Brookings India Director of Research and former Deputy Governor of the Reserve Bank of India Subir Gokarn talks to P Vaidyanathan Iyer on a range of economic issues that are topical today.
The banking sector is still coming to grips with the Jan Dhan programme of the government? What are your initial impressions?
To me, it represents a conceptual leap from the first phase, which basically entailed opening as many accounts as possible. But opening an account is not an end in itself. Its not a product, its a channel, a channel for distributing products. What the Jan Dhan programme does is bundle a distinct product with the channel.
So when you open an account, you have immediate access, of course with some conditions, to an overdraft of Rs 5,000, and general and life insurance products. That is where the value of financial inclusion becomes direct and obvious to the customer. This bundling of product with channel is what will result in an economic impact.
For example, a street vendor is borrowing from the informal sector at very high rate, anecdotally at 10 per cent overnight. This business is viable because the productivity of capital is extremely high. So he can afford to pay 10 per cent overnight rate and still make money. Now if you are talking about a Rs 5,000 overdraft facility at a price which is clearly lower than this, it can make a huge difference to people’s ability to improve their livelihoods.
But banks are worried about delinquency. How does one address this risk given the profile of the beneficiaries?
There is no question that banks will find it difficult to monitor such small ticket loans. What I visualise is a two tier system where banks utilise the mechanism of business correspondents or any other micro finance institutions, or even payment banks that are being allowed now. They can make the monitoring activity at such small levels viable. They have to have processes, technologies, and most importantly a direct link with customers. The challenge is the cost, and who will bear it. These are details of design and implementation that need to be worked out.
The Goods and Services Tax has petroleum outside its ambit. Is it a compromise that will outweigh the benefits?
I think the principle of a self-enforcing tax (like VAT or GST now) is that anything tradable should be brought under its purview. Otherwise it defeats the purpose.
The objective is to achieve the most efficient location of production. If you exempt certain goods, it distorts the mechanism. If you exempt petroleum products, it incentives consumption of products at a place where it is taxed least. But that is not necessarily the most efficient place to ship petroleum products to. So that is a loss of effectiveness. But obviously the government felt it was a price worth paying to make GST happen. It will do two things: fiscal impact will come from the disincentives it creates for people who stay out. State and Central tax databases will be integrated. Economic benefits kick in since we can now avoid the loss of productivity from sub-optimal location driven by tax arbitrage.
Oil at $60 a barrel brings cheer to net importers like India. But is there a worry on the global growth front with oil dipping further?
The question really is does this oil price decline represent a moderation of commodity prices? Or is it a reflection of a larger collapse of the global economy itself. I think those fears are starting to become more pronounced.
My own sense is that its impact is very heterogenous and different across countries and that the countries adversely affected — commodity exporters — are not going to influence that much the global economy. Overall, its impact will be quite positive.
If you look at the three growth engines of the global economy today, it’s going back to the 2003-08 period when the US, China and India contributed 50 per cent of global growth. All three are heavily influenced by low energy prices. China and India will certainly benefit. The US is in a slightly different situation. The US then was a large net energy importer, and today and over the next two years, it is poised to be a net exporter.
The rupee is falling against the US dollar.But at 63+, is there a need to panic?
There’s no unanimous framework that the currency should be at a particular value. What is important is to recognise that exchange rates are a factor in determining export competitiveness, and competitiveness against imports also. But the most important factor is the domestic cost of production.
If we are not able to improve our overall conditions of production in a way which allows us to reduce it, then the exchange rate offsets it to a certain extent. But excessive depreciation has a bearing on input costs too. The ability of using exchange rate management as the sole component of competitiveness is limited.