Focus on the fundamentals, get them right and we will suffer the least damage in a highly leveraged world , Raghuram Rajan, Former Governor, RBI, tells Supriya Shrinate of ET Now at the India Economic Conclave.
You have the advantage of being a global insider of sorts. You have been in policy making in India. Are we future ready and what do we need to do to get to a $5 trillion economy?
First, we must pat ourselves on the back a little for what we have done so far. I think 25 years of 7% of growth is a good thing and we have come some distance. However, we are approaching middle income country level and that means we have to focus much more on getting our growth path straightened out. There are some problems that are emerging that we have to be wary of.
One, of course is that we actually need more equitable growth than today. For example, one must worry about the extent of job creation in India. Reports of 25 million people applying for 90,000 railway jobs is something that suggests there is not enough supply of jobs in the market.
We also have to worry about the path of growth in terms of pollution, emissions and so on. We are choking our cities and if we are doing that at our level of growth, think of what happens when we double our GDP to $5 trillion as you suggest! So we need to do a lot more on having cleaner growth. Of course, that leads to the issue of institutions. The factor that helps us grow in a healthy way is strong institutions, whether it is the pollution regulator, the emissions regulator or whether it is the financial regulator. These are structures that we must strengthen. They have to stand as independent bodies to ensure our growth is healthy and stable.
Everybody seems to laud each other on the 7% growth and I know you say that we have grown at 7% for 25 years. Is it really phenomenal or is this the new Hindu rate of growth up from the Asian 3.5% that we have seen? Is this going to lift these people out of poverty, create jobs, create the necessary gainful employment that is required or are we stuck in the range of 7% to 7.5%?
I wish this was the new famous Hindu rate of growth. I am not sure. It is a healthy rate of growth but it is insufficient in terms of creating the jobs that we need. We either need to shift some of the growth to job creating sectors and we have not done that well in the past. I am not sure we know quite how to do it or increase the pace of growth more generally by a couple of percentage points to absorb the people coming into the labour force.
A key to stronger growth will have to be areas like construction where building the infrastructure that India needs, will employ a lot more people and create jobs for people leaving agriculture as well as for modestly educated people from urban areas. We need to think about what we can do to create these jobs because otherwise we have problems ahead.
Indias physical infrastructure will be key to a development and yet it hinges on two issues – land acquisition and environmental clearances. These are both politically and socially sensitive. Can there be a balance?
We do it the right way. The temptation will be to cut corners, to have draconian powers on land acquisition or to eliminate the need for environmental regulation. But that would be a mistake both for our long-term growth as well as a mistake given our democracy. The more draconian you get, the more opposition builds up.
Instead, we have to find clever ways of trying to achieve the objectives that we want with these measures while at the same time respecting the intent of environmental regulation or careful land acquisition. We need to take people along. For example, in land acquisition, could we improve the pace of the process first by making land rights much clearer?
Right now, there are a lot of states where it is quite opaque who owns land wiht a decent price as well as some kind of long-term incentive for the person who parts with the land. For example, a land sharing mechanism like the one we had with the Andhra capital acquisition. Let us look for best practices in India and see how that would work.
Similarly, in terms of environment, we have a lot of regulations but if you look at some of what is happening for example in Delhi or you look at the growth of a place like Shimla, you see that we have not achieved the objective of having clean growth. How do we go about that? We need to spend a lot of time thinking how we manage this process sensibly without shortcuts.
This government has significantly benefited from a benign oil regime. From the highs of $140 a barrel, we have seen the lows of sub-30. in In the last policy, RBI called it a tailwind. It has become a headwind after the OPEC cuts. Why did the tailwind not spur our growth further?
It is a very legitimate question. Where has the oil windfall gone and how does it hurt us as it comes back in the form of higher prices? But let us put that behind us. The key issue is volatility of oil and with geopolitical tensions, volatility is going to increase.
There is a very strong need for oil hedging mechanism for a country like ours which is so dependent on oil. We have discussed this in the past. Of course, we have started a strategic petroleum reserve but overall and beyond that, we have to think about whether it makes sense to hedge the price of oil, especially when it comes to levels such as these.
The problem is many fear the fallout if oil prices fall even further and you have hedged it. But that has to be taken as a natural consequence of hedging programme and we must as a country think about whether we should start this process.
How crucial will the human capital be for being future ready to emerge as a $5-trillion economy? Do we run the risk of fewer knowledge workers in India in future?
It is not just education, it is also healthcare because of the kind of nutrition and healthcare that our young get at an early age. It may in fact stunt them for the future and make it much harder for them to benefit from any kind of education system, let alone the education system that we have.
Now there are some pieces of good news on education. One is that everybody eventually seems to be entering the classroom. Now whether they continue in the classroom, whether they learn enough is a very different question and the ASER surveys, the work that Pratham has done suggests they are not learning enough. A few of them can enumerate and are able to read in an effective way.
At this point, we have to shift towards improving the quality of education and that means a lot of remedial education to ensure that children are not left behind. After all, it is the children who are left behind, who do not understand anything in class and who are prime candidates for dropping out also. Now that we have got everybody into the system to begin with, let us keep them there by giving them a much better, much higher quality education that they are currently getting.
It requires a tremendous work on all sides again.
From human capital, I would like to address intellectual capital requirements. Are we not investing enough in the future? Are our companies not investing enough?
This indicates that we have work to do. There are small startups. I have met some people in Bangalore who are working on artificial intelligence and machine learning but clearly at this point, our northern neighbour China has stolen a march over us in terms of how prepared we are.
Again, there is no shortcut here. You cannot produce world class companies in these areas without having a strong research university system which backs them. China has made that leap. If you look at Chinese universities, they have made a tremendous change over the last 10 to 15 years and now some of them are really world class.
We need to do the same in India also and focus on improving the quality of research or the quality of our universities and as a by-product our companies will also get better.
We were relying a lot on the companies themselves for doing what was necessary. Certainly they could do some as well. We had world class companies in the IT area. Now to some extent, they are falling behind as there is a shift to new areas and we need far more research teaching in those areas to create the human capital to take us forward. I think this is a wakeup call for us that we should do far more in the area of education.
What do you make of the debate on growth data in the light of reports that say that there was a set of data on GDP figures earlier which was not allowed. The credibility of statistical system is perhaps what is really in focus. What is going to be the future of the economy based on this data? Are those waters being muddied really?
This is a current controversy that I do not think I have knowledge or expertise to wade into. The broader question you are asking is as we go forward and become a five-trillion economy from the 2.5 trillion plus we are now, what more do we need to do?
Clearly one part of what we need to do is to have a robust and reliable data so that economic decision makers can take decisions on that basis. This means strengthening of our whole statistical process. It is not just the quality of data that we have to worry about it is also the quantity of data. For example, look at the whole area of labour. What are the unemployment numbers? How do they vary month by month, we have no idea. We really do not collect this well and it is very important we do it quickly because a lot of economic policy making otherwise is made in the dark.
As far as the overall GDP growth numbers and GDP level numbers go, the reality is whatever they be, we need to do more because again the proof of the pudding is in the eating. If 25 million people are applying for 90,000 jobs, it suggests that we are not supplying enough jobs. That means growth is not strong enough, at least in the job creating areas.
What are some of the fault lines that worry you about Indias macroeconomic management? Is it the current account deficit (CAD) if oil prices go up? Trade disbalance or , is this the deepening fiscal fault that worries you?
We have structures that can bring them back in line if they depart too much but at this point, the big concern has to be with the state deficits, especially as we go into a flurry of elections with a variety of states promising a lot of waivers, a lot of cheap goodies in order to get votes and this often hampers them later on because ultimately what is suffering is investment.
If we look at agrarian unrest, one of the big concerns is that agrarian productivity has not increased as much as it should. Of course, our prices are fluctuating in ways that hurt the farmer a lot but the net effect of all this is that people are getting more and more concerned that they do not have access to good livelihoods.
The first order is of, of course, macro stability because the world is getting a little more dangerous for us, including the fact that oil prices are fluctuating tremendously. But interest rates are also going up and there are the fluctuations on what is going to happen on trade.
But macro stability is number one and second is focus on the sectors that are distressed. Try and get them back on track, I am talking about agriculture, banking sector and power which is a distressed sector and needs to be fixed very quickly. But then also think about the long term which is where all the talk about education and so on goes. There is no immediate reason to be overly concerned about India but there is a reason to revisit our growth path and to ensure that it is stable, sustainable and equitable. All these three should be attached to stronger growth. If we can do all that we are on the right track.
Where in the world is the next crisis brewing according to you?
You want me to be a Cassandra again? Look, risks build up during the period of a very accommodative monetary policy. There are risks around the world and enormous amount of money has flowed into the emerging markets. There has been a huge amount of leveraging in China as well as in the industrial West. There are pockets of high leverage in the US also, for example, the shale industry.
The combination of very easy conditions and leveraging makes us vulnerable as interest rates go and as volatility picks up again. And we have got volatility from the process of normalisation but also geopolitical volatility introduced by the personalities who dominate the global scene today. All this put together makes it a risky place. And can accidents happen? Of course, they can happen. What is the lesson for India? Focus on the fundamentals, get them right at this point and we will suffer the least damage that we can expect.
Of all the risks out there why is it that you believe the underpinnings of populist movements are the most threatening of the world that we live in?
Uncertainties are created by populist actions, The whole uncertainty about trade is in fact direct consequence of that. That overlaid on a process of normalising interest rates creates a situation we have not really experienced before. Where are you going to invest today? How do you know that where you invest is not going to be subject to 20% more tariffs which will render the operation uneconomic? You do not even want to invest in your home country in case a competitor becomes significantly cheaper when the tariffs are withdrawn. So, there is a lot of uncertainty created by this populist movement.
I think they are asking the right questions, has the global growth over the last 25 years benefited all? There are people who have not benefited at all and who are saying what about us? That is an important question that the elite have to answer. At the same time, they are proposing a whole set of policies that could be disruptive. We have to find ways to adopt the best of those policies without overturning the whole system that we have built which has also served us reasonably well, though not as equitably as we would want.