‘India should encourage more FDI, ease labour restrictions’

Professor LARS PETER HANSEN, the David Rockefeller Distinguished Service Professor in Economics at the University of Chicago and 2013 recipient of the Nobel Prize in Economics spoke to the Indian media on diverse issues, including the global impact of Brexit and the role of central banks in pushing growth, among others. Edited excerpts: a lot more cautious now. Right now, London is the hub of financial activity in Europe. If firms pull out their headquarters out of London, that is a possibility, it could have very grave consequences down the road. I think, companies will wait and watch before doing this. Over nearly a decade, we have seen liquidity being pumped in by different central banks. Now we are seeing negative interest rates in some of the markets. Also, people are talking about helicopter money. Where does it end? How should India deal with this global scenario? The central bank (RBI) should continue, as it has been, focussing on controlling inflation. Much too often people ask central banks to do too much. It’s not in their power to do it. If the government really wants to do other reforms for Indian economy, it should encourage more FDI. There have already been big, positive changes there and I hope they would continue. Second, they should look at changing the labour restrictions in order to make it easier for new firms to enter. So, in general, I would like to see central banks to do inflation control and do oversight of financial markets. In recent times, India’s central bank has been focusing on cleaning the balance sheet of banks, which is a very good step in the right direction. How do you define the scenario of negative interest rates? There is a limit to how far you can push rates in the negative direction. There is a cost for hoarding cash. There should be a cap on that. And that’s only for risk-free assets, risky assets will always have positive returns.