Increase in the government expenditure, especially the capex are the right ways of addressing the current slowdown in the economy, according to former Reserve Bank of India (RBI) governor C Rangarajan. In an exclusive interview with Furquan Moharkan of DH, he explains how the government can tackle the current slowdown. Edited excerpts:
Q. The government has been addressing the supply side issues, instead of demand-side issues. Is it the right approach?
A. There is a supply-side problem. They should address it through investment expenditure. The government needs to increase its expenditure, but convert that into capital expenditure. That means when the investment is made, the output will increase. That is how the supply-side issue will be tackled. The capital expenditure will also push demand. So, that is the way to do it.
Q. A lot of experts attribute the current slowdown to the note-ban and shoddy implementation of GST. Is that correct?
A. Demonetisation was essentially carried with the purpose of curbing black money. The problem was that they haven’t managed it well. I think it is a big management blunder. If they had been ready with the new currency, the problem would not have been there. All the problems arose because the new currency wasn’t available and the old currency was to be surrendered. A large number of small income earners were left out of jobs. Whether note-ban would have curbed the black money or not, first of all, the management of that programme has been thoroughly bad. I think this is a disaster.
Q. There have been a lot of questions on the credibility of GDP numbers. What do you think?
A. The methodology of calculating national income is one thing. The other thing is the actual data that fits into the calculation. On the methodology, there is not really much of a problem. The problem is that it’s only CSO that should look into whether there is anything wrong with the calculation. For outsiders, it’s very difficult.
Q. In the past couple of years, we have seen one PSU being acquired by the other in the garb of divestment. How correct is that?
A. There are two types of divestments. One is essentially to say that we had invested earlier so we will divest a part of our share. A change of ownership there is really the part of the scheme. But in the case of strategic divestment, the idea is to bring about a change in ownership. I think, only in the case of the latter, there will be substantial divestment. At a time when we are saying that we need more resources, and since revenues are not going to be that great, the only option that is open is strategic divestment.
Q. Do you think the constant interference by the government in the RBI is detrimental?
A. The real issue is that the government must decide on what areas RBI will have autonomy. Once that is given, those areas must be given to the Reserve Bank to handle. There is a goal independence and instrument independence. Goal independence can’t be there for the Reserve Bank. What RBI should be doing, should ultimately be determined by the government. But once the goal is set, the RBI should get a free hand to do what it deems fit. That is what is the instrument independence -- which should be fully given to the Reserve Bank.
Q. Do you think RBI needs to buckle up on the face of the rise in frauds?
A. The RBI is also loaded with many functions. In the case of the co-operative banks, there is also the problem of dual authority as they are controlled by the state governments while RBI is the regulator. We need to make some legislative amendments to make the authority of the Reserve Bank primary. In the case of UCBs, this dual authority is causing problems. On the other hand, the RBI should also go beyond the numbers supplied by the banks and examine a little more about the veracity of the data that they have supplied, and the intelligence network also needs to be tightened.
Q. Do you think that the ongoing shadow-banking crisis could have been better managed?
A. The NBFC crisis is a problem that has been building up for many years. At one time, IL&FS was regarded as a model finance institution. The tightening of the role of NBFCs, which are large and are of systemic importance, will have to be separated out and more attention needs to be paid towards it.
Q. Despite repo rate cuts, transmission isn’t happening. What do you think are the factors, other than the pile-up of bad loans?
A. The transmission is effective only to the extent by which the bankers are dependent on the RBI. That is why I say when you control inflation, it is more effective. Because when you borrow from the Reserve Bank, you raise the cost, then automatically raise the lending rates. But when they lower the rates, the problem is that it has to happen that depositors’ interests are also to be taken care of. There are two problems there: one is the problem with the non-performing assets and a sustained decline in the interest rate can only happen when the deposit rate also comes down. Now they are in two minds over that: whether the depositors will agree. And that is where the government and the RBI have to co-ordinate regarding the rate at which the government borrows through the savings instruments. They will have to simultaneously bring that down also to enable the banks to lower the interest rates.