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There is no doubt that over the past few years, successive governments have made several efforts to inject new life into the reforms story for India. In fact, a key governance aim of the ruling dispensation – the BJP-led National Democratic Alliance – has been to overhaul the country’s policy infrastructure on the basis of reforms. However, Bimal Jalan, ex-Reserve Bank of India Governor (1997-2003) and former Finance Secretary, believes that what the country is plagued by is the fact that the pace of implementation of reforms leaves a lot to be desired. Jalan, who was also India’s Chief Economic Adviser for most of the 1980’s, pointed out that the problem is primarily an administrative one. Edited excerpts:

As a former RBI governor, what would be your suggestions for reviving growth amid the Covid crisis?
So far as growth is concerned, it is not very low just now. I understand that growth is about 7.6% in 2021-22. During the pandemic in 2021, it was much lower. It is now rising and it is likely that in 2022 it may be around 8% or more. It is not very definite, but growth will certainly be higher than now.

In the recent MPC statements and minutes, we have seen a note of dissent from one member of the MPC about the accommodative stance. What is your view on inflation at the present moment? Is there a danger that inflation expectations could be getting entrenched?
Not really. I do not think so because RBI has given a lot of liquidity to the market; and although inflation has gone up a bit, it is not very high at the moment.

Earlier, credit demand was very low, but now credit demand is increasing and so RBI has increased liquidity. Let us wait and see how this liquidity works. If demand is also increasing, then there is no problem. I am quite sure that RBI would manage the liquidity in a way so that inflation does not rise too much.

We have been seeing that the growth in the US is picking up and there is some talk of the US starting to tighten monetary policy. How do you think the rupee would be affected by tightening in the world’s largest economy?
Foreign exchange reserves in India are very high; there is no problem.

Despite what is happening in America, the rupee has been flat more or less in the last eight months. Now it is possible that the rupee may decline a bit and instead of 74 per dollar it may be 75. We have enough reserves to be able to manage it in a way so that it does not affect the foreign exchange availability in terms of either providing credit or foreign exchange expenditure.

You have been a veteran member of India’s public policy infrastructure for many years and witnessed plenty of economic cycles. How much of a challenge would it be to return to a path of sustainable high growth?
Reviving growth beyond 8-9% is not going to happen. Debt to GDP ratio in India is quite high. I am sure that with higher liquidity, we will be able to manage it.

So far as growth is concerned, over a period of say two years, we can expect growth rate to be around 9%.This is just a projection based on what is happening today; but if something else happens, and if there is another problem like a third wave, then the outcome will be different.

We have to make sure that growth is consistent with stability. Also growth should be consistent with inflation within a range and so the higher the growth, the better it is. But if growth, instead of 9%, is 20%, then that gap will increase inflation by a large amount and it will be difficult to manage. So various parameters in terms of policy and the outcome of this policy are most important. We have to make sure that growth as well as inflation are within control.

You mentioned the state and central debt-to-GDP ratio is around 90% at present. Are we nearing a threshold which could pose financial stability issues?
I do not think so. So far as rating agencies are concerned, they have accepted debt of even 80% to 90%, but it should not increase more. We should try and make sure that debt to GDP ratio does not exceed 90%, and it would be better if it is about 80%.

Globally, different governments have approached the pandemic differently – some have provided income support; some, like ours, have focused more on disentangling supply side factors. What would you say is the best approach?
Demand side is very important. Supply side and high liquidity may create inflation but if there is no demand for credit or if there is no demand for investments or expenditure for households, then there is a problem.

Do you have a timeline that you have in mind in terms of RBI starting to normalise its policy?
RBI will definitely normalise its policy depending on what is happening on the ground. MPC reports, and everything else that they were doing, say, three or six months ago, has been maintained. Over a period of time, depending on growth-inflation relationship as well as the amount of money which is abroad and foreign exchange reserves, I am sure RBI would normalise its policy. If inflation is high and RBI wants to reduce it, then it will have to take further action.

What is your view on dynamics in the debt market? The government has been running large borrowing programmes over the last few years as revenues have taken a hit.
My view is let us concentrate on high growth, relatively low inflation and try to make sure that whatever liquidity is being created by RBI is actually involved in expenditure of households and the corporate sector as well as the public sector. Already, fundamentals are very good from India’s point of view.

It is the impact of liquidity on inflation as well as growth which is important. As long as our growth rate is good and inflation is relatively low, then the liquidity issue is not the problem. Liquidity issue is important because it allows public sector, private sector as well as the households to rely on credit growth. Purchasing liquidity from unknown sources is not desirable. There are a number of unknown sources which charge high rates to provide liquidity.

An issue that has been talked about quite a bit for quite a long time is challenges surrounding implementation of policies. Apart from the Governorship of the RBI, you have also held important positions in the finance ministry. How would you suggest we tackle the problem?
This is a very important issue that you have raised. We know that implementation in India is very weak. We have policies which are good, but implementation of those policies on the ground is relatively weak.

So we have to concentrate on implementation. It has been basically an administrative problem. I do not want to get into any comment on the administrative system. Government does not do anything without 20 administrators involved from different ministries and so on and so forth. Implementation is weaker in a large number of policies announced.

You cannot go away from the reforms. It is only a question of implementation of reforms that we announce, which is essential. Reforms are important, and we have to make sure that what we have announced is implemented in a short period of time. This is an important administrative problem and the number of ministries which are involved in doing anything that we want to do on the economic policy is also a problem.

On the fiscal front, for quite some time now, governments have faced challenges when it comes to the achievability of the targets set under the Fiscal Responsibility and Management Act. Does the situation call for a different approach?
No. FRBM targets, I think, are a bit outdated. There is an FRBM target but that was set several years ago. We should not worry about that part because economic matters are changing over time, and we have a 6.8% of fiscal deficit this year.

Fiscal deficit of 6.8% is actually not very high and we can expect that the rate of inflation will be within control. When we talk about fiscal deficit in particular, it is the most important policy issue that we have to concentrate on. If higher fiscal deficit is due to investment, there is no problem. But if it is demand, then we have to examine what this demand is for. Are people just using money to hold or to transfer it to non-financial institutions?

Do you think that the current accommodative stance could render the RBI behind the curve in tackling inflation expectations?
So far as RBI is concerned, there is no question of their not being able to control inflation without affecting rates. This is the most important thing. Whether inflation is 4.5% or 6.5% does not matter so long as the growth is good. If RBI is not creating too much money and it is not creating inflation higher than what is feasible, it can still have a target of inflation. I personally believe that a particular target in two digits or one digit is not important as long as it is consistent with high growth and financial stability.

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