In a compelling conversation, noted economist Montek Singh Ahluwalia, one of the key architects of India's 1991 economic reforms, shared his insights on India’s policy transformations, ongoing economic challenges, and the road ahead. His reflections provided a rare glimpse into the behind-the-scenes decision-making that helped shape modern India’s economic trajectory.

The 1991 Economic Reforms: A Defining Moment

Ahluwalia began by recalling the economic turmoil India faced in 1991, marked by a severe balance of payments crisis. At the time, foreign exchange reserves had dwindled to a precarious level, and a radical shift in economic policies was the only way forward. The reforms that followed, including trade liberalization, de-licensing of industries, and opening up to foreign investment, were a watershed moment in India’s history.

While the reforms were spearheaded by then Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, Ahluwalia emphasized that their success lay in a collective effort. He dismissed claims that the World Bank and IMF dictated India’s economic policies, clarifying that discussions on structural reforms had already been taking place within the government. The crisis merely acted as a catalyst, allowing long-pending reforms to materialize.

He also recounted how his policy paper, later dubbed the M Document, influenced the government's approach to economic restructuring. He highlighted that resistance to change existed even within the bureaucracy, but strong leadership and a strategic approach helped push reforms forward.

Fiscal Challenges and India’s Debt Burden

Shifting focus to current economic challenges, Ahluwalia addressed India’s fiscal health, particularly the rising debt-to-GDP ratio. While India’s public debt remains below that of many advanced economies, he cautioned that sustaining long-term growth requires a disciplined fiscal policy.

He pointed out that India needs to balance its social spending with fiscal prudence. Excessive debt, if not managed well, can crowd out essential investments in infrastructure, education, and healthcare. He also discussed how government borrowings impact private investment, suggesting that a measured fiscal deficit is crucial to ensuring macroeconomic stability.

The Role of Globalization and Trade Policy

Ahluwalia reflected on the evolving global trade landscape, particularly the increasing protectionism seen in the US and other developed economies. While globalization had initially benefited emerging economies like India, latest trends indicate a shift towards economic nationalism.

He criticized the US’s approach of imposing tariffs on allies and competitors alike, warning that such transactional policies create uncertainty in global trade. He stressed the need for India to remain engaged with international markets while also building domestic competitiveness through trade reforms and strategic tariff adjustments.

Rupee Depreciation and Exchange Rate Policy

On the subject of India’s currency, Ahluwalia supported a managed exchange rate rather than a completely free float. He argued that some level of rupee depreciation is beneficial for boosting exports and maintaining economic competitiveness. Countries like China and other East Asian economies had historically kept their currencies weak to support exports, and India should take a pragmatic approach rather than aiming for an artificially strong rupee.

The Need for Structural Reforms: Human Capital and Employment

A critical area of concern, according to Ahluwalia, is India’s human capital development. While India boasts a large young workforce, a significant portion lacks employable skills. He pointed out the mismatch between the education system and industry needs, arguing that mere degree acquisition does not translate to employability.

He emphasized that states must take a more proactive role in education reforms. While the Centre can provide a framework, execution lies with state governments. He also urged for better governance in educational institutions and stronger linkages between academia and industry to bridge the skill gap.

Climate Change and India’s Green Growth Agenda

Discussing climate change, Ahluwalia acknowledged the growing global pressure on India to reduce carbon emissions. While India has committed to achieving net zero by 2070, he stressed that immediate policy actions are required.

He advocated for accelerating the transition from coal to renewable energy while simultaneously investing in climate-resilient agriculture. He warned that climate change could significantly reduce agricultural productivity, underscoring the need for better water conservation, agricultural research, and sustainable farming practices.

He highlighted that some states, like Tamil Nadu, have begun working on climate action plans, but a nationwide coordinated effort is necessary. He called for greater cooperation between the Centre and states, labeling climate adaptation as an opportunity for true "cooperative federalism."

Welfare Policies vs. Freebies: A Political Dilemma

Addressing the growing culture of populist welfare schemes, Ahluwalia cautioned against excessive reliance on government handouts. While targeted welfare policies are necessary, indiscriminate giveaways often come at the cost of long-term economic sustainability.

He noted that fiscal discipline is essential to ensuring that social schemes do not compromise essential investments in infrastructure and development. Political parties across the spectrum, he argued, must rethink their approach to welfare to strike a balance between social security and economic prudence.

The Road Ahead: India’s Continuous Reform Journey

Ahluwalia concluded by emphasizing that economic reforms are not a one-time event but an ongoing process. The 1991 reforms laid the foundation for India’s economic rise, but newer challenges demand fresh policy innovations.

He stressed that India must continue improving its business climate, integrating with global markets, investing in human capital, and adopting sustainable policies to ensure long-term, inclusive growth. He also urged policymakers to foster open debates and include experts from diverse fields to shape policies that are both progressive and pragmatic.

Final Thoughts

The conversation with Montek Singh Ahluwalia provided a valuable perspective on India’s economic evolution. From the bold reforms of 1991 to today’s policy dilemmas, his insights reaffirm the need for continuous adaptation in an ever-changing global economy. As India marches towards its goal of becoming a developed economy, the lessons from its past serve as a guiding light for the future.