Bimal Jalan is a former Governor of the Reserve Bank of India (RBI), a former member of the Rajya Sabha and a well-known author on policy regimes. In this interview with Olga Tellis, he urges that inflation be tackled on a priority basis through a coordinated approach in the whole of the government and believes that drop in investment is a cyclical issue that can be dealt with as we have sufficient resilience.
Q. There is a lot of concern about dwindling investments, both domestic and foreign. How do you see these things?
A. Any dip in investment, or in buoyancy in the market is a concern. But the greater concern is that of inflation, and the perception of lack of governance in the wake of the 2G spectrum and other scams. There is a feeling that the government is not as effective as it should be and that there is lack of co-ordination between different parts of the government. These are more fundamental issues. Issues like drop in investment are cyclical issues and can be dealt with. India has the resources with a 35 per cent domestic savings rate and investment at 37 per cent of the gross domestic product (GDP) that is one of the highest in the world. This short-term dip doesn’t mean much. The growth in quarter on quarter terms is not so worrying as the medium-term worries about corruption and non-governance. These are very fundamental issues that are affecting the country and the economy.
Q. What about fall in portfolio and foreign direct investment?
A. I am not worried about fall in portfolio investment as that concerns the stock markets. If the markets go down, it will affect some people. But it is not a priority as we already had excess inflows and added them to our reserves. Direct investment is more important, as also is the climate in the country and whether we will generate a unified voice on issues that affect governance.
Q. There is also concern that government is not going ahead with reforms like the Land Acquisition Act.
A. Land acquisition has been a problem since our Independence. And despite all this India has been recognised as an emerging global power. So, these are not immediate issues. The real question is the confidence, ability and political will of the government to tackle rising corruption at the political level. Now the Supreme Court has entered in the picture with the 2G scam.
Q. Do you feel that the RBI and the government are playing a losing game in tackling inflation? Despite all the rate hikes, inflation is still at over nine per cent.
A. It cannot be a losing game unless you make it so. Inflation should be tackled effectively as it affects people at large. What is worse is “inflationary expectations”. If people expect inflation to go up, they will automatically buy more than they need if they have the liquidity. The problem is that there are too many voices saying things like “after the monsoon, food prices will come down”, or “after the harvest, prices will come down”, and then non-food prices go up. If RBI measures do not lead to a fall in food inflation, we have the resources to do what we want. We can import.
Q. So far, it is growth that has been going down and inflation has been rising. What does this indicate?
A. How do digits matter — 8.7 or 8.5 per cent etc? We are still a country with high growth rate. If there is a conflict between growth and inflation, there should be a concerted approach to tackling inflation and there should be definitive action, no matter what happens to growth in the short run. India’s resources are much greater than ever. We are adding to our reserves but not using them. There are tradeoffs in the economy. It is not so simple as people think and there must be a concerted effort to tackle what we consider to be the priorities. These are certainly inflation and corruption at the moment. Oil prices are high but we have controls, and we have not raised domestic prices as much as the rest of the world. They should be raised so that there is a one-time effect. There has to be a coordinated approach and action rather than just relying on rain clouds.
Q. Would you say that there is limitation to monetary policy tackling inflation?
A. There has to be a unified view that inflation needs to be tackled and that whatever needs to be done in monetary, fiscal and trade areas will be done. Some dip in growth may be the cost, that if tackling inflation means taking unpopular actions we are willing, we are willing to do whatever is necessary even if it displeases specific interests.
Q. Does this mean that the government is not doing its bit on the fiscal front?
A. I don’t want to blame anyone. In a political system there are multiple centres of power and different ministries have their own focus points. But if there is a national problem, say inflation, we need a consolidated effort and policy overriding the specific interests of different ministries.
Q. So, are you optimistic about the future, or pessimistic? Do you see government taking action where necessary?
A. I am optimistic, but not about the immediate future. I am sort of disappointed with the drift in policy and decision-making. But we have the ability and the capability. Responses are coming in as people are fed up with corruption and inaction on priority issues such as inflation and corruption and priority governance issues. To take a longer-term perspective, we have passed through various crises in the ’70s, ’80s, ’90s and I have no doubt we will overcome the present problems.
Deccan Chronicle
