By Sidhartha & Shankar Raghuraman, TNN
NEW DELHI: Raghuram Rajan, the newly-appointed chief economic adviser to the finance ministry, has said a period of rapid economic growth in which governance capabilities did not keep pace has allowed sections of the private sector to “make a killing”.
Elaborating on this comment, he told TOI that natural resources such as spectrum or coal, which were plentiful earlier, had become much more valuable today because of the growth not only of India but of other countries like China. Yet, the process of allocating these resources had not changed to take account of this fact.
“The private sector to some extent took advantage of this gap — some of them through means that were fair, some through means less fair — and has made a killing,” he added.
Rajan said what was urgently needed was to bring the level of governance on a par with the level of the economy, a process that “is under way”.
Acknowledging that it was difficult to improve governance mechanisms in areas like coal allocation in the midst of a debate on what happened, he stressed that India would have to do it because “if we don’t then we are going to stagnate”.
Pointing out that various parts of the global economy were in the grips of a structural crisis, Rajan acknowledged that this would be a constraint on India’s growth. Yet, it would also mean that if India’s slowdown bottoms out and growth starts rising to about 6-6.5%, “we will create a positive dynamic that will serve us very well”.
Asked which was the bigger threat to growth — internal issues like the governance gap or external ones like a sluggish global economy — the CEA pointed out that while India can’t do anything about the external factors, “higher value to us would be to get our internal act in order”. This would include not only fixing the governance issues, but also getting investment going again, he said.
TOI spoke to him about the challenges to the economy and how they can be overcome. Excerpts:
Q: When you spoke to TOI in 2010, you had talked about how India has the largest number of billionaires per trillion dollars. You had termed it a dubious distinction and said that a lot of billionaires became billionaires because of their proximity to government. You had described it as ” oligarchic capitalism“. Do you still think it’s an appropriate description?
What is widely perceived in India, and what I believe is that we had a period of very rapid growth and growth overtook our governance capabilities. One way to think about it is natural resources, which were very cheap suddenly — as a result of our growth and because of the growth of other countries — became quite valuable. In the days when they were plentiful, we were used to giving them out. As they became more valuable, we didn’t really change the process to fit the fact that they were that much more valuable. Think of spectrum. Earlier there were no takers for spectrum as no one thought this would be very valuable. So, early spectrum was not given away at the huge rates at which later spectrum was bid. So, the private sector to some extent took advantage of this gap – some of them through means that were fair, some through means less fair – and has made a killing. In some areas, proximity to the government is natural because it’s a regulated area. So, despite the wholescale intervention of the government, people are producing a product which is very cost effective and a lot of consumers are benefiting. Telecom is one example. A lot of Indian advances in telecom have been very valuable. In other areas, such as iron ore, it’s not entirely clear that a lot of people who have become rich have done anything other than dig the stuff out of the ground. Without the government intervention in a big way, a lot of money has escaped the public coffers. So, what we need to do is improve the level of governance to the level of the economy that we have and that process is underway. Take the Ashok Chawla committee report, which has argued that by and large most natural resources should be auctioned. That’s a good starting point. Let’s start by having free and fair auctions for most of the stuff. If we don’t do it, explain why and under what circumstances. That kind of transparency will start bringing more confidence, not just in the government, but also in the private sector and allow us to regain the pace of growth. Part of the reason why we are a little stalled is that there is an apprehension that if we give permission too easily, we look like we have not done the right thing. If you can build more confidence in the governance process, and transparency, it can help give confidence to the bureaucrat taking the decision, to the public as well as to the entrepreneur, as it does not show him in a bad light just because he is dealing in an area where government permissions or resources are required.
Q: You said some in the private sector have made a killing by using means that are fair and some by using means that are not fair. What do you do now about those who have made a killing by using unfair means?
The law takes its own course. In some areas it is taking its course. The sooner we can deal with these and put them behind us, the better for growth. So, even as discussion is going on about who is to blame and how much and why, if possible, we need to move to improve governance mechanisms in those areas even though it’s hard to do so when there is a debate on what happened. But we should, because if we don’t then we are going to stagnate. Some of the areas, such as coal, are extremely critical for the economy. We need to be able to do multiple things at the same time.
Q: One of the reasons given for the lag in governance catching up with growth was that we did not have the luxury of waiting to get it right.
You don’t have the luxury of long timeframes, especially when there is immense pressure due to slowdown or because of growth. But to the extent that you have time for reflection, trying to get the structures right is well worth trying. You have to be careful about saying that you have all the time in the world, but at the same time a few weeks or months…we aren’t talking about rocket science, we are talking about things other countries have done. There are models that we can pick up. Getting it reasonably right can be quite valuable down the line when you can eliminate the possibility of questions that can stall the process.
Q: To what extent have we been able to fix the global financial system and what is your assessment of the situation?
We really don’t know whether the measures that have been brought in are enough. It’s one of those problems where stress-testing the system will tell you whether it works. You need a mini crisis, but not a maxi crisis. Those don’t come naturally. Europe may produce something that will test the system, but we don’t know, because many of the systems are still theoretical – resolution systems in the US, the capital requirements – we have to wait and see. There are some lessons from the crisis that regulators can absorb. Amongst the key lessons is: be very careful when there is a massive credit expansion along with an expansion in asset prices, because these are the roots of longer term problems.
Q: How do you see the global economic situation evolving?
Slow. It’s not just debt deleveraging, it’s also a structural crisis. Before the crisis, Europe was growing at 1% a year, and now they are negative. They need to up that rate of growth through structural reforms. Similarly, in the US, there are mismatches in terms of labour capabilities and they need to fix that. It is in a much better situation than Europe in terms of long-term growth prospects. If they can do things to increase that and deal with fiscal issues, you put all these together and add the debt overhang, you have naturally slow growth. China has been in a process of rapid growth focusing on an investment-led model that has come to an end. The question is whether they can push the consumption-led model to replace it quickly enough. There are big question marks about other countries, which is why if we can get our act together, we will look a lot healthier than many other countries. If we hit the bottom and starting growing 6-6.5%, whenthe rest of the world is growing 1-1.5%, we will create a positive dynamic that will serve us very well.
Q: What are the three-four things that you would like to see to push the growth rate beyond 6-6.5%? Also, between the investment-led and consumption-led models, which works better for India?
We need a balance. We were moving towards more investment but that has slowed. We need to ramp that up quickly because supply constraints are showing in different ways in the economy. On the agriculture side, supply of vegetables, pulses is not keeping pace with the demand, which is reflected in higher prices. But on the goods side, till recently, there was a fair amount of pricing power, suggesting that supply constraints were an issue. So, investment is needed not just for today but tomorrow because we have a growing population that will need more goods and services. Investment is very important. Consumption has slowed, but there is no reason why it should not pick up. The stock market is up, so at the higher end people who have invested in the stock market will start spending more. At the middle and lower end, as you see more jobs getting created once investment picks up, people will start getting confidence and start spending. You put all this together and, hopefully, you will see as inflation comes down, you get the added benefit of lower interest rates and you have a dynamic that looks very good. That would be a very rosy scenario. With that kind of scenario, there is no reason why we can’t go back to much higher growth rates than we have now. But we need a lot of things to come together and we need the international scenario not to deteriorate, which for us would be the financial crisis coming from outside, or much higher commodity prices or strong investor risk aversion. Any of these could be problematic. A good environment for us will be better growth elsewhere, or at least they don’t collapse, and second, if commodity prices stay relatively low and give us some respite on oil prices perhaps that gives us time to do all that we need to do and get the fiscal situation in better shape.
Q: Between the two threats to achieving a high growth path — one internally of not getting governance right and the other the threat from the global economy — which is more serious?
Internally, it’s as much investment which is creating the climate, part of which is investment. Governance broadly speaking, about permissions, land acquisitions, there is a whole range of things that need to be done. Given that we have the capacity to generate domestic demand, higher value to us would be to get our internal act in order. We can’t do anything about the external factors, so we can only hope that the external environment cooperates to get our internal act right.
Courtesy : http://www.timesofindia.com