‘Globally, biggest insider game is between Govt, financial markets’

After discussing Global financial crisis and the uneven recovery in two earlier books, Y.V. Reddy, former Governor of the Reserve Bank of India, has now come up with the third.

The latest book ‘Economic Policies and India’s reform agenda — New Thinking’ outlines the need to rethink the reform agenda of India in view of the new thinking on global economic policies.

In a lucid style, Reddy has delved deep into the ‘New Normal’ for the global economy.

Repeatedly emphasising that global thinking is new and global economy is new, Reddy has argued that India’s reform agenda should visit that issue before proceeding with any reform that one may think within the country as appropriate.

Excerpts of the interview:

What is the New Normal you have articulated in your latest book?

The future global economy will be different from the pre-crisis period in some important respects.

I have said that rate of growth of the global economy as a whole may be less than what it was prior to the crisis.

It would not be realistic to expect the post crisis rate of growth of economies to be similar to that before the crisis.

Also, inflation is likely to be higher than what was experienced immediately before the crisis.

Third, the enthusiasm for globalisation of finance may be moderated as the downsides of global integration of finance have been recognised.

So what do you think will be the New Normal for India, post crisis?

There are significant challenges for India to achieve a 9-10 per cent growth rate in the short term and in the new normal over the medium to long term.

It will be useful to assess whether during the years subsequent to the crisis India has added to the productive capacities of the economy, and thus increased the potential rate of growth of output.

You have referred to the ‘trilemma’ (free capital flows, fixed exchange rate and independent monetary policy)..?

Yes, I think in the new normal, this ‘trilemma’ has to be resolved and cannot be managed.

Can the ‘trilemma’ problem be mitigated through trade openness?

Perhaps, that is not the optimum way.

What do you think is the major reform challenge going forward?

It is introducing coordination in public policy without blurring accountability, and avoiding conflict of interest in the private sector without sacrificing economies of scale and scope.

In the book, you have referred to somewhat controversial phrases like ‘insider game’ and ‘insider trading’. Can you elaborate?

In a way, the biggest insider game that happens in the world is between the government and financial markets, especially banks. This is what I have said in the book.

People trust in banks in which the government and the financial sector reinforce each other. They feel that government ensures the trust in banks in some way or the other.

The financial sector feels that they give money to government, whenever feasible. That is, in a way, insider trading.

When both of them fail, there is a crisis. One can support each other, but what if both of them fail? That is what is happening in the Euro Zone.

What about lessons to be learnt from the ongoing Euro Zone crisis?

I have not elaborated on it in this book. It is for my next book (chuckles).

What about bank licences?

I have not dealt specifically about bank licences. But I do agree that we should recognise the lessons of global financial crisis and its influence on the policy on bank licences.

Whose fault was it that led to the global crisis — Markets or the State?

Experience with the crisis has shown that the market failures and regulatory failures reinforced each other.

The traditional debate between State and Markets is not correct. It is the relationship between the State and Markets. Here is a moment for considerable serious reinventing of capitalism.

> srivats.kr@thehindu.co.in

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