New Delhi: In his latest book India Ahead: 2025 and Beyond, former governor of the Reserve Bank of India (RBI) Bimal Jalan charts a way forward for political, economic and administrative reforms that should be implemented by any government that comes to power post the 2019 general election. Jalan, who is credited with successfully guarding India’s financial system during the East Asian financial crisis, is equally guarded while speaking about the central bank. However, he touches upon the broader issues such as independence of the regulator, prompt corrective action, a payment regulator and handling of the contingency reserves that have set the central bank and the government on a collision course. Edited excerpts:

There have been phases of high growth in India, but we haven’t been able to sustain it. What are the structural issues we need to address that prevents sustaining high growth?

In terms of comparative advantage and factors of production, we have everything; for example, technology, manpower, land and capital. What can be done essentially is to increase investment rate. Number two, the government needs to make sure that the public sector banks do not suffer from the kind of NPAs (non-performing assets) that they are suffering at present. There is a major problem with the level of NPAs in the public sector banks. We have to take care of that. Two, three measures have been taken such as prompt corrective action (PCA) by the RBI (Reserve Bank of India). Similarly, the government has enacted the Insolvency and Bankruptcy Act. So, hopefully, in six, seven months, we will see some positive results. So, we have all the inputs that we require to achieve a higher rate of growth. The question is two-fold: When we will be able to step up growth to more than 7% and more importantly, how to eliminate poverty. A lot of positive measures have been taken such as in infrastructure and housing and we have to make sure that they reach to rural India and semi-urban India. That should be given higher priority in the future.

You touched up on the PCA measure taken by RBI. But it seems the government does not fully agree with RBI’s view on this matter.

No, it’s the implementation part. But there can be no two views that PCA is desirable because so far we have not taken as many steps as required on NPAs and for handling defaults in the banking sector. So, this is something that needs to be done and there is no doubt about that.

But do you think RBI is taking a slightly tougher stand than required on PCA front?

I don’t comment on RBI. So, this is for you to decide.

You have said in your book that government should decide the inflation-growth trade-off and the instrumentalities of achieving it should be left to the regulatory authorities. What do you mean by that?

What I mean to say is that all of us want low inflation. But there is a trade-off, that in order to have lower inflation, if I increase interest rate, by two or three percentage points, then obviously, growth will be affected. So, it is balancing growth and inflation. But I don’t believe inflation targeting per se, in the sense that 4-6% is okay. But supposing there is a drought or something happens and instead of 6%, it is 6.1%, it does not matter then. All of us want low inflation but when there is a trade-off between inflation and growth, then we have to decide. And that is something the government and people have to decide what should have a larger weightage.

But you have said the implementation of it should be left to the regulatory authorities and the government should not interfere.

No, no, the government has to decide policy that I want to give higher weightage to growth rather than inflation or the other way around. What one is saying essentially is, you have institutions which have done marvellously because they don’t have to report to the government about their governance system. CVC (chief vigilance commission) for example. UPSC (Union Public Service Commission), it selects civil servants. We have CAG (Comptroller and Auditor General of India), which does not have to report to the government. Government can decide on what needs to be done, we can create institutions to implement, the citizens and government can monitor what the institutions are doing. If the institutions are not performing, then they should be held accountable by the government and Parliament. But you don’t have to do the day-to-day accounting. And the government should be in a consultative mode whichever are the agencies involved.

You have written that all appointments to regulatory bodies should be left to specialized bodies. Do you mean to say even the RBI governor should not be appointed by government?

No; so far as regulatory bodies are concerned, the government and the cabinet is the final authority. But after appointing the top persons, you don’t have to get into appointing the second layer and the third layer.

You have written “All appointments in autonomous institutions, regulatory bodies, public enterprises, banks and financial institutions, educational and cultural institutions in the public sector should be entrusted to specialized bodies set up along the same lines as the UPSC." So, that means the RBI governor or the Sebi chairman should be appointed by a specialized body; not directly by the government, right?

No, that’s not the intention. Government is ultimately the highest authority.

Okay, so further appointments within the body should be left to the regulator.

But it should be through a process of consultation with the government. Supposing there is difference of opinion, it should be resolved.

But what happens if there is irreconcilable difference of opinion between the government and the regulator?

Then, whoever is heading the agency should step down.

Step down!

Why not? Ultimately, your duty is to perform and do what you have promised to do in people’s interest. Now, supposing you feel I should give much more weightage to growth or inflation and the government is not listening and you are very particular about it. Then you should move and somebody else should come. What’s the harm?

In the context of NBFCs (non- banking financial companies), you have said multiplicity of regulators have always been an issue in their functioning. Do you think all NBFCs should be regulated by RBI?

No, I don’t have a view on that. What I am saying is that they can set up a subsidiary which can regulate NBFCs. It should be accountable to RBI and RBI is accountable to the government.

In this context, how do you see the proposal for a new payment regulator?

That’s for them to decide, if they want a payments regulator that would be accountable to the RBI for performance .

Not to the government?

Not directly to the government. RBI is anyway accountable to the government.

Do you think government can dip into the contingency reserves of RBI?

I don’t want to comment again. It depends on what is the impact of the contingency fund on the rest of the banking sector or the financial sector and how urgent it is. RBI’s responsibility is also to make sure the financial system, public sector banks, credit delivery by all the banking system is as desirable as it can be. They have contingency fund in the sense that if there is requirement, then they can meet those requirements to finance the interest of the creditor. The contingency reserve is supposed to enable RBI that without creating money they can finance what is required. For example, exchange rate management.

You have said in case higher capital inflows are needed, RBI in consultation with government should change its current exchange rate policy. Do you support increasing interest rate to attract more capital inflows?

If you need higher capital flows, then you do it. These are all instruments. You must distinguish between the means and the end. So, what is it that I want? Suppose I want capital flows for investments, then you can say can I do something to encourage capital flows and that may depend on taking other steps in terms of both interest rate as well as inflation (the real interest rate).

But if you increase interest rates, then it will impact consumption and cost of capital.

Yes; so there are always those choices. So, you have to balance. If a real economic situation requires that we should increase interest rates, then we should. But then, there is a price to be paid by the borrower in India. So, you have to balance those factors.

Do you think the current outflow of short-term capital poses a real threat to the economy?

No; not at this moment, because our reserves are high and our total foreign capital requirement is relatively low. So it’s not a problematic issue just now. But encouraging capital flow for investment is desirable.

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