Exclusive Interview: Raghuram Rajan - Good thing about democracy is that it pushes the system to find solutions

The Common man on the street is asking when will the inflation come down.
In a way you are asking me when will inflation come down. We think by march WPI inflation should be down, but the common man doesn’t sees WPI, he is more concerned about CPI inflation Which means prices of vegetable, sugar, wheat, services, education, healthcare that has been high for long and has to be brought down.

Can’t promise that we will get the inflation down to 5% by March but hopeful we can bring the inflation down from current levels of 9.8%. We have a good monsoon which will have impact on pulses and oilseeds. As food inflation comes down some other prices will also come down. The important thing is to tackle sooner than later which is why we are trying to focus on inflation

Due to  high interest rates and high inflation the spending power of people has come down. On the other hand India story was a consumption based country; what went wrong; was there a mismatch?
There  is a mismatch, investment is about 35% of GDP down from 38%, but saving has come down from 36% to 30%, so people are spending even if they can’t afford  it which is why CAD at 5% is so high. So we have to change and consumption has to come down, saving has to go up more, what we are saying is consumption in urban areas is slowing but that necessary but hope it won’t be long lasting. Part of consumption is also coming from rural areas, there has been NREGA, MSP prices has been better, farmer are selling land and also more growth is happening in rural areas. Some of stronger growing states are Bihar and Orissa. They are growing very fast and catching up. Spending power is moving up in rural areas, rural consumer wages have been growing more. Overall consumption is growing fast. So as inflation comes down, we will lower interest rates, but before that we will have to go through interest rates regime higher that what we want in longer term.

The Common man wants to basically know that if he is buying a car when will his EMI comes down.
As and when inflation comes down, interest rate will come down, but we can’t predict when that will happen. We are hopeful food inflation will come down, which will lead to wage inflation coming down. But before that we have to endure high interest rates for some time. We are at growth rate which is lower than which we are used to and that will also lead to some price correction. We have seen already see like auto companies are cutting prices of its product. This entire thing will also lead to lower inflation

Will this happen next fiscal?
It will hopefully happen over the next few quarter, we are keenly watching the data. The weather department has predicted good kharif crops but also Rabi crop produce will be better. So weather Gods are helping this time.

Do you feel frustrated when common man criticise RBI as high inflation is due to supply constraint?
Supply constraint is something which we have to take as given; if we didn’t have problem in coal production we would have had more power and a lot more growth in south India, Where factories are facing power shortage. So supply constraint has to be taken as a given. We can’t continuously increase supply of anything; we have to curb demand as well. We should be prepared for balancing. There is no overnight solution to this. So in short run if we want to bring down inflation we have to slowdown demand and that will definitely lead to slower growth.

Currency had a sharp volatility. But now is it safe to say it has settle down.
Central banker can never be comfortable; we tried to balance between inflation and growth. The moment we find a right mix, currency will take care of itself. That is why we initially emphasised on inflation. FII also sees inflation as an issue, if he invests in dollars and finds his investment to be depreciating by 10% he won’t come to India. This will lead to currency depreciation. So we have to convince FIIs to invest in our country and currency will then automatically settle down. So we want to convey that RBI will bring down inflation.

We believe that the message has been conveyed, and markets say that it’s the Raghuram Rajan effect. Do you feel the pressure?
I don’t take credit for markets movement. What we have to focus on is a stable macro economic environment. We have to bring inflation down. That is the best way we can help growth. We can help growth in other ways. Let us try and increase the reach of the financial sector to every village. We can give people good instrument for saving like inflation indexed bonds. We can focus on financial sector development which will also improve growth. We are also trying to push financial inclusion in many other ways. Mobile payments is also an option.

RBI and the Government have taken many steps on curbing gold imports and consumption. What is your view on that?
There is nothing wrong in investing in gold. Gold is not just traditional but also portable. Gold is a form of investment which is liquid. Truth is that our CAD grew because gold imports were high. So to bring down CAD we had to curb gold. I believe this is not a long term solution. Longer term it our responsibility to give people saving instruments which will channelise savings into productive sectors. If we can get financial savings and they can earn adequate returns, the economy can also earn from the same. That is our long term endeavour.

Why are we trying to suppress domestic consumption?
I am not against growth. I would love to have strong growth and low inflation. Typically, the inflation problem comes when you have very, strong growth. Because of all the problems in the economy which we talked about the supply has been very, very slow so we are having inflation at low levels of growth. Now, the question is if we don’t tackle this problem, if we don’t solve the inflation problem, we are already saying aam aadmi is getting worried about inflation, his pay cheque not growing with inflation. And, this is going to be more wide spread.

We have already seen rural wages not growing any faster than inflation. At some point it will go below. So people in the rural areas who are happy so far will also start getting upset. Yes the short run impact of higher interest rates of RBI action will be too depressed in some elements but if we can bring inflation down that demand is more sustainable. If I today say I am not going to act against inflation, I am going to let inflation pick up I am creating much bigger problem for future because to some extent the fact that we have not been able to bring down inflation over five years means people have got more used to high inflation. Everybody will think that inflation is going to remain so much so your vegetable seller is going to say why should I keep the prices fixed, I will increase the prices every month by so much. So inflation gets entrenched in the system. Once its gets entrenched all the problems which we have faced will become even bigger.

This is history speaking, this is not me speaking. Historically, the answer is fight inflation early before it becomes a problem that requires much bigger weapon to solve. If you remember in the US and I am not in any way saying I want to do what Paul walker Federal Chairman did when he was facing inflation at 13% 14%. He raised the interest rates to 18%. I don’t want to be in that situation. I hope we never get that but let us tackle inflation wherever we can rather than say today growth is very important let that growth happen but if supply is constraint that means more and more inflation. I am taking measured steps I am not intent on killing growth. But let us take steps which allows us some chance of bringing down inflation.

Since the US tapering has been postponed from global perspective how are you seeing the US?
Global growth is still weak and a lot of the burden globally has fallen on central banks. So its not peculiar to India that people want interest rates to be low. Globally they want interest to be low because they feel growth is very weak, but that is also only so much that central banks can do for promoting growth and central banks are implementing whole lot of unconventional policies which to my mind are setting up problems for future.

When Federal Reserve was doing quantitative easing ,iIn 2010-11 I saidthis going to hurt the emerging markets because a lot of money will go their way and it will create an impression of strength and  as soon as the Federal Reserve starts tightening its going to flow back and its going to create problems for them and I think we see that right now. Of course if the US grew strongly on the back of what Federal Reserve is doing then it would be as much of a problem because we would be exporting to the US.

Do you see any signs US growing?
We don’t see US growing strongly as a result of what is happening, because nobody knows how much this is contributing to growth. But I would guess that it’s not a huge amount that there are other problems that US has, which they have to fix. Same way there are lot of issues that India needs to fix for stronger growth Its not just the interest rates.Tthere are other thing that needs to be done. So I think that we are in a situation where the central banks are trying to do their best but I fear that in the long run this is creating more problems elsewhere. You already see very loose lendings starting, trying to emerge in the crisis there is something called the government-like-loan where bankers lent money without writing in any strong governance. They suffered because of that. The level of those loans is at the level that was before the crisis. So there are worrying., I don’t think we are facing anything like the crisis in 2008 right now. But I don’t think we can go on  this too long with these very easy monetary easing conditions globally.

Coming back to India, your focus is largely on increasing investment avenues for retail participants. Retail investors, because of one mishap drives investors away from investments for many quarters. What is the solutions and also what should we do about issues like NSEL which will have a wider effect?
We have to do deal with these issues. It is an issue under investigation so we cannot call it a fraud. We have to be very careful. We are a poor country and financial literacy is limited. People go to chit funds. People go and invest when they get an email from me saying that please give me 100,000 rupees and they will send a cheque and will say RBI asked for it. RBI does not take any people’s money. We have plenty of money which we print. Don’t ever send a cheque to the RBI because somebody sent you an email which says RBI has asked for it. But people fall for this all the time. Some of it is education but even very educated people get in to this. So we have give them savings avenues which give them reasonable returns and advertise those widely.

Investing some amount in stock market. Investing some amount in bonds, investing some amount in deposits, some amount in provident fund. Diversify your holdings and don’t put it in one new sort of promotion that’s coming about. Look for trustworthiness. We need to create comfort for this. All of us has an education business to do. Your network is doing that on educating people on what makes sense.

At this  point what is the situation of India story? 
No need to get upset because I think it will change. I am not saying it will happen tomorrow. But I think that partly what we have run up against is the limits against the old way of growth. Growth requires more transparency. We can’t allocate gold mines without a transparent process of allocation, without auctions and so on. But that new way which we are in the process of developing will be more sustainable, more fair, more equitable.

One of the good things about democracy is that when things go wrong it basically pushes system to find solutions. So if you look at the history of democracy and growth, you will find that it is more stable. It will go off track but it will be pushed back because democracy then demands a solution. So when ‘aam aadmi’ says things are not going well and I don’t like the way things are going, “kuch karo”,  the politicians listen and they start making changes. May be this is an excessive faith in the democratic system but I think you are seeing some changes happen and that will turn around to some extent the path of growth. I think with stronger growth new stories will become happier. Also, I am hopeful to bring down inflation and people will feel wealthier. You can’t keep a country with the kind of talents and capacities we have down for too long, I am not saying that successes are sure, we have to work on it.