Arvind Panagariya, professor of economics, Columbia University expects the Indian economy to see a turnaround in another year-and-a- half and blames the ruling UPA government for the crisis. According to him, a good nine-and-a-half years were lost under the present government UPA I and UPA II. He, however, remains hopeful of a turnaround and says the economy is growing at 5 percent even though the country is undergoing a slowdown and facing currency crisis. (Read More)
Speaking to CNBC-TV18's Siddharth Zarabi, he says he does not focus much on what will happen in the US. If the Indian policies and measures are right that will be sufficient to save India from crisis just like in 2008 when Lehman Brothers crisis happened, India was in order so it was not affected much. "When reversal is happening, when money is flowing back, we will have some impact and so, we should be prepared for that," he adds.
Below is the verbatim transcript of Arvind Panagariya's interview on CNBC-TV18
Q: It is clearly bad time for the Indian economy. Confidence is down like never before in the last 20 years and there is a situation where everyone seems to believe that the Indian economy is going downhill very rapidly. How do you assess this situation to be?
A: The situation is unhappy by all the indicators that we might look at and we are seeing are a bit too grim. I have been an optimist on the Indian economy. I feel a bit disheartened in view of a lot of indicators but in another year-and-a-half we will see a turnaround happening. Even in this low period, we have been growing at 5 percent per year. There was a time when 5 percent was regarded as a high growth rate, our expectations have really changed.
Q: A lot of sentiment seems to be driving the foreign institutional investor (FII) inflows into the Indian economy, the expected US quantitative easing (QE) rollback by September end has also impacted the stock markets, rupee. Why is it so bad?
A: When the US interest rates rise, the emerging market (EM) economies do have the impact of the capital flying back out of these EM economies back to the US chasing high rates of returns in the markets there.
To a large degree our problems originated here, things that we did not do right in the past several years. In a way we lost almost nine-and-a-half years under the present government UPA I and UPA II. A lot of people are now calling it a lost decade and it is.
We took growth for granted. Right from the beginning of 2004 when the UPA government came into power saying we want reforms with human face, and my reaction always was that reforms do have a human face. In the end we are not doing reforms for their sake or for the sake of growth, but for the poor.
If you look at the poverty numbers in 2004, poverty was declining. Reforms did not have a human face and that was a bad beginning and from there on we went downhill. This is a background to what the current situation is, we have suffered, some from the expectations of rising interest rates in the US but largely due to our own problems and their solutions are domestic.
Q: What is your expectation as far as the QE and the tapering fears are concerned? How genuine are these because there has been a lot of commentary on the way to read the Federal Open Market Committee (FOMC) minutes and there are dozens of views on it? What will happen come September?
A: I would not focus much on what will happen in the US. If we get our own house in order we will do ok. Ultimately, this QE was not the normal state of the world, US had certain monetary policy that was targeting about 3 percent inflation. So, the US will go back there and we all have to live with it.
When reversal is happening, when money is flowing back, we will have some impact and so, we should be prepared for that. I wish we had our own house in order like we did in 2008 when the Lehman Brothers crisis happened, our house was in order so we were not much affected by it. Today, it is a lot more severe in magnitude than in 2008.
Q: You spoke about domestic factors since you said that we failed to put our house in order, the house is full of people and there are people responsible for running the household. Who are these people whom you seem to indicate have failed very badly?
A: It is a joint decision and I cannot tell you because I am not directly involved in the decision making. So you got the Reserve Bank of India (RBI) making policies, you have the finance minister making the policy and also you have the Prime Minister making the policies. In our complex system, as it currently exists, we have Sonia Gandhi who is a decision maker. So, ultimate impact of these players, the whole of Cabinet, we cannot ignore there is democracy so there is the opposition’s role as well. But if you really want to focus on a few players the finance ministry and RBI are the two major players.