"It's puzzling that exports hasn't been consistent"

Dr. Rakesh Mohan over his long and illustrious career has been the Deputy Governor of Reserve Bank of India (RBI); Executive Director at International Monetary Fund; Chief Economic Advisor to the Ministry of Finance, GoI and more. In an exclusive interaction with The Dollar Business, on the eve of the launch of his new book, he held forth on a wide-range of topics including fiscal responsibility, GST, the role of RBI and more.

INTERVIEW BY AHMAD SHARIQ KHAN | September 2017 Issue | The Dollar Business

TDB: Congratulations on your latest book – India Transformed: 25 Years of Economic Reforms. What is the theme?

Dr. Rakesh Mohan (RM): The book is a documentation of India’s transformation, over the last 25 years. It begins from the time India embraced the liberalisation, privatisation and globalisation (LPG) model, and how the country’s image changed from a poverty-ridden, slow growing, closed economy to that of a fast growing, open and dynamic one.

The accomplishments that we see today weren’t achieved overnight and it is still a work in progress. One of the points I have emphasised in the book is the level of consistency that all the governments have shown in their approaches while reforming the country. For instance, Goods and Services Tax (GST), as a concept, originated 30 years ago. I believe, it was in the year 1986 when the former Prime Minister Rajiv Gandhi and Finance Minister V. P. Singh brought forth the idea of Modified Value Added Tax (MODVAT), which finally became input tax credit (ITC). And there are many such stories and examples which ‘India Transformed’ talks about.

TDB: Do you think governments have been doing their best for fiscal reforms?

RM: Each government has contributed to the idea of fiscal reforms and the process continues. I believe that fiscal responsibility in the Budget was given serious thought first in 2003, when the Parliament enacted the Fiscal Responsibility and Budget Management Act (FRBMA). The law was aimed at institutionalising financial discipline, reducing fiscal deficit and strengthening fiscal prudence. I think the agenda initiated by the then Vajpayee-led government has been followed by other governments too. As a result, when PM Manmohan Singh was at the helm, we almost achieved the fiscal objective of 3% deficit in 2007-08.

It was also during this time that most states adopted various measures as suggested under the FRBMA in the state-level budgets and quite successfully achieved a lot of intended results too. Then, in 2009-10, the government, in order to arrest the ill-effects of the North Atlantic credit crisis had to embark upon a fiscal expansion of the economy. The correction measure was restarted by the previous government in 2013 and the current government has continued the consolidation process.

All the governments have indeed been showing responsibility and commitment towards this cause.

TDB: How do you see the Reserve Bank of India’s (RBI) current functioning vis-à-vis counterparts elsewhere?

RM: One of the big strengths of Indian bankers has been the Reserve Bank of India (RBI), which in a way is a full-service central bank because it is not only the manager of our nation’s monetary policy, but a banking, financial services and insurance (BFSI) regulator, a currency issuer and a debt management facilitator (apart from being in charge of payments and settlements system). RBI in its existence of 80 years has demonstrated its competence in handling its wide-ranging duties. No doubt it has gone through ups and downs, but it is important for both the government and the citizens to continue reposing their faith in RBI.

TDB: The RBI and the Finance Ministry have not always been on the same page. Why has that happened?

RM: Worldwide, there is always some degree and scope of tension between central banks and their respective finance ministries. It’s no different here. With new the monetary policy framework in place, RBI is doing exactly what the government has assigned it to do. For example, regarding reining in inflation, it is the government that asks RBI to set inflation targets. And, since the government has set up the monetary policy committee in that regard, RBI is doing exactly what the legislation permits.

TDB: Of late, India’s exports has been on a steady decline. Has there been an instance when RBI could have done things differently to help exports?

RM: Since liberalisation all the governments have been pushing industrialisation. So, it is puzzling to observe that exports hasn’t been consistent. Between 2003 and 2010, exports did well but has slowed down over the last few years. Of course, factors like the global economic slowdown have made us lose our share in the traditional markets. But, I also think that the real exchange rate which appreciated significantly over the last couple of years has contributed to the slowdown too. In some sense, the real exchange rate shouldn’t have been allowed to appreciate to that extent.

TDB: Based on your experience, why are Chinese SEZs more successful than Indian SEZs?

RM: Well, there is no parallel to their growth story anywhere across the world. Other Southeast Asian countries, including India, have tried to replicate their model but haven’t been as successful as the Chinese. I think an all-encompassing ecosystem that enhances a focused policy is the main differentiator here. Outgoing National Institution for Transforming India (NITI) Vice Chairman Arvind Panagariya has very rightly advocated setting up of Coastal Economic Zones (CEZs), which in my view is an idea worth pursuing. If actualised, industrial enterprises out of such CEZs can considerably improve our export performance.

"Besides a Reform-Oriented Policy, We also need a Goal-Oriented approach"


TDB: What is your view on ease of doing business in India?

RM: We have to work on this front. However, once the GST system settles down, I believe the whole ecosystem would benefit from its positive effects. Indeed, there is no shortcut to achieve this. It’s a continuous process. To achieve ease of doing business, apart from a reform-oriented industrial policy, we also need a goal-oriented approach. Also, alongside a well-defined tax and fiscal policy, we need an efficient tax and fiscal administration – because in the absence of one, the other is simply a toothless tiger. Most importantly, we must have a well-functioning transport and logistics system in place. I think this is where we lag the most and need to take immediate steps to rectify the situation. As Chairman of National Transport Development Policy Committee (NTDPC), in 2014, I submitted wide-ranging recommendations to this effect. Our agenda was to provide a long-term transport policy for the country, up to the year 2030.

TDB: Last November, RBI and the government initiated demonetisation. Was the initiative able to achieve its stated objectives? What more must be done to clean up the fiscal system?

RM: Only the future can tell whether the objectives behind demonetisation exercise have borne fruits.

I think the RBI’s ongoing drive against non-performing assets (NPAs) is well intended and so is its increased focus on restructuring financial assets. I also need to mention here that the RBI’s emphasis on improving the bankruptcy rules and regulations are all positive moves – which I believe would help in cleaning up of the entire fiscal system. I believe, the Bankruptcy Act is a big step forward and is going to be the most effective tool to recover bad loans in a time-bound manner for banks grappling with NPAs. Also,

I believe such measures would go a long way in helping banks regain their lost confidence in lending following a longish period of sluggish growth in lending activities.