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:
When you spoke to TOI in 2010, you termed it a dubious distinction that India has the largest number of billionaires per trillion dollars, said many of them became billionaires because of proximity to government and described it as " oligarchic capitalism". Is that still an appropriate description?
We had a period of very rapid growth and growth overtook our governance capabilities. Natural resources, which were very cheap, suddenly — as a result of our growth and 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. The private sector to some extent took advantage of this gap - some 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 consumers are benefiting. Telecom is one example. 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 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. Let's start by having free and fair auctions. 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.
What do you do 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, the better for growth. So, even as discussion is going on about who is to blame and how much and why, we need to improve governance mechanisms in those areas. Some of the areas, such as coal, are extremely critical. We need to be able to do multiple things at the same time.
How do you see the global economic situation evolving?
Slow. It's not just debt deleveraging, it's also a structural crisis. The US is in a much better situation than Europe in terms of long-term growth prospects. 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 start growing 6-6.5%, when the rest of the world is growing 1-1.5%, we will create a positive dynamic that will serve us very well.
What are the three-four things 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 the economy. On the agriculture side, supply of vegetables, pulses is not keeping pace with the demand, which is reflected in higher prices. On the goods side, till recently, there was a fair amount of pricing power, suggesting that supply constraints were an issue. 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. 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.
Between the two threats to achieving a high growth path — internally of not getting governance right and externally from the global economy — which is more serious?
Internally, it's as much investment which is creating the climate. 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.
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:
When you spoke to TOI in 2010, you termed it a dubious distinction that India has the largest number of billionaires per trillion dollars, said many of them became billionaires because of proximity to government and described it as " oligarchic capitalism". Is that still an appropriate description?
We had a period of very rapid growth and growth overtook our governance capabilities. Natural resources, which were very cheap, suddenly — as a result of our growth and 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. The private sector to some extent took advantage of this gap - some 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 consumers are benefiting. Telecom is one example. 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 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. Let's start by having free and fair auctions. 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.
What do you do 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, the better for growth. So, even as discussion is going on about who is to blame and how much and why, we need to improve governance mechanisms in those areas. Some of the areas, such as coal, are extremely critical. We need to be able to do multiple things at the same time.
How do you see the global economic situation evolving?
Slow. It's not just debt deleveraging, it's also a structural crisis. The US is in a much better situation than Europe in terms of long-term growth prospects. 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 start growing 6-6.5%, when the rest of the world is growing 1-1.5%, we will create a positive dynamic that will serve us very well.
What are the three-four things 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 the economy. On the agriculture side, supply of vegetables, pulses is not keeping pace with the demand, which is reflected in higher prices. On the goods side, till recently, there was a fair amount of pricing power, suggesting that supply constraints were an issue. 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. 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.
Between the two threats to achieving a high growth path — internally of not getting governance right and externally from the global economy — which is more serious?
Internally, it's as much investment which is creating the climate. 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.
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