CNBC-TV18’s Suresh Venkat spoke to the Deputy Governor of the Reserve Bank of India and one of India’s finest economists, Dr Subir Gokarn on the challenges a country like India faces with respect to inflation and what are the measures that can be taken to keep it in check.
Q: Are economists an ambivalent lot do you think generally speaking?
A: It is important from an analytical perspective to be ambivalent because it is not a precise science. Let us not delude ourselves about the scientific content of economics. There are analytical frameworks; there are ways of linking factors together to reach some sort of assessment of the situation. These we call models or paradigms. These are proven or disproven by data. So, paradigms are sometimes effective sometimes not. At the end of the day the value of a paradigm is its ability to address a whole range of alternatives. That is why you get to this one-hand, other hand situation which is that if you impose a certain scenario on a model you will get one outcome and if you impose a different scenario you will get another outcome. Let us not get too carried away with this sort of ambivalence because ultimately the economist is not the decision maker. Economics as a science is not leading you to the ultimate decision. It is leading you to a set of alternatives each of which is associated with some benefits and some costs.
Q: One of the knowledge inputs into judicial decision making?
A: Absolutely. The more precisely or more persuasively you can put these costs and benefits across, the more value it adds to the decision making. There is the profession of economics which feeds effectively mostly, sometimes not; into the act or process of decision making. It is the knowledge input. The more concretely you can put these alternatives forward with their respective costs and benefits, the more effective the decision making process becomes.
Q: You sometimes feel that we as a country are conflicted between good economics and bad politics?
A: If this is universal, the objectives of democratically elected political class argument. They have the fundamental need to be re-elected and they have to balance out what they do in the short-term to achieve this objective with the longer-term statesmen or vision dimensions of good politics. To the extent that they can achieve this balance without compromising too much on the fundamental economics or other principles that makes for a sustainable process. There are always trade-offs. At some point you feel that you are not the one who will win an election by focusing on the long-term. You need to do something quickly to achieve that objective how you are going to do it.
Q: The raging issue of the day is inflation. Inflation cannot be all bad if vegetable prices and food prices are going up somebody down the line, a farmer is getting more money for his crop. Why is it such a bad thing, if more people are making more money?
A: The simple principle that we have to consider here is - are we producing what we are producing with the greatest efficiency? If inflation is being driven by inefficiency, the fact that the productivity is much lower than it could be. Yes, the farmer benefits because there is a supply-demand gap; if there is more demand than supply that is when prices go up. If this can be dealt with by increasing supply through improved productivity, that would actually benefit the farmer and the consumer. When we look at opportunities for larger or mutual benefit and we see that these are not being exploited then we have a problem. If you reach a point where somebody’s benefit can only come at somebody else’s cost, we have to accept that there is where there is a trade-off. But given a situation where with the undertaking of certain actions and here I am talking specifically about actions to improve both productivity of food and the efficiency of its distribution then you have a situation where farmers incomes go up but consumers pay lower prices, that is a sort of win-win, that is the kind of scenario. We have had this repeatedly in our own economy in the last twenty years. If you look at consumer durables they have gone up in volumes enormously. This has come both at the consumers benefit because prices have gone down and the producers benefit because profits and margins have either gone up or remained, they have not been compromised. So you are making more money because you are producing more goods but because you are producing more of them you are doing it at lower costs and this is translating to lower prices for consumers. That is the opportunity which we have to exploit.
Q: Is that one of the key causes of inflation that we are seeing currently?
A: Yes, we are in a situation where five years of very rapid growth has resulted in very significant changes in food habits. People are consuming more proteins. When you look at what is driving food inflation, it is predominantly proteins, fruits and vegetables. This suggests that while demand has been rising which is very good but the production system has not responded. That is where the pressure is emerging and that is what we need to address.
Q: Given the current market scenario of high inflation, can we afford to have high growth and high inflation at the same time?
A: It is a complicated question. The conventional wisdom on growth and inflation is that eventually high inflation compromises growth because it creates additional uncertainty in the environment and therefore deters any kind of long-term investment. Over the years looking at the experiences of different countries, particularly, those which have had this situation of often not having very high growth but having very high inflation that it weakens the incentive for the most fundamental requirement for sustaining growth which is investment. The policy premise now is you cannot ignore it or let it get out of control because you are distorting the incentives that people have to invest.
Q: How do you think the Middle Eastern crisis will impact India in the near and the middle-term?
A: There are a set of forces that has now started to spread across the region. It is starting to absorb oil producing countries. The first two are not very significant in terms of oil and I am not in any way belittling the human and social aspect to it. But as far as oil goes, Tunisia and Egypt are not very significant, Libya we don’t know where these forces are going to manifest again. We also have to keep in mind that the distribution of oil resources is very skewed. Saudi Arabia and Russia have very large reserves. Their ability to influence global prices by simply raising production is quite significant. Now they have to make choices, Saudi Arabia particularly is clearly in the line of fire so to speak about how far they want to let oil prices go. Keep in mind that the only reason we as a global system remain so dependent on oil is because it is still more economical than other sources of energy. But that is not a given nor is it a constant. At some point, persistently higher oil prices will induce shifts in energy consumption patterns. We have seen this historically, through the 70s and 80s, as oil prices grow persistently, every system adapted. Technologies came into existence that reduced energy consumptions whether in auto sector or anywhere else. So, there will be a temporary disruption, no question. But the ability of technology to respond to this is proven. The ability to bring alternative sources of energy into the market including oil, because, if oil is at USD 120 and USD 130 there are reserves that do become economical at that price. I don’t see this as a sort of freeze; it is not a frozen situation. It is something that can evoke response, a supply response and a demand response. Disruption, possibly, but long-term implications I would be a little wary about drawing a doomsday scenario right now.
Q: I am going to quote something that you have written. You have said, “The unfortunate economic reality today is that the state far from being a partner and facilitated for a faster growth imposes an extra load on the system.” In affect the state is getting into way of growth. Can the state get out of the completely at all?
A: Where you quoting this from?
Q: From one of your articles.
A: It was a judgment based on my observation that when we went into reforms in 1991 we created a whole different world actually for the private sector, a whole new range of incentives both rewards and punishments that the private sector had to deal with, to the extent that the private sector responded. Many organizations, many who had done well earlier were able to reorient themselves and do very well in the new environment, many new organizations came into being and did extremely well in this new regime, many failed and that was the whole point that if you weren’t able to survive, there had to be some way of exiting. When you look at the organizational transformation that went on the way private sector responds to this new environment, it was phenomenal and that is something that I was observing. The reforms that we did in 1991 unfortunately did not spread to government despite good intentions and pious statements. The process of governance remained largely untouched. So, this is where the disconnect that I was emphasizing in that article, that the government did not keep pace with the economy in a sense. I still feel that even despite being in the government system now there are many ways in which the processes of knowledge simulation of decision making was from my outsider viewpoint could stand enormous improvement.
Q: How do you make a monopoly efficient?
A: You do it in two ways. You reduce the scope of its power which has happened, and two is you try and improve the internal systems in a way which incentivizes good performance. That to some extent is also happening but is not happening fast enough.
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