NEW DELHI : Former Reserve Bank of India (RBI) governor Bimal Jalan, who has held top government positions including the post of finance secretary, is often credited with successfully guarding India’s financial system during the East Asian financial crisis. Most recently, his report, as chairman of the panel set up to review the hotly debated economic capital framework of RBI, was able to strike a fine balance in maintaining the credibility of the central bank and partially satisfying the government’s need for additional funds in a fiscally tight year. In an interview, Jalan elaborates on the logic behind his report and his views on the state of the economy. Edited excerpts:

How would you characterize the current state of the economy?

As you know, all the factors are known. For example, the growth rate is not as good as it should have been. It is very low now at 5%. Credit demand is low. The amount of investment, which is going on, is lower than what it used to be. So, all these factors are there. But inflation is low. We have not seen increase in consumption demand. That is an issue. My view is, in a year or two, we will probably see a turnaround. This is cyclical. I don’t regard this as structural. But, so far as the fundamentals of the economy are concerned, they are still very strong. The factors of production—land, labour, capital, entrepreneurial capacity—are strong even now.

Do you think the government’s measures are enough to reverse the economic downturn?

It’s very hard to say what is sufficient. ‘Sufficient’ in my view is the implementation part, not the announcement part. For example, if you decide that I am going to restructure the economy and the investment rate has to be increased by 4 percentage points over the next one year or so, then implementation is of crucial importance. The equally important thing is administrative reforms. The government should decide the policies, how much resources the budget can provide for different types of investments in different segments. And then they should have an interaction—as the present finance minister is having with all the agencies on the ground—and decide on a time frame which should be relatively short-run, not 2025. In the present circumstances, that is what is of utmost importance. I hope implementation will happen, with delegation of authority rather than six-seven administrative ministries deciding. Let the ministries decide policy and the amount of money that will be available, and where the money needs to be spent, where the roads and ports will be built. Once those are done, then leave it to the implementing authorities to actually get it done. And the ministries can monitor.

Do you think the government should provide a fiscal stimulus?

Out of the total expenditure of the government, public expenditure in the investment area is not very huge. So far as fiscal stimulus is concerned, what is important is how much of that increase is due to the focus on relatively short-term capital expenditure that can be implemented on the ground. Whether fiscal deficit is 3.4% or 3.5% is not important. The amount of extra money required for investment is not very high to implement in the short run. You can increase capital expenditure in the margins without allowing fiscal deficit to go out of control.

Everybody expected the panel, headed by you, to recommend that RBI’s surplus will be released to the government in tranches. Did the panel have a change in mind at the last minute?

All alternatives were considered, as you would see in the report. As a percentage of GDP, the transfer of funds is not that high. The full resilience of RBI has been reserved. It is a one-time transfer and the government can decide how to spend, where to spend and how to maximize the outcome.

What is the rationale of not including the revaluation reserves in the dividend formula?

We wanted resilience of RBI as there are fluctuations in prices and so on. Resilience of RBI should not get affected. If you need it in some later years, something needs to be done, there is defence or security (exigency) as it happens from time to time, then you can do that, next year, or year after. All these things are open to consideration, depending on what the circumstances are. 

But under the present formula, can the revaluation reserves be touched? 

Anybody can touch anything. It’s up to the government and RBI. RBI can revise its opinion. It’s not written in stone. RBI and the government may have accepted the report. If something was required to be done in public interest, this report does not say it should not be done.

Both RBI and the finance ministry take action based on the current situation. If circumstances change, then the action will change. This report is written depending on the circumstances and depending on expectations. The report is not a constitutional activity. It’s an advisory report. 

Do you think the panel disappointed the government on its expectation of higher surplus transfer?

Everybody is entitled to his or her views. We are a free country. You arrive at a consensus and proceed. And we arrived at a consensus and we are all fine with it.

Would you have personally liked the transfer of a higher surplus to the government?

No, I can’t say what I would have preferred personally or not (laughs).

Was it one of the points of contention with one of the previous representatives of the government (S.C. Garg)?

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