Economic growth doesn't come about overnight
Raghuram G Rajan, who took charge as India's new chief economic advisor, spoke to Hindustan Times on a range of issues. Excerpts:
Do you think India can regain double digit growth?
Remember that we struck double digits only for a year in the recent past. There's no reason why we can't be in the high single digits. But double digits is extremely high for any country, especially when you're a $2 trillion economy, it becomes harder and harder to hit those kind of levels.
China managed it…
Perhaps there's a certain amount of democratic discount you have to apply for the kinds of processes that democracies have to undertake. When you look at democracies versus more autocratic countries, the average growth rate levels don't differ that much but democracies are more stable. That's partly because democracies do things in a more consensual way, which takes a little more time. So, I would be very happy if we got back to high single digits and I think we can do that.
What's your forecast?
What's your forecast for next five years?
It's very hard to do a five-year forecast because there are so many imponderables. Planning Commission has suggested we should be in the low-8s and there's no reason to dispute that. But the real issue is ramping up from where we are, back to the high single digits.
No. Growth doesn't change overnight…
I would be good if we could do it.
This new surge of reforms that have begun, surely we're not expecting immediate results but how much lag will there be before it can translate into growth?
If I decide to put a project today. What's your estimate on when it could be up?
Two to five years.
So, that's the kind of time we should start giving to return to high single digits. But even before that companies can ramp up production. They can utilise their plant and equipment better. And ramping of production can add to growth. Ultimately we need to get investment back into the high 30s.
For that we need a general climate of investment, removal of retrospective laws for instance.
If you see across the board, the actions the government has taken is to improve the investment climate. You need a country with a good fiscal because you don't want it blowing out of shape and lot of new taxes being imposed. Next, you want a good comparative investment climate with relatively free entry, low cost of doing business, good infrastructure. So, we've done some actions on FDI. There is an attempt to push stalled projects. Some of them are power which will create infrastructure for new projects. Then there are financial sector reforms to increase liquidity, improve money-raising capacity for corporations, reducing cost of capital.
Yes, opening up the debt markets but also equity markets, bringing more small investors in, doing more disinvestment to create a climate for growth. All these are important measures.
What new reforms would you suggest?
If you can do a bunch of things --- they don't need to be dramatic --- that don't require a huge amount of legislative capital, that can help. Among the things already on the anvil that could be pushed with a little capital are land acquisition that will push a lot of projects being called off because of land. Second, if we can get the companies bill through, which will help the governance climate. There are other smaller financial sector bills that can help.
What about the executive side?
There are smaller regulatory changes that could help. Interest in insurance has been declining. How do you revamp it? Some insurance companies are saying we need a greater ability to pay our agents. Similarly on mutual funds, can we improve the distribution, can we allow for some incentives --- not huge incentives --- to distributing mutual funds?
That argument is a little flawed because with the hugest-possible incentives, insurance hasn't been able to penetrate to any significant degree.
Yes, but the growth rate has changed considerably.
The danger is by increasing incentives, the industry will continue to exploit consumers, where their money is being rolled over without them benefiting in any way. Loosening regulation to give an incentive to industry could have negative repercussions on consumers.
Of course, any action you take could backfire if not done well. At the same time, the argument that the distributor needs no incentive to sell is also…why would you do charity?
Like in the US where you must have seen financial planners who charge a fee.
Somebody is taking a fee, right? The point is who is taking that fee and is that adequate? Is it exploitative or is it reasonable? So, how do you create a process? And absolutely, what you want to avoid is the consumer being exploited.
Let's move to inflation. Do you see it coming down, particularly food inflation?
Food inflation is driven by supply constraints for things like poultry, egg, fruits, vegetables, milk. We need to work harder on ameliorating supply constraints. Short term you will still see some fluctuations but longer term if processes kick in, we could have a much bigger effect.
Would FDI in retail help?
That is the hope. But you have to manage the process in a way that the people who come in create the infrastructure which can bring produce from the farm to the city at low cost without adding huge mark ups of their own. Logistics is part of the answer but competition is part of the answer too.
Why is the government unable to sell the fact that this reform is good for majority of the citizens, that is, farmers and consumers and being cornered by the middlemen constituency?
That depends on how much time you have to give an argument. The whole point of supply chains is various forms of efficiency. The easiest way to explain it is to say what you're doing is allowing lower wastage and not allowing absorption of rents in the process of moving from one point to another. This will improve returns to farmers as he moves to crops that increase his income.
The question is why are you unable to articulate a strong argument?
Why are you saying this argument is not strong? What you are saying is that the public is not listening. You, as media, need to tell me why they're not listening. I have made the argument.
OK, let's move to interest rates. RBI says unless inflation comes down it cannot reduce rates. Is that valid?
I don't think my job is to comment on RBI. Combating inflation is a cooperative task, in which the government can help on the supply side because those are real actions. RBI's attempt is to quell the demand side and so there's a better match between demand and supply.
So, if inflation is a supply-side issue that cannot be addressed in the medium term, would keeping high interest rates still be a good idea?
If you say inflation is the result of demand side factors, clearly there's a role for interest rate policy.
In your book, you wrote about the fault lines of the global economy. What are the fault lines of the Indian economy?
Short term or long term?
I want to get a little away from short term. How to get growth going in the medium term is what we should worry about. So, we certainly have to work on the inflation front. But we also have to re-establish growth. To do that we have to realise that growth will come from moving people from agriculture to industry and services. Services we're doing pretty well. Can we create the environment for higher growth in industry? So we need to think about impediments to industry apart from infrastructure --- connectivity, power, roads. But is there anything else the industry needs --- permissions, regulations, constraints on growth, access to finance. If we can fix all these elements, we have a way to grow industry, especially small and medium industry. That will establish our medium term picture.
You mentioned in your book how a small group of businessmen, politicians, and developers have got together and are directing policy, manipulating land use and so on. Don't you see that as a major problem?
The fact that our governance needs to be up in quality to meet the size and kind of economy we have become is undoubted. For example, natural resources were very cheap, we were just giving them away. Then they increased in price and we were still allocating them in the same way. Now that we realise we have a problem, we need to find more transparent ways. And processes are underway, both through public debate and judicial system but also through the administrative reforms mechanism. You will get more transparent and much less of an ability to get rich by access. The sooner we overcome some of these past legacy problems, the more we fix the system to look into the future, the better.
Do you think Air India needs to be privatised?
I think first Air India needs to be fixed. We need to make sure that Air India doesn't continue to consume taxpayer resources going forward. It's a luxury to be able to finance a company indefinitely. There are many pressing needs of the economy. The government is very well seized of the need to make Air India operate on commercial principles.
Does a $2 trillion economy need a national carrier?
That's something we can debate. There are some things the government can do better and some that it can't. We need that debate.
You can listen to the full interview here: