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…
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.
Former RBI governor Bimal Jalan.
It’s also possible to argue the opposite, not because of inflation per se, but because you have a real financial sector problem. If you see the way the Sensex (the benchmark index of the Bombay Stock Exchange) was going and then it broke apart, purely due to speculative pressures, this is not explicable in any objective terms. One is now borrowing only to invest in the stock market long term, practically tax-free; last year’s return (on the stock market) in dollar terms, from budget to budget, was 70%. Despite all the obstacles, the kind of escalation in asset prices that we see does pose a kind of danger. The most important thing about the financial system is that a crisis happens particularly when times are good. And when it happens, it affects the real economy. In real economy terms, the US slowdown will not affect us, but if you look at its implication for the financial markets, it is vital. The profit margins of many corporates have been swelled by other income. Every company is creating its own mutual fund. Once that bubble gets pricked, the real economy is bound to be affected. Steel or construction could get affected because there’s no money. There’s a linkage, a triangular relationship between the real economy and the financial economy, and the external economy. So, that symbolic gesture could lead to more bubbles.
How serious is the inflation threat?
It was believed in the beginning of the fiscal that it would be 5%. From 4%, with the oil price hike, it could end up as 4.8%. We had 6% last year. We also have supply-side remedies and growth is good. I don’t see it as a threat really, unless we make any mistake.
Capital inflows, too, are still high…
In?an?environment?of?an appreciating rupee, foreign funds add another dimension to the problem. At the microlevels, if you are managing this economy, you can use the tolls of interest rates, exchange rate, etc. From the macroview, the real question we have to ask is why do we have this situation and why are we not managing this economy in a better way.
If money is coming in, in this way, we have to find a way of either making it more expensive, less remunerative, less sure, (through) more holding restraints, capital gains taxes, measures that are not capital controls per se, but ways to reduce the attractiveness of this route, which is without any risk.
The Tobin tax (a tax on currency trades across borders)?
The Tobin tax won’t work because it creates multiple exchange rates.
I agree there are no easy answers, except that I would closely watch why is so much money flowing into one segment of the financial markets. The only lesson is to take pre-emptive steps, to reduce the “exuberance”, which is rational at the moment, but will very soon cease to be if more and more people start borrowing abroad to invest here.
Are a high fiscal deficit and increased government spending a prerequisite for inclusive growth?
The fact remains that half of our upper middle class, especially in skilled categories, is raising its income by a minimum of 25%. That part is good. But on the other side, the unorganized sector, the wages are not increasing. So, there’s a real sense of disparity. If this means no wage growth for the poorer, no health, no housing, no education, it results in a lot of bad inequalities. So, a lot of this 300 million (population) is dependent on the government for education, health services, employment schemes.
But they are not necessarily getting it despite the higher allocation.
The core issue is that the use of money is much less than the allocation. There is very little doubt that in contrast to private corporate systems or other kinds of governance, our public delivery system has become worse. The real challenge for India is to hold people responsible for non-delivery and to go back to examining the public institutional framework, a lot of which is inherited, pre-independence and obsolete. Look at Delhi. Where is the accountability between the plethora of agencies—the Central government (the urban development ministry), the local government, and the municipal corporation. We are yet to see a scheme where you can put the responsibility on one person or department. This is vital in a situation where the demand for goods and services is increasing so fast. The Central government should do nothing other than look after security and make broad policy and leave the rest to the states. We cannot have inclusive growth in the current structure of trickle down. Real inclusive growth would need much better governance and high accountability.