'India should tackle the problems of energy pricing and subsidy'

The Inquirer

Virmani has served on various key  positions in the Government of India. He was chief economic adviser in the Ministry of Finance before joining the IMF in December 2009. He has also served as principal advisor in the Planning Commission, director of Export-Import Bank of India and director of Life Insurance Corporation of India to name a few. He spoke to Deccan Herald’s Annapurna Singh. Excerpts:

Where is the Euro zone debt crisis moving and what are the risks for India?

Currently, we are in the high risk environment and it is riskier for emerging markets, including India. So, we cannot be complacent.

When I say crisis, I am not talking of the continuing crisis. What I am talking is about a meltdown in Euro zone. I am not saying that it will surely happen, but if it happens, it will have dire consequences. So one of the issues is that if we have the time, we should think whether we want to take action now or wait to take action when the crisis happens.

We cannot be complacent. I had warned of an economic complacency during the 2008-09 crisis as well. This needs to be addressed. We need to remove bottlenecks to growth and take up institutional reforms aggressively. If we are able to maintain average level of reforms, we could maintain a growth rate of 8.5 to 9 per cent or else we slip, and that is what has happened.

What are the specific reforms, which can energise growth?

There are five different policy areas in which reforms will be helpful in promoting equity and growth. Besides, some of them will also be useful in checking the possibility of corruption. These include oil and energy pricing and subsidies.

This is a major issue. Oil pricing and subsidy needs to be separated. Then, there is, urban related reforms like land use, land auction and management of urban areas. Another area is fiscal and financial reforms. This is necessary because of the volatility of capital flows, which is bound to happen in next 10 to 12 months. Then, there is agriculture. The reforms in supply chain. There are a number of critical areas in which action will help in improving the investment picture and therefore overall (economic) growth.

There has been a lot of discussion on IMF’s role in solving the Euro zone crisis, what is your view?

You must look at my blog where I have explained what I believe personally is the way to solve the Euro crisis. And, in discussing the fancy financial ideas, you cannot miss the basic issue.

So, what I did was, I looked at the basic problems in the Euro area and gave a five-step solution. In that, the fifth step involves the IMF. I don’t believe outsiders can solve the Euro crisis unless they (European Union) take some of the steps themselves. It is only at the last stage, in my view, that IMF can do something. And, that is only to help those outside the Euro, who may be affected by the events.

There has also been a debate that India and China can together help mitigate Euro zone crisis, is that true?

It is a question of what is the problem and what is the solution. India is not in the problem and therefore not a solution.
But, clearly, if India and China keep growing at a reasonable pace, that helps everybody. That has nothing to do with the Euro crisis. That is a general proposition because you are going to have a slow growth globally.

I believe that even though there are recent signs of recovery in the US. And, unless they solve one or two of their fundamental problems, they will again have slow growth.
In that kind of a situation, it is clearly the BRICS or emerging economies, including India, China, Brazil and Russia that can take policy actions to promote their internal growth. In that sense, yes, we can contribute and we will contribute.

With the rupee slide continuing, making it the worst performing currency among Asian peers, do you think the Reserve Bank of India should intervene now?

The basic policy of exchange rate management is that any intervention should be there only to dampen the volatility, otherwise the market should be allowed to determine the exchange rate.

That is the policy we have followed since 1991 and I think it is doing good for the economy.

You have always advocated opening of retail sector to the foreign players. As a former policy adviser, can you elaborate if FDI in retail really going to help us, then what could be the reason for delay?

Opening up of retail to foreign players is absolutely necessary . If you don’t do it, you have to face the consequences. Take FDI in multi-brand retail, for example. The rate of growth of per capita GDP has doubled since 2002.

Try out FDI in retail. It can solve a lot of problems. It can improve supply chain. You can try it. If it works, continue. If it does not, then you can go back to your old system.

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