The Hindu Business Line : `Controlling fiscal deficit is the biggest concern' — <i>— Dr Raghuram G. Rajan, Economic Counsellor and Director of Research, IMF</i>

Opinion - Interview
Industry & Economy - Economy

`Controlling fiscal deficit is the biggest concern' — — Dr Raghuram G. Rajan, Economic Counsellor and Director of Research, IMF

Vinay Kamath
Sriram Srinivasan

IT is 5 p.m. on a working day. Music Academy on Chennai's busy Cathedral Road is packed, almost to capacity. "The crowd's larger than what you will even see for a kutcheri," remarks someone from the audience. The audience is expectantly waiting to hear a lecture under the aegis of the Palkhivala Foundation by Dr Raghuram G. Rajan, Economic Counsellor and Director of Research at the International Monetary Fund, or its Chief Economist.

The Chennai public is at the hall as much to hear his views as to get a glimpse of the man who has attained high office at the IMF at a relatively young age of 41. Perhaps it also has to do with the fact that they could call him Chennai's own, as his parents live in the city. After his lecture he is mobbed on stage by enthusiastic members of the audience, firing away questions on a wide array of subjects.

Before his assignment at the IMF, Dr Rajan taught at the Graduate School of Business at the University of Chicago where he is the Joseph L. Gidwitz Professor of Finance. His research is broadly on the role of institutions, especially financial institutions, in fostering economic development. In 2003, Dr Rajan was awarded the inaugural Fischer Black Prize by the American Finance Association for contributions to finance by an economist under 40. Dr Rajan, an electrical engineering graduate from IIT Delhi, earned his MBA from IIM Ahmedabad and his Ph.D. from MIT. After his lecture, Dr Rajan spoke to Business Line.

Excerpts from the interview:

Are you happy with the macro-economic indicators of India? Would there be a backlash of rising commodity prices the world over?

We see inflation coming down. I would say the fiscal deficit is the most important and the process of bringing it under control would be the biggest concern that I would have. Last year, commodity prices rose because of a strong global recovery and also from China. Now, that growth has slowed off, in certain commodities, there is a capacity constraint. For example, in oil, there is no excess capacity. There is a possibility of spikes happening down the line, but the initial demand shock has tapered off, seeing the reduction of oil prices the past few months.

You had said earlier that last year's growth of five per cent was among the best the world has seen in decades. Do you expect that trend to continue?

This year will certainly reach that projection. In fact, even next year, our projections of a four-plus per cent growth for the world economy will continue to hold. The problem in the world economy is not the average levels of growth but that the growth is focussed on a few areas: China, the US and many emerging markets such as India and Latin American countries where growth is rapid; but we are seeing weakness in growth in Europe and Japan and so the imbalance in growth is more of a worry than growth itself.

What about the depreciation in the dollar? Isn't that a matter of concern?

The dollar has depreciated a fair amount already. How much more it has to go is anybody's guess. We think it is important that countries undertake policies that would reduce the imbalances in the global economy. The US is running huge current account deficits and some countries in Asia running huge current account surpluses; now that imbalance has to be brought down and we have said in the past that every country has to do its bit, you cannot point fingers at one country and say that they have to do it; you cannot point to the US and say that its fiscal deficit is a problem and you cannot point to Asia and say that its exchange rate is a problem; every country has to do its part.

Do you expect a revaluation?

I cannot say we expect a revaluation, but we have said before that in the interests of the Chinese economy and in the interest of other Asian economies, more flexibility in the exchange rate is a good thing.

It would ease some of the monetary pressures building up and also allow them to use some of the tools of monetary policy, which they cannot if they target a particular exchange rate.

We don't see as much policy moves to the extent that we want. We want firmer action on the US deficit; we want more action on the Chinese move towards flexibility. Upfront actions are obviously more welcome rather than vague promises down the line; time-frames are needed.

All countries have said they want to do what is necessary; China has said that it is moving towards more flexibility; Europe has said that it will undertake the structural reforms which is necessary; Japan has made the same statements; the US has said that it wants to cut the deficit; but what we need is for them to undertake policies that will convince markets that they are serious.

In India there is a feeling that the merger of the banks is more because of IMF dictates rather than being warranted by the need for economies of scale or need for recapitalisation of the banks. What is your response?

Let me state categorically that it is not the policy of the IMF to advocate the merger of state-owned banks willy-nilly. I would say that in a global economy, certainly size is a criterion to play in that market; you may not want all banks to be a player in that economy, banks can be a pure domestic player. But that said, there are other attributes than size that matters, including fast decision-making, good incentives and those are things that also needed to be worked on.

There is apprehension of China's financial system, which if it goes under can have repercussions for the world economy. What is your view?

I think there is a legitimate concern of potential bad loans building up in the Chinese financial system. This is why we have said that the pace of investment is excessive and it could create bad loans in the future and this is an area of concern and the Chinese authorities fully understand this and are trying to clean up the banking system. Now, that said, whether in fact they will do everything that is necessary in a timely way, needs to be seen, but that is a matter that has to be dealt with.

Generally, the World Bank and the IMF have been unpopular in developing countries; how do you see the IMF views being taken in India?

The fact that they have been unpopular is partly based on misunderstanding on what their ideas are. Let me give you an example; if some subsidy has to be cut because the government is running a large deficit; it is very convenient for the government to say that the World Bank or the IMF is forcing us to do it instead of saying that we have to do it. The IMF ends up as a scapegoat. The accusation that we always support cuts for the poor and that we are a pro-rich organisation is completely inaccurate. The IMF typically is called in because a country does not have a stable system; we pay a great deal of attention to whether the people who are affected can bear it or not and often our suggestions are for cuts in area where there is too much fat, rather than in the areas that are targeted at the poor. Now countries determine their own policies. It is far easier to cut down on people who don't have a voice rather than cutting down on people who can yell on the streets. The outcome of the policies may not be what is intended when devised. But there is only a certain amount that we can do and there is a lot on the country's part. You can point to many countries where the IMF policies have worked and the government takes the credit. But, hopefully, will give some to the IMF itself.

Brazil is one example which would have faced drastic consequences a few years ago if it was not bailed out by the IMF. India would have suffered a crisis in 1990 with severe consequences if it had not gone to the IMF and many of the changes that you see today came from a dialogue between the IMF and the Indian government.

Do you see free trade agreements between nations going against the concept of world trade through multilateral agreements... do you see them as building blocks or stumbling blocks?

Our sense is that while the evidence is somewhat mixed they more often than not they are stumbling blocks and do not serve the purpose of moving toward larger global agreements and clearly global agreements are more preferable than regional agreements — it was thought of a half-way house with the intent of going global but in practice more often than not it stands in the way.

You had mentioned that the demographics were in favour of India and that a younger population would be to its advantage. But how much of this resource would actually be employable?

That is why I said we need to move more towards more employment generation, but you don't create it by mandating it or by saying the government should do it; the government has limited space because of this huge fiscal deficit. So, it has to move towards an enabling structure where it creates more possibilities for employment growth and we have to unleash the private sector. The facilitating infrastructure is what needs to be enabled. The government has to create the environment.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Dual citizenship — Driven by pride and pragmatism

Broad-banding competition

`Cut the fat, not the muscle'

Leg up for infrastructure

Global B2B mantra — On a new learning curve

Regulatory authorities — Role in a deregulated economy

`Controlling fiscal deficit is the biggest concern' — — Dr Raghuram G. Rajan, Economic Counsellor and Director of Research, IMF

NRI meet

FII flows