Not possible to hit 8.5% growth without inflation: Gokarn

During Edelweiss's seventh annual conference, RBI deputy governor Subir Gokarn said that it will be difficult to achieve 8.5% growth again without triggering inflation. "The risk with aspiring to grow is that inflation can catch up with you very quickly," he said.

Therefore, he believes that growth has to be discounted somewhat so as to get a better handle on the growth-inflation balance.

Below is an edited transcript of his interview. Also watch the accompanying videos.

Padmanabhan: In many ways, India today is a sum of the parts, which are the states. As to the whole state story, what are your views on how it connects the dots and takes the nation onto another level?

Gokaran: I think the basic framework that I would use to look at it is key elements such as high growth, low inflation and inclusive sustainable growth strategy. If you are drawing on historical experience, it's a very straight forward message. There are three-four ingredients that characterize all this. There are of course other factors such as geopolitics and favorable historical circumstances, but we are abstract away from all of that. There is macro stability, very clearly, which essentially means sustained periods of low inflation; typically countries have not grown on a sustained basis in high inflation environment and I think that's something we have got to be very clear about.

Openness to trade I think is a message that translates to states also because as people say we are many countries within one sort of sovereign framework, which has strong advantages. Ultimately let's not forget that what the EU tried to do as an economic entity. We had already achieved a political union through our constitution because of the federal structure.

The third is basically human capital or what it is referred to as the broader sense of empowerment, but sort of a basic ability to participate, having the capacity, having the opportunities, the access to economic activities, having the skills to take advantage of opportunities. So when you look at this set of factors, it's internal as we all internalize these now, but then the question is the delivery, how do you deliver this? So, there we see a clear division of responsibilities between the central structure and the state structure. So we are looking at macroeconomic stability.

When you are looking at openness, it falls at two levels - trade policy or international trade policy where we have pretty much reached a point where it is productive to us, it is something that supports growth, but at the state level that's not the case. We have huge internal barriers, which actually take away some of the benefits of openness that our states could realize, could exploit by the number of barriers. I once wrote a column on the lessons from Europe for India or vice versa and this was in the context of the European constitutional debate. My observation was that Europe has achieved economic union first and it's then trying to achieve political union and is not succeeding. We had actually achieved political union, but had really not achieved economic union and I think that was something which to me was a very striking, having looked at the multiplicity of barriers that exist between states. Any time you cross state borders, there is a visible manifestation of this. It takes more time to get through inter state boarder then it takes to get through customs, and those are the kinds of things which we really have to be very focused on in terms of realizing the full opportunity for this particular economic structure that we have.

The third element is human capital empowerment. That is where I think states need to speak about issues linked to land and that's where the state authorities, the state jurisdiction is very important. The ability to match the kind of resources you have with the kind of activities you are focused on, I think that's something which we have not really taken what I might call it a business-like approach to this, despite having fairly elaborate state planning process.

For example, many states aspire to having an IT sector because it's visible, it's high-profile and the states are typically seen as successful. But that's not necessarily consistent with the endowment of the state capabilities, the kind of investments that you need to make to complement your existing resources. In fact it maybe more difficult to achieve. You have IT centres in many states but many of them have actually just failed because they have not been able to cross threshold. So, I think linking up basic capabilities, resource endowments with the objective and then building the whole strategy around it is something that state government's need to do to be able to take advantage of this umbrella.

I think from the viewpoint of development, this is a phenomenal combination where you actually got the flexibility to perceive a strategy, but you are not adrift because you have got this larger entity, many responsibilities taken care of by this larger entity, which give you give a lot of margin or error, which is always got to be there. But, it also absorbs you of many of the responsibilities that an independent country would have to do and you may not have the same flexibility. So, I think that's the balancing act that we need to address.