Excerpts From An Interview

Is the gloom surrounding the Indian economy justified?
People who talk about gloom actually get gloomy; it has a habit of growing on you. I think the reality is not as bad as people have worked themselves into thinking it to be.

What’s your optimism based on?
On two things. First, I think realism demanded that we understood we were looking at a world slowing down. It was misplaced to think that because we were out of the recession in 2007-08, we’d get back to 9 or 10 percent growth rates. I don’t think anyone who’s seriously thought about the Indian economy had any illusion on that. Those who did were disappointed. One has to understand that our fiscal space is very different from what it was — and allowed us to do — during 2008.

What does that mean?
It basically means that, along with the rest of the world, we had a stimulus package and spent money not to go down as much as people thought we would. And we sort of surprised everybody with how well we did, though our rate of growth came down. It was always going to be more difficult the second time round, and that second time is coming. A lot of us could see that the world was changing very rapidly and it could not but have some effect on us. That’s what we are seeing now. Of course, it hasn’t helped that during this period there’s been all sorts of other stories, basically domestic. The fact that inflation was relatively high; that government did not seem to do enough; that the FIIs started pulling out; that the stock market started going down and exchange rate started deteriorating. Except for the exchange rate, all of this had also happened in 2008 but the pessimism was not that evident then, because everybody recognised that there was a world problem. What people don’t seem to be recognising now is that it’s again a world problem and are essentially finding domestic scapegoats.

But why would there be such a change in perception? Would you concede there’s a lack of policy cohesion?
Oh yes. I think the government has not been able to give a clear vision that people can automatically believe. To some extent, the 2G controversy weighs on people’s minds, but I think there’s also a general perception — more politics than anything else — which has reduced the credibility of government. The other factor is that the government didn’t seem to read the inflation situation correctly. It kept saying it’ll get okay in the next four months, and then the next six months and so on. I think that’s also led to the credibility problem.

The government was applauded in 2008 for insulating India from the crisis. Has it been less alert in taking adequate policy measures this time?
No, I think the two situations are different and the current one is inherently more difficult. In 2008, countries across the world had basically decided they would create the fiscal space to have a stimulus package. We were part of what everybody was doing. But today’s situation is that the Eurozone is breaking up, the American Congress is not yet able to decide on what they’re going to do — and it’s certainly not going to be any sort of stimulus, they are discussing how to cut debt. So everybody is talking about cutting expenditure rather than increasing it.

Given where the world economy stands, the first step is to be satisfied with 7 percent growth

Some economists say the government’s social spending is inefficient and charity-based rather than enabling and has triggered cascading negative effects. Is there any merit in this argument?
See, there will always be two views on the matter of whether we should have growth now and postpone the consumption or we actually deliver the fruits of consumption, at least in some dose, today. It’s all a matter of timing. I don’t think anyone in their sane mind would say “let’s have growth for growth’s sake even if it doesn’t reach anyone”. Or that “everyone has enough so even if there is no delivery, it’s still okay”. As I said, it’s all a question of timing. Nobody complained about it in 2008. In fact, there’s been very little increase in expenditure after 2009 because nothing has got off the ground. Inflation has been so high, in real terms, some of the public spending is actually lower today than it was in 2009.

From TEHELKA’s point of view, one would be on the side of having good social spend schemes but is efficiency a real area of concern? Like growth benefits, even social spends is not trickling down enough.
Of course, there are lots of problems with our social sector schemes. Those looking at it from within government know that better than anyone else. But there’s a simple fact that has not got the coverage it ought to get because the government has not yet come out with these figures. Between 2004 and 2009, poverty fell much more than it had done, at least in per annum terms, since 1989 and this despite the fact that 2009 was a drought year. There is another National Social Survey (NSS) taking place this year and I hope the decline will be even more. So something is working for the poor. The 2009 NSS data shows that most of this decline in poverty is actually due to social spending, so we didn’t get more poverty reduction from higher growth but we did get it from greater expenditure on social sectors, even while we recognise the leakages.

Apart from the global circumstances you’ve outlined, do you think there were active policy mistakes this time?
I think there’ll always be things people disagree on even if they’re done with the best intent. I do acknowledge the way we went about our monetary policy was probably not the best way of doing it. It was too slow. Increasing interest rates in very small doses over a prolonged period didn’t help much. There was continuous uncertainty but the general feeling was that the RBI would raise it and so everybody had built it into their plan and it neither had the effectiveness of a short but sharp upward movement nor did it have the element of surprise that government policy needs.

I also think a lot of other things have got complicated by delays and lack of clarity about which way decisions would move. For example, take the whole thing about Jairam Ramesh as environment minister and every joker in the country saying he held up our coal supply. A government has to be clear about its priorities and stand by them. In this case, at some point the priority was — and I think everybody agreed — that we’ve got to be better on the environment and there’s going to be some cost to this. Jairam was trying to create a clear-cut situation where certain areas would be no-go areas. Whether this was the right way to do it or not, a clear decision should have been taken. But the government was unable to project a cohesive stand on it.

There is a strong sense that the high interest rates are now choking the economy. In your view, what’s preventing a correction on this?
Inflation is actually coming down and there’s a big danger that we might actually go into reverse gear in exactly the same tentative sort of way we got into the forward gear. There has to be a correct application of mind. If the real root cause of the problem, for instance, is that our exports are slowing down and affecting the rest of the growth process, then you must actually look less aghast at the devaluation of the rupee that has taken place. Of course, there can be many points of views on this, but the worst thing that is happening is that people are not coming out with two-sided debates saying “I would’ve done this” or that “no, we don’t want a devaluation”, with the other side saying, “but a devaluation is good for exports and imports, especially at a time when the world economy is slowing down”. We don’t have this kind of healthy debate. What we have instead is people just saying “the government doesn’t know what it’s doing”.

In a personal capacity, then, what do you think are the urgent correctives that need to be put into place? Are there things the country can feel resilient about?
The first thing, I think, is we have to be realistic and be satisfied with a 7 percent rate of growth, given where the world economy stands. Having said that, I think we must also ensure that the relative growth we’re having in agriculture must continue. Most of the discontent you see today is basically an urban middle-class discontent. I think things will get much worse if the agricultural side starts going the same way. So far, of course, even though there are people who are dissatisfied at the agriculture end, it’s been more muted.

Then there is the question of investment picking up again, the flow of private money from abroad. Yes, there are a lot of things that can be done to boost this but the issue here is of timing. Like the FDI fiasco showed, before making any big move, you have to be clear that you can actually get it done. And the atmosphere is not conducive for this at the moment.

Finally, we come to the food security issue. A whole set of people — some even within the government — are somehow suddenly, very worried about this and are shouting their heads off. But this was a big election promise. Are we then saying that make a promise, but please don’t keep it? Will the government’s credibility not be dented if this major election promise is not delivered? Don’t judge credibility on only the things that you like and be expedient about what you don’t like. The second thing is, you’ve got to think in terms of a) are your numbers right; b) is the government all that stupid; and c) is the government really committing itself to the sort of numbers you guys are talking about? In general, the nature of our public debate is very choppy and has to be steered well. I agree it’s not been steered well enough.

But the Food Security Bill is a perfect example of a good idea crafted badly. Even sympathisers would be worried about it.
Yes, I myself have problems with the Food Bill as it stands, in terms of its ability to accomplish what it wants to, given the huge targeting and delivery problems it will face. But the debate is not restricted to improving it; it’s about saying we should be doing something else altogether.

You mentioned priority areas. What do you think are the priority areas the government should be focusing on now?
The priority areas are all the old-fashioned ones. I don’t think anyone would disagree with that. It’s just that the fiscal situation will determine the pace of how we go about it. The first obviously is infrastructure, the whole gamut of urban and rural infrastructure. The second is the whole area of health and education and we have a very small window in which to accomplish both. In education, particularly, I think the window is getting shorter and shorter, and if we don’t keep up the momentum, we are going to actually lose this whole demographic dividend people talk about. We only have 10 years to do it. If we don’t do it now, we won’t be able to do it again. Finally, the third priority, probably even more than infrastructure and education is that we’ve got to start thinking seriously about water.

What explains the corporate sector’s disenchantment with UPA-2 and Prime Minister Manmohan Singh, when he is very much seen as being pro-corporate? What has changed in that relationship?
I don’t think anything has changed in that relationship. It’s basically about a collapse in expectations. UPA-1 was constrained by its alliance with the Left, but it still managed a lot. With UPA-2, there was a sense of anticipation that let’s now get on with it. The disappointment is that many new reforms have either not been put forward or have been forced to roll back.

What, according to you, are the reforms that should go through?
I think the economy should actually be looking at not so much outside players but at its ability to utilise its own domestic resources. Many of these reforms will be tougher because they essentially involve labour or land or control over resources on which people have clear visions of what they are already entitled to. So this is not about making some concession to a foreigner; it’s about making a new set of rules by which we Indians will deal with ourselves. Given that, the process has got to be slower. However, some of them are very necessary. I also think it’s very necessary to recognise that our economy should not be driven simply by outside demand; it’s got to be an economy that creates its own demand. And you cannot create your own demand without actually having a lot of people involved in it. So, inclusive growth cannot just remain a slogan.

Why this constant irony of starvation set against millions of tonnes of rotting grains? Coca-Cola delivers its bottles to remote villages, why can’t successive governments get it right?
Yes there are losses, and it is absolutely right for the press to play this up. But what people forget is that the losses are less than about 1 percent. Of course, when you have a stock of more than 60 million tonnes, 1 percent amounts to about 600,000 tonnes which is a lot — but it is still 1 percent. In very few places in the world do you have such low loss levels. I’m sure even Coca- Cola will have a fair percentage of loss but that, of course, is not news. Nonetheless, even this 1 percent is huge and I don’t blame anyone for playing up that story. What I do find bizarre is that the people who get really worked up about this are not saying let’s fix it. What they are really saying is: Why are we doing this? Why should we have FCI at all? Why not to give it to Coca-Cola to distribute food?

The middle class is talking about the flight of capital. Is this worrying?
It is a bit worrying. But this sort of thing is linked to the rest of the world not doing well. Whenever the rest of the world doesn’t do well, there is bound to be an impact on capital, particularly in places like India, which is used as a parking rather than as a long-run place. But I think if we can actually convince people that we have 7-7.5 percent growth and are looking at consolidating what we have got, a lot of the money will come back because after the money has gone back to consolidate their own things in their respective home bases, it has to start moving again. At the moment, they are investing in Africa and other so-called emerging economies but India still remains a very bright spot. In the short run, when you don’t know where the rupee would be tomorrow or whether the interest rate will rise, it may be a bit daunting. But once a little stability comes back, all this will take care of itself.

It is important to remain realistic. The unfortunate thing is that a lot of people from the government have been repeatedly saying that it will all be okay in the next six months. We should not claim that we are going to go back to 9 percent growth overnight or back to 3-4 percent inflation. The world is not a happy place and we are a happier place than most other parts of the world. Just say that.

Shoma Chaudhury is Managing Editor, Tehelka. 
shoma@tehelka.com