India needs economic liberalisation, reforms: Kenneth Rogoff

The backdrop towards the World Economic Forum 2012 at Davos continues to be one of slowing economic growth. Leaders are now worried about Europe re-entering into a recession. As far as India is concerned, leaders feel that India needs to get its fundamentals right.

Speaking to NDTV’s Ira Duggal at the World Economic Forum in Davos, Professor Kenneth Rogoff said that a country like India should focus on liberalisation and reforms than worrying about the macroeconomic picture.

Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the International Monetary Fund (IMF). He is also a recipient of the 2011 Deutsche Bank Prize in Financial Economics.

Below is the complete interview.

Ira: Last year, the focus was purely on fiscal austerity, everybody wanted fiscal austerity measures. But this year everybody was wondering whether it wasn't the right way to go and whether you need to now shift focus to get some growth back and use that route to try and reduce debt levels. Is that at least one issue on the debate agenda here at Davos?

Rogoff: Not much, I mean that's a pipe dream. I understand some of the European countries, which really need their debt wiped out significantly, are turning up their hands at their creditors saying look this is not going to work; what you want us to doubt if you are talking about the vast majority of the advanced countries what they are supposed to do.
There are people who would say they should run more deficits but any measure of debt, the government's debt, what private people owe, what the countries owe abroad, the pension systems are all bankrupt by any measure, we are looking at a store high at Davos. It is very risky that you are saying I'm going to pile on top of that. But you love to grow, be great.

Ira: When the GDP levels reached 90 per cent or so, there was a direct co-relation in terms of slower growth, shows your research...

Rogoff: There is a correlation and you don't get to these debt levels very often. They are very rare. We don't know exactly when we have not analysed every detail but probably at some point, the markets shut down and clearly that hasn't happened yet.

Ira: That's true. So if we use that as an academic backdrop to what is happening in Europe right now, Greece in particular for instance, they are trying to get some sort of deal going with their private creditors which doesn't seem to be working, is that a stop cap solution is best even if it goes through?

Rogoff: Well, I don't know what's going to go through. They are talking about growth being an inadequate here. The IMF has finally admitted that the if Europe just rides the debt down, then this much is not enough. So they are asking where can more help come from. It has to go way too down by historical standards. Greece is so far off, what the government owes, what the country owes to the rest of the world. Other countries don't look good either, Portugal looks good only next to Greece; it doesn't really look good by the benchmark. The other countries like Ireland which is in a situation but they owe 10 times the national income to the rest of the world and we haven't seen that before except Iceland.

Ira: So what's the solution for these, these stop cap solutions are not the option if the IMF funding which is already considerably large is not finding us a solution then what is it. Greece exiting, their own currency getting competitive on their own, is that the sort of realistic solution now to look at?

Rogoff: I mean IMF funding has nothing here, a country like Greece just doesn’t solve in and having the IMF come in and say that they would give you some money but you have to pay back in full, every dollar, it doesn't really help. It can give a little bit lower interest rate but it’s really not enough. Ultimately, they need to get the debt go down, they need to have some of it forgiven, restructure it in some way.

For other countries in debt like Japan, the United States, they are just too big to talk about; there is nobody out there to help them. I don't know what’s the end game going to be, could be inflation, the ECB spending money, the Federal Bank spending money, could be Natural Repression and you're very familiar with that in India, where you sort of hold down interest rates people can get. So the government can comply more clearly. The problem is that it is not very good for growth, may be they'll raise taxes. I don't think the biggest countries are going to default.

Ira: But printing money is not the answer because particularly on the ECB, there is a fair amount of pressure that you think is just compounding the problem or pushing the problem down the road?

Rogoff: Well, there aren't a lot of options here at the moment and the ECB is printing money and buying time but people should not be confused. Having the Central Bank print money only buys time. I am amazed how many people say the ECB has its own balance sheet it. The government owns the Central Bank, the government owns the ECB and the government owns the Federal Reserve also.

Ira: Talking about the Federal Reserve just want to get a sense of what you make of the US economy right now. The data has been looking a bit better, people seem pleasantly surprised. The sceptics say it’s going to run up to the elections. But beyond that is there are real improvements that you are starting to pick up on.

Rogoff: As I see that the US is most likely in the typical lethargic, slow post recovery growth. But we find it normal and not in the face, where it’s about to collapse again. It’s very vulnerable but for sure there is still lot of debt. But the baseline is better than with Europe, the problem is not just the debt, they need a new governance structure, they need a new constitution and not just these little changes that we are talking about.

Ira: But debt still remains a huge issue in the U.S. as well. It has been ignored because the bond market is not taking a note of it and there is still huge demand for treasuries but that hasn't gone away.

Rogoff: You are absolutely right; these are things that don't unwind quickly. India too has a lot of debt and it could be a problem. I think after 7-10 years in the United States, if there isn't really a fundamental reform it'll explode. Japan, where people thought it would unravel because they have debt higher than anybody, it hasn't yet but it’s not going to go on forever. So, certainly in the biggest countries, there is a longer term concerned. But it is not immediate; I don't know how assuring that is to listeners.

Ira: Just one specific question on the Fed, we won't pre-empt with what they say or do later today, but you know sort of the assured low interest rate strategy probably all the way to 2014, other negative implications of it must be there.

Rogoff: Logically, I would like to say what your policies are going to do relative to the economy and not relative to the calendar. On the other hand, they are going to get surprised with incredible growth and wish they hadn't promised that and they probably think they could undo it. And the real question whether the Fed could do more or can do another round of printing money. Basically, a lot of people are very angry but let me tell you the United States is in trouble.

Ira: The entire currency war this year is seeking trade advantages through currency, printing money, keeping extreme trade low of depreciating currency, is that something you think is still playing out, something you warn a caution against?

Rogoff: We have to see that the emerging market currency is wise. The emerging markets are growing, the advanced countries are not growing but any of the advanced countries aren't and the exchange rates have to move. The emerging markets have been resistant and with the low interest rates in the advanced countries, you got inflation and people aren't happy about it.

However, I think a lot of these adjustments here are really about the emerging markets, which are accepting higher exchange rates. I understand why they avoid it. But if India is growing at 8 per cent-9 per cent, the United States cumulatively doesn't grow half of that, you have to expect to have a big rise in your exchange rate.

Ira: Are you concerned about China going down that route?

Rogoff: There is always a chance say 10 per cent that China really has a significant slowdown ahead. I hope it doesn't happen this year because with Europe going so slow, the United States slowing, so much overhang of debt, I am just now sure how we would handle that. So, I hope they are not to have a collapse but there needs to be strategy to avoid that. I would like to see the advanced countries take a more pro-active policy.

Ira: How closely have you been tracking India? We seem to be in a strange scenario, moderate growth, relatively higher inflation than we are used to but public debt to GDP, relatively low to global comparison terms but still not something we can ignore.

Rogoff: The debt in India poses a problem because alternately you would like to liberalise markets somewhat, but then interest rates would rise and it would be more painful for the government. I think the government's been trying to do some important measures in liberalising the retail sector, this would be a huge thing and this was a very bold move really and India needs that. India needs to keep moving ahead and having liberalisation in some dimensions, may be not in the financial sectors urgently but things have to happen in order to keep it going.

Ira: But apart from reforms just the growth-inflation balance that India is battling right now. We have fiscal policy which has been loose, the monetary policy a little bit ineffective. Can we afford to allow high inflation continue?

Rogoff: To be honest, they really only make clear statements when you are much higher than you are. We are sort of down like 8 or 9 per cent inflation because it’s unstable; it’s like what's it going to be like 5 per cent or 15 per cent? So I think economists put a big emphasis on stable inflation but there isn't some magic line that you get to say 20 per cent inflation. I think it'll be good to bring it down because it’s not stable at the level. But it’s not what worries me the most about India. In fact, reforms, getting fundamentals right rather than immediate macro picture is more important.