'Reforms Should Centre On The People Of India’

25 Feb,2013 00:40 IST

'Reforms Should Centre On The People Of India’

BW’s Raghu Mohan talks to Reddy about his book 'Economic Policies and India’s Reform Agenda: New Thinking', and more

Moments after he took charge as the 21st Governor of the Reserve Bank of India on 6 September 2003, Yaga Venugopal Reddy told the media “Continuity and change will be mixed appropriately depending on the context”. Pressed further on what his priorities will be at Mint Road, he said “I am not coming in with preconceived notions. We are bureaucrats. We look at things only after taking up the job”.

He read the context as it took shape. “Unlike Alan Greenspan who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality”, wrote Joe Nocera in the The New York Times (`How India avoided a crisis’; 20th December 2008).

With Reddy, it’s never business as usual. The designate-head of the 14th Finance Commission latest work is Economic Policies And India’s Reform Agenda: New Thinking. The main intent is to provoke a discussion on the agenda for reform of the economic policy of India that is conscious of the emerging global developments. The central themes for this volume are Indian perspectives, global experiences and emerging issues. In the good doctor’s words “you have to look back at what you called good reforms before the crisis and see what has changed in the world, what is okay for us, and what is not”. That in essence is what the book is all about. Reddy spoke to BW's Raghu Mohan on his book and reforms in India. Excerpts:

You say it’s essential to make a convincing review of the reform path conceived in the pre-Lehman period. Why is it important?

The reforms considered in India were based on the globally prevailing beliefs at that point of time, that is, prior to the global crisis. For example, the belief then was that the central bank was to concern itself mainly or solely with price stability, and was to ideally target inflation. It was thought that models of financial sector regulation in the US and UK were ideal. It was said that a country should not build up too much reserves (forex) since they were expensive. In any case, the belief then was that central bank should not try to interfere with exchange markets.

But now after the crisis, all these beliefs have, in some ways, changed globally. There is a review of economic theory broadly on how the state interacts with the markets. Similarly, now it is recognised that the financial sector can enable the growth of the real sector, but may not lead the growth process. We must appreciate new economic thinking after the crisis. So, you have to look back at what you called good reforms before the crisis and see what has changed in the world, what is okay for us, and what is not. Then, we in India need to modify the reform-agenda, as needed. More so, if India is increasingly going to be part of the global economy. The state of the global economy in future, after the crisis, is bound to be very different from the pre-crisis days. This is the main theme of my latest book.

You are in effect saying the days of operating in silos are over. How do you go about it?
All over the world, there is a better recognition of importance of coordination of public policy, and also of the need for counter-cyclical policy to be adopted by financial sector regulators, by monetary authorities and by fiscal policy makers. If all these players are to coordinate, you can’t work in silos.

Economic Policies and India's Reform Agenda: New Thinking
By Y.V. Reddy
Orient Blackswan
Pages: 296
Price: Rs 550

Just look at the Euro Zone to learn some lessons about linkages in policies and need for coordination. Basically, there was some trade and some economic integration in the Euro Zone, but the fiscal rules in some countries were not effectively implemented. Some governments, like Greece, did not even give out proper data on the fiscal deficit. As a solution to this and after the onset of Euro crisis, they want to fix the fiscal. But they are not stopping there. They want a banking union in addition to a fiscal union, which means that there is a close connection between the fiscal, financial and monetary policy. And that’s what I meant when I said you can’t think or work in silos anymore.

What does all this mean in the Indian context?
We have the RBI, IRDA (Insurance Regulatory Authority of India), and Sebi (Securities and Exchange Board of India); we have a HLCCFCM (High Level Coordination Committee on Financial and Capital Markets) to coordinate. But surprisingly, now there is talk of a super-regulator when other countries are giving up ideas of too much of separation of monetary and financial sector, and now globally they are giving a central role to central banks in coordination. We need to learn from global developments and thinking in our reform agenda now, rather than continue to believe that the RBI should only be a monetary authority as part of reform-agenda.

Dr. Reddy, for many reforms means a lifestyle of the kind you see in the West. There is also a thought (after the crisis), it is also about happiness. How are policy makers to address these issues?
I will give you an example. Let us assume that the citizens of Delhi want to have a US lifestyle; each family will have 1.5 cars. Even now, with less than 10 per cent of people having a car, there is no space for pedestrians to walk. And if you are to have a US lifestyle for all in Delhi, the environment will be virtually unliveable – with all the pollution. There will be only cars, and no place for people to walk. Reforms should aim to put in place policies to increase the public welfare over the longer run also. For example, we have to price travelling by private cars high, like in Singapore. For every mile you drive in a car when where public transportation is available, you should pay a tax or fee.

In the long-term, the goals of reforms cannot be about growth for the sake of growth without looking at the expectation of what constitutes healthy and happy life for most people of India. As Gandhiji pointed out, there is enough to meet everybody’s need, but not everybody’s greed. That should be the foundation for the debate of reforms in India now.

A version of this interview was published in Businessworld issue dated 11 March 2013

2 Pages
Back To Top