India needs to hit 4th gear to drive 6%+ growth: Bhagwati

Jagdish Bhagwati, professor of economics, Columbia University shares his views about the Indian economy and the action that needs to be taken to bring back the economy on tracks.

Also read: Banks well positioned in terms of liquidity & deposit: SBI Below is the edited transcript of his interview to CNBC-TV18. Q: Growth or lack of it is the biggest story. The years 2003-2005, gave us a feeling that we are a 9-8 percent economy. Was that the irrational exuberance of the world that made us look like a double digit country and that we actually were always only 6 percent? What is your view?
A: We were on a high growth trajectory. Many people were un-analytically thinking that economy should continue to grow and grow. Two factors in last two years led to the breaking of the growth rate. 
The first temporary factor which I think will be reversed is that central bankers always worrying about inflation. European central bankers are worried about, 'if we spend more it will lead to inflation.' It is in their DNA to worry about inflation and they tend to worry too much, you cannot fine tune everything, we cannot get it perfectly right. It will get back and forth.
One needs to play with it. We overplayed our central banking hand; there were many interest rate rises, because the central bank was worried about inflation. I think the RBI should reduce some interest rates and that will give us impulse towards growth. I think activist like Kejriwal has added pressure on bureaucrats to act with more caution. Though, this activity puts pressure from the civil society to get things done in a better manner. Q: The argument of civil society up in arms is taken. But even if you look beyond that when we got out from that Hindu rate of growth and came into the 90s with the 5-6 percent there were seminal reforms. We saw tariffs falling from 200 percent to 20 percent, de-licensing, interest rate deregulation. Now, we do not have a second generation of reforms. That gave us 6 percent, but have we had enough reforms to give us 8-9 percent? We have not really generated much. Would you say that something else is needed to reactivate it?
A: We will not go to 6 or 7 percent from 8 or 9 percent that we were already experiencing before the current 5 and 6 percent; the reforms were quiet sweeping that time. In 1991, it was amazing to see how the Rao, Manmohan Singh team managed to introduce many reforms. I think those are in place, because now the young people will never stand for reversal. This is already in place and it means that basic rate increase is safe. 
We were hoping for reforms from last 10 years and things had fallen into a rut for a variety of reasons. The government has now reaslised that the growth rate has slowed down and they need to think of the reason behind it.   
The Prime Minister and the Gandhi family have now realized that their historical legacy is extinct and so now they have to shift gears and push reforms which promise a substantial return. I think liberalization of retail sector is clear element of the program.   Q: After reading your pieces on retail liberalisation and foreign investment, I understand it’s a reform. Will it generate more reforms?
A: When we devise a set of reforms, BJP and other people points out, why do you pick this action? Why not something else because they feel that the political cost of disrupting the mom and pop store or kirana stores is very high compared to what you get by way of economic. So, there is a political cost and economic benefit ratio.
My work shows that the government will be able to bring in more goods which will be good for the consumers, like 1991 reforms. So, that's a big pay off. With Wal-Mart we will be able to export more and it will improve the ability of the farmers to invest more, refrigerate goods and get to the markets. That is a big pay off. We have also quantified that. It will not impact kirana stores much.
_PAGEBREAK_ Q: In past four years, we registered almost two years of near double digit inflation and now it is still at 7.5 percent. When we compare globally among 150 countries, up until 2008 India was in the top half in terms of inflation control. Now we are at 151. Would you really brush it as something that central bank can now reduce?
A: We need to worry about inflation, but not in the degree in which we are. It's a relative matter because now our growth rate is affected and we still have inflation, but it's in one digit. I think we can now shift the balance. Q: The other issue which restrains or would restrain the RBI is current account deficit. We are now running at 4 percent of the GDP. The last monthly trade deficit was highest in terms of monthly estimates. Would that be a concern – run on the rupee if we continued this way?
A: If we open up more foreign direct investment, then money will come in. Will a foreign investor invest in a country which has particularly, political volatility?  We have to change our attitude and the thinking of our institution; we need to be more impatience and act faster. We need quick action in variety of things which we are doing right now. Q: Gold imports is complicating the issue of current account deficit.Gold imports have risen so, anything that you have seen globally, This is a unique situation. Is it possible at all to curb what is now becoming mix of both cultural and investment compulsions, high inflation leading to making gold attractive and the cultural compulsion?
A: Around the world, after economy disturbance and current crisis's post 2008, everybody is shifting from currencies into commodities and within commodities into gold. It is part of risk-averse phenomenon which takes over.
I think there is nothing much one can do because everybody is doing it, be it American or European because there is hardly any currency where you can invest, dollar is the only option.
If I had any money, I would invest in the US because they have a stable political system. No great upheavals will take place, even the fiscal cliff will be surmounted. Dollar is only alternative right now to gold, but dollar is also risky. Q: We have a fiscal problem ourselves, we really messed up the fisc, we weren’t in that much of a downturn post Lehman but we ran up a huge fiscal deficit from 2.6 percent and in a year it was 3.3, 4.8, 5 and now it is just refusing to come below 6 percent even though we get promises of 5.3 percent?
A: If you include states then it is even higher. I think we should stop giving subsidies as it will get mixed up with our reforms. Under current reforms, we not only think about high growth but also about health, finance and education. Political aspirations of the people are aroused, so they will demand more and they are.
Once a commodity is subsidized it will add more pressure to the deficit. It is very clear that inflation hurts the poor. If the growth rate decelerates then there will be less revenue which means less money to spend, to fulfill people’s aspirations, through health, education etc which means the temptation to spend more by just printing money. In my opinion we will need wise leadership. Q: On fiscal cliff, President Obama said was little positive after his discussions with Republicans and Democrats. You think the targets will be delivered or will they ask for more time?
A: The plus signs are that the country needs something like that; people will feel that US cannot continue in this manner much longer. China is also running into problems.
Many people will say that they will not do on the President's terms because the President has gotten re-elected, the popular vote is 50-50 and he doesn't have a mandate. Many Republicans feel that the President does not have a mandate and if he does it on his own terms then Republicans will not be helpful. Its implementation will depend on how the republican leadership will be able to pull its disgruntled members together. 
I am optimistic that in the end the Americans do manage to pull together. But these last 3-4 years they have really been polarised excessively. I think President Obama has done his part also but the Republicans have done a larger share that may be because I am a democrat, I am biased. Q: Do you think we will get back to 8-9 percent growth or do you think it is going to be a protracted 6 percent?
A: We will, provided we don't assume that it will automatically happen. The real challenge is this fourth gear which we want to get into. The Prime Minister and other ministers, who are relevant, are determined to stand firm because if they don't, our last chance will be blown. Because without that we will stay put around 6 percent and nobody is going to be excited about us. I feel we don’t always show the determination that is necessary. It probably goes with the democracy but it is also because politics is divided.