‘If I Were in MPC, I Would Have Gone for a 50-bps Cut’

The Economic Times - - Markets: Beating Volatility -

De­mon­eti­sa­tion was an un­for­tu­nate pol­icy in­ter­ven­tion. But it con­trib­uted in some way in bring­ing down in­fla­tion, says the for­mer chief eco­nomic ad­vi­sor to the fi­nance min­istry and the World Bank chief econ­o­mist, in an interview with

and Basu, who now heads the In­ter­na­tional Eco­nomic As­so­ci­a­tion, was in Mum­bai to de­liver the Lalit Doshi Memo­rial Lec­ture. Edited ex­erpts:

Is the 25-bps pol­icy rate cut by the Re­serve Bank on Wed­nes­day ad­e­quate? I am very happy with the rate cut. It had to be done. If I were to vote, I would have voted for a 50-bps cut it­self. I can give some rea­sons. I feel in­vest­ments need to pick up. For a va­ri­ety of rea­sons, the in­vest­ment to GDP ra­tio has been on a down­ward slide for the last seven-eight years. But it’s sharper now. It’s about 28% of GDP from its peak of 38%. Cut­ting rates tend to make peo­ple more free to bor­row. De­mon­eti­sa­tion caused dry­ing up of liq­uid­ity in peo­ple’s hands. So, you have got to give that a boost. The fear that in­fla­tion could pick up may not hap­pen for the next seven-eight months be­cause the amount of cash in peo­ple’s hand has gone short, but it is coming back slowly. So, I don’t ex­pect in­fla­tion is go­ing to pick up in a hurry.

Do you think RBI is too rigid in keep­ing rates where they are? No, RBI has to rightly worry about in­fla­tion. I like the idea of a cen­tral bank be­ing cau­tious. But as an in­de­pen­dent econ­o­mist, if I were in that com­mit­tee cast­ing a vote or ad­vis­ing, I would say cut a bit more be­cause you have got to give growth a big boost and you re­ally don’t have to worry too much about in­fla­tion over the next six months.

Do you think it is de­mon­eti­sa­tion that is driv­ing in­fla­tion down? There are a va­ri­ety of things in­volved. But there is a bit of a fac­tor that has to do with de­mon­eti­sa­tion. Agri­cul­tural out­put was fine de­spite the de­mon­eti­sa­tion. Peo­ple were al­ready into the sow­ing sea­son, they did take care of it. But by the time they were go­ing to buy that out­put, they were short of cash. De­mand for food fell. The food had come into the mar­ket that got stalled. In re­cent weeks, prices of tomato and a cou­ple of other things are go­ing up. But it is item-wise. So, de­mon­eti­sa­tion did play a role. But I don’t know how much. Has de­mon­eti­sa­tion re­ally served its pur­pose? I think de­mon­eti­sa­tion was an un­for­tu­nate pol­icy in­ter­ven­tion. There is cor­rup­tion and I ap­pre­ci­ate that the gov­ern­ment wanted to do some­thing about it. But how do you tackle cor­rup­tion? Over here, 86% of the value of the cur­rency is at­tacked. It is too big a jolt to the mar­ket sys­tem. I be­lieve mar­kets need reg­u­la­tion and con­trol. But 86% of the mar­ket get­ting a shock is too big. So I think it was an un­for­tu­nate move with a good tar­get. If you look at the pack­age of poli­cies like GST, a whole lot of very good moves have hap­pened. But this was an un­for­tu­nate one.

The NPA prob­lem is an old one but there is now an ef­fort to clean up the sys­tem. What is the real is­sue and what is the so­lu­tion to this? NPAs have been go­ing up for the last nine years, but the good thing is that at­ten­tion has been drawn to it. Usu­ally, NPAs build up but banks en­sure that their bal­ance sheets look nice. Af­ter Raghu­ram Ra­jan took over at­ten­tion has been drawn which is a great trib­ute to him. Now that at­ten­tion is on this is­sue, we can ex­pect some so­lu­tion. One of the rea­sons why NPAs have built up is be­cause of crony lend­ing which has been hap­pen­ing for a long time in In­dia, es­pe­cially with pub­lic sec­tor banks. Hope­fully that will now go down which will bring down NPAs, so we are go­ing in the right di­rec­tion. But as long as you are ne­go­ti­at­ing a big NPA, there are risks in­volved like I saw when I was in China where the debt-GDP ra­tio is large.

The ru­pee has been ris­ing. How will it im­pact In­dia when forex re­serves are at a high? On the ex­change rate front, I don’t see any ma­jor con­cerns. In­dia’s re­serves are at the sev­enth high­est in the world. But com­par­a­tively, China is at $3 tril­lion and Ja­pan at $1 tril­lion, for In­dia to be where it is, is a com­fort­able po­si­tion. My view when I was in gov­ern­ment was that we should use a small frac­tion of the re­serve very ac­tively and put it for use for things like in­fra­struc­ture, which could bring long-term re­turns to In­dia. But RBI’s view was more cau­tious be­cause it wanted to keep re­serves in hand to in­ter­vene in the mar­ket, which was also un­der­stand­able. If we use a bit of re­serves ju­di­ciously for in­fra­struc­ture, that can give In­dia a boost.

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