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Home / Politics / Policy /  Economy on way up, but risks linger: Raghuram Rajan

New Delhi: As chief economic adviser, Raghuram Rajan observes the economy from a vantage point. The first Economic Survey that he authored after taking charge in August was distinctive for its candid observations on the state of the economy, devoting an entire chapter to the vexing and politically contentious issue of jobless growth. Rajan, a former chief economist of the International Monetary Fund, spoke to Mint on a range of issues, including the thinking and the process that went into the Economic Survey, the state of the economy and downside risks to the rather optimistic growth projections for 2013-14. Edited excerpts:

Moody’s Analytics put out a report on Thursday saying the worst is over for India. What’s your view?

I have not (so far) seen their report. My sense is the data that is flowing in is still a little mixed. I find it hard to say I am sure the bottom has been hit.

In India, the Central Statistics Office (CSO) keeps revising the data for two-three years and those revisions are not small. So I would say we won’t know. I would like to see improved consumer confidence, I would like to see more consumer purchases of durables, I would like to see firms putting investments on the ground, I would like to see credit expanding. Once I see all of these, I will feel okay.

Now we have mixed signals. Sometimes you see some credit measures increasing, I can see food inflation coming down, pulses for example, on a week-to-week basis. But I don’t know whether this is going to persist for months or this is temporary. In India, given the volatility in the data and the fact that we don’t have all the data we want, my argument repeatedly has been that we need to be a little philosophical. You do what you want because you know what needs to be done, but the outcomes, let it take its own due course because you can’t actually do anything about it.

How can you do policy on a GDP (gross domestic product) number that changes by one-two percentage points. That makes the big difference between whether you are above potential or below potential. And we have to determine monetary policy and fiscal policy on that basis, which is very hard.

Moody’s also said India will recover to 7% economic growth in 2014 and that this will be the trend rate of growth going ahead. It also said that though there is an effort to go to double-digit growth, it should be avoided. If you need to push it up, you need to fix the structural problems first.

So you are saying we are not yet sure whether we have reached the bottom as far as growth is concerned.

Let me be more specific. I feel we have crossed the bottom and are on our way up. But if you ask me ‘can you be certain’, I would say no.

But the savings and investment rates have also come down very significantly. So from 5% growth this year, do you think savings and investment will revive sufficiently to support something like 6.5% economic growth next year?

Well, we gave a range for (GDP growth) next year (6.1-6.7%). I think economic growth will be above 5% this year. There is no reason for recovery to be a slower one. I think we could see some acceleration once firms are convinced demand is there, once the households are convinced that interest rates are reasonable, once households start making financial investments, once they start putting their money in banks and deposits and so on. And banks have a lot of money they can start lending out. This is a virtuous cycle that starts building up.

If that does build up, then we are looking at the upper range of growth. If it does not build up, then perhaps we are looking at the lower range of growth.

Why do you think growth this year will be more than 5%? The third quarter GDP number shows growth decelerated to 4.5%.

The third quarter numbers do not add much to the CSO’s earlier statement that growth for the entire year will be 5%. If your first two quarters are at 5.5% and 5.3%, the remaining two quarters have to be less than 5%. The issue is which way the revisions that the CSO will undertake over time will go. My sense is they tend to move up. But I don’t think it is worth spending a whole lot of newspaper ink debating whether it is 5% or 5.5%.

You ask me why growth next year will be higher than this year, I would say rabi crop—(this) to my mind is going to be stronger and that will help. It will also help bring down food inflation. One concern that the Reserve Bank of India has is that food inflation is still sticky while core inflation month-to-month is in the 2-3% range. That would suggest if we get a handle on food inflation, then we could see an environment in which interest rates could come down more. These are all ifs, but let’s see.

If interest rates come down, then that creates a lot of incentives for consumers who are using EMIs (equated monthly instalments) to start buying more; real estate, car purchases start picking up, and finally investment. Our job is to do everything to ensure that at least the government is not the constraint here.

What do you think are the two or three big downside risks to the economy from here onwards?

One downside risk is the current account deficit—not so much that it is impossible to finance; I think it is perfectly possible to finance it. But it does make the country vulnerable. By and large, international investors have stayed by us during the crisis.

The second big factor is oil prices. The general expectation is oil prices will not go up significantly, but general expectation sometimes gets belied. To the extent we can immunize our budget from higher oil prices, we should start thinking what those ways might be.

Of course, monsoon is a perennial concern. I would say that although the macroeconomic effect of monsoon is diminishing, it is still a very important concern. So we can’t dismiss monsoon as a factor.

On financial sector reforms, what should be the government’s priorities now?

I think we need to deepen our markets. We have to increase liquidity, reduce transaction costs and take the risk away from the banking system. We can’t finance our whole infrastructure on the back of the banking sector; we have to be a little more sensible. Get a sound corporate market, get an equity market which is willing to take risk. These are all things that will de-risk the system and allow the enormous amount of financing we need in the future.

This was your first Economic Survey. How was the experience?

The Economic Survey is an interesting animal. On the one hand, it is an uneditorialized record of government activity; but then, to some extent, you have to take a distant view and say that, okay, here is what we are doing right and here is what we are not doing right. My job, not being a career bureaucrat, was to say what I think is right or wrong; it is less easy for somebody in the system to take such a stand. So I have to make it my job to raise the issue.

At the same time, the document is also seen as a document of the government. So people are going to point to it and say ‘you, the government, said this’, which may expose the government to many possibilities. So you have to weigh a whole lot of things—the value of warning versus the cost of potentially opening new debates, which may not be worthwhile.

It is an interesting task. But, fortunately, I must say there are very few layers of oversight over this. The finance minister reads it cover to cover, but in terms of getting a sign-off from the ministries, no. You say what you want to say (after) taking inputs from the ministries. So it can be a very powerful document.

The second chapter on ‘Seizing the Demographic Dividend’ touched a raw nerve everywhere, politically and policy-wise. What was the thought behind it?

That was a chapter that colleagues in my office thought a lot on. What I wanted to say very strongly was that while a lot of focus is placed on agriculture and the fact that agricultural incomes aren’t keeping pace, unless we do something outside of agriculture, this thing will actually become worse.

When you look at Indian industry, a vast majority of jobs is being created in low-productivity areas. If you look at the contribution of industry to GDP, it has been relatively flat, even though the number of people (in it) is increasing. That must mean productivity in manufacturing is low. Truth is most people are going to construction, which has a fairly low level of productivity in India. How do you move people to organized high-productivity manufacturing, when it is not creating enough jobs? The key is how to create that pathway. We need to think of what ails manufacturing.

The services sector is very productive. It is not just IT (information technology) services, insurance; retail is moderately productive, but financial services sector is productive, even utilities are fairly productive. How do you move people to good jobs there? There again, services are creating too few jobs. The constraint there is not the demand, but the supply of well-trained people. People need to be upgraded in terms of skills—this is where skill-building, education are very important.

How are we doing? I think we are doing much better. Infrastructure is starting to be built out in a much better way and I think it will go on. But on the education front, we have to worry a little bit. We have the right intent, but the jury is still out on how well we are doing on it. The primary education performance is very worrisome, if you look at the ASER reports. I think some of these things we need to pay more attention. (ASER is short for Annual Status of Education Report.)

How do you now see this articulation in the survey changing policy?

My aim here is to start the debate and I am very glad to see people picking it up. One of the things you will notice is the empirical work we have put in boxes to say we are not taking the position on it, but to say let’s debate it. We don’t want to get into the ‘Left’ and ‘Right’ business.

I don’t think this is a left or right issue; it is an Indian issue. If you have a whole mass of people who are unskilled and not able to partake in the growth, we will end up in a situation where we need more and more transfers in a country which is at very early stages of growth and, therefore, the ability to make such transfers is limited.

A good job is the best form of inclusion. If you can train them up to get that job, they are independent of the government for life and they would be able to carve their own destiny. Can we give them the opportunity? That is, to my mind, the challenge of the next 5-10 years.

Do you see the political will in the government for labour reforms you have strongly advocated in the survey?

We have to be very careful; what we are saying is that we need to ask very serious questions of the current system—why is it that we seem to be losing out on the industries that are leaving China? Why is it that they are moving to Bangladesh and Vietnam, but not coming to India? Why is it that despite having, by the OECD’s (Organisation for Economic Co-operation and Development) account, some of the most stringent labour laws in the world, so many of our workers have absolutely no protection and are essentially casual labour. Any thinking Indian should be asking these questions. Is there a better way?

Our intent was to start the debate. My view is that we should start experimenting with alternatives because these are things that both the left and the right have very strong views about and could have diametrically opposite views. The only answer is not to continue this debate forever, but to try alternatives.

What are the alternatives available to us?

There are a whole variety of alternatives. For example, what if we started a type of intermediate contract where if you worked for a year or two, it gave you a certain amount of benefits if you were fired? Is that something worth exploring? It is going to improve the lot of so many people who have no hope of becoming permanent, but for whom this will increase the level of protection. They now face the reality that they can be fired at a moment’s notice, without any protection. Would that give companies (incentive) to invest more in people because they are going to stay for two-three years at least, and teach, train and do more things with them?

But there are so many other possibilities that one can think of. But the question is can we try them out? Or are we locked into ‘this is the only way’, ‘the laws we have had since independence are the only ones that would work’, in a world that is so mobile, so different from the one that our parents or grandparents came into?

Kirthi V. Rao contributed to this story.

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