Raghuram Rajan: Should focus on structural reforms, not get fixated with growth numbers

When asked about India’s ability to achieve 8 per cent growth, Rajan said being “overly fixated” on a certain growth number should not be the priority, rather the focus should be on carrying out structural reforms that will enhance the pace of growth and ensure macro stability.

The RBI Governor, who will return to academia after his term ends in September, also talked about plans to explore usage of mobile companies’ kiosks as bank branches in rural areas.

Rajan said a mobile company has average 150,000 kiosks through which it sells mobile cards and if those kiosks can take in money and give out money, that could be a “big game changer”.

Edited excerpts from the interaction:

Q. In the current domestic situation that we have and the global economic challenges, what major challenge do you see for the Indian economy and RBI in particular?

Raghuram Rajan:  I think the challenges have been relatively same for quite sometime, which is, we are in the midst of a recovery. There is a lot of frustration with the pace of the recovery but we should remember that it’s in the face of two consecutive droughts and with a global economy which has been quite weak and of course with number of shocks coming from the global economy such as what we saw most recently with Brexit. So given that I think the performance of the Indian economy has been quite creditable and I think that the hope is that with the good monsoon, which we are seeing just now, that sentiment gets elevated especially in rural areas, rural consumption picks up more strongly, the agricultural sector gains strength, the rural industry gains strength and overall demand starts picking up more strongly. I think that will be, that certainly is our expectation and we will see how that plays out. The challenges are obviously strengthening this process by undertaking all the reforms that are needed, there is a lot of talk nowadays about GST being done in the Monsoon Session that would be a good thing. I think from our perspective at the RBI, the number of issues that we are working on and trying to accelerate the structural reforms process, so let’s see how much we can do.

Q. You have opened so many accounts under PMJDY (Pradhan Mantri Jan Dhan Yojana), maximum in rural areas. But now you see in rural areas for any bank branch or ATM people have to walk 4-5 km. Business Correspondents are not situated there in rural areas, they are shifted in small cities. What is the solution for rural areas?

Raghuram Rajan: We cannot put bank branches in every village. That would be too expensive, at least the full fledged brick and mortar branch. Now one possibility is a mobile branch and some banks are bringing in mobile branches, which travel from village to village and stay at a particular fixed time in a village. We are also exploring definition of a branch to see if mini branch, micro branch and mobile branch can fit into it. But I also think we need to work with new institution as well as technology. We have given the in-principle licence to Postal payment Bank. When it is licensed formally, that could bring a lot of Post Offices into the process and so you can put in money and take out money. With the mobile companies coming in, you can put in money, take out money from a mobile kiosk. So my hope is, take average mobile company has 150,000 kiosks through which it sells mobile cards.

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If those 150,000 kiosks can take in money and give out money, that could be a big game changer. But one more thing which is happening, perhaps by the end of this month, is the universal payment interface (UPI) which I can make a payment from my bank account to your bank account just by knowing your alias. So if I am in a village, I can actually do a lot of payments without going to my bank account and taking out money. I just need to know your ‘Mohit@something.com’ , I do that the NPCI has your bank account details and will transfer the money to your bank account and you will get a message that so much money has been transferred. So I think, with the UPI, and I am telling you a two stage process. One we have to make it easier to take out and put in money, the kiosks will help, the Post offices will help. But also the need to take out money or put in money will reduce if I can do it directly into the bank account, if I can make payments electronically and I think UPI will help there. So my hope is these things will actually reduce the problem that you are talking about.

RBI Governor Raghuram Rajan has decided against seeking a second term. He will return to academia once his term ends in September.

Q. In the backdrop of fragile economic situation and subdued domestic growth, a lot of suggestions came in that RBI was probably behind the curve in cutting interest rate. Your views on that.

Raghuram Rajan: This discussion keeps going on without any economic basis. You saw the CPI numbers just last week. 5.8 per cent is the CPI inflation, our policy rate is 6.5 per cent. So I am not sure where people say we are behind the curve, you have to tell me that somehow inflation is very low for us to be seen as behind the curve. So I don’t really pay attention to this kind of dialogue.

Q. We were made to believe that the Monetary Policy Framework agreement which was signed last year that target was fixed. But now there are talks that the target will be reviewed and will be notified separately. Is the target of 4±2 per cent under review?

Raghuram Rajan:  I think the government has to notify the target. That’s all that’s on the table.

Q. No review?

Raghuram Rajan:  The government has to reflect on it and notify. But that’s all that is on the table.

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Q. Is there a need to ring fence bankers from the investigative agencies especially given the kind of debt restructuring schemes you recently announced?

Raghuram Rajan:  I think bankers have expressed some concern that they should not be held liable for actions that are taken in the full spirit of what is needed and I think everyone has respected that need that where they take actions based on appropriate due diligence, on a proper application of mind given the situation, they should have some freedom to take actions, because otherwise we will not get the kind of clean up, the kind of putting over leveraged projects back on track that the economy needs. Now that said, you can’t give a blanket sort of relief saying whatever actions you take no matter what their character, you should be absolved of any responsibility. I think there has to be some responsibility but the responsibility has to be for making the appropriate due diligence of taking measured decisions. So long as somebody has invested the effort in taking the right decision, they shouldn’t be held responsible based on which way the decision could go. Sometimes, you know, uncertainty creates the possibility that decision turns out wrong. But if you took the best decision, given the circumstances, then that should be respected. I think that’s what they are asking for. To my mind, this new group that has been created to examine the process by which the decision was made, will try and give them comfort on that. Beyond that it’s not clear to me that anybody can give a blanket guarantee.

Raghuram Rajan: “I think we sometimes get overly fixated with a particular growth number. 7.6 (per cent), 8 (per cent), they are all within the same sort of range of numbers.” Express Photo by Prashant Nadkar.

Q. How do you ensure that balance?

Raghuram Rajan: You need appropriate balance. As a society we have to reach that which is that we have to respect the decisions that were made so long as they were made in the right spirit, given the information that is available at that time.

Q. With good monsoon, many Union Ministers are saying that 8% growth is achievable. Do you think that is achievable?

Raghuram Rajan:  I have sort of refrained from having thumping on the table and saying this is going to be the growth number or that is going to be the growth number. Our last projection was 7.6 per cent and I think as the monsoon develops, as the global economy develops, clearly there will be changes in that. But I think we sometimes get overly fixated with a particular growth number. 7.6 (per cent), 8 (per cent), they are all within the same sort of range of numbers. What we should be focussed on is undertaking all the actions that we need to ensure that growth is strong and sustainable and that means macro stability, that means the kind of structural reforms we are doing to enhance the pace of growth. I think those are really what we should be focussed on rather than whether it is half a percentage point up or down.

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Q. On the balancing part, with inflation rising again, what would be your message to your successor?

Raghuram Rajan:  Wait for monetary policy.

Q. Your predecessor has written a book where he said that you would pay a price if you do not follow the government line. Do we expect similar book from you few years down the line?

Raghuram Rajan:  I have no immediate plans to write a book on this subject. I’ll write on academic issues.

RBI Governor Rajan will not be seeking a second term and will return to academia once he exits the Central Bank in September this year.