I worry that we are not getting decisions taken by the bureaucracy, says Raghuram Rajan , Former Governor, RBI speaking to ET Now at Davos. Are we getting too centralised and is there enough capacity to manage what a 2.5 trillion economy needs?
This Davos was a lot about India. You have seen many global leaders make a pitch before. What do you think of Mr Modi’s?
He was trying to say that India is open and favours global initiatives and also keeping the trade channels, investment channels open. He was trying to add another voice to the global leaders who are saying that the system we have is a good one and we should be more cooperative within it.
True to India’s style. Obviously there is a lot of euphoria around that at Davos and there is a lot of euphoria back in our financial markets as well. Do you believe the fundamentals backed that euphoria?
Look India is a recovering economy. Recovering because we had a couple of shocks last year and recovering in face of rising oil prices. We have to work on the fact that we are still growing at 6.5-7%, which is creditable but we really need to build on this and to some extent we are going to have to build on it in the face of adversity as oil prices move up from the levels that were quite easy a few years ago.
Just a quick focus on the Indian markets. The Sensex hit a new high. The Nifty hit a new high. Markets have almost been on a tear. What are you going to put your finger on? What is driving this rally, it cannot just be the fundamentals. Is it being driven by sentiment and are you someone who is concerned that perhaps too much money is now chasing too few stocks?
Well it is an across-the-globe phenomenon. Look at the Hong Kong market. We are not alone.
There has not been a correction in 10 years, a big correction.
Across the world, markets have been ramping up and to that extent we are part of that same phenomenon. It is a phenomenon where a lot of money is chasing relatively sort of limited assets and some of the concerns have to do with the narrow sort of areas where this money is going. But longer term, the issue is whether we can get our fundamentals to be really strong. There are people who look to India for growth leadership over the next 10-15 years and we need to prove them right and do what we need to do.
The liquidity that we are seeing at least in the Indian markets is being led by domestic investors. We are perhaps finally seeing a flush of retail investors coming to the market and household savings making its way. SIPs have gone up. The mutual funds and all of that. Do you believe this is financialisation and formalisation of the economy? The government wants us to believe that this is an after-effect of demonetisation.
What happens is that over time, as markets move up, people get more enthusiastic about it and are willing to put money in until they come down. So, we have to look beyond short-term movements to longer term trends. The Indian market has been growing more financialised over time. I do not know whether it is one act like demonetisation but it is a more general trend. In fact, the movement into financial assets was happening before the savings in financial assets was going up. This is an important trend. The movement into the market is probably a little more recently driven by returns and of course the worry there is return chasing is not always the appropriate thing to do.
What is that one big cue that you will caution global as well as Indian markets against? What will be that one cue which will signal that this is the tipping point now?
What is happening is money is tightening around the world. The Fed is on track to raise interest rates three or four times this year and QE across the world is slowing down. A lot of the money that was flowing into the markets via the central bank’s buying of government papers and taking that out of the equation is going to dry up. When that dries up, there has to be new sources of funding the liquidity that the markets need and if that is not available, do the markets then back up a little bit? Now, is there a signal event where this will happen? Maybe an inflation reading which suddenly turns out to be high and there is a sense that central banks are behind the curve, or a more rapid tightening that may be the signal event.
Maybe it is when one of the big two, the ECB or the Bank of Japan signals a more rapid end to the QE. These are potential risks. It is hard to say which one will come true.
I want to shift focus to the macroeconomic fundamentals. IMF says we will be the fastest growing economy in the world. You had once said we are the one-eyed king in the land of the blind. Given that global growth is also likely to pick up by 3.9%, do you believe we can pat ourselves on the back and say we really are this shining spot, this oasis of hope or is it too early to jump to that conclusion?
What we need to do is ask why we need growth and we really need growth for the jobs that our young people need. Even with this level of growth, are we creating those jobs? If we are really to create those jobs we need massive investments and investment in job creating activities like infrastructure, construction etc.
I would think that the biggest concern in the Indian economy today is that those massive construction projects we talked about just couple of years ago. I remember talking on an international forum about the Delhi-Mumbai Industrial corridor and so on. We are not seeing those. What has happened? We need implementation of those kinds of projects because they have multiple effects, jobs, they create possibilities for industry. That is one area where new industries could come up with the better logistics from a Delhi-Mumbai industrial corridor.
But why do you believe it has not happened?
There are bottlenecks: land acquisition has been difficult and unfortunately people do not seem to want to touch the issue of land acquisition and try and make it go faster for fear of people. This is a political issue. That is a speculation of what the concern is but somehow it has gone off the front page.
Similarly, look at power. If we had 24×7 power throughout the country, it would be a very different story and unfortunately our attempt to remake the distribution companies at this point has still not shown results. UDAY is sort of much promised project but it is not clear if it is showing the results that we need to make the distribution companies buy power from people who are able to produce power but are not getting prices for them. Therefore we have excess capacity, we have power producers foundering because nobody is willing to take the power off their hands and we have distribution companies.
Is this lack of political will, lack of political gumption?
It is the need for political focus on implementation and I worry that we are not getting decisions taken by the bureaucracy. Mr Jaitley has talked time and again about removing the impediments. For example, the fear that bureaucrats have being accused of corruption but why are we doing that? So, that is one set of issues — decision making by the bureaucracy. But we also have to ask whether things are getting too centralised and if we are trying to run the economy by a very small set of people and whether there is enough sort of capacity to manage what a 2.5 trillion economy needs.
We are aiming to be $5-trillion economy by 2025. You spoke about crude early on and there is a very distinct divisive debate on crude. There is a section that believes that rising crude will make sure that the tailwind turns into a headwind for India. Then there are others who believe that rising crude will ensure that the producers of crude globally do well, global growth picks up and that in turn will aid the India story as well. What is your take?
Almost surely crude is a headwind for India. The global growth impact is a minor relative to the direct effect of crude on India. that said we are in a very good global environment and so it is quite possible for us to weather the effects of crude and to that extent I think we still I do not think that we should abandon all hope.
Sometimes, You Have to Keep Promoters and Cronies Out
There was something that you started as the RBI Governor and people had a lot of hope that this will clean up the bank’s balance sheets. You almost waged the war against NPAs. That battle has been delayed but finally we are seeing IBC norms and talking about structural norms that has reset the promoter-banker equation. You have said that the promoters in India cannot treat debt as equity. Do you believe that equation has been reset?
We have to see the outcomes of the bankruptcy code. The first few outcomes will be very important. It is very important because once they set the pattern, you will see if in fact there is a fair treatment of the banks. In that process, they can recover some of the money and some of the promoters who have been recalcitrant, suffer some penalties. There will be much more of an incentive to negotiate outside of bankruptcy.
Do you believe a lot of that will happen?
We have a lot of mechanisms outside the SDR. For example, the S4A mechanisms we set up. Without the bankruptcy code to focus minds, people got a little lackadaisical about using them. If the bankers and the corporations can come together and negotiate in good faith with the threat of bankruptcy behind that if we do not arrive at an agreement, we will have to go there, will actually allow for a lot of sensible renegotiation. But we still need one more piece which is that bankers have to feel confident that what they do will in fact not be second and third guessing.
You are essentially saying that you will give your judgement on it when there are a few cases of resolution. But one of the arguments in favour of these new IBC norms has been that there has to be morality. People who have taken bankers for a ride, cannot come back and bid for the same projects. As somebody who believes in free markets, do you believe morality can be placed over markets?
After you have done all the possible negotiations and still not have come to the table, at some point, the promoters should be kept out of the negotiation process because they have had that chance. They have had their ability to pay back, to renegotiate in a way that is acceptable.
The worry is if they participate in that last auction. I have heard businessmen talk about being warned by promoters to stay away from the auction because that would give the promoters an ability to bid at very low prices. That creates a sense of corruption, which this process would do well to stay away from.
If at that last stage, you keep the promoters and their friends and cronies out, I do not think it is a terrible thing. Yes, maybe in the best of all worlds we would get a more sound auction if they participated but given the Indian environment, I think to being with, to keep them out and to let that process take place in a free fashion is much better. Give them their chances before but once you get there, leave them out.
Basically you are not somebody who is overly worried about the argument that comes from Indian industries on the other receiving side that say this is going to lead to significant asset value erosion or asset value depression. Do you think that is a concern?
I think that once they realise this can happen and they will lose their companies if they go to this process, they will be much more forthcoming in the pre final auction negotiation. At that point they will be able to retain by paying a reasonable amount.
100% FDI in Pvt Banks
On banking, there have been some speculative reports that Indian banking should be, at least the private sector banking should open up to 100% FDI. Government officials have denied that report. This anyway has been red-flagged by some private bankers. What is your take on this? Are we ready to import 100% FDI?
We are but the bankers themselves might want to consider what that means. If, in fact, they are seen as foreign banks, will the country be as favourable to them going forward? Being a private bank is one thing, being a private foreign bank is another and many countries tend to be a little more concerned if the foreign banks account for more than a significant part of their financial sector and that is a legitimate worry.
To some extent, private banks themselves have to think about what happens if they are seen as crossing that threshold when nobody actually sees that Indians owning the banks.
There is Nothing Called Perfect GST
While we are talking about structural reforms, we have to talk about GST. You have been a long-term proponent of GST, perhaps a different GST than that was rolled out but there have been changes made along the way. How long do you think it will take the Indian economy to do away with the pain induced on account of GST?
I do not know but…
Or are they making too many changes?
Look, in the best of all worlds we would figure out the pristine pure GST, bring that in and it will work from day one. We do not function like that. I do not think anybody can function like that and some adjustment was needed. It is important we do this quickly and then we stabilise and people have a sense that this is what it is going to be going forward. There are a lot of people working overtime on this and to some extent this was inevitable. I am glad that we are doing it because long-term benefits will be quite substantial.
Budget Should Not Blow The Fiscal Deficit
The last full-year budget of this government is just a few days away. Given somebody who has been a part of budget making and then outside as the monetary authority, what is your expectation from Budget 2018 given the macroeconomic realities that we face as a country?
I do not want to talk about expectations. I want to talk about the hope that we will stick to what we have acquired which is macro stability and that the Budget will not blow the fiscal deficit to such an extent that people think that India cannot be relied upon.
One of the benefits we have had over the last few years is the India premium in, for example. foreign money coming in has gone off. People are demanding 6% extra to come into India because of exchange fears, fiscal fears and so on. That is a good thing. We have achieved that. We should retain that which means that if you want an enhanced growth not in terms of the fiscal stimulus but in terms of implementation of all these projects that have been announced, we need to take a look at all the stuff and make sure that they are actually working.
I would like to see a budget focus much more on implementation and probably maintaining the fiscal course that the government has.
I get that point about fiscal prudence but this government is also trying to press the puddle as far as divestment is concerned and I think for the first time in many years we will be overshooting the divestment target. Do you believe that is way to go or are we resorting to that because obviously there is obvious dip on revenues on account of the GST?
I think we have to do what it takes whether it through divestment and so on to maintain the fiscal targets but I would think more that at this point our focus should be on removing supply bottlenecks than on creating much more additional demand. We already have sort of signs of inflation coming up. We have concerns about the fiscal deficit reflected in bond yields also moving out, so at this point I would say that is not where we should we put our focus. Whatever bottlenecks there are in terms of growth, let us fix those, implementation.
Re-examine the Tax System
There is a lot of talk also on the Long-Term Capital Gains Tax (LTCG) and equities. There is a section that believes it should be brought at par with debt. Do you believe that given the political mandate they will be able to do that and should they be doing this, it has been a long standing debate?
I do not want to comment on specific tax these things because I have not thought about them too much but I think there is a need for ensuring that we do not have sort of very significant loopholes in the taxes and one of the concerns about the short-term about the capital gains has been that this could be the source of a loophole. I do not want to offer a particular solution. We need to re-exam the entire tax system. Abrupt frequent tax changes are also problematic. Whatever we do has to be flagged and done in a more systematic and sensible way so that we do not move back and forth.
Monetory Policy Committee Doing Its job
Let us talk about inflation and you had flagged it off earlier. Thanks to rising crude prices inflation is on an uptick. We will perhaps end the year higher than RBI’s own inflation target. What does that mean for monetary policy? Are we going to see tightening this year?
Look I do not want to comment on the specifics of monetary policy. The monetary policy committee gets a lot of advice from many people. I would say that thus far it is heartening that they have taken their task seriously and are going about it and are basically focussed on what they need to do. Let them do their job.
Because you mentioned Fed and because you believe that Fed is going to raise rates perhaps more frequently and perhaps higher than most have anticipated, what does that mean for monetary management for emerging economies like us?
As markets tighten over the world, we may have a little more pressure on money coming in. At one level, it is not that bad because to some extent that money coming in has to be managed and we have seen our reserves go up substantially as we manage that.
So a little bit of pressure in the other direction may not be a bad thing. But I do think we have to be vigilant and this is why in this environment of rising oil prices, rising interest rates, macro stability is extremely important.
Aadhar Can’t Be Mandatory
There is a massive debate back home on the implementation of Aadhaar, the Supreme Court is now hearing whether it should be mandatory or not. Nandan Nilekani calls it the Khan Market critics who are trying to undermine the rollout. What is your view?
I do think that we have to assure the public that their data are safe. All these reports about easy availability of data are worrying and we have to ensure the security. We cannot just say trust us, trust us, it’s all secure and then have these reports coming out. So clearly more works need to be done. That said, we should also be open to careful and monitored use of Aadhaar to deal with some of our problems. For example, the US has a social security number which allows all financial transactions to be tracked. Now there are people who can do it and it is not everybody who is allowed access to that kind of data. But somebody who is for example responsible for taxes has some insight into that process and that is not entirely a bad thing. So we have to balance privacy issues.
It can be mandatory for just about everything under the sun.
It cannot be mandatory. There has to be a structure by which we decide what it is allowed for, what it is not and it should be such that somebody cannot go fishing and find the goods on you.