He added that India needs to attract more domestic savings and investments for macroeconomic stability.
Below is the verbatim transcript of the interview.
Q: When you look back at 75 years, from an economic standpoint, what do you think is a big success or success?
A: What I like about the introduction is that you listed the factors that we should be proud of, and also the factors that we should be equally ashamed of. I think that's the right approach. Secondly, I think when we look at the economy, we should have two things also in mind and perspective - some non-economic factors which may be relevant, particularly for our country.
1947 when we got independence, we had to face the problems of partition, we had to go through the integration of princely states, and we had to face the consequences of the Second World War in the global economy. We had to settle the issue of states namely linguistic states. The official language of the union government was a big issue, people committed self-immolation. So, that was settled again. We had to fight wars in 1948, 1962, 1965, and then again in 1971-1972. So, after 1971, we had peace for 50 years. So, we must value the opportunity of working on something that was well established, I would call it making India.
From 1947 till about the early 1970s, we make India actually, many people were not sure whether we will be able to make India a united country. Many newly independent countries had not succeeded in that. So, we should recognise the value of making India.
Having said that, now, let me come to the strengths and weaknesses. As you rightly said, agriculture is an achievement. I think we should be proud of that. Mistakes perhaps we made in the 1950s and 1960s, essentially related to neglect of primary education and primary health, though we talked of socialism, we interpreted socialism as heavy industry. I think that is very surprising how this elementary thing which was particularly relevant for India, was missed. Otherwise overall the economic policies under what I would call the plan era in the 1950s, and 1960s should be recognised as appropriate.
I think the 1970s and 1980s that is the time when the understanding of the interface between state and market was changing. I think it was a period when even China and Russia joined the World Bank and IMF. Now, in that situation, what we in India did was, we did not change the mix of our mixed economy, consistent with the understanding of the developmental process and the global developments. Instead, we nationalised more. So, we did not support the private sector nor expand the public sector but we nationalised. So in that sense, the 1960s and 1970s were lost decades for Indian economic management.
In the 1980s actually, we grew but it was with borrowed money. We borrowed money internally and borrowed money externally. So GDP numbers by themselves are not enough to understand the situation.
In 1990, we got into a balance of payments (BoP) problem which was in any case anticipated, it just coincided with the Gulf crisis. The Gulf crisis was a good excuse for us, otherwise, we were on the path to a crisis in any case.
So then from 1990, the reform process started and I think that's where we can be proud of a number of things. Most important, I would say is the external sector. In 1957, a foreign exchange budget was introduced and there were severe controls on foreign exchange. From 1957 till almost 2003 we were always suffering from the problem of scarcity of foreign exchange or valuable dollar, valuable foreign currency. I think it started in 1993 with the Unified Exchange Rate but by 2003 when Atal Bihari Vajpayee was the Prime Minister and Jaswant Singh was the finance minister, that's the time when the individuals and the corporates were relieved to some extent. So the exchange rate is no longer a serious concern and we were able to manage the different crises. As you rightly said, very prudent policies we had put in with regards to that.
Q: What would you say is the big red flag, which is staring at us in terms of the economy?
A: We may have to face the problem of demographic dividend possibly turning into a demographic disaster. Human skill sets also are low, institutions are perhaps not that strong and nor is the law and order. There also can be some immigration, they may go out of the state, but I doubt whether the other states will be able to absorb the numbers that we are talking off.
Perhaps we have already lost some time in developing human skills. So I would say that the biggest opportunity may be there with the addition of the labor force. But equally, there's a danger that we may not be able to utilise the advantage and that can lead to regional tensions. When you have the unemployment problem it manifests itself in some of these forms. So I would say that's the big problem. Secondly, related to that basically is police and judiciary. On both these counts, I am not sure whether all states are on par.
The future of the Indian economy, I would say in this order will depend on demographics and the way human skills are managed by the police and judiciary.
Q: You did speak about the longer-term problems we face but more immediately, do you see fiscal deficit and current account deficit - both of them are huge at the moment? Do you see them as big problems?
A: Honestly, no, not as an immediate problem. But it is a big problem, particularly on the fiscal front. I don't expect any crisis or anything like that both on current account and fiscal deficit for a variety of reasons. Partly our prudent policies, as you mentioned in the introduction, and partly to many other competing countries, emerging market economies are in worse shape at this stage.
But overall, I don't see a crisis around the corner. And the management on this front by the government has been quite commendable.
Q: So the other thing that seems to stare at us is a fall in the savings rate. After 2010, we have not come back to the savings rate of pre-2010. This looks like a secular decline or peaking off of the savings rate, would you say that might constrain growth in coming decades?
A: You are absolutely right. The recent trend in domestic savings gives rise to a situation where the structural rate of the growth potential of growing the country has come down. Basically, the potential growth depends on investment and productivity. The investment consists of domestic savings plus foreign savings. Now when the domestic savings is low and the foreign savings can only be less than 10 percent of the total investment, we will talk about a lot of foreign investment, whatever you talk of, consistent with macroeconomic stability, you can have only 2 percent current account deficit. If a 2 percent current account deficit is all that you can afford on average then you should plan for not more than 2 percent of foreign investment.
But whatever it is, you are right, the fiscal deficit is, and particularly for financing revenue expenditures is a drag on our growth.
Q: When do you see the rupee becoming an international currency?
A: There are two ways of looking at it. What are the gains of being an international currency? Our share in the world trade is not great, the other countries, invoicing in rupees is not common, and our own efforts of trying to encourage masala bonds have not been very fruitful, so I would say that internationalisation of currency by itself does not hold any potential benefit for the country. However what should be on the agenda is issues relating to poverty, health, education, human skills, and whatever productive investments that are required to enhance our capabilities to invest in this.
Q: Do you think we have done a good job of the evolution of the Reserve Bank and even the SEBI? Can we say that our financial markets and our financial institutions are proud achievements of the last 75 years?
A: I certainly would agree, particularly RBI because I was associated with it. Reserve Bank of India maintained its professionalism even during the period of planning and after nationalisation of banks where our fiscal dominance was huge and the government was running the financial sector also, but even then, the core professionals continued to professionalism. In particular, the leadership from the 1980s onwards after C Rangarajan joined as deputy governor, I think a deliberate effort was made to attract trade, retain professionals, and inculcate and promote professionalism. And it was reinforced when the RBI warned the government repeatedly about the 1990 crisis. During the crisis and subsequent reforms, RBI played a very important role. Incidentally, many of the committees which were the basis of the reforms were headed by former governors. SEBI was started later, but again SEBI had good leadership, particularly in the beginning and they have drawn from different sources, and we should complement the leadership of SEBI also.