‘I am a little worried. Now there is 10-20 per cent chance that we might see 1991 again’

Economist Arvind Panagariya in talks with The Indian Express Editor-in-Chief Shekhar Gupta.

Written by Shekhar Gupta | Published: July 30, 2013 12:35:48 am

In this Walk the Talk on NDTV 24×7,economist Arvind Panagariya tells The Indian Express Editor-in-Chief Shekhar Gupta why he is “optimistic” about Modi and why this has been “one of the worst eras of performance by an RBI governor”

I am at the campus of the National Council of Applied Economic Research in Delhi. And my guest this week is a brilliant economist who I shall not describe as an establishment economist—although that is a species found widely in institutions in India—and somebody the BJP takes very seriously and I hope it continues to listen to…

Well,the UPA takes me seriously too.

…Arvind Panagariya—Bhagwati professor at Columbia,former chief economist at ADB and writer of many books,including your recent one with Jagdish Bhagwati,India’s Tryst with Destiny,and somebody willing to question establishment views even within the intellectual establishment. How tough is that?

If you believe in integrity and if you believe that you should speak your mind,then it is not so tough. And if you are not looking for a job with the government,it is even easier.

With this government? Or maybe that works better with the next one?

Look,if the next government does good things,then I’ll be with them,but if they really don’t do the right things,they will get my criticism too.

Describe this Indian economic establishment to me.

In our tradition,there isn’t enough questioning,particularly when it comes to social programmes run by the government,which has no real capability to deliver. Even then,we don’t somehow question. We criticise,we say the government can’t do this or that,complain about corruption,but when somebody says this needs to be done,we say the government must do it. There is a disconnect.

So,there is a touching faith in the government.

There is. Look at what happened in Bihar to those 23 children in the mid-day meal (tragedy). It reflects gross incompetence in running those kinds of programmes. Yet,we won’t sit back and say that maybe there is an alternative solution that we could work on,with the same objective of doing good to the people at large and reducing poverty.

Do most modern economists know this in India?

Well,I think we are trying to change the narrative as it existed and that was a very important part of the book Jagdish Bhagwati and I wrote. We took various myths—that growth doesn’t really matter enough and that redistribution itself can be sufficient—and demolished them one by one with evidence and data.

Would you say that India’s intellectual economic establishment is complicit in perpetuating these myths?

It certainly has not played its role and,to a large degree,it has played along. From the beginning,the Left has been pretty strong in India,intellectually. The kind of Right that exists in other parts of the world,like Thatcherite or Reaganite,doesn’t even exist in our system. All of us are by that measure left-of-centre. I mean,we all believe in social programmes,in redistribution,nobody says that growth alone will do the trick. This partly comes from this old tradition that the government has to do everything. We built it into our psyche when we started off on this road,first under Jawaharlal Nehru and then in a big way under Mrs Gandhi. By the time Mrs Indira Gandhi became prime minister,we got into tourism,hotels,taxis and all sorts of things.


I wasn’t even aware of that. Didn’t know about parachutes. This is exactly what the private sector can do pretty well.

Salt. Did you know that a company called Hindustan Salt has 40,000 acres of land and now the minister who is obviously scared of using that land for whatever else,has decided to lease it to BHEL to set up solar power farms?

What an enormous waste of the country’s resources.

You are now a senior citizen in your business,as a professional economist. Do you get the sense that too many Indian economists have decided to go along with politics?

Well,some. If I really believed that this was some kind of a lost battle,I wouldn’t be making an effort here. I think minds can be changed. We do find several scholars who now think differently. Part of the big problem in India has been that we have not been able to explain to the youngsters properly. I have gone to colleges and universities to give lectures. Once you explain,a large majority of people understand. Look,Narendra Modi was applauded at the Shri Ram College of Commerce because he tried to explain why we need growth,why markets are important,why we need better governance,not necessarily more government,and he is able to pass on that message.

But economic thought in this country is very much dominated by the Amartya Sen school on the one hand,Joseph Stiglitz on the other.

Remember,you are looking at the static picture. Ten years ago,nobody questioned Amartya Sen. His word was taken as Gospel. Not today. Lots of people in the Indian press are questioning Amartya Sen. The whole debate has been unleashed,so Amartya Sen is not getting a cakewalk anymore.

Including my colleagues Surjit Bhalla,Sunil Jain.

Yes. Today,you have Ajit Ranade,Vivek Dehejia…

And these are healthy intellectual arguments.

Absolutely. We need to open up this debate. Professor Sen does not like to debate,does not like to engage,prefers to just pronounce from his rostrum,but what we younger than him are trying to do,is say that you can’t do this anymore,we will question you and you have to answer. Finally,we provoked him. We had written a letter in The Economist questioning him and he came around and said that so far I have not replied,but today I have to reply.

If Harvard has to accommodate Neil Ferguson,then times have changed. So do you see this as a healthy argument?

Absolutely. To me,the big optimism is that in the political arena,there is Narendra Modi who actually now plays the song of the markets,who says that where the private sector can deliver,let’s bring it in.

The rest of the BJP has not being saying this.

It is true. Part of the problem in this is that the BJP has taken the 2004 defeat as the defeat of reforms. It is a damaging reading of the election verdict. Except for Narendra Modi,a large part of the BJP leadership has not come out of it. What is the point of an opposition which simply goes along with what the ruling party is saying? Objective-wise,I don’t think there is any difference. We all want to combat poverty,we all want to better health,we all want better education. This is an issue of instrumentality. Professor Sen would say the government has to do it,we can’t trust the private sector to do it. But the government has been doing it for 50 years. You look at the rural health system. For 50 years,we have built these primary health care centres,yet today,80 per cent patients go to private providers. Schools are the same. Private schools are delivering much better outcomes. Even in Kerala,53 per cent students in rural Kerala go to private schools. Can you name a single member of the National Advisory Council who sends his or her children to public schools (government schools)? Or goes to government-run hospitals or dispensaries? Therefore,for the general public there are government-run hospitals or schools where you won’t get proper treatment or education and for their own,they are finding ways to send their children to America for higher studies. This is grossly unfair. Give people the choice,empower them. This is why I have always said give cash transfers or cash vouchers for education so that people make the decision.

I think I invented this term ‘povertarianism’. It is a very Indian ideology,the central principle of which is that poverty is my birthright and I shall make sure that you have it because as long as you are poor,I can feel sorry for you and feel better.

Exactly. We have practised it to the hilt and that is a disease.

It is very difficult to have this argument because when the other side does not have facts,the answer is,what about the poor? It is a weapon of mass destruction.

You mentioned Joseph Stiglitz,my colleague in Columbia. He takes this line all around the world. In one debate,Jagdish Bhagwati went in and told him,Joe,don’t use your Nobel prize as a weapon of mass destruction.

These days,it’s difficult to say anything kind about Manmohan Singh because you get hit in the neck. But I don’t quite believe that Dr Singh embraced Stiglitz/Amartya Sen views so unquestioningly. He has got too much intellect for that.

I don’t think he believes them. As far as the philosophical bent is concerned,he is more of a Bhagwati. And remember,that is what he practised when he first came as the finance minister. I think it is his political compulsion that has driven him to this. Power has shifted out of the executive into the Congress party. I suppose the Prime Minister’s fault is that he embraced it without providing sufficient opposition and I think he could have made a lot better effort to persuade the Congress president that this was not a good path.

With the force of his own intellect.

With the force of his own intellect. He could have mobilised,a lot of us were there who could have pitched in.

Has he underleveraged his intellect and moral authority?

He has. Let us face it,as much as we all love Dr Manmohan Singh and admire him for his integrity and for the reforms that he launched,but in his incarnation as the PM,he has not lived up to his own thinking and legacy. So,it is a bit of a disappointment.

If you wrote an honest memoir,how will you describe what happened under his watch?

If I were to write a book on the prime ministers of India and had a chapter on Manmohan Singh,he would go in my book both as an angel and as the villain,because in the first half of the 1990s,we cannot forget that even though Narasimha Rao was really the man behind the reforms in the sense of providing the political cover,Dr Manmohan Singh was the intellect. But,on the other hand,you have to admit that in the last 10 years,we have lost out. We had a great story going,we had kicked growth all the way to 9-10 per cent. Then,suddenly,bang,this Lehman crisis really did this for us. We had recovered after the Lehman crisis in 2008-9,we still grew about 6.9 per cent and then we jumped up to almost 9 per cent. In 2011-12,growth began to drop.

So,you are saying this is self-inflicted. We can’t blame global factors.

No,because we came out of the global crisis.

How did we inflict it upon ourselves?

Overreacted to inflation. I understand that inflation does hurt the poor,so you have to be a little tough,but you have to do it right. Also,what we did was that in the name of stimulus,we expanded social programmes. So,this fiscal deficit also rose,but above all,the most important factor is the paralysis that came to characterise the government’s decision-making. Hundreds of projects amounting to several billions of dollars are hanging fire,not being cleared.

If you were to name three persons who broke UPA’s growth momentum,who would they be?

Jairam Ramesh,followed by Jayanthi Natarajan

Although she is fixing it now.

I hope you are right. I am sorry to say,but I will also put in this list the name of Mrs Gandhi for pushing inefficient programmes through the NAC. Her instincts are right that we need to do good for social programmes,but the instrumentality used is very harmful.

Talk a bit more on what has led to this current economic crisis in India.

I think we made huge mistakes. This is a man- or woman-made problem. What we did starting 2009 is we stopped intervening in the foreign exchange market and said we are going to be good boys and not intervene in the market. We should have,because 2009-10 and 2011-12 were two years when the rupee was appreciating. We could have built up our reserves. We should have bought dollars and accumulated our reserves. Our reserves would have been much larger today. Now,the war-chest is too small. If Ben Bernanke raises interest rates in America,capital will flow out.

So,who missed this trick? The government of India or the RBI?

Well,I don’t know if this decision was of the Finance Ministry or the RBI,but they are part of the same unit. Certainly,the RBI is not totally independent. During this period what we actually did was to open the capital account. Today,our private sector’s borrowings abroad are about 200 billion,which are completely uncovered. There is no forward cover on that. Who is going to provide that forward cover? That will fall on the RBI. But the RBI doesn’t have enough reserves to provide that cover. I have been among a handful of people who were upbeat that we are not going to get a crisis again,but today I am a little worried.

We could see 1991 again.

Well,I feel shaky. Now there is 10-20 per cent chance that we might see 1991 again.

You do one more thing that very few people do—you are very critical of the RBI establishment.

Yes,I am. In a way,this new policy started really with the current RBI governor. The timing connects to his tenure and certainly his own public pronouncements suggest that he stands behind this policy.

How do you assess him as a governor?

I am afraid to say that this is one of the worst eras of performance by an RBI governor. One day,we should get to a situation where the RBI targets inflation and is hands off in the exchange market,but the time is not yet. Particularly when you start opening the capital account,you got to be damn careful. Which is why I have not really believed in sequencing of reforms because politically,doing reforms is such a difficult thing that I usually say that when there is an opportunity,don’t worry too much about sequencing. One thing I do worry about is that don’t open capital account just yet. That is one reform I will put farther behind.

Now you can’t put the genie back in the bottle… So,if Dr Subbarao were watching this and he called and said,‘Dr Panagariya,you have doubts about what I have been doing. Obviously,something has gone wrong,tell me what to do now,doctor’,what will you tell him?

I think now we need to wait it out. Now we can’t get in a big way in the game of intervention in the foreign exchange market because it is not credible.

Also,George Soros is lurking around in the corners.

Exactly. And so,I would try to ride it out…the rupee has been allowed to depreciate and exports will respond. There is a lag,but I think this will happen. This depreciation from that perspective has been a good thing,even though a lot of people get exercised that the rupee is worth nothing now,but the macro implications are very different. I think we will see response happening,current account deficit will begin to narrow down,but in the next round when foreign capital comes in,I will advise Mr Subbarao to start accumulating foreign exchange reserves.

There was a time when the rupee was below 42 a dollar. We should have been mopping up dollars at that time

Absolutely. We did. In 1991,during the crisis,we had zero reserves,but we built it up to 300 billion.

At that point,we could have gone from 300 to 400.

Exactly. But now we have to wait it out and see that in the next two years,the current account deficit will come down to 2 per cent or so.

Talk about a couple of your favourite myths that you have mentioned in your book.

One of my favourite ones is that when we say poverty has come down and growth did help the poor,it immediately comes down to this—that socially disadvantaged groups have not benefited. It turns out to be false. When you do the numbers,you see steady decline in the poverty rates for both scheduled castes and scheduled tribes. There is this widespread belief that because the socially backward are out of the mainstream economy,nothing has happened to them. That is wrong.

In conclusion,tell me one thing that you will say today to Dr Manmohan Singh and to Narendra Modi.

To Dr Singh,get back to reforms. I think we have waited long enough. To Narendra Modi,I would say,don’t lose sight of it. Once you get into power,it is very easy to.

Will you also tell him to defocus himself from the puppies and the burqas?

Yes,when this happens,it doesn’t help people like us who admire him.

And,you do admire him?

Yes,for all that he has done for Gujarat and for the policies he has advocated. I have written about it. But I think the puppies and burqas,I can really do without.

Don’t you think that sometimes his politics runs contrary to his economics?

We need to wait and see. There is always 2002 lurking in the background,but in the last 10 years,Gujarat has been peaceful. And my personal belief is that India being such a diverse country with caste,religions etc,you can’t run this country if you are divisive,if you play religion or caste politics.

Have you told him this? Or will you tell him this?

I do it through my writings. The arms length approach is a lot better. He doesn’t call me; I don’t try to reach out to him.

We’ll see how things go in 2014,which side of the establishment fence are you on.

I am always on the side of reforms.

But wherever you are,keep your questioning mind and your ability to,as they say,cut the crap.

That is something I live by and hope to really keep doing that.

Thank you,Arvind. I learnt so much in this conversation.

It has been a pleasure.

Transcribed by Reeja Jacob

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