The Hindu Business Line : India is not risky, says RBI Governor

Management meet: (From left) Dr Thomas Anderson, Associate Dean, Stuart School of Business, USA; Dr Y.V. Reddy, Governor, RBI; Dr Bala B V Balachandran, Founder and Dean, Great Lakes Institute of Management (GLIM); and Mr Shailesh Rao, Managing Director, Google India, at the inaugural session of L’ Attitude, a two-day management event organised by GLIM, in Chennai on Friday. —

Our Bureau

Chennai, Dec. 14 The Governor of Reserve Bank of India, Dr Y.V. Reddy, on Friday stressed that India was not risky, as was projected by a report in The Economist last month, and said that the report failed to take into account how the perceived macro economic risks were managed.

The Economist report had ranked India as the riskiest of 15 developing countries studied, basing its judgement on ratios such as current account to GDP, budget balance to GDP, growth in bank credit and inflation.

Speaking at a two-day seminar on management organised by the Great Lakes Institute of Management (GLIM), Dr Reddy said that while the numbers showed risk, the report ought to have taken note of the “mitigating factors”, namely, the policy response to the risks.

Giving an Example

Stressing on the limitations of making assessments strictly by the books, Dr Reddy gave the example of Indian Bank, in whose hall the meeting was being held. He said that when he had come to the hall the last time, in 2002, Indian Bank was considered a “weak bank”, and indeed all major parameters showed it to be a weak bank. However, with proper management (recapitalisation by the government) the bank turned around. The Government’s support was then termed as “bail out” but now, since the bank’s shares are quoting at over Rs 210, the Government “has made a killing”.

Similarly, he said it is necessary to take into account how the Indian economy is being managed, and not just the numbers (such as current account deficit, inflation). He noted that India had never defaulted on international obligations and had even pledged gold to raise funds to meet its obligations.

Regarding Inflation

While admitting that “we have some way to go to be in the company of some stable economies,” and that the RBI would like inflation to be below 3 per cent, Dr Reddy said that inflation was not a big risk here. Giving credit to all his predecessors in the RBI and the policy makers in the Government, the Governor said that those in the Government never allowed inflation to go beyond 10 per cent.

On its part, the RBI “hates inflation”. Therefore, Indians have faith in the rupee.

Noting that in India the gap between the savings rate (32.4 per cent) and investment rate (33.8 per cent) was small, Dr Reddy said that a current account deficit of 2.1 per cent of GDP was not a big risk.

On fiscal deficit, the Governor said that although it was coming down, it was “an area that requires careful and constant attention”. He noted that fiscal discipline was not enough, but the country needed fiscal empowerment — that can come only by investment in social sectors.

Short-term outlook

Dr Reddy said that the RBI expected India to grow at 8.5 per cent in 2007-08, inflation at under 5 per cent and stability in the financial markets. “Domestic conditions are conducive to growth, but we are watching the global situation very carefully.” Should there be an “accentuation of financial disturbances” India would be much less affected that most other developing countries, he said.

Later, during the questions and answers session, Dr Reddy was asked if capital inflows needed to be moderated. He replied that inflows had to match the absorptive capacity of the economy and any excess inflow would lead to price instability.

Money alone will not give growth. Un-reigned capital inflows is like printing more currency notes. “I also like to run fast, but if I try to run faster than I can, I’ll fall,” Dr Reddy said.

He also underlined that maintaining control on capital account was not inhibiting growth. He pointed out that the economies that are attracting the most capital are the ones that still have controls on capital account.