Reserve Bank of India (RBI) governor Shaktikana Das, after delivering his ‘Governor Talks’ at the International Monetary Fund headquarters, had a small fireside chat with Changyong Rhee, director of the IMF’s Asia and Pacific Department, and also took some audience questions. The growth-focused governor, under whose chairmanship the monetary policy committee of the central bank executed two back to back rate cuts of 25 basis points each since February, said India needs to grow at 8% to eliminate poverty. Edited excerpts of the interaction, by Anup Roy in Washington:
Rhee: In your speech you spoke about global spillover risks, but when I talk to the governors of advanced economies, they say by doing quantitative easing we stabilized the global economy, that was good for the emerging markets, but now for financial stability, we are normalizing and emerging markets complain again that we are tightening. They always complain. How do you respond?
Das: I think nobody is complaining. In a dynamic world when you take a particular decision, it plays out in many directions. Some of the collateral consequences may not be intended but they do happen. And if that happens and somebody is affected, naturally he has to voice his concerns. What is very important is that the communication should improve. And over the last seven or eight years, the communication of central banks indeed have improved. We had situations earlier where suddenly there was a turnaround in policy, or there was a complete U-turn in policy and change in monetary policy stance of advanced economies. Today the statements and the communications coming in from central banks in many advanced economics and also in many emerging markets economies have become far more forward looking and give a clear guidance about how it is going to play out in the next six months or one year. This is completely different from the taper tantrum, where there was a sudden mention of normalization and you know what happened after that. So I think, it’s a process, but there is a scope for better communication.
Rhee: At the end of your speech, you mentioned about India’s economic situation. But for us, I found it too modest. India is the fastest growing large economy, and according to our calculation, China, India accounted for close to 50 per cent of the global growth in the last couple of years. You mentioned that structural reforms are important despite slowdown. To maintain this high growth momentum in India, what kind of reforms are needed?
Das: India’s average growth rate of 7.5 per cent over the last few years is certainly very good. But India needs to grow at 7.5% plus. In fact, India needs to grow at about 8 per cent to eliminate the problem of poverty. There is still a large number of poor people living in India, there are still many challenges in social and other development sectors. And so India needs to grow faster. Particularly, in an aspirational India, 7.5 per cent growth is seen by many people as good, but the expectation is that it can be better. And I would feel that the potential growth is definitely 7.5% plus. I don’t want to start a debate on what should be the potential growth rate of India, but by and large, let me say 7.5% plus should be the reasonable growth that India can expect.
Now as regards to the structural reforms, some of the major reforms that has happened in the recent years are GST, putting in place a legal framework for stressed assets in banks, insolvency and bankruptcy code etc. But then areas that require attention in terms of reforms would be in labour, land. Many steps have been taken already at the provincial level. But much more needs to be done. One major area where reforms are necessary in India, again that is something that lies in the domain of the state government, is with regards to agricultural marketing. We have certain laws related to agricultural marketing, which act as impediments in getting private investments in creation of agricultural markets. As a result, the flow of private capital into creating a value chain in the agricultural products from the farm to the consumers are getting hampered. The laws are in the domain of the state governments and they need to be completely overhauled.
Audience: How worried are you about the fiscal positions of the states, especially considering the farm loan waivers that are happening?
The general government deficit in India is about 6% plus and this year so far 24 states have presented their budget for 2019-20. What will be the final figures I don’t know but if you look at the revised estimates figures, I think at an aggregate level, fiscal deficits of the states are a little below 3 per cent, which is the FRBM (fiscal responsibility and budgetary management act) target. But yes, there is a greater borrowing by the state governments, because they rely less on small savings. The state governments are taking larger share of the open market borrowings. As you know the reserve bank is the debt manager of the government of India, and we also assist the debt of some states. As far as the central government borrowing programme is concerned, we always try to ensure that the borrowing programme is executed in a manner that is non-disrupting, and the state governments’ borrowings and that of the centre’s are suitably spread out.
With regards to farm loan waiver, I have already articulated my views that any kind of generalized loan waiver definitely adversely impact the credit culture. Any kind of waiver has to be targeted, has to be criteria based, for example in times of cylones and drought etc.
Audience: How do you see the influence of automation and artificial intelligence technology, especially in fintech and do you have a policy to ensure the system is safeguarded against negative consequences?
If you look at the kind of payments system that have been introduced in India, the payments through mobile apps and other forms of digital payments have witnessed an exponential growth, if I remember correctly about nine times, in the last four of five years. And to give a further boost to digital payments, we have constituted a committee under the chairmanship of Mr. Nandan Nilekani. We would be putting out guidelines for regulatory sandbox for fintech innovations, so that any kind of disruption or damage in the process is contained and the lessons can be learnt and you can develop the process further. it is the best way in bringing innovation into the fintech sector.
Audience: Your idea of the size of rate actions, as needed by the economy, is interesting. Are you thinking of doing it in the RBI?
Well, I have tried to articulate an idea. I have discussed this with my colleagues within the Reserve Bank and I get two kinds of views. At this point of time, I would not like to elaborate further on this idea and I would rather wait for more reactions and comments and observations from other central banks.
Audience: How oil prices are going to impact India’s inflation and deficits?
Oil prices do play a significant role in our current account deficit and obviously over a period of time that inflationary impact is felt. But the inflationary impact of the oil prices sometimes is exaggerated. The impact is not going to happen the next day. There is a transmission time. So if there is a temporary spike in oil prices and again it comes down, then obviously the impact gets moderated as it happened in the last September and October when the crude prices went up to $85 a barrel but again they came down. Now he prices have again stared going up. We are watchful of the oil prices and a sustained increase in crude prices will definitely have an impact on inflation, but we have to see how sustained it is. That’s why I talked about stability of prices. I am not saying that a country will subsidise another country, no business can subsidise other business. All that I was emphasizing in my speech is the need for stability in prices so that emerging economies, the net oil importing countries, they know exactly what is the range the prices are likely to move. That will help them manage their current account deficits and will also help their fiscal deficits. Stability is the key.