The Narendra Modi government’s shock decision in November to ban high-value banknotes not only hurt the economy but also dented the image of the Reserve Bank of India and governor Urjit Patel as an independent banking regulator. In an interview, former RBI governor Bimal Jalan shares his opinions on demonetisation, RBI-government relations and how the upcoming budget for 2017-18 could fix the economy. Edited excerpts:
What are your expectations from the budget?
Inflation in India is on the lower side, growth is among the highest in the world, we have the technology, and we have the manpower. There has been some criticism of the demonetisation policy but if you look at the totality of the picture, India’s situation is very positive. This positive situation in the present context facilitates the making of the budget.
If you look at the whole fiscal picture, it’s very positive… whether it (fiscal deficit target) is 3.1% or 3.2% is not fundamentally relevant right now. If you look at the normal increase in tax collections, low oil prices mean more revenue for the government, and I think the budget will reflect all this. To build on this positivity, I think the government will follow it up with an increase in investments.
Public investment is of considerable importance and we are in a position to accelerate it. The main issue for the government will be implementation as this involves several ministries and departments. What we need to do is try and device a governance mechanism whereby priority areas are identified, responsibilities are fixed and each knows what is to be done and by when. We need some administrative changes for better implementation.
The government has done very well in keeping the fiscal issue under control. I hope to see an increase in public expenditure and investment. How it is formulated is for the finance minister to decide. Capital expenditure is also important from the subsidy point. It has two sides of the coin — one is investment and the other is subsidies for the poor.
Would you expect incentives in the budget to boost production and consumer spending?
Demonetisation is past. We need to look at the future. The impact of demonetisation has to be taken into account while preparing the budget. But that per se does not create a problem from the budgetary point of view. If the fiscal deficit is low and capital expenditure can be expanded and if revenues increase, then the most important thing will be to see how can we achieve what we want to achieve. In terms of sops and subsidies, there is a fundamental case for making sure that nutrition, health and literacy are given maximum push.
What is your assessment of demonetisation? The RBI’s role has been criticised.
I do not want to make any comment right now. A lot of discussion has already happened. Let’s wait and watch. I want to look ahead rather than look back.
Do you think it could have been implemented better?
In terms of policy, whatever you did on the ground, yes. But this was a new experience. But if you talk about better ways and if you are looking ahead, then after this drive some lessons would have been learnt. How to implement, how to go ahead and what is to be done to ease the discomfort that was caused to a very large segment of the population and all that is part of the learning process.
You have to take everything into account and hopefully this will help us in framing policies, particularly regarding handling black money, because the fundamental (goal) was to handle black money. It had a substantial impact on black money and let us concentrate on the fundamentals.
Are there too many restrictions on an RBI governor?
Obviously, every job has its issues. So far as the Reserve Bank of India is concerned, it has a responsibility and a task to perform in the monetary policy area and monetary policy is fundamentally linked with inflation. This is also linked to ensuring that what we do in controlling and managing inflation is consistent with a higher growth rate. So, it’s not an easy job. And these are all done in consultation with the government because the government is, after all, in charge of the whole economic scene and fiscal policies.
The RBI has a role in the monetary area and in the areas of interest rates and debt management, and all these should be consistent with what the overall policies are. Now supposing you have a large government deficit, then government must secure that money from the market in terms of bonds or in terms of taxes and then the role of the RBI would be to facilitate that process. So, all of it is combined… the government, the RBI and the economy.
So, do the RBI and the government work together, in agreement?
Just concentrate on one point. And the point is that ultimately the government is responsible and answerable to Parliament in all matters of the economy. All the organs of the government must work in consonance. I am sorry for evading your question. We can talk about autonomy, which is extremely important. You are given a task and you are performing but the performance must be consistent with other aspects of the economy and that’s where the consultation process between the government and the RBI is of utmost importance.
If you were the RBI governor, how would you have handled demonetisation?
I am glad I am not the governor now. It’s a tough job, and it’s a tough one under present circumstances.
Do you think it’s time policies were reviewed and RBI revisited the lending norms to boost investment?
Of course, everything has to be reviewed. Any policy you develop is for a long term. All of us want growth, low inflation, employment and jobs, and you have policies to promote all these. What you can do at a particular point of time depends on the circumstances that you have. So, depending on the circumstances and the performance, reviews and changes in policies should happen.
What’s your assessment of growth and what should be the way forward?
All the estimates suggest growth (for this fiscal year) will be lower by 0.5% to 1%. Expectations are that growth will be lower than expected. In that case, the government will surely take steps and increase capital expenditure as we have the means to do that. The government will have to tackle not just economic issues but political ones, too. Policies will have to be acceptable to Parliament and the policies will have to be such that they work in every part of the country. We know that given the vastness and diversity of the country, there is no one formula that fits all.
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