New Delhi: Bimal Jalan, a former governor of the Reserve Bank of India (RBI), is widely credited as having successfully limited the impact of the East Asian crisis on India in 1997. Currently an honorary fellow at the National Council of Applied Economic Research, Jalan said in a telephone interview that it is time for the government to end the discretionary powers of ministers and leave the implementation of important policies to independent agencies. Edited excerpts:
What do you think is the biggest policy challenge before the government? Is it curbing inflation or preserving economic growth?
There can be no doubt that inflation has to be the highest priority. It has continued for long and despite expectations that with good rain, we will not have food prices rising and inflation would decline; it has not happened. Ultimately, if inflation is not controlled, it will become the enemy of growth.
So that means some degree of growth has to be sacrificed in the process?
No, I think this is a wrong question. Under any circumstances, growth is a process. It is not sacrificing growth but achieving long-term process of growth. So if you can achieve reduction of inflation for one or two years, how does it matter if growth rate declines from 8.5% to 7.5%? Just imagine, we spend so much of time and newspaper headlines are so preoccupied on the second digit (decimal point in the growth number), but does it matter to the people of India? Inflation matters much more.
Is high inflation becoming a structural phenomenon in India, because we are experiencing such high inflation rates for the last two years?
Yes, one has to get into the ingredients of why it is happening. Is RBI too soft? Somebody has to grapple with what exactly is happening. We had 15% inflation in the past in the 1960s, 1970s and 1980s, but that was all controlled. In the 1990s also we had a high rate of inflation. So I think it is not something which is out of control and we should be prepared to focus on that issue rather than hoping that something would happen. And you can see, just look at your newspaper headlines for last eight-nine months—there were expectations that inflation will come down from different sources, but it has not. So something has to be done.
Is monetary policy an effective enough tool to curb inflation?
Monetary policy is one of the most important ingredients of controlling inflation expectations. If everybody expects vegetable prices are going to go up, every household will buy vegetables tomorrow. So the view that RBI, the government authorities are going to get it right is important.
Then you will not buy (extra amounts) and stocks will decline, for both industries and for households.
How close do you think we are to the end of the current policy rate increase cycle by RBI?
I do not know. I can’t predict that. If inflation comes down, then naturally you would not need to hike rates. But if inflation does not come down, then something has to be done.
How do you see the impact on the global economy and India in case Greece defaults?
That is a big thing. If you go to the past history, it goes to the root of the viability of euro as a currency. If debt and fiscal deficit are not under control of the same government, so this federalism with different countries deciding what should be done and what should not be done and currency flexibility not being there is a big problem. A double-dip recession is already being talked about. But I hope it will be corrected because Europe is one of the very important components of global growth. If there is a recession, there will be direct impact on India. Fortunately, our dependence on trade is not as high as some other countries.
To what would you attribute the present state of policy paralysis and the lack of economic reforms?
It is something on which there are different voices. We all know the sense of collective responsibility, which is fundamental to the functioning of our parliamentary democracy, is not quite there. It does not need a great political scientist to say that. Every day there is something coming up. Naturally, this is affecting governance and I hope something will be done.
Does this policy paralysis have the potential to derail India’s growth story?
In the long run, it is bound to. We have been reading headlines of this whole enthusiasm becoming somewhat milder, there is concern all around.
The behaviour pattern of consumers, investors, corporate, public sector will be determined by what exactly is the expectation. When you are investing for the next four years, say in infrastructure, you are making some demand and revenue projections. If that changes, then your revenue will decline and your ability to finance investment will decline. So, of that there is no doubt.
What are the major economic reforms you would like to see?
On economic reforms, it is of utmost importance to deliver what you say I will, in the sense that on the public delivery side, food delivery to the poor, the working of the rural employment scheme, construction of power stations or delivery of power. If you say you want to do this, you have to do this. If you succeed, then people will start feeling that, yes, the government means what it says.
What about big-ticket reforms such as allowing foreign direct investment (FDI) in multi-brand retail and increasing the limit in insurance?
No, all that I don’t believe in. These are all very simple solutions, which is okay, but ultimately it is the execution of what you are saying.
Suppose I say I am increasing FDI limit in power, then if the state government, the Central government or the power development authority can’t implement it, then how does it matter. Capital is not a problem. So you have to look for execution. Ultimately, it is the real economy which matters.
So how do you think the present policy paralysis could be ended?
You have a sovereign government. If it decides to do something collectively, it will happen. We have some brilliant minds in the government also. This is the same country which has given you the freest election with the largest population in the world history. Why can’t you do what you want to do? Why can’t you appoint an agency and give it full power. Why should ministers decide? You take 2G (second-generation) spectrum allocation, why should they decide? You decide policy.
What do you think went wrong with the 2G spectrum allocation?
Once you give discretion, then today you have Mr X, tomorrow you will have Mr Y, day after tomorrow you will have Mr Z. You take the highways. Go over the ground for the last five years, each new minister has a different view. Some are very, very good. Some are good in talking and some are good in execution. For example, who does elections in India—some bureaucrats.
You decide the policy, you decide the dates, but the Election Commission is in charge. So, one, you need to decide the policy and leave it to the agency to implement, and, two, monitoring the delivery system—these are the two most fundamental reforms that you need. The age has changed.
Government would say, we are elected people, we have the right, etc. Yes, you are elected to make policy, but why is the Election Commission allowed to hold elections and not the home ministry? So we need to think about it. We need to do something about it.
So much energy is being invested on issues such as corruption and black money these days. Do you think it demands the highest priority of the government?
Obviously, but go to the root. Why is it that you have a system of corporate-government (nexus). How did this happen? Who had the discretion? The answers are simple. How did it happen that this country is regarded and applauded for its democracy and elections and the same country is regarded as one of the most corrupt. The conviction rate under corruption is minimum. Why?
So it is basically the concentration of power in the hands of a few?
Yes, it is concentration of discretionary power. Where I want to have a highway and where not, which state I come from, which is my district. Then the compulsions of coalition. The compulsions of coalition did not stop you from having a free election of the highest number of people in the world in history.
Your report on ownership and management of stock exchanges has evoked strong responses. Some of the criticism to this report is that it is not in tune with international best practices. What are your views?
There are different practices abroad. The committee consisted of representatives from Securities and Exchange Board of India (Sebi), finance ministry and listed companies. It engaged in a lot of consultations. It is for Sebi to decide after taking into account more opinions. This is not the last word. And we have said that you must constitute a committee after five years. I am not saying the committee may be right regarding non-listing of stock exchanges. Why it has opposed this is because stock exchanges also have supervisory power. Once you can separate supervisory power, you set up another agency and say you would be a trading platform and some other independent agency would decide what the supervisory, regulatory role of the stock exchange is, then you can list.
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