4%. They are like 5% in the 68-69. Prior to that year, they were about close to 6%. And so that gap was being maintained largely. I think a lot of the food imports were happening and there was PL480 and so forth, you know, and some borrowing may have been happening, foreign aid may have been coming. So those were the sources of foreign exchange that bridged the gap between the foreign exchange earned from exports and foreign exchange required to import. For imports. Yeah. So early 70s, similar, this pattern remains, you know, imports in the subsequent years, don't you know, they do not rise beyond 4.5% until like 74-75. So the imports remain between 4 and 5% during the first half of the 70s and exports remain below 4%. It's strictly below, it's above 3% but it's below 4%. So that's the rough kind of out scenes in terms of these where I think 73-74, there is a little bit of break. 73-74, this was oil price crisis, if you recall. And at the same time, there was also general commodity boom. Commodity price boom, let's say. Commodity prices had seen a bit of a boom during 73-74. And in particular, I think, you know, the sugar, for example, there was partly this, like from India's point of view, there was sugar, for instance, where crop failures had happened both in Cuba and Brazil during that year. And that allowed India to actually expand its sugar exports. Now, basically, those of us who were in India at this time, really suffered through because sugar was a very controlled item. And you got something like 1 kilogram per person or something like that, some very limited amount of sugar, actually. So there was a Russian card and there's a black market in sugar and whatnot. Lot of people would be using gold to make tea and all. So anyway, that was part of it. So that helped 74-74, 75 also, I think commodity prices remained elevated. Particularly in the 74-75 year, we got help on things like tea, particularly, because Kenyan and Sri Lanka had crop failures in tea. So that helped India raise the gap. So that allowed a little bit of expansion, both of exports and of imports during 73-74, 72-75. But the more important catalysts were different. I mean, these were a few little things that a market conditions kind of eased up the foreign exchange just a little bit, not by big margin, but just a little bit. But politically, really, as far as the businesses were concerned, there was always pressure because they had difficulty getting their raw materials, getting their components, intermediate inputs. So there was always this pressure that government needs to do something. So that pressure was there. But something else also had to happen for liberalization to happen, and that something had to be that where is the foreign exchange going to come from? That was really the crucial issue. So two things happened, which had, one was the oil crisis also opened the door to migration of the Indians to the Middle East. And that began bringing in the remittances. So there was some bit of migration earlier also before the oil price crisis, but there is small. But after having that set of migrants in the Middle East was helpful because when the oil prices rose and these revenues became available to the oil exporting countries, they wanted to bring in more workers. And so the fact that we already had a kind of foothold in the Middle East helped that migration could expand and respond and expand pretty quickly. And that continues even today, the foothold that was set up in the early 70s. Even now we have a very substantial number of people seasonally or annually migrating to the Middle East and sending back huge remittances. Today India's remittances are practically about 1% of the GDP. It's quite a bit, 2% to 3% of the GDP. So very large. Today, of course, yeah, I mean, they're about 67, I mean, last actually number, 100 billion hit. We hit 100 billion actually, the latest figure that I remember. So even these are relatively sort of what I call circumstantial things that were happening that impacted India's sort of balance of trade situation. So if there is a drought within India and there are two or three bad droughts, it severely impacts, right? If there are crop failures in other countries, then it boosts India's exports and brings in a little bit more. So these are sort of what is happening globally and domestically in markets. But was there much movement in policy, which moved us towards liberalization, either because of pressure from the business community or others, such as liberalizing the licensing regime, like the open general license and so on, or mostly what was happening in the mid 70s just restricted to all these circumstantial things, which may have benefited India a little bit here and there? Yeah, no, I think the very early one is circumstantial. And so one was this remittances which helped bring in more foreign exchange. So even by like around 1970, 71, your remittances are about $134 million. Why 75, 76, $524 million? So almost fourfold increase. That's quite substantial. So that's one factor that's at work. And after that, of course, in the second half of the 70s, these remittances were rising by about $300 million every year, such that by $79.80, $2.2 billion was a very large amount actually for that time period. And the other thing that happened was that you remember that the 1971, the entire the Bretton Woods exchange rate system was collapsing. And after that collapse, actually, some of the European currency is appreciated. Mark, you know, the German mark, French rank. So now they appreciated, which means relative to those currencies, the dollar in the British form depreciated. We were paid to these currencies in rupee was. So that allowed rupee to also depreciate against the European, these other European currencies. Yeah, without actively depreciating. Without actively depreciating. And that depreciation also helped exports a bit. Yes. So that happened. Also, I think now this begins to go into the second half of the 70s, that in September 1975, finally, India decided to let rupee depreciate about, sorry, what happened was that they packed the rupee now to a basket of currencies. So this was a big important policy change September 1975. So rather than packed to the British pound or to the US dollar, what we did was that we are going to pack the currency to a basket of currencies. You can always play with the weights on different currencies in the basket and play with the exchange rate a lot more. It gives you much greater flexibility. And this flexibility was used and apparently between 1974, 75 and 78, 79. So that's what 75, 77, 78. It's four years. In four years, in four years time, the rupee depreciated about 30% against the British pound. So that depreciation was very helpful they could not devalue in the usual sense after what happened in June 1966. But it happened naturally to some extent. But this was surreptitious. Without anybody noticing, there were no announcements to be done at all. But basically at the technical level, the RBI could basically achieve that depreciation. So that was a very smart thing to have done. So that depreciation had the merchandise exports back time. They grew from 4 billion in 74, 75 to 6.4 billion in 77, 78. Now in today's context over these are small numbers. No, but it was a big improvement then. India was a tiny economy and so much compression of the external sector that even a little bit of liberalization through depreciation or something else just has this big impact. Exactly. So 4 billion to 6.4 billion, that's more than 50% expansion. That's again within those four or five years. It continued. In the following year 79, 80, it went to 7.8 billion. Services exports also stepped in. So they went up from 632 million in 74, 75 to 1.2 billion in 77, 78 and then to 1.9 billion in 79, 80. So why 79, 80? Your total exports have become this is 7.8 plus 1.9. So it's about 10.7 billion. So that's a very large compared to where we were 74, 75, you take it's 6.4 plus 1.2. So it's from 7.6 billion in 77, 78, we went to 10.7 billion in 79, 80. So good expansion and that is what then gives the government confidence to begin liberalizing on the import side. So this one single factor, the depreciation about 30% depreciation became the catalyst to liberalization on the import side that was to follow. So here on we can discuss a little bit if you wish on the import side of it. So 75, 76, some small steps get taken, but important. They prove important for the future not necessarily for 75, 70 itself, but for the future. So one important thing that was done in 75, 76 was to resurrect the open general licensing list, which basically had been lying dormant at that time. So it was a small change, six items got placed on it and there was some free trade zones were also included in it, meaning that free trade zones could also any enterprise in the free trade zones could import under open general license. And then the six items that they put on the list could be imported by anybody regardless of where their location was. 76, 77, some of the iron and steel items and some of the machinery requirements by leather industry were added to open general licensing as well. Then a much larger expansion took place in 77, 78. They expended the OGL open general licensing list to include leather making machinery, garment making machinery, a large number of drugs, medicines, chemicals, electronic items, iron and steel items, and scientific and technical books. So now this became an important instrument for the government of liberalization. This had always been used. I mean, starting from the Second World War itself, open general licensing had been used and whenever foreign exchange became available, they would use this instrument when it did not, so this had always been in play, but for a while it had not been there, but now having been resurrected, they started expanding that. Then in 75, 76 itself, they had also introduced a second way to liberalize and that was the system automatic license. Now, in a way, if you think about it, the word automatic license carries a little bit of contradiction. It means it's not licensed. I mean, either it's not licensed or it's not automatic, I mean. But that's how our system was. So under automatic license, basically what it did was that there was a list of selected industries which were given, so a list was drawn up of industries. So within those, and it's a fairly liberalist, so within those selected industries, the enterprises were given exemption from the domestic non-availability condition. As you recall, we discussed this when we discussed the import regime that you had to satisfy the essentiality and domestic non-availability condition. So they were given and so now you no longer had to apply through something like sponsoring agency. Usually the usual track used to be that you put in your application for the imports first to the sponsoring agency, which then gives you the clearances on the essentiality and domestic non-availability. And then the application goes to the what is it called CCI and E. Yes, chief controller of imports and exports. Under the automatic license, you could apply directly to the CCI and E. So that's sort of some easing up. There's a procedural easing up. But the procedural easing up helped a lot because it meant fewer trips made to Delhi and fewer visits to different ministries to get your file through from one desk to another. So it sounds simple, but on a day-to-day basis, it does change a lot for the firm or the businessman. Yeah. And some of the liberalization was also done through the exporters. There's always, in the Indian system, it's always been there that restrictions exist, but for exporters, we'll make an exception. So they tried to also improve the access of the exporters to imported imports. So they expanded the import entitlement. So under important entitlement, an exporter got a certain amount of imports permitted without license. Also, there was the import replenishment license. Under that, once your imported inputs got used up, they were replenished, meaning that automatically you get to, once you have used up, you provide the evidence that you have used up. And then duty drawback also was offered to the exporters. So that also became another instrument. Now, very interestingly, I discovered actually through some of the reading, we all think of the liberalization of computers, that it was done by Rajiv Gandhi, that's the story that we all have heard. But there was actually a prior step that was taken much before Rajiv Gandhi, actually during the emergency, so July 1976. So what they did was, the electronics commission used to exist already then. Yeah. So they announced the policy for the import of computer systems by Indians returning from abroad or those residing abroad under the provisions of the import trade control policy of 76-77. So liberalization, first liberalization of computer imports. During the emergency. During emergency, yeah. So basically, individuals were allowed to import computers provided they came up with necessary foreign exchange and use the computers for specialized applications and overseas customers in areas such as engineering, design, engineering, consultancy, and process control. So, of course, even that is controlled, what they use the computer for, but sure, there is some move towards liberalization. It is such a strange time that these are big, that we consider these important moves towards reform. Yes. Yes. Yes. So after this, also by the way, we used to have these export controls, remember? Yes. So even on the export side, there were all kinds of restrictions. And so some of the liberalization happened on the export side also. So 75-76 again, about two-thirds of the items that were subject to export licensing were freed up. So I think something close to about 300 items had been subject to export licensing. About two-thirds of those were pretty much freed up. And in 1977-78, some of the remaining items were placed on the open general licensing through some export regulations, though some export regulations remain. One example I found actually of this was the shoe exports. Yeah. So shoe exports, you see, were at one time actually canalized. Yeah. You may have to explain what canalizing is for the young listeners and young readers, because this is such a bizarre thing, but there was actually a canal or a government channel through which goods could be brought in and out of the country, which seems very bizarre. So can you first explain canalization and then how we reduce the number of goods that needed to be canalized over time? Yeah. So I mean, you know, this is an old history. The agency to canalize the big one, state trading corporation, state trading corporation was created somewhere around the second half of the 1950s. It was a very early history. At the time, it was for some very specific items and what canalization amounts to is giving monopoly of trade to a state agency of which state trading corporation was only one, although really the biggest one. Then you had something like MMTC, minerals and metals trading corporation. There were several others which were more specialized, but state trading corporation was the big one. There are all sorts of reasons for this. Originally, one of the key driving forces was also that because the Eastern European countries, basically you're dealing with the governments. So to conduct trade with that, the government felt that they also needed a state agency to then negotiate the agreements with the Eastern European countries. So then you needed a state agency which would then conduct that particular trade with the Eastern European countries. But there were other reasons that if there were too many small little importers of many products, for each of them to go and import the product was a problem. So state trading corporation will do them porting and then allocate those to the domestic users of those products. Similarly, on the export side, if the exporters are very small, potential exporters are very small, it's harder for them to do so they will canalize. So SU was one of those products. Remember, there is this small-scale industry, there is a vision going on, so there's no large potential, there's no large exporter here, all small. So the state trading corporation steps in, says, I will export your products. This is very Chinese style. If you looked at the China, had all these trading companies, foreign trade companies, which had the monopoly of trading, in fact, just as the state trading corporation had on certain products, MMTC had a monopoly on certain products, like that. So anywhere around this time, there's a good example of how we made policy. So around this time, 75, 76, they did actually begin to allow true exports under open general licensing, meaning that individual manufacturers could sell. But then we put in minimum export price. Minimum export price was 75 rupees. And the story, this was a story actually in the times of India of that time period, that story says that at that time, even the Italians could export their shoes only for 75 rupees, only 15% of their true exports. So therefore, about 85% of the Italian shoes were also selling at less than 75 rupees per pair. So to expect that these Indian shoes would compete at a price of 75 rupees or more was completely unrealistic, implausible. So in a way, you liberalize, but probably nobody could fetch that price. So these kinds of all kinds of anomalies existed in our system at the time. Yeah, and decanalysing meant that from a system where they could only go through one of these trading corporations or MMTC or something else, they slowly start saying that you can trade on your own. But if for instance, unlike shoes, if there wasn't a minimum price, was there an uptick in exports in those areas? Was there an expansion in those sorts of goods or it's hard to find data for that? But we'll have to look at it. I don't know. I don't know the answer. I really don't know the answer. So, but here, since we are on to canalization, this area actually was going in the other direction. So as I said, this is largely otherwise some bit of liberalization phase, the second half of the 70s. But one area where we are actually also simultaneously going in the opposite direction is canalization. There is progressively more canalization of imports, particularly. And as we get to 1980s, I will have some more figures. But even in 74, 75, they expanded the work 200 items already under canalization. They added another 10 in 74, 75. And that process continued actually through the second half of the 70s. It began to unwind the 80s. We began to unwind it. So, yeah. So just as a reminder, though there is an increase in the 70s and there's a slight relaxation in the 80s, when we think of canalization, we're talking about a list of more than 1000 goods. More than 1000 commodities at one point had to be canalized until the 91 reforms happened. And eventually they decanalized in a significant manner. Like this list is a pretty big one. No, I mean, I don't know the number of items on the list. One number that I have is from 74, 75 and the number was 210. But I think we'll come later, if I remember correctly though, by 80, 81, nearly 60% of the imports were coming under canalization. So that was a very large proportion, more than half, more than half of your imports became canalized. But that will get checked as we proceed further. So now on the export side also, you had some restrictions introduced. So, this process is always, all you can say is that on balance, this was a liberalizing phase. But for some particular items, you did introduce more restrictions as well, things like export taxes on tea and coffee. At any time that the global prices of tea and coffee went up, the government would also raise the export taxes. And so, that some of this is a wind fall gain and they should not get windfall gain. But these are the types of things which are very detrimental to the development of the industry. Because if the industry says that any time we have more profit, you are going to tax it away, then there is no incentive for us to take measures, productivity and enhancing measures. We take productivity and enhancing measures, improve our export performance, but then you are going to come back and hit us with more export tax. So, it doesn't pay. So, I think these policies in the end were a bit detrimental, but that was the kind of thinking that prevailed, that dominated the system. So, particularly on the export side, we used to tax quite a bit, the traditional exports of jute tea, jute products, sometimes in textiles. So, you would put these export taxes in the belief that we had market power. But temporarily, you do have market power, it is true. But the fallout from it is that substitutes come in or the other countries begin to find the exporting more profitable. If you are raising the price, export price by restricting your exports because you got monopoly power, you don't see that there are potential exporters sitting there on the fence who become competitive at that higher price. Absolutely. So, they take away your, I mean, you don't get the full advantage of your export restriction because even the price will not rise as much as you thought it would rise because other exporters come in and replace you. Also, the importers begin to find substitutes, like when we were putting export taxes on jute, substitution into plastics and other plastic bags and other kinds of materials got speeded up as a result. So, one has to be very careful in thinking that you have monopoly power in the export markets. It's a very temporary thing even if you haven't. Yeah. No, and it's this period. So, of course, what's interesting about this post-emergency period that you're talking about is Indira Gandhi's government after the elections doesn't come back. So, you have Muraji Desai, who is one of the members of the old syndicate, who is much more liberal than Indira Gandhi. And the second is that even though the post-emergency government is a coalition government with very interesting group of people, like you have members of the Janasan, but you also have Jay Prakash Narayan, who was sort of leading them at the helm against emergency use and about Gandhi and socialist. So, it's an interesting group of people, but in terms of sort of, you know, the technocratic level, which is, you know, what are these lists? Who is deciding what goes in the list and what doesn't go in the list? What all needs to be rationalized? What kind of prices need to be brought back to power? I think that process starts with the Muraji Desai government, right? Like they start moving in a direction away from Mrs. Gandhi. And by the time Mrs. Gandhi comes back, you know, in the 80s, the process is already underway and the gains from it are enough to give momentum to sort of continue in that direction through the 80s. Is that a good way to think about, you know, this phase liberalization in the late 70s? Yes, yes. So, in fact, yeah, I mean, there is a slightly bigger change as we discussed just now, you know, 75, 76, some changes begin to happen, the OGL automatic licensing. So that hadn't started. But now, you know, with the Muraji Desai government, a more activist policy comes in towards liberalization. And you could say that, you know, under the earlier one, 75, 76, 77, 78 was a bit more opportunistic that, you know, export revenues became available. And because of the exchange, depreciation exports also expanded. And so that gave the, even at the bureaucratic level, the officers got some confidence to liberalize. And then in the 80s, we get what you have called in your book, you know, India, the emerging giant liberalization by stealth. And so two things are happening in the 80s. One, of course, there are all these, you know, moves which are being made to reform both, you know, mainly on the export side, but also the import side, you know, things like broadbanding, which affect domestic licensing regime and so on. But also, you know, a lot of committees have been formed to look into the question of, you know, should we remove sugar subsidies, for instance, you know, what should we do about reforms in the external sector. So in the next episode, can you walk us through the 80s, sort of the big, you know, liberalization by stealth, which is a lot of small things going on simultaneously. And then how that leads up to the big moment in 91, of course, preceded by a crazy balance of payments crisis like India is back, exactly where it was in 6566, maybe worse, you know, in that period. So maybe in the next episode, you can take us through that entire journey where, you know, the change has started forming. Right. So we'll start with, you know, what is known as the P.C. Alexander Committee, which was, which reported in early 1978, that played, you know, the initial kind of the Muradzi Desai government initiative. And that initiative started the process. But then you're absolutely right that Mrs. Gandhi, when she came in, it continued. And there is some case to be made that perhaps, you know, Mrs. Gandhi was herself a bit of a changed prime minister. And P.N. Huxer was already behind her, so to say. Yeah. And there are many, many reasons, but also, you know, once something succeeds, it gets a lot of supporters, right? They say success has many fathers. And so if suddenly, you know, opening up a little bit is bringing in more foreign exchange and, you know, firms have started doing better, which means businessmen start, you know, having better relationship with politicians and giving them a little bit more campaign finance money and donations and so on. There is a cycle which can, which can propel that or, you know, keep that momentum going. But the technical aspects of that, exactly what is going on in the economy in terms of specific policies, it would be great to hear that from you. You know, it's the outline in quite a bit of detail in your book, but it would also be great to hear that from you both on the domestic and the foreign side in our, in our episode eight. Okay. Good. So let's do that. Thank you so much, Arun. This has been a pleasure and we will see you soon. Perfect. Perfect. See you.