Raghuram Rajan, former RBI Governor and former Chief Economic Adviser, spoke to The Indian Express’ Udit Mishra on topics ranging from inflation to GDP growth to the impact of a possible global trade war on President-elect Donald Trump’s second term. Edited excerpts.
A: I think the reason why we target headline inflation (CPI) instead of core CPI (inflation without food and fuel prices) is that food is a big part of the Indian consumption basket; To ignore it is to ignore either one The biggest component of inflation. So you can say, like the RBI says, core inflation is coming down, but if your food inflation is high, people are unhappy and they are saying, “What world are you living in? You don’t see the fact that we are suffering.”
Question: What can or could the government do to control inflation?
A: That’s the real challenge we have, right?
If you look at our GDP level, what it would have been if it had been growing steadily at 6% through the pandemic, we’re down about 6% of growth a year. That one year down means a lot of jobs (lost).
However, what is important is that our economy does not create enough jobs on its own. For example, construction is becoming more capital intensive over time. Where we are creating jobs is manufacturing and agriculture. Of course, construction due to the boom in infrastructure spending, etc., is understandable. Agriculture is a concern. In fact, in every developing country, people are turning to agriculture when they are coming out to services and manufacturing.
Services were creating jobs, but through the pandemic, this has not happened.
I think the big question for the government should be: How do we create more jobs and higher quality jobs?
Q: Before covid hit, India’s growth rate was less than 4% and there was a secular decline that was happening in the three years before covid. Why did we make this big jump three years in a row?
A: Well, recoveries aren’t instantaneous, right? So remember, there were some quarters of really negative growth, strong negative growth during the pandemic. So the spring returns, the recovery has increased growth in two or three years. Now, I wonder where you’re going: Is our real growth rate the 2019 rate (4%) or 6%?
If we go back to that, a 4% growth rate would be terrible. My hope is that we may have another quarter of low growth, but we will eventually return to six. But even with six, you know, it’s not enough.
Question: For an economy like India where even 4% GDP growth rate looks like a stable economy. And now that it’s not exactly stagflation, is India facing something like a stagflationary scenario?
A: Oh, 4% is a deep recession from our perspective … I think if we go to four, we’re in dire straits. Remember, we’re in that sweet spot where every East Asian economy had a population dividend: more young people coming into the labor force, and lowering the dependency rate—that is, less old people who can’t work and more young people. . So our working population—the working-age population as a fraction of the population—is growing. This is when our growth, compared to the recent past, should increase by a percentage point or two if we create jobs for people coming into the workforce. The fact that we are not growing fast right now is really worrying, isn’t it? In other words, I say 6% doesn’t cut it, but it should be more than just 6% from the population dividend. There has to be more for us to achieve the goal of being a “developed country” by 2047 and if it’s business as usual, it’s not going to happen.
The problem now is that some of our state governments are spending so much on it, not investing enough to improve the capabilities of our population, the former RBI governor said. (Express Photo Chitral Khambati)
Question: How do you see the tendency of all political parties to promise to work for the government? Does this mean Indian politicians have given up on solving unemployment?
A: Well, I think there is a competitive political process to give doles. Some transfers are not bad if they are targeted at the poor because it gives them some capacity.
But if you spend so much that you can’t invest in infrastructure, public services, good schools, good healthcare, for example, rural roads – these are the things we need more of. to grow
The problem now is that some of our state governments are spending so much on it, there is not enough investment to improve the capacity of our population, and ultimately we will live or die by how much we invest in our people. Today, production cannot really, if it is global competition, Employing unskilled workers. It uses machines. Workers who can take care of the machines are needed. That requires a level of skill. Likewise, services.
Q: Many leaders are now urging Indians to increase economic growth or have more children for political reasons. How do you view these calls?
A: So the reality is that in some states the fertility rate has fallen below the replacement rate. The reality is that we are a country with a very mixed economic experience. In terms of per capita income, the West and the South are not doing well.
What would be better if we encourage more (internal) migration instead. Because really, countries that are rich sometimes stay young—a country like America—because there’s been so much immigration. In our country, we may have internal migration which takes care of the problem.
Question: Should India reduce GST rates to boost consumer demand?
A: If you continuously reduce and increase GST rates, people will not have the ability to plan. And then you have a lot of lobbying, cut my rate, keep his rate higher, etc. I say, keep, work towards normalizing GST rates over time. But offer some predictions.
Question: The Union Budget will be presented within a month. In such a situation, what should be focused on the budget?
A: I think as a country, we need to ask, what is our path to development. Almost certainly the export of low-skilled products, which was the way other countries in South Asia – such as China – grew, is much more difficult today. One, because of the protectionism you see. Two, because it is increasingly automated and does not create many jobs. And three, because you know automation etc. China will be in it for a long time, Vietnam etc. We are not competing with America. We are competing with these guys. We have to think, what is our comparative advantage? If you look at the final export numbers, where are we really? Well, highly skilled services. So we start thinking about multiplying the number of people who can do that.
Q: With Donald Trump becoming the US President, do you expect a global trade war and how it might affect a country like India which is struggling to grow its exports?
A: Fortunately for us, a trade war, if it happens, will focus on manufacturing. This does not mean that services are immune, but it will focus on building.
It will also focus on America’s deficit with the rest of the world. And it runs a very large deficit with India, not the biggest – Mexico and China come ahead of India – but not even 60 billion to sneeze at.
However, even though India does not impose customs duties and the special relationship between President Trump and Prime Minister Modi continues, there is still the problem of Chinese goods not finding a home in the US or being delivered to the US through surrogates in Vietnam and Mexico. Forced to flood the rest of the world.
And so we have to think about second order effects.
Q: The rupee exchange rate has been a very emotional issue. How will it affect?
A: I think we should sort of try and reduce the visibility of the rupee in people’s minds because it makes us focus too much on keeping a strong rupee.
I think the right thing to do is to focus on keeping inflation moderate and under control, and the rupee will take care of itself. When you lose the plot on inflation the rupee does all sorts of strange tricks.
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