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Reserve Bank of India Governor Raghuram Rajan on Friday backed fiscal consolidation over “aggressive” policies to boost economic growth as the finance ministry grapples with a dilemma between economic stability and growth ahead of the Budget.

Delivering the C D Deshmukh memorial lecture at the National Council of Applied Economic Research in New Delhi he also favoured greater competition among banks saying the government should decentralise decision making in public sector banks (PSBs) after professionalising their boards. Asserting that some stressed loans have to be written down to improve the health of PSBs Rajan said it will pave the way for mergers and help optimise their resources. “The consolidated fiscal deficit of the states and Centre in India is by far the largest among countries we like to compare ourselves with; presently only Brazil a country in difficulty rivals us on this measure” Rajan said.

He cited International Monetary Fund (IMF) estimates saying that the consolidated fiscal deficit of the Centre and states went up from 7 per cent in 2014 to 7.2 per cent in 2015. “So we actually expanded the aggregate deficit in the last calendar year. With UDAY the scheme to revive state power distribution companies coming into operation in the next fiscal it is unlikely that states will be shrinking their deficits which puts pressure on the Centre to adjust more” he said while adding that it is the IMF figures which investors watch.

The governor questioned arguments by those favouring fiscal expansion on the grounds that it is necessary to generate the growth needed to put our debt to GDP ratio back on a sustainable path. “This is a novel argument. Ordinarily one would think that a government should borrow less that is run lower fiscal deficits in order to reduce its debt. But there is indeed a theoretical possibility that the growth generated by the fiscal expansion is so great as to outweigh the additional debt that is taken on. Unfortunately the growth multipliers on government spending at this juncture are likely to be much smaller so more spending will probably hurt debt dynamics” he said.

“Put differently it is worth asking if there really are very high return investments that we are foregoing by staying on the consolidation path?” he wondered.

Rajan said the common man does not really care whether the government stays on the consolidation path or not. “But the bond markets where we have to finance over Rs 10 lakh crore of deficits plus UDAY state bonds do care. Deviating from the fiscal consolidation path could push up government bond yields both because of the greater volume of bonds to be financed and because of the potential loss of government credibility on future consolidation” he said.

Rajan quoted American strategist James Carville: “I used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

Rajan cited the example of Brazil as a similar developing economy which tried to grow too fast through artificial monetary policy stimulus and paid the price. He said the fellow member of the Brics is now grappling with high inflation and fiscal deficit with growth having shrunk by 3.8 per cent last year. “As Brazil’s experience suggests the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be very careful about jeopardising our single most important strength during this period of global turmoil macroeconomic stability” Rajan told the audience.

“It is to the immense credit of the (Indian) government that we have over seven per cent growth low inflation and a low current account deficit. But it is at such times that we should not be over-ambitious” Rajan said

Ahead of the Budget Reserve Bank of India (RBI) Governor Raghuram Rajan today warned against generating economic growth through additional debt saying that any deviation from the fiscal consolidation path will hurt stability of the economy.

“As Brazil’s experience suggests the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be
Delivering the CD Deshmukh Memorial lecture Rajan said there is a public discussion whether India should yet again postpone fiscal consolidation path with some arguing that it could lead to higher growth.

“Unfortunately the growth multipliers on government spending at this juncture are likely to be much smaller so more spending will probably hurt debt dynamics. Put differently it is worth asking if there really are very high- return investments that we are foregoing by staying on the consolidation path?” he said.

Rajan said that consolidated fiscal deficit of the Centre and states rose to 7.2 per cent in 2015 from 7 per cent in the previous year.

“So we actually expanded the aggregate deficit in the last calendar year. With UDAY the scheme to revive state power distribution companies coming into operation in the next fiscal it is unlikely that states will be shrinking their deficits which puts pressure on the centre to adjust more” he said.

The NDA government had last year deviated from the fiscal consolidation path postponing reduction in fiscal deficit target by a year.

Originally the target was to bring down fiscal deficit to 3.6 per cent of the GDP in 2015-16 but it has been postponed by a year. Now government is targeting 3.9 per cent in the current fiscal.

Rajan said deviation from the fiscal consolidation path could push up government bond yields both because of the greater volume of bonds to be financed and potential loss of government credibility on future consolidation.

He said that fall in inflation has been on account of the “joint work of the government and the RBI aided to some extent by the fall in international commodity prices. This is no mean achievement given two successive droughts that would have in the past pushed inflation into double digits”.

Unfortunately he added despite the success on the inflation front there are voices suggesting weakening the fight against inflation.

He said: “Let me reiterate that macroeconomic stability relies immensely on policy credibility which is the public belief that policy will depart from the charted course only under extreme necessity and not because of convenience. If every time there is any minor difficulty we change the goal posts we signal to the markets that we have no staying power.

“Let me therefore reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the Government. We look forward to the Government amending the RBI Act to usher in the monetary policy committee further strengthening the framework.”

Macroeconomic stability Rajan stressed would be the platform on which “we will build the growth that will sustain our country for many years to come no matter what the world does”.

On the interest rate he said both industrialists and retirees overstate their case and the way to resolve their differences is to bring CPI-based retail inflation steadily down.

RBI is scheduled to announce the next bi-monthly monetary policy on February 2.

Rajan also cautioned against raising tariffs to protect the domestic industries which are facing problems.

“Clearly there are industries in trouble. We should however be particularly careful about raising tariffs at a time when costs are falling everywhere – aside from the inflationary impact for every happy domestic businessman whose prices are raised by the imposition of tariffs on imports we have an unhappy domestic businessman whose costs are raised by the very same tariffs as well as unhappy consumers” he added.

Rajan said that though RBI is in “fine fettle” the world today is much less comforting as industrial countries were still struggling with a few exceptions to grow.

“Our fellow BRICS all have deep problems with confidence about China waxing and waning. Indeed India appears to be an island of relative calm in an ocean of turmoil” he said.

Citing the example of Brazil which is facing double digit inflation Rajan said it is confronted with financial problems because it tried to grow too fast on the back of substantial stimulus.

He added: “While the Brazilian authorities are working hard to rectify the situation let us not ignore the lessons their experience suggests. It is possible to grow too fast with substantial stimulus as we did in 2010 and 2011 only to pay the price in higher inflation higher deficits and lower growth in 2013 and 2014.

“Of course India is not in the same situation today. Given the inhospitable world economy and two successive droughts either of which would have thrown the economy into a tail spin in the past it is to the immense credit of the government that we have over 7 percent growth low inflation and a low current account deficit. But it is at such times that we should not be overambitious.”

The Brazil’s experience suggests that the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies he said adding that “we should be very careful about (not) jeopardising our single most important strength during this period of global turmoil macroeconomic stability”.

Reserve Bank Governor Raghuram Rajan on Friday invoked ‘dosa economics’ to explain that pensioners are better off in the regime of falling inflation.

Delivering the C D Deshmukh memorial lecture in the capital he said that a pensioner would be able to buy more number of dosas from lower interest income provided the inflation remained under control.

“…while I sympathise with pensioners they certainly are better off today than in the past” Rajan said. Elaborating his point the RBI chief said a pensioner would be able to buy less number of dosas if the interest rate as well as the inflation remains high.

However pensioner’s ability to buy dosas would increase with fall in inflation as it would also protect the purchasing power of the principal amount invested in bank deposits or other debt instrument

Pensioners oppose lowering of interest rates as it directly hit their income. Rajan has been trying to keep the retail inflation under check despite pressure from the Finance Ministry and the industry to cut interest rate to boost growth. He will be coming out with the next bi-monthly monetary policy on February 2.

New Delhi (January 29 2016):  Dr Raghuram Rajan Governor of the Reserve Bank of India delivered NCAER’s 4th C. D. Deshmukh Memorial Lecture on January 29 2016 to an audience of distinguished economists civil servants industry analysts and economics students.  Dr Rajan’s speech is attached in its entirety. Dr Bimal Jalan Chairman of India’s Expenditure Management Commission and former President of NCAER’s Governing Body and former Governor of the Reserve Bank of India was the Guest of Honour at the Lecture.

NCAER instituted this Lecture series in 2013 in memory of one of India’s most eminent economists and a founding father of NCAER.  Established in 1956 NCAER is India’s oldest and largest independent non-profit economic policy research institute. NCAER’s work cuts across many sectors including growth macro and trade infrastructure labour and urban agriculture and rural development human development and consumers. The focus of NCAER’s work is on generating and analysing empirical evidence to support and inform policy choices. It is also one of a handful of think tanks globally that combine rigorous analysis and policy outreach with deep data collection capabilities especially for household surveys. NCAER is celebrating its 60th anniversary in 2016. More information on NCAER is available on www.ncaer.org.

Said Dr Shekhar Shah Director-General of NCAER “This is a very special evening for a number of reasons. First not only are we honouring the first Indian Governor of the Reserve Bank of India and one of NCAER’s founding fathers but we are privileged to have both Dr Raghuram Rajan and Dr Bimal Jalan with us.” 

He went to say “Second 2016 marks the 60th Anniversary of NCAER.  The founding fathers of NCAER including Sir C D Deshmukh made a promise in 1956 to the nation of serving both government and industry with economic and social data of the highest scientific quality with empirical research of the highest order and with solid evidence to drive policymaking in India. Today we launch our 60th year celebrations with a renewal of this promise.” 

Dr Shah concluded “It is totally appropriate that the Lecture will take place in the Nehru Memorial Library a stone’s throw from the very house in which Pandit Jawahar Lal Nehru spent his life as the first Prime Minister of India.  It was on Nehru’s request that Dr Deshmukh and others came together in 1956 to conceive and then implement the idea of an institution of national importance for applied economic research. And it was Nehru who laid the foundation stone of NCAER’s office building not too far from here.”

In a wide-ranging address Dr Rajan emphasized the supreme importance of maintaining macroeconomic stability.  He said “Macroeconomic stability will be the platform on which we will build the growth that will sustain our country for many years to come no matter what the world does… Let me … reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the Government. We look forward to the Government amending the RBI Act to usher in the monetary policy committee further strengthening the framework.”

Talking about how best to clean up bank balance sheets he said “we believe enough capital is available. While the profitability of some banks may be impaired in the short run the system once cleaned will be able to support economic growth in a sustainable and profitable way. To be less proactive as our past and the history of banking across the world suggests will only see the problem get bigger and less manageable.”

Dr Rajan’s address also dealt with fostering completion financial inclusion consumer protection and literacy.

Dr Raghuram Rajan became the 23rd Governor of the Reserve Bank of India in September 2013. He was earlier the Chief Economic Advisor to the Government of India and the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business and Non-resident Senior Fellow at NCAER. He has been the Economic Counsellor and Director of Research at the International Monetary Fund (2003–2006). Dr Rajan chaired the Indian Government’s Committee on Financial Sector Reforms (2007–2008). He was the President of the American Finance Association in 2011 and is a member of the American Academy of Arts and Sciences.  Dr Rajan was the recipient in 2003 of the first Fischer Black Prize awarded by the American Finance Association for the best finance researcher under the age of 40. He received the Global Indian of the Year award from NASSCOM in 2011 the Infosys Prize for the Economics Sciences in 2012 the Center for Financial Studies-Deutsche Bank Prize for Financial Economics in 2013 Euromoney’s Central Banker of the Year Award 2014 and Central Banking’s Central Banker of the Year Award 2015.  Rajan’s work spans a range of areas in Financial Economics.  Dr Rajan has a BTech in Electrical Engineering from IIT Delhi an MBA from IIM Ahmedabad and a PhD from MIT.

Previous C. D. Deshmukh Memorial Lectures include the 2013 Inaugural Lecture by Professor Kaushik Basu Senior Vice President and Chief Economist of the World Bank and a Nonresident Senior Fellow at NCAER.  Basu spoke on “Grassroots Welfare Schemes and Macroeconomic Choices: India’s Dilemmas”. This was followed in 2014 by a lecture by Dr Arvind Panagariya now Vice Chairman of NITI Aayog  on “A Reform Agenda for India’s new Government.”  The 2015 Lecture was by Mr David M. Malone UN Under-Secretary-General and the Rector of the United Nations University on “From Millennium Development Goals to Sustainable Development.” These Lectures are available on www.ncaer.org

“Timely” weather forecast services to 11.5 million peasants resulted in economic profit worth Rs 42000 crore during 2015 Minister for Science and Technology and Earth Sciences Harsh Vardhan said today.

He also made a strong pitch for expanding the web of facilities to all farmers to attain estimated profit of Rs 3.20 lakh crore.

Referring to a report by National Council for Applied Economic Research (NCAER) which carried out a third party audit of the forecast services provided last year he noted 11.5 million farmers were benefited by the facilities during the year and sought to increase the coverage to all that is 90 million peasants in time to come.

The minister claimed fishing community too reported similar benefits last year and noted strengthening marine forecast services was high on the government’s agenda.

“According to NCAER timely forecast services to 11.5 million farmers through SMSes resulted in profit of Rs 42000 crore (on four principal crops) in GDP in a year.

“The profit is estimated to increase up to Rs 3.20 lakh crore if we manage to cover each of the farmers under the services. We are taking efforts for that” he told reporters here.

Stating agro­meteorological advisory services (AAS) are being provided from 130 centres across 633 districts in the country currently Harsh Vardhan said the network will be expanded at sub­district level with the help of NGOs.

“We will provide crop­specific information to farmers. Based on such scientific information they can decide on whether to delay sowing of a crop or sow some other crop for a shorter period if they should use pesticides or not what to do if heavy rainfall is predicted to occur” he said.

The minister though did not specify any deadline by when all the farmers are expected to be brought under the net of the services saying it is an on­going process.

“When we took charge only two million farmers were benefited by forecast services. Now according to the report 11.5 million farmers are being benefited. So we will continue to witness rise in number” Vardhan said.

The minister also said similar economic benefit expected when fishermen are provided with timely forecast services in terms of potential fishing zones (PFZ) and adverse conditions.

Union Minister of State for Science and Technology and Earth Sciences Y S Chowdary also attended the briefing. (Reopens DEL31).

The GDP contribution of PFZ and Ocean State Forecasting services for the fisheries sector has beenassessed at 3.9 per cent in 2012­13 from 1.9 per cent in 1995­96 and can potentially increase to 7.8 per cent. Accordingly the additional income to fishermen is aggregated at Rs 3034 crore annually Vardhan said.

“There are 72 coastal districts where there are fisheries harbours. We will engage fishermen from there in awareness and training programmes” he said adding the ministry has been asked to prepare action plans to achieve these targets by 2019.