Interview Transcript | Growth over Prudence? Dr. Rakesh Mohan on CNBC


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Dr. Rakesh Mohan, Distinguished Fellow at Brookings India, insists that the government keep up public investment in a credible and transparent fashion, during a panel discussion on ‘Budget 2016’ with CNBC TV18.


As a person who saw a lot of economies grappling with similar problems, how sacred should India’s 3.5% fiscal target be?

It is indeed important for the government to provide credibility through its fiscal programme, so that once they set the targets it’s important that the world at large understands that our government means business in terms of keeping the targets and keeping fiscal prudence as among the top objectives of the policy. Having said that, I would however say that it is important to give a greater focus on the quality of expenditure and the composition of expenditure. It does seem to me that at the current time, where private investment in India is indeed lagging, given the stressed balanced sheets of many of the large segments of corporate sector and the corresponding stressed balanced sheets of banks, the likelihood of private investments reviving in the coming fiscal year doesn’t seem to be very high and therefore it is very important for the government to really keep up public investment in a credible and transparent fashion.

In that context that, I would say that it is important that the government provide a clear programme of pubic investment in roads, railways, health, urban infrastructure, ports and so on — both public and private, particularly the public. They need to do this in a transparent fashion, [giving a comparison, of, for example,] last time we spent so much in public investments, this year we are going to spend so much, and also provide evidence of the big push and setup the implementation procedures. If they are able to do that, then corresponding with that, one needs to look at the revenue sources for such increases in public investment, and that could indeed be either through the IIFCL as off-budget borrowing or I would suggest that there should be special infrastructure bonds floated by the government whose proceeds go into a public account which is non-lapsable and these proceeds are only used for public investment. They would be no different from any other bonds but they should be labelled as infrastructure bonds, whose proceeds gets separated from rest of the budget.

What is forgivable in the form of fiscal largess? 3.6, 3.7, 3.8, 3.9?

I don’t really want to focus on a particular number. What is more important is the actual public investment figures and credibility in being able to make that investment in infrastructure.

We do have a tax-GDP ratio that is lower by any standards, that is lower than comparable economies with similar per capita incomes, so we also need to focus much more on revenue raising in order to increase public investment.

Till a few weeks ago, the state governments were unable to sell their state development loans even without the excess, the split with GoI papers which normally was 25 basis went up to 40 basis. State governments are therefore borrowing at a heavy price. Do you think that there is appetite for more government bonds, even if there is a very good justification? Let me go with a 3.8% fiscal deficit that will mean the government borrowing programme which will be at least 25% more than what it is estimated for FY 16. Will it not come at yields at over 8%? Will it be worth it then?

Given the circumstances, with the global economy being in the state that it is, the IMF has been revising downwards its forecasts for global economic growth consistently for the last three years. Each and every forecast has been revised downwards. Second, in terms of keeping the commitments etc. remember that the huge monetary policy stimulus through unconventional monetary policies in the United States, Europe, Japan, their expectation in terms of recovery of global economy have been bellied. So given these conditions where the kind of forecasts the IMF has been making for the global economy, the kind of expectations the central banks of the Federal Reserve, the DZB, the bank of Japan have been making which have not fructified, it’s not surprising that some of our forecasts also don’t get fructified. So in that sense we are in a special situation in the global economy and so if there is something that the government can do in a credible fashion, both combining the resource raising sides, both in terms of off-budget and even on-budget — if you segregate the funds raised from infrastructure bonds even on budget not off-budget, but credibly in a separate account which only goes to infrastructure investments — if you do that communication properly and do the implementation properly, it does seem to me that the market will not react as badly as it might if you just raise the fiscal deficit without giving that kind of information and that kind of implementation and commitments.

This year it was a 5.15 lakh crore net borrowing, in FY 17 it might well be northwards of 5.4lakh crore if the fiscal deficit can be in at 3.8%, 3.9% of the GDP. The only way this can keep the yields below 8% is if RBI bought more bonds, did more open market operations, expanded its balance sheets. It looks like “the” only way out. Is that what you want?

No, what I would say in the context of expansion of Reserve Bank balance sheets, that the expansion of the balance sheets, should be proportionate with expansion of the expected growth in the economy as a whole while keeping…..

That’s what it is this year, this year the reserve money growth is 11.3%, nominal GDP in the first 9 months actually in the first nine months is not in the double digits. So actually the current years OMO and reserve money creation is over 11% or 11.3%. Next year, you have to account for a higher bond buying then we will be way above the nominal GDP. Are you okay with that?

These are not one-to-one relationships. They vary. The Reserve Bank does need to show that the expansion of the balancesheets is consistent with the kind of monetary programme that they would like to have. They shouldn’t do excessive expansion of the balancesheets. But nonetheless, these are not one-to-one relationships. I certainly would not say that the Reserve Bank should go all out to expand their balancesheets so that the government’s borrowing programme gets done in a reasonable basis. The government does need to get market signals in terms of the cost of any kind of higher borrowings, I would not want to do that. But nonetheless I do think that you need to maintain a certain desirable growth of the Reserve Bank balancesheet, consistent with its monetary programme.