Dr. Rakesh Mohan is the Deputy Governor of the Reserve Bank of India. Before his current stint with the RBI, Dr. Mohan has been working with various government research agencies and is also an author of a number of books on Indian economy. He was also a Member of the Economic Advisory Council to the Prime Minister and Telecom Regulatory Authority of India.
In an interview with Equitymaster, Dr. Rakesh Mohan shared his thoughts on the objective behind the interim monetary policy. He also shared his views on global economy and future growth prospects of the Indian economy.
EQTM: The RBI has revised downwards GDP growth from 6%-6.5% to 5%-5.5%. What are the key reasons for the revision?
Dr. Mohan: I think the reasons for downgrades are very well known and there is no element of surprise in the same. The Reserve Bank of India’s annual report for 2002 had indicated that we would be revising our growth projections. The key reason was of course the draught that has particularly affected expectations of agricultural growth. With the mild recovery in industrial sector and expected service sector growth, we have scaled down our GDP projections to 5%-5.5%.
EQTM: Could you highlight some of the salient features of the recent monetary policy? What is RBI trying to say to the economy through this policy?
Dr. Mohan: First of all, I think the view is towards drawing attention to stability in all the monetary magnitudes. That is interest rates, exchange rates, foreign exchange reserves, liquidity conditions and the increase in non-food credit (commercial credit) that is taking place.
The first message that is being sent out is the relative stability in the monetary system. With this backdrop of relatively high degree of comfort in the monetary system, we have a policy that is aimed at further strengthening the financial markets that is underlined by market determination of interest rates. So in that direction, as far as the CRR rate cut in concerned, the message is that we are putting more money in the system. Therefore, the more the money in the banking system, more the interest rates would indeed reflect the scarcity or otherwise of the money.
Similarly the announcement of setting up a new working group to study rupee derivatives (options and forwards) indicates that it is yet another step towards increasing efficiency.
Third, the management of government debt is sort of an increasing part of managing money/debt markets. There are a couple of announcements on this front. One is to do with more frequent issue of floating rate notes. Another is to make the government debt market broader through trading in stock exchanges and increasing retail participation. A number of those initiatives are also aimed at making financial markets more efficient. So that really is the overall thrust of the monetary policy that is a continuation of what has been done or embarked upon earlier.
From a system that used to be highly regulated, which had administered interest rates, high allocation for credit, high SLRs (statutory liquidity ratio) and CRRs (cash reserve ratio). Over a period of ten years, the change has been tremendous.
EQTM: How complete is the flexibility in interest rate at the current juncture because you still have certain benchmarks like 7% bond, EPF and PPF rates? How much time will it take to become complete?
Dr. Mohan: The finance minister announced in the budget that small savings and PPF would be benchmarked against government securities. So that is moving a great deal of agility in the system. Whereas others like 7% bond should not hamper this agility because there are conditions like only individuals can invest with a six-year lock-in, you cannot have much of withdrawals and you cannot borrow on the back of relief bonds. It has special characteristics designed for individuals for savings. Yes, obviously at the margin, it has an effect. But given the conditions that are being put on that, it should not have that large an effect.
EQTM: There has been some mention of interest rates being at a reasonable level in the policy. Is the RBI trying to say that interest rates cannot go down further?
Dr. Mohan: I think what has been said is that the bank rate at 6.25% and 7% interest for a 10 year government security are reasonably low real interest rates (assuming inflation at 3%-4%). That said, the lending rates that borrowers get -- i.e. non-government and non-large corporates – those interest rates are still higher.
EQTM: As far as credit flow is concerned, what is your reading on credit movement? Where do you see credit moving in the future because we have not seen much capital investment in the manufacturing sector in the recent past?
Dr. Mohan: It is true that we have not seen a great deal of investments in the manufacturing sector. However, there is no shortage of any goods in the market be it investment goods, basic goods and consumer durables. This is also indicated by very low inflation. So it cannot be argued that some investments that should have taken place in the past are not taking place now in the domestic market. To the extent, exports are also growing by around 13%. Having said that, investments are taking place in some sectors like roads and housing. But certainly investment demand is slow and may be that is essentially reflecting the over capacity and it will take some time before they work themselves out.
One can really say that there is some indication that capital good production is looking up in this fiscal year. But it is too early to read too much into that.
EQTM: Considering slower economic growth, shortfall in disinvestment proceeds, higher expenditure towards drought relief and poor state government finance, what is your evaluation of the country’s fiscal situation?
Dr. Mohan: I think it is very difficult to make an evaluation. But it needs to be observed that at any given time some measures are taken quickly and other take discussions. There was lot of resistance for allowing private sector players in the insurance sector in 1997-98 because people did not want foreign equity greater than 26%. The same was the case with the telecom sector. But eventually the market has been opened up and benefits are significant.
So I think it is a process of discussion, consultation and consensus. If you look at any given time, you would have said that there is a problem here. But if you take the process as a whole, the trend has been in one direction i.e. improvement.
EQTM: What is your outlook on the global economy?
Dr. Mohan: Well, the global outlook is really well known, that US recovery is slower than what was expected at the beginning of the year. European recovery is still sluggish and there is no sign of Japanese economy reviving either. But it is expected that 2002 will be better than 2001. It is still expected that 2003 will be better than 2002.
EQTM: What are the chances of India bucking this trend and actually outperforming other countries?
Dr. Mohan: Well, the fact of the matter is that we have had consistent growth of around 5.5%-6.5% for the last 10-20 years. And there is no reason to believe that it will be atleast that much, if not better.
EQTM: Where do you see India, in terms of economic status, a decade down the line?
Dr. Mohan: It is a difficult question to answer in a one liner. As I said earlier, we have exhibited 5.5%-6.5% growth in the last 20 years with growth in 1990s slightly higher than 1980s. There is nothing in 1980s and 1990s that was better than what it is today and you would expect in the next ten years. If we believe economic climate is better today, macro management is better and that stability in terms of standard parameters like foreign exchange and interest rates are better, there is no reason to believe that the next ten years, in terms of growth, will be atleast as good as previous 10-20 years or even better.