BRIDGE Briefings with Subir Gokarn
In a conversation between Mint’s editor R. Sukumar and Subir Gokarn, former deputy governor of the Reserve Bank of India, at the BRIDGE BRIEFINGS held at Bridge School of Management last week, Gokarn talked about the factors that could trigger the next spurt in economic growth.
Do we have any good things going? We have obviously seen a situation where a new government has come in and there has been a lot of euphoria. Are there any positive signs that you see?
It is a crossroads moment for India. Where we are today resembles where we were in 1991. In 1991, there was a do-or-die compulsion.
Though the government did not have a majority and there was a political balancing act that had to be carried out, because the crisis was so visible, it was so vivid, that didn’t matter.
Getting a consensus wasn’t too difficult. This time around, getting a consensus might be difficult, but it’s offset by the fact that the government doesn’t have to worry about political compromises because it has a majority. So, I think that is a very positive sign.
The second thing that is quite important is the move towards administrative streamlining. You cannot be endlessly debating issues when somebody has to act. There has got to be closure. And from my experience with the previous government, both from inside and observing it from the outside, we had a very weak closure mechanism; the ability of anyone in the system to veto decisions was unchecked and unchallenged. So, you could actually stall proposals till they became irrelevant.
So, this announcement that there is going to be a 15-day limit on inter-ministerial consultations, I think, is absolutely critical and fundamental in changing that orientation. I hope that it’s enforced with great rigour because I think that is going to change things very dramatically.
Also, I think the recognition that some flexibility in the labour arrangement and labour regulations is necessary. It is not going to solve the problem entirely, but it is necessary to get the ball rolling. Without it, all other solutions would have ended up being very marginal.
So, Rajasthan is setting up a very important precedent in two ways: one, it is actually carrying out the reform, or proposing to carry out the reform; two, it is testing the federal arrangement by absolving the central government of going through the hoops of making this reform. And if it does that successfully, then every state will start to see this as an opportunity. And I think it will be a cascading sort of thing.
The interesting thing is the states have become pretty competitive.
They have, and these are states which have created some basic infrastructure, some basic industrial eco-system for the industry. The labour reforms will attract enormous amount of SME (small and medium enterprises) activity into a cluster. So, I think these are some positive signs we are seeing right off the bat.
I am going to go back to what you said about the 1991 crisis-like situation right now. I think in 1991, everyone sort of just realized that there was a crisis. Even the public, right? Because sending gold out of the country, which was a very, very symbolic sort of thing, especially to a country like India, where people pay so much emphasis on gold. Do you think there is a similar realization of how close we are to the chasm right now?
Well, I don’t think the situation is in that direct sense comparable. I don’t think it is a matter of falling over the precipice the way that we were, two weeks’ worth of imports and foreign reserves and so on. But people’s benchmarks have changed. In 1991, if you ask people about growth rates and so on, it wouldn’t figure in anybody’s consciousness.
So it wouldn’t look bad.
Yes, it wouldn’t look bad, nobody would say that we are worse off. But, you know, the fact is, a foreign exchange crisis or a food crisis are much more vivid.
Today, the benchmark is much more focused on growth particularly because we have sustained a period of close to 9%; whether it was sustainable, or not, is a separate issue. The psychology is, we did it then, why can’t we do it now?
So, for a government, the criteria, the yardstick, has now become ‘you are only as good as your last two years in office’ and that is a very, very powerful stimulus. So, if this government is learning that lesson, that nobody gives a damn about what happens in the first few years—the UPA’s first five years had 9% growth—then this government is going to be very conscious that if they do not undertake policies that will push the growth rate up over a five-year period, they will be struggling at the end of those five years, to justify their re-election. So, I think the benchmarks have changed, the indicators have changed, and that is very positive.
So, in the first term of the UPA, the economy grew at over 9% thanks to which their entire 10-year average looked pretty good. What went right for India in that period?
A number of factors. Firstly, there was a huge global tailwind, the average rate of growth in the global economy in that five-year period was twice what it has been in the subsequent five-year period. So, that was a powerful force.
India was globalizing, was integrating much better. A lot of the indicators that have deteriorated now were actually very strong then. We had a very good fiscal position, improving consistently over that period, because of the Fiscal Responsibility Act, because of the much-improved tax administration, because of the introduction of service tax which was a very important balancing factor in terms of the fiscal burden or tax burden, rupee and the balance of payments looking extremely positive... Three out of those five years, we had a current account surplus, because of the contribution of the IT sector. The rupee was appreciating because we had a lot of capital flows. And investment picked up because public and private investment complemented each other.
The key trigger was the highway programme. There is no better demonstration of network externalities than a highway system. So, every highway stretch that was built generated opportunities that other private investors were taking advantage of. So, I think highway is a very powerful stimulus.
Inflation was low because oil prices were moderate. And then, we had the one-off benefits: huge dividends from telecom.
The expansion of the telecom network was phenomenal and unprecedented, and all of us saw a huge impact on our productivity as a result of mobility.
And if you want to recapture these forces, I think the macro is recaptureable. The structural problem needs very coordinated efforts, the food infrastructure and employment. And then, there is the one-off technology shock that can come from anywhere. I don’t know where it’s going to come from, but it could come from somewhere.
But the global environment doesn’t look particularly good.
I think firstly, compared to two or three years ago, it is certainly less threatening, except for the recent developments in Iraq. That's an unknown and I have no way of predicting how that is going to play out.
It has not impacted oil prices—a little bit of uptick, but not very significant. I think the reason for that is that everybody who is in conflict is very conscious of the significance of oil. Iraq is the second largest oil producer, oil exporter, and nobody wants to lose that, but these things have a way of spiralling, so we don’t quite know how it’s going to play out. So, that’s a risk that's looming. But, otherwise, the US had a contraction in the first quarter, but it has been on a relatively steady recovery path.
Europe has stabilized and the risks that it posed three years ago are no longer visible.
Japan is trying to stimulate, and China is stabilizing. So, I don’t think the global environment is that great a threat right now, though it may not be as hospitable, as motivating as it was before the crisis. Our challenge is to get our domestic drivers back on track right now.
Do you think we should be worried about the monsoon?
I think we should. I have studied the monsoon extensively in my various capacities, and essentially the rainfall pattern in each month is not correlated.
So, if we have a bad June, it doesn’t mean we are going to have a bad July. The key months will be July and August. So, if we don’t see any resumption by middle of July, a lot of the sowing will not take place. This has significant inflationary implications. We still have a couple of weeks to go before we can take a call on whether it is bad or good. The June weakness is 45% below normal and it is a problem because the ground water gets depleted and the reservoirs get depleted. That will have some spillovers.
What this also means is that the government’s priorities sort of change?
Firefighting is obviously going to take precedence. You will tend to shift focus from structural issues to the immediate and that always comes at a cost.
You have seen this government now at work for about 30 days. There has been this clear establishment of at least some sort of decision-making protocol, which was entirely absent when the UPA was there. So what’s your sense? Do you think the current government will go out and do some of the tough things, given that it has come in with a lot of expectations from people, especially in terms of jobs? How soon before we start seeing the results? Because, while they may improve sentiments, a lot of things will take time to kick in.
Well, I think you have a menu of choices here. There are some things that will pay off quite quickly. I think, for example, a budget which sends a clear signal on tax reforms and on some subsidy capping, larger commitments to capex. Obviously, the outcome will play out over time, but it’s the commitment that is important.
On some of these other issues like food procurement, we have already seen an increase in the procurement price of rice. It’s very modest, it’s like 1.6% compared to aggregate of about close to 90% over the last five years. But it doesn’t suggest that there is a rethink on the whole incentive system.
So, we need to wait and watch as to how that’s going to play out. It will be more difficult if the monsoon is bad. Farmers’ livelihood security becomes more of a concern than the fiscal problems. So, that is something to wait and watch.
But on the other issues, when I look back at 1998 or 1999 to 2000, the highway and the telecom, to me, were the trigger—the two things that I think what really pushed that growth spurt. And everything else followed in a virtuous circle.
So, we need something to do that here. Where is it going to come from? It will come from public investments, it’s going to come from all these backlogs of all the clearances.
If they do at least some of these things that we have been talking about, do you think we could see a 7% growth say in two-three years from now?
I think so. I think in a three-year horizon, a 7% growth is not an unreasonable expectation, provided that all of these cylinders start to fire.
A growth rate of 8.5-9% was achieved in a very favourable global environment, which is not there. So, I think we have to shave some of that expectation off. We are going to be dealing with energy prices that are in relative terms significantly higher than they were in that high growth phase. So, we will have to take that into account. So, there are some headwinds which will constrain that acceleration, but with enough things being done, 7% growth is not an unrealistic proposition.
Where will the jobs come from? Because the services boom which was there through the 2000s is sort of slowing a bit.
I have been very pessimistic about emulating a kind of China or East Asia strategy of manufacturing-led employment. Primarily because the nature of manufacturing has changed dramatically over the past 20 years. This blue-collar workforce... mass production kind of model... is completely in danger of being obsolete. Now, one way to look at it is, it is still in play as long as the cost structure remains competitive—if your wages are correct and your mass manufacturing labour-intensive operations are still commercially viable or competitive.
Then one channel of growth is going to come from migration from China because of its losing competitiveness in many activities. But even in soft manufacturing, it has become very much more automated now. You keep seeing headlines in newspapers where software engineers are being replaced by algorithms. So, we have to be very realistic about the sustainability of an employment process. We should be focusing on what sort of activity is going to absorb the most number of people, what sort of skill sets does this imply, what sort of geographic pattern does it imply. Where should these things be located—can you move millions of people from the eastern part of the country to the west or the south? I think those are the deeper set of questions that this strategy has to address. But I think it’s going to be extremely challenging. I think the job challenge perhaps, in my view, is the most challenging.
Are you long on India or are you short on India?
Gokarn: I think that the virtual certainty that we typically do right things when sort of faced with a crisis—this has been a recurrent pattern. It is not something that is confined to 1991. Right through the mid-60s, the Green Revolution, for example, was a great example, of when pushed to the wall how the system was able to get its act together. It, of course, literally sowed the seeds of future crisis, but that is true of any solution.
So, I don’t doubt that even if we get all our things together now, five or 10 years later, we will be having the same debate. And the reason is that we are moving from one set of constraints to another set of constraints. So, every time you have a good run, you hit the next set that much quicker, you don’t have a reaction time, and because you haven’t had the capacity to think about what those constraints are.
I used to have this complaint. I was on the board of a public sector bank and also Reserve Bank of India and when I looked at HR policies, I got the impression that they were always training somebody for the job that they are just about to be transferred out of.
And that is a guarantee of obsolescence because you are never putting a person who has trained for that job into that job. And I think that is a kind of anticipation, or forward looking dynamic, that is very important both at the organizational and national level. And I don’t think we have ever had it. We are always actually training ourselves for the job that we are about to exit. So, that is the danger, that is the negative.
So, I will balance out these two things. The ability to act very appropriately and quickly in a crisis, but then the ability to also sink into a self-obsolescing kind of a mode when things are going well. That is the trend.
So, long or short, I think, depends on horizon. If you give me a five-year horizon once a set of reforms have been put in place, I’d say very long. If you will say how we will jump over the next hurdle, then I will get a little nervous.
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