Prannoy Roy Speaks To Raghuram Rajan At Davos: Highlights

Raghuram Rajan on if he reflects on anything unfinished

"There is certainly unfinished stuff but I think the progress is being made on that, which is what I am really happy about. That these structures that we put together, people have taken ownership in Reserve Bank, of those structures and moving them forward. So I think to some extent it would have been much more disappointing if we had all worked together on these changes and then you know, you leave and everything drops. The fact that people have continued on cleaning up the banking system, on the monetary policy approach, suggests that they have taken ownership and they deserve to do that because it was part of their ideas."

Raghuram Rajan on being a potential choice for Finance Minister after the 2019 general elections

"No, I was told when I was coached by the IMF on how to respond to questions, to never answer a hypothetical question. The truth is I am perfectly happy being back in academia. I am working on a book. I am working on an educational institution in India in which we are trying to set up a liberal arts university. Some very fine people in the south are working on it. So my life is full, I don't need more complications."

On Rajya Sabha membership

"I think my official statement was I have a job and I am doing it, I don't want to. I love my job in academia. At the same time, I feel a sense of obligation to India, so I try and keep a foot in both worlds."

On if he's ignored a potential genius when he was RBI governor

"Given the volume of mail you get, that's always a possibility and so you have these 30-page closely spaced documents, handwritten, where you're wondering "is this guy a genius or is this a crackpot"? Am I going to be sort of ignoring the new kids and so it's difficult, takes a lot of time."

Raghuram Rajan on if he misses being an RBI Governor

"I enjoyed the job tremendously and I enjoyed the people around me. It's a fantastic group. As an institution, it was one of the few institutions that I actually genuinely say, has stood the test of time without descending into the sort of malaise that some of our other institutions have descended into. Still (there are) stalwart people, like any institution, there are some people who do not pull their weight, but by and large, (there are) a really strong set of people and very capable."

Raghuram Rajan on Chinese companies and competition with India

"I don't have a pat response here, ''no, no; we should have left it open'' or ''yes, we should have closed'', because one of the things that's different here, from our old style protectionism, is there are significant scale economies in this kind of business and therefore someone who comes in with the ability to bring these scale economies has a little bit of an advantage over somebody starting anew. So our Indian corporations may have a slight, you know, some disadvantage in going up against an Amazon or an Uber and it's worth thinking about it."

On whether tech companies are over-valued, and on their value being more than India's GDP

"The only thing that will upset that is growing fears from the broader public and the demand for regulation."

On tech companies and potential bubbles

 "I don't know if it's a bubble. I mean some of these companies are also the most profitable in the world and so people are discounting very healthy profits also. I do think that it raises questions about how open, now that these companies are there, the field is for smaller companies to innovate and grow."

Raghuram Rajan on bit-coin

"Certainly there are some places where we have seen a bubble-like feeling. Bitcoin is one example, here is the, I would say, almost the classic definition of bubble. It has no real use; even the transaction use we seem to talk about seems to be, you know, very costly and slowing down. Obviously the underlying technology is useful but we have seen this being bid up to near 20,000 levels."

On global banks' recovery after 2008 crash

"I am less worried, but I am worried about the banks, we did a lot to fix them post global crisis. They have more capital and so on. However, we didn't sort of have uniform regulation across the system, so some of the risks that were in banks have migrated elsewhere."

Raghuram Rajan on monetary policy

 "I am a mouse as far as monetary policy goes. I think the Monetary Policy Committee has too much advice from too many people. It should do what it thinks is appropriate; and I am not going to add my voice to the voice of; all I would say is that, you know, they are trying to do a creditable job, they should be allowed to it."

Raghuram Rajan on interest rates being too high

"I don't think (they are). I mean if you look at the real interest rates, you know, most people look at the current real interest rates and say "oh! Interest rates are really high". You have to look a little ahead, what's going to come and if you look at what's coming, I think real interest rates in India are not out-of-sync with rest of the world. If you project inflation, it's about 5% now. Yes, the last number is lower but it's anticipating around 5, whereas the policy rate, it said 6. So there is a 1% real interest rate, you know, where in the world."

On how RBI can tackle inflation emerging again

"On the RBI's side, presumably the Monetary Policy Committee will do what it takes to keep inflation under control. But of course, with rising oil prices there is a spillover into inflation, which we have to be wary of and they will have to think about it. I think on the growth side, our main problem is not little demand, our main problem is supply side constraints and therefore we need to fix those constraints. I think slowly they are being fixed, I mean some of the adversity from last year will dissipate but I think at this point, with the world raising interest rates, with the money starting to flow out, I mean markets seem extremely complacent at this time, they would wake up at some point."

Raghuram Rajan talks about farmer debt and Indian agriculture

"The answer can't be get them (farmers) indebted and then sort of waive their loans. That seems like a fiscal transfer. The problem to some extent is that every once a while we fall under this sort of old style thinking, "oh, we have to preserve them on the farms". No. The only way you are going to make farming viable is to get most of the people off the farms, into rural industry and leave a smaller number of the farms who now farm in much more efficiently and then can get adequate incomes, to have more and more people depending on that farm."

Raghuram Rajan talks about bureaucratic accountability in India

"Mr (Arun) Jaitley has repeatedly talked about repealing the Acts which sort of hold officials responsible for taking decisions if they unduly benefit some private party, even if there is no gratification involved. So there may be, I don't know, an overhang of worry amongst bureaucrats to take decisions, given the corruption cases and so on that have taken place. I don't know, this may be an excuse, this may be reality but we really have to look at why we are not moving faster on implementation."

Former RBI Governor Raghuram Rajan's prescriptions to hit 8-9% growth rate

"I think we definitely can if we focus on this and construction would create so many jobs. The strength of our IT industry that people admire, but I would also, so that the strength of our entrepreneurship as well as the confidence that our entrepreneurs have, that our property rights are secure, which doesn't necessarily exist in other countries. I think we need a consensus on the kinds of buttons that we need to push. Certainly, the government has done some of that with the GST as well as the Bankruptcy Code reforms."

On FDI in India versus FDI in China

"To some extent, we are one fifth of that of China as an economy so one fifth-one sixth FDI is presumably sort of par for the course given our size. However if you want to get to that level I mean, one of the concerns we should have is that when you look at global supply chains, we under-perform. We are less part of the global supply chains than other countries."

Raghuram Rajan on India's malnutrition problem

"I was just talking to the President of the World Bank and one of the things they are worried about, which we've been worried about in India for a long time, is a tremendous amount of malnutritioned kids who are going to come out in the labor force without the kind of mental capability. Whatever education improvements we do are going to do are sort of wasted in some sense if these kids grow up with a stunting in growth, in mental capabilities, that don't allow them to participate. We are sort of condemning them. This, if there was one sort of priority for the country from a social perspective, it should be this."

On a realistic growth rate for India

"We were at 8%, before the sort of slowdown. We will get back to that. Every year there will be a new shock. This year, the interest rates are going to go up, some of the money will start getting a bit worried. Oil prices are going up. So that underlying growth of 8% is going to be affected by these kinds of shocks. To really get those jobs that we really need in India, we need to have an underlying growth of 9% or 10%, which means all these micro level reforms, including education."

Raghuram Rajan on India's policy implementation

"I think in implementation, land acquisition is a problem. Can we fix it? If the Land Acquisition Act is preventing us, why don't we sort of modify it? The many millions of jobs that come from construction; that will come from industry that sits out around infrastructure. We are missing out on that. So that seems much more important in terms of the next step than almost anything else."

On India achieving parity with China and an 8-9% growth rate

"One of the major achievements over the last few years, both by the UPA and the NDA government has been macro-stabilization. We've worked on bringing inflation down. The downside in the last few years is that the micro-implementation has lagged behind, whether it's because government officials aren't willing to take decisions, because we have got an excessive amount of centralization. It's less clear why that's happened, but think; the Delhi Mumbai Industrial Corridor; every international conference I went to, I said this is coming; this is China style mega projects. Where is it?"

On if there is a trend of RBI becoming less independent

"I don't think so again. I do think that the amount of freedom that you have in various ways is substantial. I do think there is a constant tussle between the bureaucrats, between the Finance Ministry and the RBI and in a sense this was engineered."

On if the Monetary Policy Committee's independence is being eroded

"It has government appointees. I mean that said, we are all government appointees as the Central Bank Governor or the Deputy Governor, we are all appointees. The only non-appointee is actually the Chief Economist of the Central Bank. The Executive Director and Chair of Monetary Policy was an RBI sort of, who moves up the RBI ranks. This is an entirely and should be, a government appointed committee. However, once the government appoints, they should leave it to do what its job is."

On whether the RBI's independence is being eroded

"I think there are always steps forward and steps backward and you have to look at the net effect."

On economists agreeing with his view on the notes ban

 "Any monetary economist would say better print the money before taking it away. But that said, I think the real sort of question is should the RBI be a fifth column if the government wants to go ahead on something? And my guess is both legally as well as ethically, you can't stop the institution."

On whether he would have done demonetization

"This is an easy sort of answer to give in hindsight. I think the government at that time asked us our views, we gave them, but at the same time, I think it's very hard. I didn't think it would have the desired effect and that it would have cost."

Former RBI governor Raghuram Rajan on notes ban

 "We have a sort of an argument that it would improve compliance. Till we the last tax numbers in I think the jury is still out. That said, I would suspect that that a substantial part of the growth slow-down was because of, was because of the effects. Some of it was in the informal economy which weren't immediately captured, which we are seeing now, business' that have shut down because they could not survive that episode. Now, are there any positives? We have to wait and see. I think it did give some fillip to the payment system but that's small."

Raghuram Rajan on the issue of oil prices affecting growth

"When it came down, since we import oil, it showed up as an addition to GDP. Now when it is going up, it will show up as a subtraction, because our imports will go up and that certainly is source for concern going forward because that hasn't yet registered in the GDP data."