Recently, the Plan panel has appointed a Committee on financial sector reforms under the Chairmanship of Prof. Raghuram G. Rajan of the Chicago Business School who has in the past also served as Chief Economist of the International Monetary Fund.

With his characteristic candour and lucidity of expression, Mr Ahluwalia makes the underlying trends in the economy clearer and, in the process, puts the accent on the overarching priorities of the Government to see that the high growth the economy has been logging leaves no one high and dry for want of inclusive policies.

Excerpts from the interview:

On farm strategy: The average GDP growth rate of 7.6 per cent during the Tenth Plan (2002-07) is the highest we have achieved in any Plan period and does reflect that a significant acceleration in growth has taken place.

In the last four years, the average growth achieved has been around 8.6 per cent and last year it was 9.3 per cent. That provides a reasonable basis to conclude that we can do 9 per cent in the Eleventh Plan, provided we take the many quality steps necessary to maintain and strengthen the growth momentum of the economy.

The weaknesses in agriculture after 1996 were highlighted in the Mid-Term Appraisal of the Tenth Plan. We have worked out a strategy aimed at accelerating agricultural growth to 4 per cent per year, which is virtually doubling the growth rate from the previous ten years. This will come partly from a continuing growth in foodgrain production at a modest rate, may be 2 per cent or so a year, and a much faster growth in non-foodgrain production — horticulture, livestock, dairy and fisheries which reflects the process of diversification of agriculture.

There is scope for faster farm growth, based on the gap that exists between the yields that the farmers actually get and the yields that are shown to be obtained using best practices, not in laboratory conditions but actually on the field. We are assisting the States to develop a region-specific strategy to bridge this gap. We had earlier launched the National Horticulture Mission, an important initiative for farm diversification. For livestock and fishery, new boards have been set up.

We have launched the Food Security Mission which will essentially produce an extra 20 million tonnes of cereals, including pulses. We have introduced a new Central Assistance Scheme, designed to encourage the States to devise region-specific strategies in agriculture; district-level plans will be built and aggregated to State level plans, taking into account the specific constraints of the States.

The States are being encouraged to undertake additional expenditure on agriculture over a baseline level and the Centre will share that additional expenditure. I should add that in the last two-three years, the growth rate in agriculture has picked up, though I don’t think we are still on a sustainable 4 per cent growth level.

On manufacturing: Recovery in manufacturing is satisfactory and shows that the prolonged modest manufacturing growth, which was holding back our economy, is not a necessary feature of the Indian economy. At one time, people used to s ay that we have to miss the manufacturing revolution and get on to services. We never agreed with that. Services are important but manufacturing cannot be ignored at our stage of development.

Recent experience shows that with the right kind of investment climate and the right degree of policy support, Indian manufacturing is capable of double-digit growth.

To sustain that, infrastructure — the single biggest constraint — needs to be improved. The Eleventh Plan draws pointed attention to it and I hope that in all critical infrastructure areas — power, roads, ports, transportation, railways — we will see a major turnaround. The real focus on the power sector is that the system must move to achieve greater efficiency in the distribution segment, which is actually controlled by the State governments. The Centre can only incentivise. We tried to do this through the Accelerated Power Development Programme in the 10th Plan but that did not produce results. We are now trying to restructure the programme.

On financial sector reform: After the two reports of the Narashimam Committee in the 1990s, the financial system in the country has undergone tremendous changes. The banking sector has improved in the way the banks are supervised and t heir risk management techniques too. Capital account has been gradually liberalised — we are now much more integrated with the world economy than we were earlier. Capital inflows have gone up, reflecting that the Indian economy has arrived.

We have venture capital funds and micro finance institutions (MFIs) have come up and there have been changes in the regulations of non-banking finance companies (NBFC). Private sector banks have expanded significantly. However, we are facing new challenges. We need to develop the bond market, if we are going to have a much larger investment in the private sector and in infrastructure. These investments have to be financed by corporate debt.

A key thing in the bond market is the need for a single regulator, whereas in our system the RBI views itself as a regulator for trading in government bonds by the banks while the Securities and Exchange Board of India (SEBI) regulates corporate bond trade generally.

When we have two major institutions performing an overlapping function, we have to between one or the other. It is not an easy decision, but the issue is very much there on the government agenda. We are looking at the Raghuram Rajan Committee for a broad-based view of the financial sector by scanning the whole structure to lay out an agenda. I am looking forward to this Committee reconciling the need to give direction to the sector and its different components — banking, non-banking finance institutions, capital market, bond market, microfinance institutions, venture funds.

The Committee will also address the question of inclusiveness. Today, there is a perception that the total credit expansion is good, but credit is not necessarily going to certain groups which are lower down in the economic hierarchy. How do you make sure that it goes to them? If banks are not able to provide such credit, who is going to do it? Cooperatives are important but they are moribund and need to be revived. Are money-lenders converting themselves into MFIs and is that satisfactory? The Rajan Committee would look into all these aspects.”

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