Chief Economic Advisor Raghuram Rajan admitted that Indian economy suffers due to slow decision making processes in the government. Rajan also incised the Indian economic system for creating barriers to improve the business environment in the country while speaking to Karan Thapar on Devil's Advocate.
Here is the full transcript of the interview:
Karan Thapar: Hello and welcome to Devil's Advocate. How adequately has the government responded to the sharp fall in the rupee as well as the state of the economy? Those are the two key issues I shall raise today with the Chief Economic Advisor Raghuram Rajan.
Dr Rajan, let's start with the sharp fall in the rupee. Both you and P Chidambaram have said this is part of a global phenomenon where countries with large current account deficits are experiencing a hit on their currency and that it is not India specific. How then do you respond to the view that that's only a partial explanation. The core explanation is the collapse in India's growth and the unrealistic, some would say even the unconvincing response of the Indian government, which has shaken the confidence of investors in India's short term future.
Raghuram Rajan: First, I think those two questions that you started with are separate. First, how has the government responded to the fall in the rupee: I think the big issue there was to build some confidence that this was not something that was specific to India. There were factors, you know, that we could do to reduce the fall and we have done some of that and I will talk about that in a second. But, as you said, by and large, across the world, emerging markets have faced a fall in their currency. Korea, Brazil, Turkey - have experienced exactly the same fall in magnitude since January as we have. And that's because there's been that outflow of money as investors who are fleeing the low interest rates in the West started thinking may be those interest rates are going to come up and move back.
Karan Thapar: I tell you why people quarrel with the belief that this is not India specific. When you look at the way the rupee fell sharply in May, you yourself have acknowledged to the Business Standard that it was a result of FIIs accelerating their pull out from India. And I put it to you that at that point of time can one deny that they were influenced by India's multiple political crisis, by the bad economic results coming out and by the fact that there are a string of reforms that have been promised, but none of which have been delivered. All of that has shaken their confidence in India's government and in the country's short term future, which is why they are pulling out in an accelerated way.
Raghuram Rajan: No, I would argue that what happened post January 1 and as we did these reforms opening up the Indian market, a lot of them came in. So if you look from January 1, we have depreciated about the same amount as some of these other emerging markets. However, in the last few weeks, we have depreciated a little more - 7.5 per cent compared to 7 per cent for Brazil or 6.5 per cent for some other countries - and the reason is because our currency appreciated as investors came in. So we got more money in as we liberalised the economy. When did these investors turn? They turned around March 20, which is when the Feds started changing the policies. Was that something that the Indian government did? I can see no policy that the Indian government announced around that time which suddenly caused these investors to turn tail.
Karan Thapar: It's not what the Indian government did that leads investors to say that the Indian government is more responsible for the slump in the rupee than the international situation, it is actually what the Indian government has failed to do. And let me give you a small but telling example. When he held his press conference on Thursday, investors were looking to the Finance Minister to come up with a list of decisions that the government has taken. Instead what he did was to talk about things that it promises to do sometime in the future. And people said this is just a roadmap, it's not action and because anyway the government's credibility is so low, rather than be reassuring, this raised doubts and questions about whether the government will do what it says it will do; how soon it will do it and how much it will do.
Raghuram Rajan: Well, we always have the sense that there's something special about India. Either in the upside or in the downside.
Karan Thapar: In the downside very much in this case..
Raghuram Rajan: In this case, no! Because if you look at the change in growth expectations for other emerging markets, many of them are faring worse than India. Look at China, for example. China is growing faster than India, but they have always grown two per cent faster. What is the expected growth for China next year according to the World Bank? 7.7 per cent. What is the expected growth for India? 5.7 per cent. That two per cent difference remains. Similarly, look at Brazil. Brazil's growth has tanked. Nobody comments on that. The fact is, across the emerging world growth has tanked. I am not saying we don't have our own problems. Now, coming to the Finance Minister's press conference. Why was there, at least for a little while.. Remember the rupee strengthened towards the end of the day.. Why was there a little bit of weakness in the rupee post the conference? The weakness was primarily because journalists came to the press conference expecting that the FM would announce yet another new NRI offer which would bring money into the country. Instead, what he said was - we are not going to react short term to this crisis; we are going to do the things which are in the long-term interest. One other thing he announced was what had been done by SEBI - let's bring long-term money into this country, let's get the sovereign funds in - $5 billion, safe money.
Karan Thapar: Dr Rajan, in all fairness, when the Finance Minister calls a press conference, people believe he is actually going to announce things he has done; but he talked about things that were being suggested, canvassed and mooted for weeks. Therefore, there was not only disappointment but look in fact at the difference between your comments a day earlier and their impact on the rupee and his comments 24 hours later and their impact on the rupee. When you spoke a day earlier, the rupee went all the way back to Rs 57.9; when the FM spoke 24 hours later, it sank back to Rs 58. He actually disappointed people. He shouldn't have called the press conference rather than calling it and having nothing to say.
Raghuram Rajan: I think the press conference was to layout a government programme and these market reactions, you have to look overtime. The next day, if you call, the rupee went up again and the stock market went up 350 points.
Karan Thapar: Because inflation figures had come and because also there was a movement of growth in America. It had nothing to do with the Finance Minister.
Raghuram Rajan: These statements that he had made the previous day were in fact confirmed by the Prime Minister. But.. You are saying that there was nothing that he announced in the press conference. Let me refer to two announcements - there were things that he done the previous day, which he announced. One was the fact that these sovereign wealth funds would now come in a much bigger way..
Karan Thapar: $25-$30 billion.
Raghuram Rajan: Actually it's more because the remaining amounts are also being allocated here. But also he said we are reducing the barriers for investors to come in into India base on Chandrasekhar Committee report.
Karan Thapar: "We propose to reduce the barriers".. He said the Chandrasekhar Committee report was positive.
Raghuram Rajan: He could not say we have done it, because that report has to be considered by SEBI.
Karan Thapar: He said nothing positive about FDI caps beyond indicating that they will happen at some point of time. And you had said the same thing 24 hours earlier. He said nothing about NRI bonds. You said something 24 hour earlier.
Raghuram Rajan: He actually put a timeline on FDI caps which is on Monday, a report will be submitted, which will be considered by the government and he put a timeline by the end of June or early July, we will have a change in the FDI caps, based on the what the government agrees to.
Karan Thapar: Let me give you another example, beyond this contentious one of the Finance Minister's press conference, where the government knows it needs to act, fails to act and is well aware of the fact that they are depressing international investors affecting the rupee, but still is unconcerned. And it is the example of Vodafone. Since February last year you have known, that Mr Mukherjee's amendment has had a deleterious effect on international investment. The Parthasarathi Shome Committee was appointed in summer last year. Its recommendations came in by September and October last year. Yet nine months later, the problem is still festering and it is still spooking international investors and we haven't got a solution. And people say, the government is alone to blame for this mishandling.
Raghuram Rajan: Well, we have moved forward.
Karan Thapar: Minimally.
Raghuram Rajan: We have moved forward to a point where we actually could get a solution. But I would agree with you on one issue, which is that government processes take too long. That's partly why we have set up new structures to try and accelerate the process. And even those structures take sometime for teething, to find their way. In a sense what the Finance Minister was trying to do in that press conference.. Rome isn't built in a day.
Karan Thapar: But the problem is Rome can burn in a day.
Raghuram Rajan: Absolutely!
Karan Thapar: And when the situation looks as if it is like tinder, you need to act fast, but the Indian government is acting slowly.
Raghuram Rajan: We fully understand that. We need to, in every way, up our game. And that is what we are trying to do.
Karan Thapar: You are being very honest.
Raghuram Rajan: I am being honest but what we should not downplay is how much has been done.. The last time we met here, you said fiscal deficit.. Everybody suspects your ability to achieve it. But the government did achieve a fiscal deficit and went beyond that. In fact, it almost achieved next year's fiscal.
Karan Thapar: I won't come at the fiscal deficit at the moment, I will come to that a little later and all I'll say for now is that you did it by squeezing expenditure hugely. I want to pick up on the point you are making because you are being in an honest mode, that the government is often slow in responding and even if it does respond, the initiatives it takes don't work fully. I will give you an example of that. As far back as September last year, nine month ago you announced a Cabinet committee on investments, which was going to clear projects that were stalled as they hadn't got clearance permission. What happens nine months later, someone as important as Kumar Mangalam Birla is telling the Financial Time just a couple of days ago that $10 billion worth of his company's projects are locked up and can't get clearance. That he is not going to do any further investment until that is cleared. And therefore, foreign investors look at the situation and say that if India's third largest conglomerate can't get clearance, what hope have we? So once again, what does the Business Standard conclude? The government is all talk on CCI, no action.
Raghuram Rajan: No, there has been action. I think you are being a little harsh. There have $25-$30 billion worth of projects that have been cleared. You remember those projects for exploration which were held up between the Ministry of Defense and Ministry of Petroleum, those have been cleared. This power plant, which was stuck in a dispute between the Power Ministry and the Coal Ministry that has been cleared. So..
Karan Thapar: So why is Kumar Mangalam Birla telling the Financial Times on June 6 'there are so many clearances required to put up a project in India. I will wait for time before I put more money into investments in the ground'.
Raghuram Rajan: Right.
Karan Thapar: He is indicating to the world that things are sclerotic.
Raghuram Rajan: Things are difficult in India, we have to improve the business climate, we have to reduce the regulations that govern business. Some of our regulations come from British times, we need to change that, there is no question.
Karan Thapar: 65 years have gone by and we haven't changed it.
Raghuram Rajan: We haven't changed it because they are all intertwined, they are at the state level, they are at the national level.
Karan Thapar: It's a horrible indictment of the Indian system.
Raghuram Rajan: We need a thorough revamping of these rules.
Karan Thapar: And you see, what does the Finance Minister offer on his press conference on Thursday - he offers a special cell in the Cabinet secretariat to clear 20, 30, may be 40 projects. What do investors say, they say if the Cabinet committee on investments manned by ministers can't clear road blocks and Kumar Mangalam Birla is still suffering, then what can a small cell manned by bureaucrats do?
Raghuram Rajan:No, that cell is purely to setup the case for the Cabinet committee. Remember, these problems..
Karan Thapar: It's a stage before the Cabinet committee.
Raghuram Rajan:No its just to get the data so that the cabinet committee can actually take realistic, sensible decisions. You don't want the cabinet committee just making decisions without any information. This is merely a secretariat.
Karan Thapar: It's taken them seven months after setting up a Cabinet committee to realise they need the cell to function effectively. It's pretty bad a conclusion..
Raghuram Rajan: The time since it was set up is.. But look we have, let's get back to the issue of regulations, we have too many regulations. We need to strip them down, create a better business environment. However, you look at the businesses that have setup and the kind of money they are able to make in India, foreign investors, domestic investors. And it is true that people who have navigated this system can find that once they figure out how it works, they can actually make it work for them.
Karan Thapar: You are suggesting that we are tying a guy into a straight jacket, he knows how to get out of it so since he knows how to get out of it let's leave him..
Raghuram Rajan: I am not saying this is a good state of affairs, I am saying when you hear foreign investors complain about how difficult it is to do business in India, you also have to ask why Hindustan Lever wants to come and by all the equity that they have outstanding in India. It is because they find doing business in India is a good thing.
Karan Thapar: Can I put this to you?
Raghuram Rajan: Yeah.
Karan Thapar: What I am really saying is that at the end of day it is the collapse of confidence in this government that is the problem - that's why the Rupee is sliding, that's why investment isn't happening, that's why the Prime Minister keeps talking about reviving animal spirits but those spirits remain depressed. People don't trust this government anymore.
Raghuram Rajan: Again I think you are looking at it as if all the problems in the world are happening to India only and this is the slide in the Rupee specific to India. It is not.
Karan Thapar: How much assurance we take from the fact that others are suffering but remember in those countries the government is doing its best to help. Here the government is dilatory.
Raghuram Rajan: Why did we get $17 dollars in portfolio investments since the beginning of the year if the people thought India was a basket case.
Karan Thapar: Except for the fact that FDI has actually gone down by 38 per cent.
Raghuram Rajan: Yeah but FII has come in, people think that Indian companies are invest..
Karan Thapar: FII has reduced by Rs 18,539 crore since May 22.
Raghuram Rajan: That is precisely what I am telling you, this is a global problem. These guys are leaving suddenly not because they suddenly think India is a basket case but because they think QE is coming to an end, it's a different issue. The fact are on net..
Karan Thapar: So the theory that I advanced, that this is not a part of the global phenomenon, this is India specific and it is a reflection of people losing confidence in this government because it's is not responding adequately, that theory you reject.
Raghuram Rajan: I reject.
Karan Thapar: Completely?
Raghuram Rajan: Completely.
Karan Thapar: But you do accept that there are areas where we need to move faster, regulations that we need to cut and that in many instances when the government makes announcement, it needs to deliver more readily.
Raghuram Rajan: Absolutely. But is this specific to any particular administration. No it's the whole.. It is endemic in the way our system is structured.
Karan Thapar: India is the problem, not any one government?
Raghuram Rajan: I wouldn't say India is the problem, I mean there are lots of good things about India but I think the issue is, how do we get an environment which is more conducive to doing business? To doing good business. To let small guys come in and grow. That's what we need to be thinking about.
Karan Thapar: Unfortunately we need to be thinking about it but we don't seem to be delivering on it. At least not fast enough.
Raghuram Rajan: Absolutely. We need to do this faster because we need to create jobs for all those guys who are coming to the labor force.
Karan Thapar: And only when we do it fast enough, will we get the sort of investment, both at home and abroad, that we want and we need?
Raghuram Rajan: No, I would differ on that. We will get that investment but we could get far more if we did all that we need to.
Karan Thapar: So our dilatoriness is working against us and we need to speed up?
Raghuram Rajan: I think, without accepting the first part of your statement, yes we need to speed up on all fronts.
Karan Thapar: Dr Rajan, the slide in the Rupee coincides with growth in quarter four falling to 4.8 per cent and over the year as a whole 5 per cent. But all of that has happened at the same time as inflation has fallen to 4.7 per cent, the fiscal deficit to 4.89 per cent and Fitch has revised its negative outlook to a stable one. And the layman is confused by all these things, not quite sure how to understand them. So how would you characterise the state of the economy at the moment?
Raghuram Rajan: Improving. What is happening really is on the one side inflation is coming down, partly as a result of the actions that were taken including narrowing the Fiscal Deficit, but also the high interest rates the RBI, sort of, has been subjecting us from some time. The fact that inflation is coming down, we still need to see CPI inflation coming down a little more, but that should give the RBI more room, overtime, to cut interest rates which then will flow into the economy and allow us to grow a little faster.
Karan Thapar: But you know, you began with the single word improving and that's what I want to question because on Wednesday we got figures that showed that in April industrial production had only grown by 2.3 per cent compared to the 3.4 the month before. That manufacturing had only grown by 2.8 compared to 4.2 the month before. So if the things are improving, they are also at the same time doing so on a declining basis. Growth is not just sluggish, its struggling.
Raghuram Rajan: Well these are year on year numbers and remember the main numbers, the March numbers were revised up. Now we have to wait and see if the April numbers are revised up. They were revised up in a day because of errors, let's see if they are revised up more. But that's besides the point. Manufacturing is 15 per cent of the economy, manufacturing is not doing well as it should, we need more investment, we need more growth, we need more demand for manufactured goods. What is more encouraging at this point is services. Service growth has been quite strong especially in areas like hotels, restaurants and so on.
Karan Thapar: Agriculture did very badly last year.
Raghuram Rajan: Finance has done quite well. Agriculture - remember it doesn't include the good rabbi crop which has been coming in post April and that rabbi crop would increase the rate of growth of agriculture. Add to that the fact the..
Karan Thapar: So the 1.4 figure that was announced in April could be revised upwards?
Raghuram Rajan: That could be revised, I don't know, but the broader point is agriculture will do better partly because of the good monsoon this year, partly of the good harvest that ended last year. And then we will also get in addition a stronger growth in services on the back of manufacturing which will pick up as demand, because of the growth of these sectors, will pickup.
Karan Thapar: Let me ask this to you. How critical, to an improved performance this year, is a good monsoon?
Raghuram Rajan: I think, in general, a good monsoon first effects a lot of people in the economy. Fifty per cent tied in some way to agriculture. Well, also there is a feel good factor, there is a sense with good monsoon things are better, a sentiment improves and I think that would help consumer demand would also help growth more generally.
Karan Thapar: Your colleague, the Economic Affair Secretary Arvind Mayaram has said that he believes that the growth this year will be above six per cent, but given that quarter four was just 4.8 and given that April has given us some pretty disappointing figures, would you as Chief Economic Advisor endorse that prediction or would you hedge your bets?
Raghuram Rajan: No, I think we are still on a path, at least we believe, to hit six plus. And my sense is you will see the improvement overtime, what we are waiting for. I think what is still an area where we need more improvement is investment. And my hope is corporate investment picks up as the demand from these other sectors starts filtering through the economy and we get stronger growth.
Karan Thapar: You are talking about the need to encourage investments which of course takes us back to precisely where we began this interview, so let me end by asking: Do you think you have done enough to actually encourage investment in real terms?
Raghuram Rajan: I think we have, I think we have done many, we have taken may actions which have made the economy more resilient. We have made it more stable by cutting the Fiscal Deficits significantly. We created the environment for more investment, we talked about needing to do more and I agree that we need to keep doing more. But, I think, in this environment we have given the economy a chance.
Karan Thapar: Alright, you have given the economy a chance, now it is for the economy to take it and run ahead.
Raghuram Rajan: Absolutely.
Karan Thapar: A pleasure talking to you.
Raghuram Rajan: Thank you.
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