Bimal Jalan took charge as the Reserve Bank of India (RBI) governor in the immediate aftermath of the East Asian currency crisis in 1997 and his immediate objective was to stabilize the country’s balance of payments outlook. By the time he stepped down in 2003, the country’s balance of payments outlook had improved substantially.
Now a member of the Rajya Sabha, the upper house of Parliament, Jalan spoke to Mint last week, in the wake of a populist Union Budget. While dwelling on the macroeconomic outlook, Jalan spoke on what needs to be done to ensure inclusive growth and also argued that an interest rate cut at this point of time—or even an inflation of more than 5%—is less worrisome than the imbalance created in the financial markets because of unchecked capital flows. Edited excerpts:
How did you like the Budget?
The big picture behind the Budget is certainly positive. The growth, deficits, tax buoyancy, etc., show the economy is in good shape. One could quibble on the finer points of the Budget, or about the off-Budget numbers, but overall, I’m happy with the big picture.
What is your view of the huge farm debt waiver?
Nobody can contest waiving very poor farmers’ dues. But without questioning the merit of the decision, which doesn’t distinguish between the people who pay and those who don’t, I have a problem about the way the measure has taken shape, as the government didn’t come out with the full details at one go. Who will be covered, what is the extent, what is the NPAs (non performing assets)—all these conjectures were totally unnecessary. It should have been clearly thought out and then announced. Also, I hope that in the context of beneficiaries, there is no adverse selection. For instance, one can use drought, for which there are fairly well-established standards and statistics, as the objective criterion to determine who should get what and not an arbitrary measure like 2ha.
Many were disappointed when RBI didn’t cut interest rates in February and now it doesn’t seem likely as inflation is up again…
Former RBI governor Bimal Jalan.
The spread between the Bank rate or the base repo rate (the rate at which RBI lends to banks) of 7% and the borrowing rate (for companies that borrow from banks), which is around 12.5% or so, is very high and if you cut the bank rate, it doesn’t make much of a difference to the real interest rate you are paying. We must realize that it is not of vital lending borrowing consideration, but it has a symbolic importance. Now, two views are certainly possible and I have respect for those who think that symbolically, RBI should have reduced that rate.