been pumping massive amounts of money in, then essentially what’s left?
Japan shows you very clearly that once you get into this
position, you can’t get out. Japan has been trying for 25
years to get out of this, but haven’t. They are up to QE IX;
they are up to the fifteenth fiscal stimulus package.
In a sense, India is a closed economy. Can India insulate
itself from this contagion reaching its shores?
In this (inter-connected) world you (India) cannot avoid
(the financial) contagion. There are two channels by
which India gets hit.
India still needs to export and foreign capital is very
important for India to finance its current account deficit.
These two lines will get hit no matter what happens.
This is like a large fire blowing through your neighborhood and, if you have a house sitting there, then it is
unlikely you are going to go out unscathed.
Is the crash in oil prices good for India? And do you see
the crash in oil prices cascading down to global banks
given their exposure — some estimates say almost two tril-
lion dollars — to oil drillers and producers?
It is good for India in the short run. But I don’t think
the fall in oil prices is an unmitigated good. At its heart,
fundamentally, this crash is just a transfer of money from
producers to consumers.
The whole assumption that the oil price crash is good
for global growth assumes that producers are actually not
going to spend it (the petro dollars they earn by exporting
oil) and consumers will spend (the money saved because of
falling crude prices).
All these petrol-exporting countries have massive spending programs. They are just going to wind back their
I don’t think the consumers who get the money are
going to spend. The multiplier that people are assuming is
wildly exaggerated. People don’t seem to be focusing on
why oil prices are actually going down. There are certainly
supply factors, but one of the reasons is weak demand
because of weak growth.
Oil prices are going down is because the US dollar is
going up. Real interest rates in US dollar terms are also
going up, which is terrible news for borrowers around the
There is a massive winding back of investments, which
is negative. There could be perhaps $1 trillion or $2 trillion of investments which won’t take place.
The United States has done pretty well in the last couple
of years, in a relative sense. Energy has been part of that.
A lot of the good jobs were in the energy or allied industries. But that may now reverse because of the fall in oil
prices. The average American may save $500 to $600 on
his gasoline bills, but if he doesn’t have a job in the first
place it is meaningless. How does that help?
This whole boom in the energy prices led to massive
investment and lending by banks and investors into this
(exploration and drilling of oil) sector. Now that oil and
gas prices have crashed, these companies won’t have
enough money to service the huge debt levels on their
People forget that Petrobras in Brazil, Pemex in Mexico,
Gazprom and Rosneft in Russia are very big borrowers. If
oil prices go down, how are they going to service their
loans? And in the case of emerging markets if their dollar
revenues go down, and if they have got dollar debt, then
they have a growing currency mismatch.
In this gloomy economic environment, do you see India
and the US emerging as the demand engine for the global
economy considering that many economists are betting on
strong economic revival in these two countries?
The US could, but India cannot if you put things into
perspective. In size, India’s absolute GDP is a fraction of
the US’. There are investment banks that are proposing
that India will be growing quicker than China.
As of now, I don’t see India emerging as a global
demand engine. Until India sorts out its domestic problems, nothing much is likely to happen in India. I can see
the Indian economy puttering along anywhere between
three-and-a-half to six-and-a-half (percent GDP growth)
depending on what happens.
There is so much that is outside India’s control. The
monsoons are still extremely significant to growth.
Depending on how monsoons fare in
India it can have enormous effect on
the Indian economy. You have to be
very, very careful.
What kind of reforms do you want
to see happen in the Indian banking
While little regulation of banks in
the West led to the economic meltdown of 2008-09, banking in India is
excessively regulated/misused, especially the PSU banks. Do you think in
these conditions Indian PSU banks
can emerge stronger?
Already, most of the top PSU banks
are loaded with NPAs (
non-perform-ing assets/ loans gone bad), a result
some allege, of the political-corporate
nexus and doles given as subsidies to
even those who don’t need it?
The real problem in India is of
mobilization of capital. India has lot
of savings. If these savings are mobilized efficiently some of the problems
of infrastructure funding can be
eased. The intermediation process
needs to be more efficient.
We all know that it is necessary to
break what you politely call the political-corporate nexus. This is very,
Indian banks need to fix their nonperforming loans first. You need to
set up a bad bank, where you can
move all those bad debts. But that
costs money — a lot of it.
Then essentially, start to modernize
banks, reduce public sector ownership, bring external capital in, bring
better non-political professional management in and then get them to focus
on what needs to be done.
Banking is very simple. There are
three things you need to do: One, provide an efficient pay-
ment system. As we know, the payment system in India is
still not what it could be; it is getting better but still there
Second, you provide a safe-haven for savings in the form
of deposits, allowing banks to provide efficiently priced
loans. A key is to provide better access to finance for small
and medium sized business.
In India, a large fundamentally bankrupt company has
better access to money than a small start up or small business with excellent prospects. That’s got to change.
The last is to provide very simple risk management
tools. If you start this today, it is going to take you five
years to get these systems in place.
The Union Budget will be unveiled soon. What is your
wish-list for India’s finance minister?
Get some funds to get infrastructure kick-started.
Fix the financial system. Improve the taxation system.
Start on a clean chit and get rid of many, many little
taxes and have simple, sensible tax administration and
collecting of taxes, broadening the tax base. Probably
AN ECONOMIC CRISIS THAT IS GOING TO MAKE 2008 LOOK LIKE A PICNIC
From left, Treasury Secretary Jack Lew, International Monetary Fund Managing Director Christine Lagarde, Turkish Central Bank Governor Erdem Basci and Turkey’s Deputy Prime Minister Ali Babacan at the G20 finance ministers and central bank governors meeting in Istanbul February 10. A draft communique gave a gloomy assessment of the outlook for global growth. M U R