In a Walk the Talk interview with Express Group Editor-in-Chief Shekhar Gupta, Panagariya observed that the slowdown in the Indian economy had been self-inflicted and was more than just a consequence of the Lehman crisis. The economy, he pointed out, had rebounded to levels of 8% growth even after the global meltdown.
Monetary policy, in his view, had over-reacted to inflation while the government rolled out social welfare programmes in the name of stimulus. I appreciate the concern on inflation, but consecutive rate hikes hurt investment. Also, hundreds of billions of dollars worth of projects are stuck because of the paralysis that has come to characterise the government, he observed, adding that among those responsible were Jairam Ramesh, former minister for environment, Jayanthi Natarajan, minister for environment and Congress president Sonia Gandhi.
The professor believes the RBI made a big mistake in not intervening in the forex market to accumulate dollars and build a war chest when the rupee was appreciating in 2009-10 and 2010-11. This, he feels, is the worst era of performance by the RBI. We said we would be good boys and not intervene in the market but if Ben Bernanke raises rate now, money will flow out, the professor said, adding he had been fairly upbeat that India would not see a 1991-like situation again but was now worried. There is a 10-20% chance that we could see a 1991-situation, he said, pointing out that $200 billion of private sector borrowings remained unhedged.
India, he feels, has little option but to wait it out, because the RBI does not have the wherewithal to intervene in the forex market but he is confident that since the rupee has been allowed to depreciate, exports will respond with a lag. The depreciation has been a good thing and the current account deficit will narrow down but when the foreign capital comes in, I will advise the governor to start accumulating reserves, Panagariya said. The central bank, he said should get to a situation where it starts targeting inflation.
The professor said there was not enough questioning about government policies, especially social programmes. We criticise, but there is also faith in the government, he said, adding there was a general belief that growth alone would not help without redistribution as also the feeling that the government needed to initiate everything.
He was optimistic, however, that while 10 years ago few questioned the views of economists like Amartya Sen, today a debate had been unleashed. There are healthy arguments and there are those like Narendra Modi who says lets bring in the private sector where it can deliver, he observed.