Focus Group Meeting with Dr. Indira Rajaraman

By Mr N Ravi, The Hindu Group

Over a delectable breakfast hosted by Rinku Mecheri, the focus group meeting held with Dr. Indira Rajaraman, formerly Reserve Bank of India Professor at the National Institute of Public Finance and Policy and member of the Thirteenth Finance Commission, on the state of the economy proved purposeful and illuminating.

“Give me a one-handed economist,” demanded American President, Harry Truman. “All my economists say, ‘On the one hand…’ ‘but on the other…’ Dr. Indira Rajaraman proved this adage wrong with specific and pointed responses to all the issues raised about the economy without any hedging.

The discussion kickstarted by Anand Raghavan was wide ranging and touched upon the revised GDP growth figures, the distribution of growth, fiscal deficit, borrowing by public sector undertakings, construction industry, banking regulation and employment figures, among others.

Among the main points that emerged was the need to keep the fiscal deficit in check. To a question why the fiscal deficit target should be regarded as sacrosanct, Dr Rajaraman pointed out that any increase in fiscal deficit would involve increased borrowing by the government to service which taxes might have to be increased. While there was no theoretical cap to public debt, she would rather stay with the overall government borrowing around the current figure of 70 per cent of the GDP.

Increased government spending and the accompanying higher fiscal deficit, advocated among others by the Nobel Laureate, Paul Krugman, might serve as a stimulus in advanced economies where systems for monitoring public spending are in place to ensure its effectiveness. In the Indian context where there is little monitoring and where corruption and leakages are common, increased public spending may not necessarily serve the purpose.

On the question whether borrowing by public sector undertakings should be reckoned when calculating the fiscal deficit, Dr. Rajaraman said if there was an explicit sovereign guarantee by a state government or by the Centre, the Fiscal Regulation and Budgetary Management Act included a cap on such guarantees. There could be an implicit sovereign guarantee but the market generally evaluated public sector bonds on commercial terms.

Dr Rajaraman was sceptical about the revised growth figures with the 2012-13 base year that showed higher growth in the economy. The revised figures for the growth in construction were particularly suspect as they were far out of line with the growth in cement and steel production. She failed to understand why Niti Ayog should be dealing with growth statistics rather than the Central Statistical Office.

Touching on the area of employment, Dr Rajaraman pointed out that the Indian labour market was very different from the market in Western economies and monthly employment figure were not available. Employment had to be estimated from household surveys carried out once in five years. The latest survey which was not released by the government showed a 7 per cent unemployment rate. In India, an ordinary person could not afford to remain unemployed and tried to get into any avocation or small trade if suitable paid work was not available. Ironically, the higher unemployment could well reflect increased prosperity with those who have completed school unwilling to take up any work or avocation unsuited to their competence as their counterparts would have done some years ago.

On the spatial distribution of growth, she said while it was true that capital would move to underserved areas where the rates of return would be high, the lack of infrastructure in many states hindered investments from coming in. Usually, in getting down to the backward areas, the last mile infrastructure was the problem. In this context, the village roads programme under PMGSY launched by the Vajpayee government was an excellent programme that has had a salutary impact. However, other areas of infrastructure had not been build up much.

On banking regulation, Dr Rajaraman said the Punjab National Bank diamond trade scam was an open and shut case of regulatory failure. The Reserve Bank issued circulars to banks with deadlines for compliance, but there is no monitoring of compliance or penalty for defaults.