“I think we certainly need to understand the technology, we need to proceed cautiously on building out a rupee CBDC. Also, I think urgency to do it because there is a consumer demand at this point is simply not there,” says
Raghuram Rajan, Former RBI Governor & Prof, University of Chicago Booth School.

Mythili Bhusnurmath: Well it certainly is a tight rope walk but is there a case to relook at the inflation targeting experience in the Indian context particularly the mandate because what we have seen is that the MPC takes one decision but liquidity management is not in their purview as result of which we often find contradictions so should the MPC also be given oversight of liquidity apart from just the repo rate, is there a case to rework that mandate?

Raghuram Rajan: I do not want to enter a debate which probably is already fraught. Let me just step back from India and say more generally the ultimate objective of monetary policy is to tighten financial conditions. The central banks have been acting on using a variety of tools including not just the policy rate but also various liquidity management tools. I think about the central bank balance sheet expansion of quantitative easing which India has also engaged in, there has been an attempt to affect the long rate and to control that particular part of the spectrum and, of course, Japan has intervened directly in yield curve control in trying to control the long rate. So all the tools that are necessary to determine financial conditions if they are under the central bank should be under the purview of the monetary policy committee. As a general principle, the details of course may differ from country to country but as a general principle they should be within the purview of the monetary policy committee.

Mythili Bhusnurmath: The governor said he sees the next financial crisis coming on to cryptocurrencies. How do you view this? Do cryptocurrencies pose a serious danger to macroeconomic stability and how should central banks respond?
First, I think that cryptocurrencies were largely touted as a vehicle for payments and I think that promise has fallen far short, very few payments are done using cryptos. I think therefore it is less of a central bank concern and more of a concern for the securities regulator that these securities are being used for speculation and therefore there is a reason for looking at whether in fact there is appropriate due diligence, whether the proceeds of some of these crypto sales, token sales are used appropriately as advertised and so on.

Now the worry that regulators have is that if they do pronounce some cryptos and say at least they are not running away with the money then immediately people will think of it as a licence to invest in cryptos and certainly many people including me feel that at present cryptos have little value other than as speculative device.

Mythili Bhusnurmath: But are CBDC, the central bank digital currency, really an answer because the RBI in India have started a pilot project but given the pace of digitisation, wherein it has really permeated almost the entire economy, is the benefit of CBDC a little overrated?
Raghuram Rajan:
I think you are absolutely right that as far as retail payments go UPI basically has taken us a long way, we started it in 2016, it has gone through leaps and bounds and for any retail payment there is no reason why you need anything more than UPI right now. Now as far as wholesale payments go, large payments, we already have the central bank involved in those large payments and again the need for a central bank digital currency does not seem that great.

I think we certainly need to understand the technology, we need to proceed cautiously on building out a rupee CBDC. Also, I think urgency to do it because there is a consumer demand at this point is simply not there. There is a need to learn more to understand because in the global arena the rules for CBDCs are now being mapped out and we need to be participants in that rule making so that we do not find ourselves at a disadvantage at some future point.

That said there are a number of concerns with the central bank digital currency. One, to what extent will you displace bank deposits and if you do displace bank deposits, will you sort of get the money back into the private sector to lend or even the public sector banks to lend that is one concern. The second is the potential of volatility if it becomes easy to convert your money into central bank digital currency, then you could have runs on shaky banks which are much faster than the runs currently because right now you still may have to go physically to the bank to extract your money, with digital currencies it becomes very easy to do that transformation. So there is a lot of thinking, perhaps the most important sort of thing to think through is how will you keep up with technological change.

Mythili Bhusnurmath: While banks’ balance sheets are much clearer today than they were during your time there is still not much success achieved as far as NPA management is concerned. The insolvency and bankruptcy code has not delivered. What really is the answer for NPAs, which are inevitable in the banking system?
Raghuram Rajan:
Well I think it has to be two-pronged. One, we have to improve the quality of lending decisions. I am still sort of perturbed that we do not track, we do not allocate responsibility for large loans within many of the public sector banks. Now making one bad loan is not an issue if you are a reasonable bank, taking some risk, that is going to happen but if 90% of the loans you have made are bad that does signify either incompetence or corruption and we simply do not allocate responsibility. We need to make better loans and I think that is at the outset.

Also in terms of recovery, I think we have had one scheme after another, each one trying to do a little more and these tend to be more draconian for the small entities because they have very little power, they cannot hire good lawyers and so on. But the large entities after an initial period when these schemes are effective, think of the debt recovery tribunals, think of the SARFAESI and now think of the bankruptcy code. They are successful for a little while then the large players understand the system and manage to get around it and I think the judiciary has some burden to bear here because they have intervened far too much and it slows down the process tremendously.

Slowing down the process of resolution is the death knell because then immediately banks become much more reluctant to invoke it because they know that it means that the assets are tied up for much longer and they tend to then accept unfavourable compromises with borrowers and that slows down, of course, the whole process of lending. So I think what we need is not yet another code but re-examination of what is going wrong and the judiciary participating and effectively putting rules on itself on how much intervention it will undertake.

Mythili Bhusnurmath: Budget 2023-24 is just round the corner and broadly given the current circumstances of high fiscal deficit, high inflation, what should the broad approach be to maintain that fiscal prudence and re-direct your expenditure or let the fiscal deficit remain as it were for the moment given that we are still not out of the woods?
Raghuram Rajan:
I think the first thing to keep in mind is that the strains are building, as you said the current account deficit is a strong indicator, inflation is another indicator that there are strains in the system and so we have to be much more cautious on what we spend on. We do need targeted spending on the very poor but we also need to understand even the layer above that the lower middle class is suffering because of the lack of jobs and therefore the reality is that the answer to many of these is to find new ways of growth.

I know we are going into an election year, not this year but next one so this budget is a preparation for an election year but I think the best thing the government could do is focus on how it re-energises growth. The numbers in the pandemic are very hard to make out because you have quarters of abysmal growth followed by quarters of spectacular growth but look at current growth relative to 2019, over the last three years we look at last quarter’s growth relative to the similar quarter in 2019, we have grown at 2.5% a year that is just unsustainable. We cannot create the jobs we need if we grow at that miserable pace and the government has to understand that more than infrastructure on which it is doing a good job, it has to create the environment for growth.

The government has to reassure the industrialists in many ways including on tariffs, on taxes but also on the reform agenda. If it can come out with a vision for reforms which is sensible, sustainable and energise them in the growth process, that I think would be the greatest contribution from this budget. I am afraid, however, it will be more limited and what I really dread is yet another round of tariff increases which will make us even more expensive and make it harder for us to become that China plus one.

Mythili Bhusnurmath: The government through the PLI scheme has raised tariffs on a number of items which it has included under the PLI scheme and there has been seen results due to it? Should more raises be made and more items be included under the PLI scheme?

Raghuram Rajan: You want to examine that last fact a little more carefully. Mobile phones, certainly we are producing many more of them, but look at the import of mobile phones components into the country. Are we producing all those components or are we importing more? When I took a look at that particular sector, what I found was certainly that we are producing more in the country but our imports have also increased considerably in that area. Now why is that? It is because PLI rewards production but does not necessarily, mobile phones especially do not have a value added requirement, you are not necessarily required to produce more value added product in the country, if you assemble and put it out you get the benefits of PLI. So if I am Samsung, I just move my assembly into this country and produce more. Of course, over time the hope is that they will produce more components in this country and so on and that may be happening but I will not simply look at the production in this country or the exports of cell phones, there is a tremendous incentive given under PLI of Rs 4000-5000 per phone for doing that.

What I am worried about PLI is two-fold – one, after these incentives cease will we really still have an industry or are people taking advantage of these incentives to temporarily produce in the country. Second, are we providing subsidies in an area where there is no need to subsidize, I mean if Tatas want to build solar cells or if Adani wants to do it, why are we subsidizing them, who determines which sectors are subsidised and have anybody done a cost benefit analysis on how many jobs are being created for the subsidy. I am particularly perturbed about this claim that we are going to build chips in this country and with enormous subsidies, how many jobs are going to be created by that and do we really think that when we put all this in place we are going to be state of the art in chips. I mean certainly when you look at the investments that the US is doing, Taiwan is doing far beyond what we are contemplating. But I do not think the players that are currently being touted like

have any competence in making chips. So I simply do not understand how these players are being picked or who is picking them etc.

Mythili Bhusnurmath: I said we will confine our discussion to economics but I want to ask if your joining the Bharat Jodo March was an indication that you might be contemplating entering politics some day?
Raghuram Rajan:
No, that reflects my concern as a citizen that I believe our greatest strength is our democracy. I believe our greatest strength is communal harmony, I believe our greatest strength is debate and I think all these are under threat and I really as a citizen want to add my voice to those who are saying let us strengthen these, let us strengthen our institutions because that is how India will prosper and also live amicably among nations. So this was a small walk as a citizen, it did not reflect political ambition, it did not reflect anything except that I am a citizen of India and I believe in these things.