5 QUESTIONS: RAGHURAM RAJAN

In September 2013, when Dr RAGHURAM RAJAN took charge at the RBI, inflation was soaring and the rupee was weak. By the time he left in September 2016, inflation had been reined in and the rupee stabilised. Rajan recently launched I Do What I Do, a book of

Q1. What do you think of the current direction of the global economy and is India a bit out of step?

A. Expansion continues in the US. Europe is doing better than anybody expected. The vast stimulus created must now be tapered carefully to tighten without panic. The Fed (the US Federal Reserve) is signalling that it will be not slow but measured as it “unstimulates”. This is appropriate.

India has seen a slowdown. The East Asians had similar ‘twin balance sheet problems’. But they seem, with the important exception of China, to have gotten past those issues.

Q2. On inf lation, how did you manage the turnaround?

A. The need to target inflation became obvious in a roundabout way. Targeting inflation is the best way to stabilise currency. The rupee had depreciated 20 per cent. We knew that if inflation falls, the rupee will automatically stabilise. Nobody believed we would keep the timelines and targets we set. Of course, we were lucky.

Q3. Corporates are struggling with debt servicing. Some complain that fast-falling inf lation has led to reduced revenues and, hence, reduced debtservicing ability...

A. This cannot be a rationale for not controlling inflation. It’s part of the debt contract—it’s the risk you take. If you’ve over-leveraged, don’t blame someone else. If you can, refinance. If you can’t, give up ownership. For what it’s worth, input costs have reduced. Prices of fuel, metal ore reduced much more than aluminium and steel.

There is corporate stress, but there’s a whole set of other reasons for it. Low demand, not completing projects on time, having a coal mine taken away, etc. are bigger reasons. Also, banks keep a significant spread between commercial lending rates and base rates, after judging the ability to repay. So commercial rates won’t necessarily reduce even if the policy rate is reduced.

Q4. Individuals complain that debt returns have reduced and household inf lation expectations are persistently higher than reality...

A. Most Indians don’t grasp the difference between nominal interest rates and real rates [real interest rate is the difference between the nominal interest rate and the inflation rate]. In fact, I wrote the essay on ‘Dosanomics’ (in the book) to explain this.

But households do respond instinctively to positive real returns even if they can’t articulate why. Savings have moved into financial assets as the real rate has turned positive. Beyond that, it’s important to manage expectations since a sudden pick-up in inflationary expectations can cause chaos. So it’s important not to fall behind the curve.

Q5. One last question. What are the burning issues of the day?

A. We have to put the twin balancesheet problem behind us. [The ‘twin balance sheet problem’ is shorthand for a combination of highly indebted corporates and a banking system with lots of bad loans.] The focus on this must be of the highest order. The bankruptcy code is an essential lever.

We must find work for our so-called demographic dividend. There will be all sorts of problems if that workforce, growing by 1 million or so per month, remains unemployed or underemployed. You can only solve [un]employment by reigniting growth. That’s critical. It has to be a multi-pronged policy effort where the government identifies bottlenecks, seeks solutions and effectively implements those.