Former RBI governor Bimal Jalan talks about the 1997 Asian financial crisis, underlines the need to decentralise power, says currency should not be seen as strong or weak, adds that while there is consensus that demonetisation was a bad move, govt had done well on corruption, and calls the IL&FS crisis a matter of concern.
BIMAL JALAN: For the first time in years, we have a majority government. Earlier, there was talk about compulsions of politics and coalitions and you could not take decisions that were not embedded in the past. You could have reforms, you could do something with the rupee, make it more free, but there was this thought that you cannot introduce major critical reforms. We now have a majority government and the next general elections are coming soon. So, if the government decides that some hard decisions should be taken in the interest of the country… that’s what we are looking at in India Ahead: 2025 and Beyond. The elections are in May 2019, and the measures can be announced now — economic measures, political measures, or some other dramatic measures that I talk about here (in the book). These measures can be implemented over a period of time, not just in the next six months.
Essentially, with a majority government, we are in a very strong position. We should look at our savings — our domestic savings are amongst the highest in the world. In terms of technology, look at India’s performance in the Silicon Valley. We have capital, we have technology, we have labour and we have the entrepreneurial spirit. We also have the budget, but what we do with it is important. Our world expenditure is growing. In terms of management of health, resources and food, we don’t just need announcements and committees. We need to shift some power from the Centre to the state.
P VAIDYANATHAN IYER: The situation today is no different from 1997-99. The rupee has hit a new low. There seems to be a problem of messaging between the Government of India and the RBI. The markets don’t seem to be believing the government. In 2018, the rupee has depreciated by almost 14%. What do you think is amiss in the messaging?
I don’t want to comment here on the RBI, for we know that there will be differences from time to time. But the thing to see here is that any policy, which is difficult on the ground… For example, in case you are intervening in the rupee, and the RBI and the government are not on the same page, then they (speculators and market players) will start speculating that this (intervention) will not happen. Therefore there has to be a consultative system, where we decide that we give the power to the RBI, or whoever it is, to manage the rupee. Also, the agency managing it should be held accountable. Now, to hold them accountable, you have to give them the powers to manage it.
P VAIDYANATHAN IYER: Can you tell us about the 1997 Asian financial crisis?
At that point we didn’t have the resources — we had sanctions because of nuclear proliferation. We had no support from other governments because of the US. Our reserves were very low. Then you had the Asian crisis and the speculation about how to manage it. There was also this fear that the rupee should not depreciate more. There were statements being made by some ministers when they came to power after the elections, that the rupee should be strong. At the moment we lost $2 billion out of the $20 or $22-odd (billion that we had). Everyone believed that it can’t be done. But we learnt by doing. Everybody expected that we will intervene when the rupee breaches 40 to a US dollar, so people start buying (thinking) the RBI can intervene at 40, and they can borrow.
There were two learnings: don’t intervene at that even number — intervene when the market is nervous — and that the interventions should be indirect. Somehow, we managed.
P VAIDYANATHAN IYER: What is it about a strong currency and why have successive governments looked at currency as an indicator?
We should stay out of this — strong, weak etc. We should avoid these terms. What we should talk about is if it is real effective exchange. Suppose inflation is 8%, and the value of rupee is going down in terms of goods and services, then there should be a depreciation of the exchange rate so that exports can take place, other than favouring imports. What I am trying to get to is the notion of strong and weak — everyone is strong. We should look at the exchange rate as nothing else but a medium of exchange with foreign economics. The criteria we can ask for is whether it’s a real medium of exchange, is it stable or not, what is it that we are doing about inflation, how are we managing it?
P VAIDYANATHAN IYER: We have a government with a clear majority, which we haven’t had in the past 30 years, and so we can push through reforms such as the GST, insolvency and bankruptcy laws etc. But such governments can also run into controversies, like at the time of demonetisation, or what we are seeing now with the Rafale deal. Do you see a flip side to a majoritarian government? Also, was demonetisation a good move?
I won’t comment on this move or that move. We all know, and there is a consensus, that demonetisation was not a good move. But, the main issue to address is corruption — which is multi-layered. We must credit the Central government, that with the GST etc, corruption has reduced at the Central level and at the administerial level. Fundamentally, if you don’t make administerial reforms, which ensure that you don’t require 30 approvals to buy a TV… What I am saying is that we have to simplify the procedure, lay down the rules. And, if you are borrowing from the banks to buy something, then the banks can decide, why should the Central government do it? Why should the State decide what the wages should be in Maharashtra and Gujarat; why should that happen?
In a large country like India, we have to transfer power to the state-level, the district-level, and then hold them accountable. For example, if you want to build roads, the Centre gets to decide where to do this, as they have the money. Now suppose you leave the other things to the state — how will it be built, who will build it. Then say that I have `7,000 crore or `4,000 crore and I am giving the states an advance of `2,000 crore and we can have a meeting with all the states and know how much does it cost to build roads in each one, and a map can be prepared. You need a method where all the taxes can be raised by the Centre, but the use of the taxes is decentralised and is based on performance, population, and other formulas.
ANIL SASI: What are your views on the appointment of political people as heads of boards, the RBI etc? Does it worry you?
I can’t comment on that.
P VAIDYANATHAN IYER: Does the RBI have any say in government nominations for appointment to its board?
It is not a question of having a say. It’s not that I have 20% vote and you have 30% vote and therefore you get elected. It is not a say. It is a consultative process. In the RBI or in any other board which is responsible to the government, and where a public service is being performed, what is important is delivering the best feasible services.
HARISH DAMODARAN: The RBI’s role has now become very transparent. They just have a single mandate — targeting inflation. Don’t you think it is a very narrow mandate and needs to be widened?
I will talk personally here. I don’t believe in targeting. It depends on what the situation is, what my priorities are. The priorities are taken into account depending on what is happening in the country. For example, if there is a drought, and if I have a target, how do I handle it? If there is a state of war and I have an exchange rate target, how do I handle that? One has to take into account all the factors that are relevant and then take a position that is in public interest.
HARISH DAMODARAN: Do you think inflation targeting is a bad move?
I don’t want to say good or bad. As a policy all of us want low inflation. There is no doubt about that. But for an ordinary Indian or any other public servant, how does it is matter if it is 6.2 or 6? I am not commenting on whether there should be a target in this particular case or not. What I am saying is that if something requires to be done in public interest, you do it and then be held accountable.
SUNNY VERMA: The government has tried to reform and resurrect public sector banks for some time now. However, year after year, they fall back into the sub-optimal territory. The recent fraud at Punjab National Bank exposed the faultlines in these banks, and prompted RBI Governor Urjit Patel to seek more powers to regulate these institutions — like the power to fire CMDs, force an amalgamation among public sector banks etc. But the government has not been very receptive. What is the solution — privatisation or granting more powers to the RBI?
There are no two views about this. If public sector banks are in crises, and they are going bankrupt, it is not justifiable. You should be able to take action prior to the crisis, unless there is a war or something like that, then it’s a different situation. These issues have to be handled by the agencies concerned, and with the approval of the governing authority concerned.
SANDEEP SINGH: What do you make of the IL&FS (Infrastructure Leasing & Financial Services) crisis?
I don’t want to comment specifically on IL&FS, but if something like this has happened, then it is a matter of great concern. Both aspects of the crisis need to be looked at. One is the issue of internal management of the institution, which is now being examined. The second aspect is of the regulatory authority — why was it allowed to develop to a point where this kind of a crisis happened? Fortunately, it hasn’t spread. If you had a Lehman kind of crisis, then what would have happened to our financial system…?
HARISH DAMODARAN: You were a policymaker at a very difficult time — we hardly had any reserves, India was nothing. Compared to that, don’t you think today’s policymakers have much more luxury? Foreign exchange, food reserves… most traditional constraints no longer exist. Also, do you think the standard of our policymakers has come down?
If we are doing a comparison, then we should also think how is it that we are so strong today. We must have dome something right, at the political level, administrative level, governance level. At the macro level, we have always been extremely resourceful and fundamentally strong with our skilled manpower, free media, free democracy, accountability. That is India’s big picture.
P VAIDYANATHAN IYER: How far have we come in terms of preventing disruptions in capital account or monetary policy independence and exchange rate stability? Do you think we can move ahead on capital account convertibility in the coming time?
Capital account convertibility is a different issue. It is in terms of the inflows. It is a very good thing from our point of view, provided we have the resources and we know what that is doing. There is a regulatory system that ensures that it is fast and fair. If you think of the outflow, any loan that we take, it must be such that we are able to service it. And there is a limit to that.
Therefore, the government or the RBI or the bank have to be extremely cautious about ensuring that whatever we owe either as foreign exchange loans or in terms of domestic loans or liabilities is manageable by that public institution.
SANDEEP SINGH: What are some of the things about the current economy that worry you and what are the aspects we can be hopeful about?
There is certainly a worry in terms of the demand and supply of credit — the gap between the two. It means that in terms of investment and the total amount of growth prospects we have today, we are not able to realise our full potential. What I hope is that we will take measures today that will make it possible for India not only to be one of the fastest growing countries but also to ensure poverty alleviation within a defined period. People should be held accountable. We should have an annual plan which can be revised if there is a security crisis of some kind. It can be monitored. The biggest task today is poverty alleviation, not only in terms of absolute numbers but also provision of basic services to the people.
We have lots of schemes, but on health, nutrition, education… we have made a lot of progress but we have to give a timeline to things, to get them done a 100% and not just stop at 84%.