Supreme Court, Election Commission and RBI are the three biggest issues facing India, Raghuram Rajan, Former Governor, RBI, tells Supriya Shrinate of ET Now, in an exclusive interview in Davos.
The IMF outlook says India growth is projected to pick up in 2019, while most of the countries’ growth will slow down. For a very long now, India has been an one- engine economy and consumption has been the mainstay. What are the vulnerabilities of the Indian economy?
There are certainly vulnerabilities, so let us start with cup half full. Yes it is good to see that growth continues at the 7 plus pace, but what is worrisome of course is some of the underpinnings of that growth. It is as you said, largely consumption-led but that is not creating enough jobs. One can dispute the jobs figures but there are lots of people vying for very few jobs and given that going forward we have to move towards a more job-creating economy, all the growth will go for nothing if it does not create good jobs.
Which means consumption and investment will have to go hand in hand?
Absolutely. Investment has to pick up and of course we also have to prepare for some of the volatility that is going to occur in the world economy. Oil prices are low now. Clearly if the world slows down, they will continue to remain low. But if there are geopolitical shocks, you could have the combination of low growth and very high oil prices. We have to buffer better. Also there is worry about the fisc. We have a budget coming up but we have lots of expenditure plans. Of course, as the CAG has said, the quality of our fiscal consolidation has not been great. There is a lot of off-balance sheet stuff and looking forward, it is very important that we focus on macro stability even while moving towards a more job-creating economy.
An agri relief package is expected in the budget this year. The finance minister has said that markets will understand that this is a rational and not a populist move. Such a move might affect fiscal consolidation efforts. Do you believe markets will be forgiving?
Well, it depends a little on how it is structured because in India as elsewhere, once something is given, it cannot be taken back. If it is structured in such a way that it substitutes for less efficient forms of giving relief to farmers, it could work.
If on the other hand, it is structured as an addition, we really have to think long-term when it rolls out how much it will cost. There are so many things that we have added in the last few years which are going to have long-term effects. For example, we are putting together health and crop insurance. The reality is the farm sector is not doing well. We do need to think about sensible ways of making it an engine of growth.
Will an income support or an assured sum of say Rs 10,000 per family be a sensible measure? I know you are against farm loan waivers which destroy credit discipline in the long term. But are these things on your recipe list?
Let us be careful. Blanket farm loan waivers do not make sense because they go to the wrong people. There is a lot of expenditure, etc. Specific waivers in case of people who cannot pay, just like you do for industrial corporations, make sense.
Now going to the issue of universal basic income for farmers, to the extent it substitutes for more distortionary subsidies. it may make sense and you want to taper it off so as to get to larger farmers. But for that you, need to plan well. You need to identify who is eligible and of course there is a question of does it go to the tenant, the owner, tenant farmers or agricultural labour? To some extent, MGNREGA is meant for agricultural labour, but what about the tenant farmer? How do you deal with them. These are the issues that need to be thought through and as a substitute, rather than adding yet another layer without trying to refigure the other layers, it makes sense.
I cannot talk about the monetary policy without getting into the realm of what the MPC needs to do next. Is the stage set for monetary easing in India since inflation has been well below the targeted levels of 4%?
When you say growth has not picked up, we started by saying that this is 7% plus and we should be celebrating. So we really have a sort of schizophrenic view here that sometimes we say growth should be much higher and on the other hand, we beat our chest and say it is wonderful. The reality is that as you push growth higher, we are seeing that we are reaching limits of our potential and that is worrisome for inflation.
Headline inflation has been really low partly because of agricultural prices but the latest reading on core inflation suggests it is quite strong. Now of course, the RBI has a mandate to focus on headline but to some extent, that was set at a time when in fact headline was the real problem. Broadly the RBI has to look at the broader mandate of inflation. That does not mean change in the goal post but it has to worry about what core inflation means for headline down the line and that is something that I am sure the RBI will think about.
So you believe that even though CPI may have eased core inflation, a sticky, stubborn at 5.3-5.6% continues to be a problem. Elections are to be held in India in May. What would be the big hits according to you and some of the misses that you would rather have not had?
When you look at a government’s performance, you have to look at the overall growth regime as well as the distribution of that growth. This is where the worries about jobs start coming and it is not just this government, that has been the case over time.
In terms of having the legislative mandate where are the positives, where are the negatives?
The positive, of course, was GST was enacted. The bankruptcy law was enacted. The negatives to some extent is that we have done little on labour flexibility which means bolstering contract labour while giving employees some flexibility. There is a win-win to be had. We have not moved in that direction.
The other big lacunae is on land acquisition. How can we speed up land acquisition using the best practices across the states because clearly one of the roadblocks in terms of infrastructure rollout is that and of course that leads to the third problem. Our infrastructure rollout has been quite slow and to create jobs, especially for people leaving agriculture, infrastructure has to be central. Therefor, to some extent both in terms of legislative activity in these areas as well as improving the pace of growth, more can be done.
I agree with you. People who are coming out of agriculture will need jobs and those jobs alone can be created by infrastructure, construction and all of that. Are you a little concerned that if a government with this brute majority could not do land and labour, who could?
Well this is the difficulty of political leadership. It is how to build a consensus about these ways of reform. Many of us now have read that wonderful book about how Narasimha Rao managed those reforms from behind the scenes along with Dr Manmohan Singh and we need something like that. Somehow, we need to push ahead on reforms. We need a second generation of reforms and that needs both political will at the top as well as implementation. For this. we have to move towards a more decentralised structure of government.
An overly centralised structure of government may offer leadership but may not offer the ability to implement and one of the lacunae we have seen over the last few years is that the policy plans at the top tend to remain that. They do not get translated into implementation.
You have underlined some of the vulnerabilities for India and fault lines if I may borrow your phrase, but in an election year, are elections the biggest uncertainty for the economic landscape?
I would see elections as both creating some degree of uncertainty about what the political establishment will be but I would also take comfort from the previous history of Indian elections that we have consistently brought in governments that have broadly stuck on the course of reforms. Some have moved more, some have moved less, but broadly the direction has been right.
Second, we have to put a lot of faith in our electorate which has sent the right message time and again and in this time, in this election as a citizen of India as opposed to an economist, the three big issues on the economic front again are — jobs, where we go as a country and how tolerant we are of different views of minorities. The third issue that has been raised and certainly is a concern is how we protect our institutions. Whether it is Supreme Court, whether it is the election commission, whether it is the RBI those are issues that come up.
PEOPLE WANT CHANGE, GOVTs HAVE TO RESPOND: RAJAN
Markets are typically very wary of fractured mandates. They hate coalitions. Our history though has proven otherwise. Two questions there – are you somebody who is wary of the coalition as well and do you believe that irrespective of the political combination that comes to power, the trajectory of reforms is here to stay?
There will be variation depending on the combination that comes to power and sometimes centralised governments with one strong party tend to have more of a mandate and tend to be able to move. But we have also seen examples where they have not moved very much. We have also seen examples of coalitions that have in fact moved considerably. So I would say the jury is still out. Some of our greatest reforms were under a government that basically hung on by the skin of its teeth to majority. So, we have to wait and see. My sense is the pressure from people now for change is increasing and any government will have to respond to that.
And you believe change on the three things that you spoke about — institutions, jobs and of course the level of tolerance in the country.
A lot of people believe economic reforms are always difficult to sell. Is that necessarily true because no true reformist prime minister in India has been voted back to power. Why is that so?
The real issue is that any reform tends to affect vested interests and they react very fast and then they push against the reforms as part of a broader agenda while singling out certain downsides of those reforms. So in public opinion, it sometimes is a constant battle to defend the reforms that you are doing and explain why it is good for the broader masses.
Now that is true leadership and it is something that we need and it is something that has to be sold. I am not a great believer in reform by stealth though I know we have done a lot in that way that if you have a frank conversation with the people, a lot can be sold. Now, we have to see.
Creative incrementalism then is here to stay as far as India’s reform agenda is concerned because that perhaps is easier politically more palatable. The second question is that has stigmatised capitalism. Your good friend Arvind Subramanian talks about this. Has that taken a toll on economic decision making in India?
Historically, we have had an excessive amount of favours done for a few segments of the population and it is good for a government to be wary about that. But that said, capitalism is changing in India also. We have a lot of self-made people who have pulled themselves up not through favours but by actually producing a better product. For example, Bharat Forge, Mahindra makes good products and so on. There are lots of these big names that have done good things.
In that sense, t is a process by which we slowly come out. Today if we can implement the bankruptcy code and essentially reach closure on some of these, it will send a message that even the most powerful are not immune to the system and will in fact lose their firms if they mismanage them. It is a process by which we steadily send the message we want good capitalist. We are not against capitalism. We want them to create jobs but if you want to misuse the system, there is the door for you.
Debt cannot be treated as equity and Indian promoters have done that for far too long. You started really the war against NPAs. Are you satisfied though I am not so sure if it has really come to its fag end?
In India, you can never be satisfied with the pace of progress. You always wanted to go faster but we have to live with what we have and to some extent, it is very important to build the institutions under the bankruptcy code so that going forward it will work really effectively. There is a backlog which has built up in the time before it was set up and so there will be some shortcuts initially but going forward, we need a reliable system. We need a system which is not overwhelmed and I hope we are in the process of creating that and that will allow debt to actually be debt in this country.
Any good economy has to be judged by the independence of its institutions. Some amount of tension is hardwired in the RBI-government relationship, but things really went downhill and eventually an RBI governor had to resign. As somebody who headed that institution at one point in time, what was going through your mind when that was happening?
The reality is as you said. there is some constructive tension built into the relationship and it is important for all sides to respect that constructive tension and this means constant process of dialogue of backroom dialogue that takes place. Going forward, it is time that we say that on occasion this kind of dialogue can break down and in that situation, how do we protect the relative independence of both parties we have to judge?
Of course. the RBI works as an entity of the administration and works under the government given the marching orders that the government has seen fit to enshrine in its mandate. But given that mandate it should have the operational freedom to carry out that mandate. Earlier, this was based on kind of informal consensus and the question we have to ask ourselves is it time to enshrine this in a much more formal consensus because otherwise it keeps getting eroded in one way or the other and with the wrong kinds of personalities at play, it could become problematic. We are becoming a middle income economy. We have to ensure that our institutions are really middle income institutions which means we have to strengthen them where necessary.
Would you then recommend a change in the RBI Act that talks about what happens during a breakdown in conversation? One thing that a lot of people point out is was this a mere personality clash because we have got a new incumbent now, it looks like the channels of communication are open. It is not as if he has written off an the entire Rs 3.6 lakh crore worth of RBI’s money to the government and there still seems to be a semblance of sanity?
I was not in the middle of those discussions, so I do not know how much was personalities and how much was other stuff. I do agree that we should not reform just based on specific personalities. But in a sense, the relationship between institutions should come down to personalities, it should not be up to the personalities to manage.
As we become more developed, we have to manage the relationships so that it survives different personalities. That is why, formalising some of the structures makes sense so that they are not constantly eroded, for example, the position of the RBI governor what level he or she occupies in the hierarchy is completely left up to the spur of the moment, some secretaries pretend that they are above the RBI governor and the hierarchy keeps getting blurred. It is time that we make it clear what that position is and why that position exists for the other regulators as well. It is not just about the RBI.
Experts have already put out there that RBI governor in a lot of ways is at par with the finance minister because he is doing the monetary management and the other one is doing the fiscal management.
It would be appropriate for the RBI governor to be below the finance minister but typically above the bureaucracy, because it is not appropriate that the RBI governor be dictated to by a secretary in the government.
There are speculations that you have been approached by political parties for political manifestos and things like that. I would like it if you can confirm or deny but on a larger question if there were to be a fractured mandate in 2019, and if you were approached. will you be open to a position back in India?
That is a speculative question and I do not answer them. What is true is that a bunch of economists and I have put out some ideas that are up to people to take and we have been open to talking to anybody who wants to talk to us. We have been talking to political leaders of different kinds. In fact, here I was supposed to be on a panel with Mr Chandrababu Naidu, unfortunately he could not come but the idea is really to do what is right for India. If we can help in any way in giving advice I think it is very important.