Former US Treasury Secretary Lawrence Summers has said “the pace of decision- making needs to become much more rapid” in order to improve the business climate in the country. In an interview to GEORGE MATHEW, Summers, who was the Director of the National Economic Council for President Barack Obama and currently President Emeritus at Harvard University, said, “with low oil prices and policy reforms, India could aspire for 9 per cent growth… but India has to accelerate the pace and commitment to reforms.” Excerpts:
The US Federal Reserve is expected to hike its key policy rate in December. What will be the impact of the hike on India in particular?
It’s generally anticipated. I will be surprised if there’s a large impact. What will depend is what happens going forward. There’s substantial risk if the Fed hikes rate too rapidly and it could lead to pressure on many emerging markets, including India. I think risk is still asymmetric between the monetary policy being tight… there’s greater risk and more costly risk than policy being too loose. I don’t think capital flight will happen and I don’t think the mid-December hike will be a macro-economic issue for India. If a perception takes hold of an excessively rapid hike, then there would be a problem.
On the growth vs delivery issue, there were big expectations from the Modi government. Do you think the government has faltered?
It’s too early to make a judgment. The government hasn’t been in place for a very long time. You have to see how policies like GST go and efforts underway to improve the quality of public services. I think this is India’s moment and expectations have been raised substantially. And it depends on how these expectations are fulfilled. I’m not yet prepared to make a judgement on where we are on those expectations.
Which are the three key reforms that India needs to undertake?
First I think changing the business climate and India becomes a place of presumption of permission rather than presumption of prohibition. I think in that regard the pace of decision making needs to become much more rapid. Second, there is a major need for infrastructure investments, particularly in the power sector. Third, I think there is a need to improve the quality of basic social services. It’s not that there’re inadequate resources for education and healthcare. It’s that money spent doesn’t translate into sops in a way one would like to see.
Private investments are not coming and there’s pressure on fiscal consolidation. How can you manage the growth and fiscal target within this framework? Do you think 9 per cent growth is achievable?
In general it needs to be recognised that there are very large benefits by accelerating growth. One thing what matters is not the absolute amount of debt but the ratio of debt-income. If you grow income more rapidly, you increase the denominator. I think with low oil prices and policy reforms, India could aspire for 9 per cent growth. I don’t think if anything can be taken for granted for it to achieve (higher growth) without substantial policy reforms. India has to accelerate the pace and commitment to reforms.
In the 2007 Jackson Hole annual conference, there were differences of opinion between you and Reserve Bank of India Governor Raghuram Rajan on the financial crisis. Where did you go wrong?
I probably spoke less carefully than I should have. I thought he had put a great deal emphasis on financial innovation. I thought large part of the risk had to do things that are traditional like lending against real estate. I was not trying to take the issue with a great degree of concern. I was trying to suggest that the focus should be more on the problem of excessive risk taking and less on technological innovation. The magnitude of the disagreement had substantially enhanced…. probably because I didn’t speak as clearly I should have. In retrospect it’s clear that Rajan’s broader theme that there was substantial systemic financial risk has been correct… there were other areas like ways in which the residents were involved where I didn’t recognise the risks.
India’s financial sector has been a huge drag in terms of bad loans. How do you see this issue being addressed?
The financial history records many more examples of countries that moved too slowly in addressing the banking problems than countries that moved quickly to address the problems. I hope recognising the bad assets, separating the bad assets, infusing capital should be priority. It’s better to face these problems rather than lend and pretend… or keep rolling over bad loans, or evergreening of loans and deny there’s a problem. Denial is not the strategy.