BR Shenoy Memorial Lecture 2022 | Dr. Duvvuri Subbarao

BR Shenoy Memorial Lecture 2022 | Dr. Duvvuri Subbarao

Source: https://www.youtube.com/watch?v=XFRUZ3L82v8 Duration: 5784.8s

Speaker 1 (00:00): Good evening, everyone, and welcome to the B.R. Shinoy Memorial Lecture 2022 with Dr. D. Subaraw as our speaker. My name is Kumar Anand, and I will be your moderator this evening. The talk by Dr. D. Subaraw will be for about 45 minutes, after which we will have about 30 minutes for question and answer session with the audience who are joining us live. You can type your questions in the Q&A segment in the Zoom here or in the YouTube section

Speaker 2 (00:29): wherever you are joining us from.

Speaker 1 (00:32): This lecture series is instituted in the memory of the late Indian economist, Professor Bia Shanoi. In early years of the Indian Republic, Professor Shanoi’s was the lone voice that dissented from the prevailing view that economic policy should focus on Soviet-style central planning, state-led industrialization with focus on heavy industries and state-owned enterprises, with limited concern for what was actually needed by Indian consumers in a predominantly agriculture economy at the time. So Professor Chinoy’s insights into the powerful, positive social good done by a responsive, competitive market economy were vindicated by structural reforms, economic reforms, which we had undertaken in 1991. That enabled a relatively fast-paced economic growth and large reductions in poverty in the years that followed. The importance and impact of Professor Chinoy’s ideas have been noted by previous speakers

Speaker 3 (01:27): in this annual Memorial Lecture Series, including by Sri Montek Singh Aluwalya,

Speaker 1 (01:32): Sri Bivik Debaroy and Dr. Parjesh Shah among others. Professor B.R. Chinoy tirelessly argued for new thinking and practical policies that would build a stronger Indian economy. Had his ideas been implemented in say 1960s, when India, South Korea and China had comparable and very low level of per capita income, then maybe India would have been a middle income country by now. Nonetheless, we can still achieve this with a strong second wave of reforms and careful steering of the Indian economy through these turbulent external global conditions, partly inspired by Professor Biyoshenoy’s ideas in making the right choices. Our speaker today has great experience in such careful steering and making the right choices

Speaker 3 (02:17): and has a vision of how to reach an aspirational national benchmark such as becoming a $5 trillion economy. Dr. Devuru Subarabh was the Governor of Reserve Bank of India

Speaker 1 (02:30): from 2008 to 2013 and is generally credited as having safely stewarded Indian economy through the global financial crisis. Until recently, he was a distinguished visiting faculty at the National University of Singapore and the University of Pennsylvania. In earlier years, Dr. Subarau worked as a joint secretary in the Department of Economic Affairs

Speaker 3 (02:51): at Ministry of Finance from 1988 to 93. Subsequently, he became the finance secretary to the government of Andhra Pradesh, followed

Speaker 2 (02:58): by becoming the lead economist at the World Bank from 1999 to 2004.

Speaker 1 (03:03): He was then appointed by the Prime Minister’s Economic Advisory Council in 2005, before he was elevated to the finance secretary position, Government of India, in 2007. Dr. Subarau was involved in the initiation of fiscal reforms at state level and produced a flagship study on decentralization across major countries in East Asia, including China, Indonesia, Vietnam, Philippines, and Cambodia. Dr. Subarau’s book on his RBI tenure, Who Moved My Interest Rate, Leading the Reserve Bank of India Through Five Turbulent Areas, was published in July 2016. On behalf of the Center for Civil Society New Delhi, founder Dr. Parjesh Shah and the

Speaker 3 (03:45): CEO, Ms. Lakshmi Eskohar, and on behalf of Economic Research Center Trust Mangalore, Chairman Giridhar Prabhu, and my fellow ERC board members, Mr. Emin Pai and Professor

Speaker 1 (03:56): Subodhah Shinoi, it gives me great pleasure to invite our speaker, Dr. D. Subarabh, for the Biya Shinoi Memorial Lecture 2022, to speak on macroeconomic challenges on the path to a five trillion dollar economy. Dr. Subhara. Thank you very much. First of all, my thanks to the Center for Civil Society and the Economic Research Center for inviting me to deliver the Chennai Memorial Lecture. It’s an honor privilege. Professor Chenoy was a distinguished economist, a liberal thinker given the free market ideology. He was a freedom fighter and an illustrious teacher. But for all of us, associated with the Reserve Bank of India is very special. He was an economist in the Reserve Bank of India and as far back as in 1946, wrote a seminar paper on India’s sterling reserves arguing that the rupee must be devalued against the sterling power. Professor Chennau is most remembered today for his note of descent to the second five-year plan. The second five-year plan, as we know, which ran from 1956 to 61, defined the philosophy, the ideology that would govern India’s economic management for the next three decades. It made a commitment to self-sufficiency, gave prime importance to capital-intensive industrialization

Speaker 4 (05:44): led by public sector investment and believed that the state must actively control the market in order that scarce resources are conserved.

Speaker 1 (05:56): Prime Minister Nehru at that time invited 20 economists to comment on and critique the the second five-year plan. Professor Chenoy was one of them. Professor Chenoy, notably, dissented from the approach to the second plan. His point was that India cannot finance the heavy industry investment all by itself, that government intervention in the market will lead to distortions, and central planning with no hit to market forces will put the economy in the wrong direction.

Speaker 4 (06:32): In the event Professor Shanoi did not prevail, India embarked on a closed economy, heavily controlled path.

Speaker 1 (06:41): We got locked into a Hindu rate of growth.

Speaker 5 (06:46): And the rest is history.

Speaker 1 (06:49): In history, there are no counterfactuals. But where India would have been today if we had heeded the advice of Professor Shanoi and people like him will forever remain a conjecture.

Speaker 4 (07:04): But even though Professor Shannoy did not prevail,

Speaker 1 (07:09): his notable descent was notable in my view for two reasons. First, it is notable because he went against the prevailing orthodoxy. The prevailing orthodoxy, throw your mind back to the 50s and 60s, was exactly the orthodoxy India followed self-sufficiency, intervention in the market, and capital-intensive industrialization. That’s what every economy coming out of colonization in the 50s and 60s followed. And Dr. Chenoy was ahead of his time. The second reason his dissent was notable was because he had the courage of conviction to go against the economic orthodoxy. Again, throw your mind back to the 50s and 60s, the Soviet economic model was a mesmerizing thing. Everyone, practically everyone, believed that the Soviet economy would dominate the world. A pre-eminent economist of the time,

Speaker 5 (08:10): Paul Samuelson, said that the Soviet Union will overtake the US in 1984. Professor Chenoy was one

Speaker 1 (08:19): of the very few who dissented against the Soviet model. But it’s not as if economists who had no influence in real time have no influence at all. In fact, this is what Keynes said, excuse me, yeah this is what Keynes said that practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. Indeed, that’s exactly what happened in India when we embarked on the 1991 reforms. It was, in a sense, vindication of people like Professor Chenoy and others who believed in free market ideology. We, the 1990-90-100 forms, we denounced self-sufficiency, dismantled the license permit regime and issued commitment to the public sector. Today, 30 years later, there is a lot of mythology, a lot of folklore about the causes for the 90-100 forms. There were proximate causes, there were structural causes. But certainly, one of the underlying causes was the osmosis of ideas like Tata Profession Noir. So in the 30 years since 1991, India did implement some significant second generation reforms, GSD for example, labor-ledding foreign direct investment. But there is generally some despair that we’ve lost the momentum, we’ve lost the enthusiasm of the 1991 reforms and the second generation reforms which are admittedly politically more difficult have become hostage to devised politics and contagious federalism. So people ask a related question which is if we cannot implement second generation reforms

Speaker 6 (10:41): how will we ever get to a five trillion economy you all recall that when prime minister modi

Speaker 1 (10:49): returned to office for a second term in 2019 he set a national aspiration of five trillion dollars of gdp by 24 25. economists did the calculation and said that if you have to reach five trillion

Speaker 4 (11:05): by 24-25, I’m talking about 2019. They said we’d grow at 9% in real terms, 14% in nominal terms.

Speaker 1 (11:14): That was very, very difficult. If that looked difficult in 2019, it was almost impossible today after COVID and with the ongoing war. We will of course get to 5 trillion. Economists now say we’ll get there by 28-29. We’ll get there possibly

Speaker 5 (11:34): a year earlier perhaps a year later but we’ll certainly get but here’s my point how quickly we

Speaker 1 (11:41): get there is important but how we get there is equally important why do i say that sorry it’s not moving okay why do i say that i say that because

Speaker 5 (11:58): Because we need growth with widely shared prosperity. Only then will we get meaningful

Speaker 1 (12:08): to 5 trillion. We can reach 5 trillion by inflating the economy. We can reach 5 trillion

Speaker 5 (12:14): by just top 10% of the population becoming richer, getting better with the bottom 90%

Speaker 1 (12:22): remaining where they are. But that’s not the type of 5 trillion we want. We want a 5 trillion growth with widely shared prosperity so we have to look ahead to how we get to 5 trillion but in order to look at it we also need to look back especially because this year we’re celebrating 75 years of independence so we’ve achieved quite a lot in the last 75 years and one of the One of the ways of appreciating how much we’ve achieved in the last 75 years is to look at

Speaker 5 (13:08): today’s world from the eyes of a 10-year-old girl. Think of a 10-year-old girl today and compare her life with that of a grandmother born around

Speaker 1 (13:18): the time of independence. The girl today, the 10-year-old girl today, is wearing a uniform. She goes to school, probably on a cycle. Her mother, her grandmother, never ever saw a school. This 10-year-old girl had the benefit of nutrition as an infant, really ICDS, has the benefit of a midday meal program in school. Her grandmother never ever saw school. She was malnourished, sick all the time. This 10-year-old girl today has a 50% probability of having access to a toilet. Her grandmother had to wait until it was dark and therefore was vulnerable to many infections.

Speaker 5 (14:10): This girl today, excuse me, her grandmother was probably married at 15, had four children by the time she was 22 and was not sure how many will survive.

Speaker 1 (14:21): This girl today probably will not get married until she’s 20, not even 22.

Speaker 4 (14:27): She’ll have two children at most and she will decide when to have one.

Speaker 1 (14:33): So that’s how much India has changed in the last 75 years. I put together here some social economic indicators to show the enormous amount of progress that we made in social indicators, in economic indicators. But the most important thing, remember, at the time of independence, we were a food scarce economy. Hunger and malnutrition were very common. Famine used to be quite, I would occasionally we used to have famine. In fact, we used to live from ship to moth, used to say that wheat has to come under the PL480 program from the US that we unloaded and moved people across villages in India, which lived from ship to mouth. Today, we’re a food exporting country. We’re the largest producer of milk in the

Speaker 6 (15:27): country, in the world. We’re the second largest producer of rice and wheat. We have a space

Speaker 4 (15:34): program. We have IITs and IAMs. We have cricket. We have volleyball. So that’s the enormous

Speaker 1 (15:40): amount of progress we made. So we’re to build on that to get to 5 trillion. So what is the big picture on the weight of 5 trillion? Here’s the big picture. If you take countries around the world by the GDP measure, India comes sixth behind the US, China, Japan, Germany fourth, UK fifth, and India’s sixth. I believe recently we’ve overtaken the UK but there’s a minor equivalent which are very very close. I’ve taken the IMF numbers of 2021. So we are the largest, sixth largest economy in the world. We are a large economy because we have a huge population of 1.4 billion people but we’re also a poor country. One standard measure of comparing countries on welfare is per capita income. If we take that as the measure, here’s where India stands. At number 156, in the bottom League of Nations in the world, the US is at 7, Germany 20, UK 24, Japan 30, China is at 70, India at 156 with a per capita income of 2,280, which is about what 13 14 percent of the us sorry that’s even lower it’s much lower than that okay so india is a large economy but it’s also a poor country we’re the poorest in the g20 with the poorest among bricks we’re more poor people than the entire continent of africa and it is from here that we want to get to our 5 trillion in order to get to 5 trillion we need rapid growth but we also need poverty reducing growth not just any growth but poverty reducing growth which is growth which

Speaker 4 (17:40): is widely shared in order to get there we have many challenges along several dimensions political challenges, macroeconomic challenges, human resource challenges, institutional challenges,

Speaker 1 (17:57): and governance challenges. Over the next 25 minutes or so, I’m going to focus on the macroeconomic challenges India will have to manage in order to get to 5 trillion. In particular, I’m going to

Speaker 5 (18:14): focus on seven macroeconomic challenges.

Speaker 1 (18:18): The first thing we have to challenge, obviously, is to accelerate the growth rate.

Speaker 5 (18:25): One of the questions that has historically been asked, that we’ve asked ourselves, is it possible for a large economy to grow rapidly?

Speaker 1 (18:38): In the early decades of independence, we acquiesced in low growth rate. We thought we were destined to an endurative growth of 3.5 to 4%. That a large economy cannot grow any faster than this. In the 1980s, we know that the East Asian economists, the East Asian tigers, Hong Kong, Singapore, Taiwan, Korea, mesmerized the world with phenomenal growth, moved from low income to middle income, and some of them to high income in the back of one and a half generations. But we were dismissive of that. We said, okay, it’s okay, it’s possible for small economies to grow rapidly, but a large economy like India cannot grow rapidly. But starting 1990, China posted spectacular growth, double digit growth on a trot for three years. India was shaken. India was jolted in a way we were even inspired by China’s growth. It’s instructive for us. Excuse me, I don’t know why. Yeah, okay. I just want to compare India and China. China we know opened up in 1979 at the time and India in 1991 about five years later but But it’s approximately a ticket difference between India and China opening up. In 1990, India and China were at around the same level. After 1990, China zoomed while India just lumbered along.

Speaker 6 (20:23): And forever, the question we are asking today is can the elephant ever mimic the dragon?

Speaker 1 (20:30): If you compare India and China, China, as I said, posted double-desert growth for three decades on a crop.

Speaker 6 (20:40): India never posted 8 plus percent growth for longer than three years except once in the last 50 years.

Speaker 1 (20:50): In the 20-year period between 2000 and 2020, China’s GDP as a proportion of world GDP multiplied four times india’s just doubled china’s gdp is more than five times in case china’s per capita gdp per capita income is more than five times in case china is the largest trading nation in the world china is the largest manufacturing nation in the world india’s share in global trade and in global manufacturing is in single business. China is a high middle income country trying to get to high income. India is a low middle income country forever worried that we might get locked into low income. So that’s the contrast between India and China. So the single most important thing to do is to accelerate growth.

Speaker 5 (21:52): And if you ask me what is the one thing we have to do to accelerate growth, I will say

Speaker 1 (22:01): investment. Economists say we know that growth comes from consumption, investment, both public investment and private investment and net expense. But of all these elements, I would think investment is the most important because today’s investment is tomorrow’s production capacity so we need to increase investment over the last 10 years investment has been dented because of the twin deficit problem because of coven because of the war whatever reason but investment is not yet picking up and if we need to grow rapidly we need investment like we had during the when we go at nine to ten percent I said if you ask me one thing I will say investment but all one word answers about India are wrong so we need more than investment and what we need is to improve the productivity of that investment. We need infrastructure, we need skills to improve productivity and importantly we need good governance because transaction costs sap productivity of investment in India. We know that. When I was finance secretary in Bangladesh here, as well as when I was finance secretary in government of India in Delhi, a lot of foreign investors used to come to us and say that we want to invest in India. We want to invest $5 billion, $6 billion. dollars and they talked to us about what concessions we would give both at the state level and at the national level and for good measure they will say oh we were in shanghai yesterday and we just flew into mumbai or delhi and we used to ask them oh what did the chinese promise you they said the chinese promises this this this and we say how long did the chinese say they will take the chinese said it’ll take six months to deliver on this so we used to say over the chinese in six months we will deliver this in three months the chinese haven’t promised deliver in six months

Speaker 4 (24:17): to deliver in three months the indians having promised that we will deliver in three months will probably not deliver even three years does this the contrast of the transaction costs between

Speaker 5 (24:30): india and china i’m just giving you an exaggerated example but there are any number of illustrations

Speaker 1 (24:36): group deal enormously high transaction costs for investment in India. So the first challenge to getting to a five trillion economy is to accelerate the growth. The second challenge is reducing inequality. India is one of the most unequal societies in the world

Speaker 4 (24:58): today what even what’s even more distressing is that far from narrowing inequality is actually wide inequality across any dimension whether you take income you take wealth you take carbon

Speaker 1 (25:14): footprint take income inequality for example the bottom 50 percent the bottom half of the population in India today get 13% of the overall income. The top 10% get 57% of the total income. So the bottom half get just 13%, the top 10% get 57%. That’s a very, very stark inequality. If you actually take wealth and carbon footprint and other dimensions, the inequality is even more stark. What is even more distressing is that the pandemic has further widened inequalities. Last year during the Omicron wave when we had lockdowns in several parts of the country, when millions of people were gasping for oxygen outside hospitals, Mercedes recorded the maximum number of sales of its top end SUV. During 21-22, when the economy went through the biggest contractions since independence, when 75 million people are suspected to have dropped retreated back into poverty, the number of dollar billionaires in the country went up from 102 to 150. So the pandemic in a way widened inequalities. Inequality is morally wrong, we all understand that. It’s just not right that some people are battle of and some people are forever condemned to no quality living. It is politically corrosive, we understand that as well. What we don’t understand as much is that it is also bad economics. Because if the bottom 50% do not get a share of prosperity, if they do not get a share of growth, if they do not consume, we cannot grow. In fact, one of India’s strong growth drivers is our enormous growth potential.

Speaker 4 (27:26): 300, 400 million people living at low to middle incomes.

Speaker 1 (27:33): If their incomes go up, spend that money to consume and that consumption will spur investment, will spur growth, will spur further jobs and we can get out to a virtuous side. So there is, for us, no path to reducing inequality day unless we ensure that whatever growth we generate the benefits of our issue in particular the benefits grow to the bottom 50% in other words that the bottom 50% contribute to growth and the benefit from growth the third challenge on my list of challenges in low and steady inflation why is low and steady inflation important it is important because for investment for consumption which are growth drivers lower steady inflation is necessary people want a predictable economic environment in order to decide to invest people want a predictable economic environment in order to consume if for example an apartment costs 45 lakhs today and going to cost 50 lakhs in january 48 lakhs in march and 62 lakhs in june next year you cannot make an investment decision you want a steady inflation you want predictable economic environment and inflation steady inflation is a necessary condition for predictable economic environment. Studying inflation is also important because inflation is a regressive tax. It hurts poor people much more than it hurts others. If for example the price of rice goes up

Speaker 4 (29:27): from 50 per kg to 55 per kg, at my level of income I may not even notice it. But for most poor people

Speaker 1 (29:36): It would mean putting some food on the table, put food on the plates of their children. So inflation is a regressive tax. If you want to spread prosperity, you need steady inflation. Steady inflation is also important in order to maintain competitiveness because high inflation saps our competitiveness and saps our export potential. One of the tensions, policy dilemmas, struggles for any central bank, particularly a central bank like that of India, the Reserve Bank of India, is this trade-off between rapid growth

Speaker 4 (30:18): and steady inflation. All of us who follow the RBI policy announcements invariably see this tension playing or the Fund commentators, economists ask that if RBI is going to raise interest rates to control

Speaker 1 (30:35): inflation, is that not going to hurt growth? But I don’t want to give the impression that this is a question only for emerging economists. In the US today, it is a big question. As the FOMC is meeting today, the biggest question is, are they going to raise interest rates and take chances on pushing the economy into a recession in order to control inflation are they going to take care of recession and tolerate some inflation so this trade-off between growth and inflation is a perennial tension for central bankers but here’s what i want to say which is that the trade-off if at all is in the short term in the long term there is no trade-off between growth and steady

Speaker 4 (31:26): inflation. RBI research shows that if inflation is above 4% it is inimical to growth and if it is

Speaker 1 (31:36): about 6% it definitely hurts growth. So we need steady inflation to accelerate. And this is another thing. All the time we talk about RBI-raising interest rates, we are concerned about maintaining low interest rates for borrowers. We seldom ever worry about giving high interest rates to savers. After all, we need savings because savings turn into investment and investment turns into production and jobs. So without high savings, we cannot accelerate growth. And we cannot get high savings without a high interest rate. As RBI governor, I once went to Chandigarh and I met the small and medium industries association of Punjab, Arianna, Chandigarh, I can’t recall, but small industries association. What was their demand? The demand was that interest rate must come down. Soon after, actually the next meeting, I met with the pensioners association. What do pensioners want? What pensioners want in high interest. So RBA has to struggle between giving a high enough interest rate to pensioners or to depositors and to savers and a low enough interest rate to borrowers. And the final thing which we all need to understand, we need to understand the macroeconomic challenges is that calibrating monetary policy in a globalizing world is becoming increasingly difficult.

Speaker 6 (33:22): If you look at RBI policy documents 20 years ago, even 15 years ago, you would not have seen any

Speaker 4 (33:29): reference to the global economy. Policy would have been made entirely by looking at domestic circumstances the entire document would have been on the domestic economy. Today RBA produces a

Speaker 1 (33:43): policy document that’s about 12 paragraphs, usually about two paragraphs, certainly at least one paragraph is on the global economy. Why? Because we’re integrated into the world. So what happens around the world matters to us. In particular what happens in advanced economies, more particularly what happens in the American economy matters to us. For example, over the last one year, particularly

Speaker 4 (34:11): over the last six months, we’ve seen capital outfills because of tightened financial conditions. The repeat depreciation is a consequence of that. And RPA today is caught in a dilemma of whether to

Speaker 1 (34:25): focus on monetary policy or focus on managing the exchange rate in a very caught in the impossible Trinity which says that no economy can at the same time have an open capital account, a fixed exchange rate and a completely independent monetary policy. So in order to accelerate growth we need steady inflation and one of the challenges for maintaining steady inflation is to manage this impossible which allows me to segue into my fourth challenge which is to maintain a stable exchange stable does not mean a fixed exchange stable means a steady exchange with no volatility Why is a stable exchange rate important? A stable exchange rate is important for the same reason that steady inflation is important. Because eventually the exchange rate is fluctuating, if exchange rate is volatile, investors, consumers cannot make decisions about investment and about consumption. A lot of people, including educated people, think that exchange rate matters only to

Speaker 5 (35:52): people who trade, who invest, who have credit in foreign currencies, who are externally linked.

Speaker 1 (36:02): That for the large majority of us who live in the domestic economy, the exchange rate does not matter. That is a mistaken impression. The exchange rate matters to all of us. Just take the price of oil for example. If the exchange rate depreciates, the price of oil goes up and the price of oil goes up, the price of virtually every other commodity, every other item in the market goes up. So the exchange rate matters to all of us. And the stable exchange rate is important for people to make consumption and investment decisions.

Speaker 4 (36:37): What is the RBI policy in managing the exchange rate?

Speaker 6 (36:43): The RBI policy, as they say today, and I have said several times as governor, is that we want a steady exchange rate.

Speaker 1 (36:54): We do not target the fixed exchange rate. We do not target a specific exchange rate. intervene in the market only to curb volatility not to target a specific exchange but for the markets for investors even for consumers for borrowers it is very difficult to make any decisions based on rps policy as it is enunciated and as it is practiced Because what is volatility is not strictly defined. Sometimes RBI intervenes even if exchange rates moving in one direction. An exchange rate moving in one direction cannot certainly be defined as volatility, but RBI intervenes. RBI is not unique. Several central banks intervene. So there is a responsibility, an obligation on the central bank.

Speaker 4 (37:57): to ensure that people who take decisions based on exchange rate have some way of understanding rps policy and in some way of predicting rps policy let me make a comment on rps exchange rate dilemma today because it illustrates in some sense

Speaker 1 (38:23): the challenge of maintaining a stable exchange rate which is important for increasing 5 trillion. The rupee depreciated by about 11 to 12 percent in the last one year. That depreciation we know is on the corner of two factors. A widely current account deficit largely because of higher price of oil. And second, capital outflows engineered by tightened financial conditions, higher interest rates in Europe, in the US, particularly in the US. RBI has so far spent about $100 million defending the exchange. It is true that the exchange rate depreciation that we’ve seen of the rupee over the last one year is largely because of external factors, not so much because of domestic vulnerabilities. But even so, exchange rate depreciation, particularly against the dollar, has causes and consequences for our economy. So even if the depreciation is a consequence of global factors, the consequences are local and therefore it matters quite a lot. Over the last six months, the price of oil has fallen. But that does not mean that there is a big relief on the rupee front as we’ve seen. In fact, the rupees continue to depreciate. And I believe that the requirement remains vulnerable because our current account deficit this year is going to be about 3%

Speaker 6 (40:16): about the RBI’s or RBI believes is a safe limit.

Speaker 1 (40:20): Our fiscal deficit, even if we meet the budgeted targets, both at the center and state levels, is still quite high. And our reserves, reserves are high,

Speaker 6 (40:37): If you see some international norms, they have actually declined quite a lot over the last six months.

Speaker 1 (40:46): And market perceptions about the level of reserves or the adequacy of reserves to defend the exchange rate, market perceptions about the ability of the reserves to defend the exchange rate are shaped not just by the level of reserves, but also by how rapidly they’re coming down the burn rate as it were.

Speaker 4 (41:07): So, as much as there is some relief on a relative basis on the exchange rate front, I believe

Speaker 6 (41:18): you continue to be vulnerable.

Speaker 1 (41:20): And there is some case for the RBI to allow the repeat to depreciate because it will increase the competitiveness. Of course, it’ll be inflationary, but depreciating exchange rate is also expansionary.

Speaker 4 (41:40): So we should take care of inflation through monetary policy and allow the exchange rate

Speaker 1 (41:46): to follow the fundamentals. Not depreciate the exchange rate or the fundamentals, but allow the exchange rate to track the fundamentals so that our competitiveness improves. point is RBI should engineer the trajectory of the fall not the level to which the rupee falls.

Speaker 5 (42:09): So as I leave this point maintaining a stable exchange rate is one of the

Speaker 4 (42:15): important challenges on a path to a five trillion economy.

Speaker 1 (42:21): The fifth challenge on my list is quite familiar predictable which is the importance of being earnest about fiscal responsibility. We’ve seen two years ago at the depth of the pandemic enormous pressure on the central government, on all the state governments to provide fiscal support to millions of people who became vulnerable on account of the pandemic. We saw on our TV screens hundreds of millions of people trudging across the hinterland of the country in the hot summer months of May and June 2020. There was pressure on governments. In the event, the central government and state governments provided stimulus but we could not provide obviously as much as the US or Europe. The US threw the kitchen sink at the problem. Europe did that too. We could not afford to do it just because we are an emerging economy and we have the minds of fiscal prudence if only

Speaker 4 (43:30): because markets are less forgiving of fiscal excesses by emerging economies while they’re

Speaker 1 (43:38): forgiving of fiscal excesses by rich countries after all america europe they borrow in countries that other countries crave. We borrow in emerging economy currencies which are not our currencies.

Speaker 4 (43:55): So we need to be mindful. Paul Krugman said in one of his books that the Asian crisis

Speaker 1 (44:04): end of mid-1990s was because of the pileup of pressure in the East Asian economies. Australia also had similar pressures. The markets allowed Australia to make a smooth adjustment under the crisis. The markets did not allow the East Asian economies to make that adjustment and landed them in a deep, protracted, devastating crisis. So markets are less forgiving of excesses by emerging economies.

Speaker 6 (44:43): Why is a high fiscal deficit bad? A high fiscal deficit is bad, we know for obvious reasons, it crowds our private investment. It also raises interest payments of the government, state and central governments,

Speaker 4 (44:58): which means that expenditure available for other needs is that much reduced. It pressures inflation and importantly, fiscal excess can spill over into the external sector.

Speaker 1 (45:16): Remember the 1991 BOP crisis that I talked about earlier and the 2000 near crisis when I was the governor when we had a rupee pressure during taper tantrums were both causes at the structural level

Speaker 4 (45:36): because of accumulated fiscal deficit and fiscal property profligacy

Speaker 1 (45:45): one concern today is is our public debt sustainable The FRBM committee said that a sustainable debt level for India is 60% of GDP. 40% at the state level, 20% excuse me, 40% at the central level, 20% at the state level and 60% overall. Our debt GDP level in 2020 before we entered the crisis was around 70%. of all the borrowing during the crisis went up as high as 90 percent it’s probably come down to 85 or 87 that is a problem because higher the debt higher the interest payments and

Speaker 4 (46:36): that much less for other expenditure and higher the possibility of getting into to debt pressures and eventually to a debt trap.

Speaker 1 (46:47): A lot of people say that India need not worry because we borrow in our domestic currency unlike other basic economists where sovereign is exposed to foreign currencies in a large way. The sovereign exposure to foreign currencies in India is quite limited which is of course a safeguard. But I want to say that that did not protect us in the past and we cannot depend on that to protect us in the future. People also say our debt GDP ratio is low. They say Japan, look at Japan, debt GDP is 300%. In Europe, several countries have debt GDP of over 100%. So why should we worry our debt GDP is 90% is going to come down to 80%. We need to worry because our revenue to GDP ratio is also low. So we can get into a debt trap or a debt pressure at a much lower debt to GDP ratio. I also want to flag this, which is that what matters is the combined fiscal deficit of the centre and states. We usually, the commentators, economists, markets, media talk about the fiscal deficit of the centre. Fiscal deficits of the states are equally important because what matters for our stability, for our growth is the combined fiscal deficit of the centre and states. And that’s important. Finally, a comment on freebies, which is, I believe, an important debate we must have. The Prime Minister two months ago made a comment on the rarity culture about how governments are increasingly indulging in giving freebies and thereby jeopardizing the integrity of public finances. I believe every government across the country, both the central and state governments, every

Speaker 4 (49:00): Every major political party is responsible for this.

Speaker 1 (49:04): It is not fair, it is not responsible to point fingers at a specific government or a specific party. Everybody is in some sense responsible. I grant that giving some safeguards, some safety nets to the most vulnerable segments of the population is not only necessary, desirable. is an obligation but there must be a limit. It cannot be the case that governments jettison other expenditure that provides the growth potential for the future and use that money for spending on freebies which is current consumption. We cannot sacrifice future growth for the sake of current consumption Because if we do that, especially because as the finance minister pointed out three days ago, freebies are being financed out of debt. So if we borrow money today, spend it on freebies, which is consumption, the burden of repayment will pass on to our children’s generation. And we don’t want to do that as parents and as grandparents.

Speaker 4 (50:25): parents, we do not shift the burden of repayment for our consumption to our children, not our grandchildren. So freebies, yes, but within limits. I believe I have 10 more minutes. Kumar, is that right? Seven more minutes?

Speaker 1 (50:43): Sir, you can continue for 10 to 15 minutes. Yeah, I’ll take about seven to eight minutes more. Thanks. The second last challenge on my list is financial stability. Financial stability is very difficult to define, but we all understand financial instability. We experienced that during the global financial crisis. We experienced that during the Eurozone sovereign debt crisis. We experienced that in 2015 when China introduced the back goods exchange rate, there were tremors across financial markets. there is instability in india here we experienced that during the covid pandemic we experienced that when several banks in india came under pressure like we will last bank pnb island fs a prominent non-finance bank a non-finance banking company so financial stability is very important for accelerating growth rate and reaching 5 trillion. The way to achieve financial stability is to build buffers. What are buffers? Buffers are to make our financial markets, our financial institutions strong enough to withstand pressures. For example, how do we make our banks strong? We make our banks strong by ensuring that they hold adequate capital.

Speaker 6 (52:21): And there are norms which go under the banner of Basel III norms,

Speaker 1 (52:26): which RBA follows to ensure that banks, non-bank finance companies, including microfinance companies, are holding enough capital as a buffer.

Speaker 4 (52:37): The other buffers are macroprudential buffers.

Speaker 1 (52:40): For example, when I was governor, there was concerns about the lending being done by gold loan companies. A lot of people were borrowing on the pledge of gold. Gold loan companies were lending. There was concerns about what might happen if the price of gold fluctuates.

Speaker 4 (53:03): And because these gold loan companies are in some sense linked to the banks. So if gold loan companies come under pressure, banks come under pressure.

Speaker 1 (53:13): So we imposed certain knots on gold loan companies during my tenure as government. So macro potential measures, that sort of run out of profit. To maintain or preserve a stable exchange rate, we maintain foreign exchange reserves. we impose certain capital controls such as for example how much our carprits can borrow and on what terms in foreign currencies so these are all buffers that we introduce in order to maintain financial stability but the challenge for regulators the challenge for governments in maintaining financial stability is to manage the tension between growth and stability It is of course possible for the RBI to absolutely ensure financial stability by keeping an absolute draconian check on banks. But if RBI does that, banks cannot lend, banks will not do any business and financial activity will come to a standstill. I’m giving an extreme example. So RBI will have to regulate banks to ensure that they are behaving and they’re conducting business in a prudential way, but not strangle them so much that it strangles innovation. It’s like bringing up a child. How do you teach swimming to a child? If you forever put the child in a swimming pool and all the time holding the child, the

Speaker 4 (54:51): child will never learn to swim. You’ve got to let go at some time. You’ve got to decide the precise point of time at which you want to let go.

Speaker 1 (55:00): That’s the judgment call that regulators today have made in managing financial stability and ensuring at the same time that growth is accelerated. The final challenge on my list, possibly the most important, is creating jobs. because the unemployment problem today is possibly the most crucial problem facing the economy. About 12 million people join the labor force every year. We’re not even able to provide half as many jobs, create half as many jobs. So the jobs that we created are low productivity jobs in the unorganized sector. someone told me that the largest number of jobs created over the last three years is of security cards now you you all understand what a low productivity job a security card says so we need to create productive jobs people talk about a demographic dividend you know 25 years ago, 20 years ago, we used to treat our high population as a problem, as a pressure, as a burden. But over the last 10 years, narrative has changed. We now think of our population as a positive, especially if we contrast our population with that of other countries, advanced countries as well as some emerging economies. Japan is seen declining population. Some Scandinavian countries are seeing the populations decline. Europe, many large economies in Europe, population growth is stabilizing, US is getting there. China is worried about the aging population. China is worried that it will get old before it gets rich. India is contraded to that trend. The median age is 29. So we have a huge labor force. People say that this labor force will join, they will earn, they will save. When they save that turn into investment, will turn into production, will turn into jobs, which will turn into growth and will get on to a virtuous cycle. But this will happen only if we’re able to provide them jobs. The critical link to exploiting the demographic dividend is to provide jobs. It is a very, very difficult challenge. It is by no means my intention to minimize the enormity of the challenge of providing jobs. But nevertheless, I thought I should flag this.

Speaker 5 (57:56): Where are jobs going to come from? They’re not going to come from agriculture.

Speaker 1 (58:00): If in fact agriculture productivity goes up as we want it to, agriculture will unleash about 75 million people, probably 100 million people who are underemployed in the agriculture sector. And these 100 million people are not skilled. So we got to generate low and semi-skilled jobs in order to provide jobs to these people. Agriculture is not going to provide jobs. The services sector is certainly not able to provide jobs of the type we need. Now, for those of us who travel abroad, people see India, Hyderabad, Bangalore, Pune, Gurgon, jobs exploding.

Speaker 5 (58:46): They see the miniscule of the software sector, but that’s just a very, very small part of

Speaker 1 (58:53): a services industry. The services jobs will come only if manufacturing jobs come.

Speaker 4 (59:00): So we’ve got to depend on the manufacturing sector for jobs. The last question on this jobs front is,

Speaker 1 (59:10): whether we can replicate the China model of manufacturing growth. This is very important because this is something that’s debated in policy think tanks around the world, particularly in India, in the media, et cetera, whether India can replicate the China model of manufacturing. The argument made is that it’s difficult for India to do that because when China opened in 1980, the world was acceptable, open to globalization. Globalization was seen as a benign force. The global value chains were gaining prominence as a preferred mode of manufacturing. transport costs were coming down. So it is possible for China to become the hub of manufacturing, produce there and export to the rest of the world because of the benign attitude to globalization, because of productivity improvement in China and because of other factors. It’s not possible for India, it’s argued,

Speaker 4 (01:00:13): to replicate that experience in 2020s

Speaker 1 (01:00:18): because the world attitude to globalization is hostile, if not very hostile today. So we cannot manufacture,

Speaker 4 (01:00:29): cannot become a manufacturing hub like China. The global value chain,

Speaker 1 (01:00:34): which has been the defining characteristic of China model is losing its prominence. Now we’re talking about nearshoring and offshoring, artificial intelligence, machine learning, Our changing comparative advantages becoming possible for rich economies with earlier outsourced production to insource it now. So people say India cannot replicate the China model. But I have a slightly different view. I believe that it is still possible for India to manufacture for the domestic economy and for export.

Speaker 4 (01:01:16): just because our domestic market is very large and because our share in global exports is very small. So it should be possible for us to double our export share by improving our productivity

Speaker 1 (01:01:33): even if the global export market does not expand. So what I want to say is that as much as there is trump some merit in the argument that india may not be able to replicate the china model of manufacturing growth we should not altogether give up on manufacturing there’s still a lot of potential and indeed it’ll be difficult to provide the hundreds of millions jobs that we need without

Speaker 4 (01:02:00): manufacturing particularly without emphasis on small agriculture industries that brings me to

Speaker 1 (01:02:08): the end of the seven challenges is just a listing of the seven challenges for your takeaway and what i want to say finally is that if you want to grow accelerate growth get to five trillion as i said we need growth with vitally shared prosperity and as much as all the challenges that i have listed are important indeed all of you in the audience can expand that list of challenges but the attitude we should take to our economic management is to be open to ideas to challenge conventional economic orthodoxy to respect dissent and to be pluralistic in our economic management in our political management And that’s where I believe the life and work of Dr. Shanoi is a shining example for guiding today’s economic management.

Speaker 4 (01:03:08): I will stop there. Thank you very much.

Speaker 1 (01:03:16): Thank you very much, sir, for that very illuminating talk. I’m sorry that we are doing this online, so I can’t offer you water.

Speaker 2 (01:03:24): So please take your time maybe for a minute or so. Thank you. I have to compose.

Speaker 3 (01:03:29): And I’ll, so we have a lot of questions from the audience and some I have received in text. So what I will try and do is if the questions are of similar nature, I’ll try and club them. So maybe a few of the questions can be bundled and more questions can be taken that way.

Speaker 1 (01:03:49): So the first question comes on the topic that we talked about last, which is around jobs. So I’m just broadly clubbing. So Shruti Ashokan asked that,

Speaker 3 (01:04:02): Sir, China’s growth model relied on manufacturing and export. However, India is a service led economy. And recently Mr. Raghuram Rajan said that India cannot follow China’s path.

Speaker 1 (01:04:13): Would you like to know your opinion on this?

Speaker 2 (01:04:16): Similarly, Shoria has a similar question

Speaker 3 (01:04:20): that on the need to ensure productive jobs, has the NREGA policy overstate its use and require a complete overall. So what according to you should be the role of government and the RBI, if any, when it comes to creating jobs? And just one more to club this entire thing and get the job thing sorted out of the way. One question is from Rajesh Jain and he asked, how can India create 100 million jobs, good jobs in the next five years, good paying jobs, something like 40 to 50,000 rupees a month and that offers upward mobility? And what are the hurdles that need to be removed? against the backdrop of war, inflation, etc. that you talked about. So overall, I think

Speaker 2 (01:05:00): it’s about jobs and what model to apply.

Speaker 1 (01:05:04): The short answer is I have no answers. Okay. Because these are tough questions. I tried to address them in part during my talk. But nevertheless, I will try and address some of I know that Professor Rajan has written and spoken about focusing on services for the future. It’s not for the faint-hearted contest what Dr. Rajan said, and I agree with him, which is that we must focus on services for tomorrow’s growth, indeed for today’s growth.

Speaker 4 (01:05:40): But at the same time, I believe that we cannot de-emphasize manufacturing for the simple reason that we still have to depend on manufacturing to provide tens of millions, indeed hundreds of millions of jobs.

Speaker 1 (01:05:58): And I believe in the short term, when I mean short term, I mean medium term, in the next 15 years, as much as India will have to mobilize jobs from the services sector, I believe there is potential even in the manufacturing sector. There is some manufacturing pessimism about people like Arvind Subramanian talk about premature industrialization or some phrase there is, which is to say that India cannot rise to the level of industrialization of other developed countries. We have to move on even before that. But I believe there’s scope, number one, because we have a large domestic market with people at low and low middle income level. We can manufacture domestically for that. Just look at this. We import as much as 100 billion of low cost consumer goods from China, 100 billion.

Speaker 5 (01:07:07): even if we can make 50 billion out of that within the country we can create so many jobs so i don’t

Speaker 1 (01:07:14): believe that we should emphasize manufacturing as much as that again something that i said during my talk yes the export market global export market may not expand in fact might even conquer it but india’s share in the global market is so small that it should be possible for us to double our share in the global market even if the global market is itself not expanding. That’s my response to Ashokan’s question. On the question of Mandriga, you know, I must admit that I have no first-hand exposure to Mandriga. It is decided with a lot of expectation And I believe it did deliver quite importantly during the pandemic when women and a lot of men who came back from their urban employment back to their villages took advantage of Mandrika. It became a lifeline and I think the government actually replenished the budget for Mandrika. See in an ideal world, we want nobody accessing Mandrega. That’s the ideal situation because Mandrega is supposed to be a safety net of fallback option. So in an ideal world, we do not want people coming into Mandrega. But we should not design it so tightly that it becomes difficult for people. In fact, this morning I was debating with some people about how Mandrega is a gender bias. things in India is that going aside a little bit but it’s important to debate one of the things

Speaker 5 (01:09:00): happening in India is that female labor force partnership excuse me female labor force

Speaker 4 (01:09:07): participation ratio FLPR is coming down not just low but coming down and that hurts growth

Speaker 1 (01:09:15): and why are women withdrawing from the labor force that’s a very very tricky question and an important question on the question of manrega there is an important positive gender bias for women manrega mandates that employment should be provided within a five kilometer radius and that is to provide employment to women who cannot move very far away from villages So, I think we should look at Manreka, look at some studies about how operative it’s been, how efficient it’s been. And Rajesh Jai’s question about how we can pay 800 million jobs, I have, you know, I cannot say any more than I’ve said, but I believe that we should focus on skilling. Skilling people are coming out of agriculture. We should focus on improving productivity. We should focus on skilling of women particularly. We should focus on raising wages for labor for women because one of the reasons women are withdrawing from the labor force, I believe, is because they’re not willing to labor at the current wage level. So we must raise the wage level for them. And we should focus on medium and small industry, which for Anirut to piece more employment in itself.

Speaker (01:10:45): Thank you.

Speaker 1 (01:10:46): Thank you. There’s one question from Anirut Datta.

Speaker 3 (01:10:51): It is outside, slightly outside our conversation subject today.

Speaker 1 (01:10:57): He asks, can you please speak a little bit about the two challenges, institutional and governance?

Speaker (01:11:02): Yeah.

Speaker 1 (01:11:03): Anirut Datta. Anirut Datta. Anirudh who is Anirudh? Anirudh Datta. Anirudh Datta. Thank you for that question. The governance challenge is something that I did. I said, you know, I talked about Chinese investors coming and how we failed to deliver on our promises. I can give you another illustration. When I used to work in the state government in Ardha Pradesh 30 years ago in government of India. A lot of investors come, we used to go around even today chief ministers, finance ministers,

Speaker 5 (01:11:42): go around the country, around the world scouting for investors. And they offer incentives, you know, freebies as it were.

Speaker 1 (01:11:49): They say they’ll give you utilities, concessional rate of electricity, land we will provide, etc, etc. But if you ask investors privately, what is important to you? They will say, yeah, we will take all these freebies that you’re giving, we’ll take all

Speaker 4 (01:12:10): the concessions you’re giving.

Speaker 1 (01:12:12): But what is more important to us is that you free us from your inspections, from your inspectors. So this is a big problem for governance problem and institutions. I actually now answer both institutional and governance challenges together. Some of you might have read Francis Fukuyama’s book, I think it’s called Trust or the other one was called the World Order something, I forget the title. But Fukuyama, I actually studied development history and he says that what characterizes developed societies is three things. Rule of law, accountability, and a strong state. Rule of law, accountability, and a strong state. So Anirudh, ask yourself, where do institutions in India stand on this, on accountability, on rule of law, on a strong state? And I, you know, Now, actually, sometimes I ask myself, can I add to Fukuyama’s list?

Speaker 6 (01:13:45): And I think all of you should ask yourself whether you can add to Fukuyama’s list, because challenge the proposition.

Speaker 1 (01:13:52): I would say that we also need to wish about it across the country in order to grow harmoniously to a 5 trillion economy. So institutional challenges, governance challenges, and political challenges. Thank you sir.

Speaker 2 (01:14:11): The next question is from Samruddha and he invokes an essay by B.R. Shinoy. It says B.R. Shinoy in a famous essay called My Idea of a Welfare State wrote that true welfare lies

Speaker 1 (01:14:22): in individuals being able to meet their own idea of their welfare goals. And the state only has a role in maintaining the rule of law. So would not goal setting like $5 trillion economy reduce the scope for individuals to decide what is true welfare for them?

Speaker 4 (01:14:38): Samrita, I can answer that at an economic level, at an economist level, at the philosophical level. I certainly cannot answer it as well as Professor Shenor would have answered it.

Speaker 1 (01:14:55): But you know, as Adam Smith said, there is really no conflict in a free market society between individual interests and collective interests. After all, what did Adam Smith say? That if people behave selfishly, the butcher and the cobbler, I think. The butcher and the baker. If they actually selfishly, self-centeredly, working for their own livelihood,

Speaker 6 (01:15:27): they’re actually collectively contributing to collective welfare. But of course, we cannot have such a free market society without any constraints because

Speaker 1 (01:15:41): we live together, we need to have some norms, we need to have some regulation. So I think it’s important for individuals, households, communities, societies to be able to decide on their own welfare norms but keeping in view the fact that their interests their welfare norms should not infringe on others that’s the whole idea of uh be living responsibly in a welfare society but in a growing economy. So I would think that the state has a role, the state will not weather away like Mark said, the state will continue to have a role, but I think individuals should have the freedom to decide their own welfare goals.

Speaker 4 (01:16:37): I mean everybody wants a certain level of income, certain quality of life, but beyond that what how

Speaker 1 (01:16:43): they spend their money how they enjoy their welfare should be left to them thank you sir next question is from mohitsa tenant and he asked where are the savings for growth i like you said that so savings is uh is missing in the investment story which is the most important thing so where are the savings for growth is this question so there in the economy savings will come if interest rate goes up okay so savings will not come out of thin air they

Speaker 5 (01:17:14): will not fall from the sky people will save and will put that in banks which will turn into investment of course savings will come from higher incomes I don’t want to be little more

Speaker 4 (01:17:26): it’s question which is that income should go up people should consume more people should also save more and they will save more if interest rates are attracted. So we should ensure that consumption

Speaker 1 (01:17:39): levels go up. We should also ensure that people are encouraged to save. Thank you. There are many

Speaker 3 (01:17:47): questions regarding rupee and exchange rate. So even clubbing them because they are in different directions, so clubbing them will also be a challenge, but I’ll try. So the question is, After six, sorry, I asked this question after six months ago, about six months ago, rupee was 78. But RBI tried to defend the currency and it’s currently now at 82. So in retrospect, would you, would it have been better if RBI didn’t try to defend the currency? In the same way, Giridhar asked this question, as Giridhar Prabhu asked this question, that Professor Shanoi mentioned that equilibrium value of the rupee has not been arrived at since 1936.

Speaker 1 (01:18:26): So when it was totally free. So how could we get into determining it now? You know, both are difficult questions for somebody outside the RBI. I said in my talk that the RBI should not try to defend the exchange rate against fundamentals. If the value determined by the fundamentals

Speaker 5 (01:18:54): is that the 80 rupees to a dollar, I think it will be futile for any central bank to try and defend that.

Speaker 1 (01:19:02): What RBI can do and indeed has done is to engineer the trajectory of the fall. If indeed RBI did not intervene, it’s quite possible that the fall would have been much more volatile, hurting the economy.

Speaker 4 (01:19:18): So I would not say that RBI’s intervention has been completely futile.

Speaker 1 (01:19:23): In fact, I believe it’s had positive impact in terms of reducing or containing volatility. But the general principle is that there is a cost to intervention. There’s a cost to maintaining reserves. And there’s a cost to trying to defend the RPA against fundamentals because eventually it will come down no matter that you’re trying to defend it. So it’s a judgment call that the RBI management in consultation with the government will have to take. On Professor, excuse me, Dr. Giridhar Shanoy’s question about Professor Shanoy’s equilibrium value, I think 1936 years said that’s an equilibrium value when we were perhaps operating in a free market system. Today, the equilibrium value is seen as the real effective exchange rate of REER, which is the exchange rate of the rupee against 40 trading partners, weighted average effective exchange rate against the rupee against the currencies of 40 of our trading partners on a weighted basis. I don’t believe that RBI tries to track the REER. You know, it’s quite possible that the rupee in nominal terms is quite stable, although RER is not zero. Or excuse me, RER is not 100.

Speaker 6 (01:20:52): Even if RER is not 100, rupee can be quite stable. But RER can be a guide for RBI to see where the exchange rate might be going or where

Speaker 1 (01:21:04): exchange rate has to go. I don’t think the nominal exchange rate has to be in complete equilibrium with the real effective exchange rate, but the RER can be a good.

Speaker 3 (01:21:17): Thank you, sir. The next question is somewhat about regarding data in general. So Amit Chandra asked this question about the reliability of data and information, that if data is manipulated or not completely reliable, then anything could be achieved on paper and would be meaningless. And in similar vein, Srinivasan Iyengar asked that to identify why there is a disparity between jobs data and EPFO data. So the EPFO shows healthy growth in numbers each month. However, the jobs data from various public and private sources presents a pessimistic picture.

Speaker 1 (01:21:51): So any thoughts on this dichotomy? Thank you. First on Amit Sinderas’ question, of course, economic policy may be depends heavily on data.

Speaker 4 (01:22:02): and reliable timely data is very critical.

Speaker 1 (01:22:08): During my time, we were wrongfooted several times because of all the data, because of revisions to data. In fact, we should have cut interest rates earlier,

Speaker 5 (01:22:20): sooner, if we had known that growth actually

Speaker 1 (01:22:23): did not decline as much as it did.

Speaker 5 (01:22:27): But, you know, whatever the reason

Speaker 1 (01:22:31): We did not get right data in the right time and therefore economic policy was wrong-footed. But over the last 10 years, I believe that our quality of data has improved. The timeliness of data has improved. There are of course some speculation that data released is becoming a matter of convenience, matter of political convenience. I have no way of affirming or contradicting that. I see what others are seeing. But for the credibility of the government, for the central bank, indeed for public institutions, it is important that we release data. and in time because the market and the larger economy is as is entitled to have the same data on which the policy makers are basing their policy so that data integrity and data disclosure

Speaker 5 (01:23:40): integrity has to be taken okay on Srinivas Iyengar’s question about the disparity between

Speaker 4 (01:23:46): vpf1 jobs that i have no view but you know i’ve i’ve heard something about job surveys they ask people about how long how many days did you work in the last one month in the last one year jobs

Speaker 1 (01:24:02): data depends very critically on the recall value of people and recall value tends to dissipate over time tends to dissipate if people are idle. So quality of data depends on the quality of responses but I have no specific response to the disparity between EPFO and jobs data. Thank you sir.

Speaker 3 (01:24:26): Geridhar asks a question about a topic which used to be when I was in college and it used to it has been a topic of a conversation for a long time but not late lately not so much. He’s asked

Speaker 2 (01:24:39): sir you have closely looked at tarapur committee in 1998 and 2001 recommendation on capital account convertibility so we can now be uh bankers to the world but why this hesitation towards uh

Speaker 1 (01:24:52): uh cse capital account convertibility uh yeah i’m aware of the tarapur committee recommendations But I’m also aware of the new experience, new learning, that capital account convertibility is not necessarily the end goal. Let me clarify myself just so that I’m not misinterpreted, which is that 10 years ago IMF used to evangelize, we used to believe that we have to go forward on the path to capital account convertibility and the ultimate nirvana is complete capital account convertibility, we will become a hard currency. Now we know that in a financially globalized world,

Speaker 4 (01:25:47): it is not necessary that the endpoint has to be complete capital convertibility because a lot of stability depends on capital flows.

Speaker 1 (01:25:57): Of course, we need to progress on the path to capital convertibility,

Speaker 5 (01:26:04): but we should keep track of our economic situation.

Speaker 1 (01:26:10): Today, for example, we still have high fiscal deficits. Our banks are not completely resilient. our financial markets are not deep enough our financial markets are not resilient enough so we got to move along the path of capital account convertibility

Speaker 6 (01:26:32): in harmony with the resilience of our financial institutions under financial markets and i believe

Speaker 4 (01:26:41): that we will move forward uh but as i say often we will make is slowly that’s a festina lent

Speaker 1 (01:26:49): you call it Latin which is in English we will make haste slowly. Thank you sir. I’ll use the

Speaker 3 (01:26:57): privilege of being the moderator and ask a question myself. So this relates to one of the conferences I was at and the most hotly debated topic was about the sharing of the GST pool, the resources, the fiscal resources between states and how you know the claim is made that some of the poorer states are being rewarded and are getting a bigger share compared to say southern states which are richer and that debate you keep seeing in the in media quite often so where do you see that debate going and what are would be the appropriate responses both in

Speaker 1 (01:27:33): from from a particularly fiscal point of view yeah finance commission particularly yeah but

Speaker 5 (01:27:40): thank you for that question i have thought about it i don’t believe i have a complete

Speaker 4 (01:27:44): answer because I’m not clued into much of the GSD debate.

Speaker 1 (01:27:49): But the GSD is a national project. Both the center and states collectively have a lot to gain. There is some given take because we moved from an endpoint sales tax to that, now to GSD. So some states benefit, some states are cross subsidizing. But eventually, I believe that a rising tide will lift all boats and will lift all boats equally. So we are still in a transition on the GSD. And therefore, there might be some disparities, some heart burning, some cross subsidization. Some of it is transparent, some of it is not transparent. But it is inevitable in every federation.

Speaker 4 (01:28:41): It is not unique to India. You see this in rich countries as well. You see this in the US. President Clinton often used to say that Arkansas, the state that he came from was one of the policies,

Speaker 1 (01:28:53): used to argue for more to Arkansas. It happens in Australia. It happened in Sri Lanka. It happens in African countries such as Ethiopia. So, interstate tensions about resource sharing are not unique to India. They are in a big federation. Is them all separated from Indonesia mainly because of this issue of resource sharing? And in India, I think we’ve managed our centre-state relations on the fiscal dimension quite well, I would say. The Finance Commission has commanded a lot of respect because their recommendations have been quite balanced. And you cannot satisfy everyone. Richer states have an obligation to come to the support of the poorer states, but poorer states should not build a vested interest in remaining poor. So that’s a difficult political judgment. I believe we have the institutions of state federalism, in particular the financial commission

Speaker 5 (01:30:06): to manage this.

Speaker 3 (01:30:08): Thank you, sir. So the scheduled time is just about over, but we have some remaining questions.

Speaker 2 (01:30:17): So depending upon if you have some time available, maybe we can continue or we can close up to

Speaker 6 (01:30:22): you. It’s up to you, I have five, 10 minutes.

Speaker 2 (01:30:24): Oh, okay, great.

Speaker 3 (01:30:25): So then we will take a few more questions before we do the conclusion remarks. Okay, next question is from Mansa Pirdala. And Mansa asks, can India pave a new model of growth if it can implement agriculture reforms and increase its productivity and exports instead of focusing on manufacturing alone in context of increasing productionism across the world?

Speaker 1 (01:30:47): Yeah, I think there are a lot of weight in what Mansa asks.

Speaker 5 (01:30:51): You know, because the traditional textbook development model is that traditional economies are heavily into agriculture and the primary sector.

Speaker 1 (01:31:07): They move from agriculture to the secondary sector, mainly manufacturing. Then they move to the service sector and they become post-industrial societies. That’s the traditional model. For months of the 1990s, including the early years of this millennium, we used to take

Speaker 4 (01:31:28): pride in the fact that India defied the traditional model.

Speaker 1 (01:31:32): We leapfrogged over the manufacturing sector. We moved directly from agriculture to services. Our services sector as a proportion of our total GDP is much larger than most other developing countries. this level of capital income so India struck a new path but that reality has come to hit us now now we know the importance of manufacturing for jobs and I’ve already explained my views on the importance of manufacturing for jobs but Master’s question is can we instead

Speaker 4 (01:32:12): focus on services. My point is that these are not mutually exclusive. Services and manufacturing

Speaker 1 (01:32:21): emphasis on services and manufacturing are mutually exclusive. In fact, I can say even this, that it might be difficult to develop a service base without a manufacturing base.

Speaker 6 (01:32:36): A lot of experience shows that services come on the back of manufacturing growth. So in striking out the new path, we must of course see if there’s a new path there, new

Speaker 4 (01:32:50): model there, but we must not jettison accumulated experience just to experiment, to conduct

Speaker 1 (01:32:58): a very critically important big experiment, the cost can be very high.

Speaker (01:33:02): Thanks.

Speaker 1 (01:33:03): We’ll take one last question and before we conclude. So Bhavya Mehta asked this question, in context of buffers for ensuring financial stability,

Speaker 3 (01:33:15): how should our country design buffers for extreme situations such as a massive lockdown affecting multiple economies at a time as seen in the COVID-19 pandemic? So any guiding points on or things to keep in mind?

Speaker 1 (01:33:29): You know, that question at a national level, how resilient should the buffers be, can be translated to a question at a personal level or household level. How much insurance would you buy? Because you can insure your property, you can insure quality of life, you can insure your family, you can insure your life at a very, very, for an exorbitant amount, but that will also cost an exorbitant amount. So you’re all the time trying to balance between the amount of insurance you want and the amount you have to pay for that insurance. It’s the same thing about buffers for an extreme situation. You know, take for example, how much a food grain should be because the cost of locking of food grain and food grain erodes over time.

Speaker 6 (01:34:27): cost to holding foreign exchange reserves. So how much of food gain, how much of foreign exchange reserves, how much of our first report. In fact, the cost to asking banks to hold capital.

Speaker 1 (01:34:39): Of course, RBI can ask banks to hold 50% capital, but banks have become so unprofitable that there’ll be no credit flow. So there is always this judgment that individuals, households, communities, societies, countries have to make between what insurance will require and at what cost.

Speaker 3 (01:35:06): Thank you very much sir. So I’m reminded of a particular quote which I want to share from Biash. This is Milton Friedman writing about Chenoy’s note of dissent on the second five-year plan. So Friedman says, if one reads Sinoi’s report now, and he’s writing in 1963, says if one reads Sinoi’s report now, it sounds like a retrospective description of what happened

Speaker 2 (01:35:33): rather than a forecast. So I’m hoping that all the challenges that you have laid down, you know,

Speaker 3 (01:35:38): and some of the, you know, quite something to keep in mind, especially that how the economic growth should not be working for a few, but for all, and keeping the 10 year old girl in mind. So I’m hoping those challenges, you know, we overcome soon. And with that, this brings to a close the Biya Shanoi Memorial Lecture 2022. And on behalf of Economic Research Center, Mangalore, and Center for Civil Society, New Delhi, I would like to thank our speaker, Dr. Subharao, for such an illuminating talk and engaging with questions from the audience. Many thanks also to Shorya and the rest of the team at CCS for helping organize this lecture. Thank you very much, sir.

Speaker 1 (01:36:18): And thank you everyone for joining. Thank you. Good night. Thank you, Kumar. Thank you, Lakshmi. Thanks, everyone.