Three years after he finished his assignment as the Reserve Bank of India Governor, Raghuram Rajan is back in the India with a new book — The Third Pillar — on how markets and the State leave the community behind. Rajan, who is now the Katherine Dusak Miller Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago, is on a roadshow to launch the book and spoke to The Indian Express. Excerpts:
You have said in the book that in 2008, attention was deflected from stagnant paychecks with cheap credit for housing and in the backdrop of the deep faultlines of inequality. Are the new welfare schemes proposed by the two major parties in India also a recognition of the inability to come up with solutions to address the challenges of a slowing economy and creating jobs?
Let me step back. In the West, the problem is slippage of those who are in the middle rung, can’t keep pace and have fears for their children because they can’t get access to the same standards of education and quality of capability building and that the avenues to progress and good incomes are shut off. In India, there is a certain amount of rural-urban divide which is due to the farm distress and the traditional problem of poverty which despite our progress has not been eliminated.
The income transfer schemes proposed now could be viewed as new ways of tackling old problems. I wouldn’t superimpose them on everything else. Structure them in such a way that they are not on top of many other schemes but becomes the primary one. They require proper design. We need to work them in. I would not see direct income transfers as a substitute to jobs as we don’t have the capacity to pay people to do nothing. Whether you are a farmer or a poor individual, it is meant to be an income support to keep the body and soul together.
You also say that the challenge in India is to make the state more effective while placing stronger constitutional limits. where should those limits be imposed?
Constitutional limits are a consequence of the distribution of power. When I say limits, it does not have to be constitutional amendments. It means a limit on government’s powers. For instance, in the Budget making process, what makes it honest in many countries is an independent Fiscal Commission or Council which says these (budget items) are believable and these are not and this is the true deficit. Is it time for us to discipline ourselves with that. Otherwise, the government can spend what it wants and not be constrained by anything. And in that context, maybe it is time that we set statutory limits or (provide) statutory protection for the term of the RBI Governor. The term of the Governor should be protected, so that the person cannot be impeached or fired unless there is a dereliction of duty. We could have constitutional clauses for that, like in the case of the Corruption Ombudsman — the Lokpal. That would allow the Governor’s term to be protected. Has the time come to do that given where we are as a country. That’s the question we should be asking and the kind of institutions we should be strengthening. Central bank independence doesn’t mean independence to do anything. What I meant is within the law, ensure the central bank has operational independence. Once you give them the mandate – either financial stability or price stability, let them carry it out. If they fail, hold them to account. You shouldn’t be interfering on a day- to-day basis saying that thou shall do this and that. That’s the sense I mean.
With the changes in the world economic order, what are the challenges you see for India?
The first is we have to grow richer. We are different from other countries as we got democracy early on. It may not be an ideal system for the early stage of growth if you don’t have an equally competent government structure which can manage all the pressures which a democracy can create. I wouldn’t trade democracy for any other system in India. We have a great system when we reach middle income. The transition from middle income to rich — with our dialogue, debate, intellectual freedom — that step can be much faster because we don’t have to undergo a political transition. But first we have to get to middle income and therefore our focus should be on growth. (In the) Meantime strengthen our institutions and we will be positioned to ensure growth. Contrast that with China. Their system at this stage is less conducive to make the transition from middle income to rich. They will have to question whether the party can be in charge. That said, unless there are big accidents, India will probably be the number three economy in the world in the next 10 years.
What do you imply by those accidents. Are they political or internal?
There are strong disruptions to growth. Ultimately, that (disruption) is always political. A serious disruption would be a change in the system or some unrest which creates difficulties for the government to move forward. You have seen some versions of that in Turkey, Egypt and so on. I hope that is not the case here and I don’t see that on the cards. Barring those accidents, we should be the number three economy, with the US at number two and China at the top in terms of GDP at market prices in the next 10 years. In the ten years we would have realised our potential. As we are going to get there, it is time we started talking about a new multi polar global architecture or structure or propose that.
You have also written about the rise of the strong state and the reemergence of populism and also populist nationalism. How much of a worry is that?
That’s not a primary worry as we have checks and balances in place in our country. As a clash of ideas, I don’t think it is overly worrisome If we have a variety of ideas being proposed and sort of debated. When you seek to quell debate, it becomes problematic. One side says the other side is anti-national and can’t speak. Again and again I emphasise that for the next phase of growth, out ability to debate is important. As long as we preserve our democratic structure, I see no problems with various viewpoints. I am happy to point out the deficiences in the other side.
What are the sources of the next crisis which governments should be worried about?
Globally, it is the build up of leverage. But the greater concern to me is political dissension in a number of industrial countries creating polarised politics and the rise of radical politicians. That to my mind is the greatest challenge. It is not going to be the same old gentle world. We will have to react to some of these forces.
You also make a case for an independent private sector with higher public status. Given the way it has unravelled over the past decade-with charges of crony capitalism and stigmatised capitalism and the lack of trust in the private sector still, how is it politically feasible ?
A. What we need is a strong independent private sector which imposes checks and balances on the government. If we have that, the corollary is that we will have a government which does less but does the remaining things well. I am all for maximum governance and minimum government, but I want to see it happen. How long are we going on to hold on to the commanding heights of the economy. I can’t understand this intolerance for privatisation successes. I am not in the camp which is averse to people making money if they make it the right way and pay taxes. After all, we want them to make money and generate growth and it should create possibilities for many more people to make money. The notion that people who have created wealth are criminals, I think we have moved away from that and shouldn’t go back to that.
One of the big concerns here has been the constant revision of economic data and integrity of that data. How do you see this issue being addressed ?
That has got compromised because of the back and forth on the GDP numbers. Because of the allegations of bias, it is worth getting some outside experts to look at it. And I don’t mean foreigners but domestic experts to add integrity. A committee under Vijay Kelkar has also suggested that. He is a person of unimpeachable integrity and seen as a honest broker from all sides. If he is saying that we need to really think carefully, we need to also examine whether to strengthen the National Statistical Commission.