Dr C. Rangarajan: We had to send 46 tonnes of gold out of India in 1991. That brought the seriousness of the situation home to many

Dr C. Rangarajan

Former Reserve Bank of India (RBI) governor and economist Dr C. Rangarajan who is widely acknowledged as being one of the more influential figures in India’s economic landscape recently launched his latest book Forks In The Road: My Days At RBI and Beyond, published by Penguin, in which he recounts his years and landmark moments.

Padma Vibhushan Rangarajan who has also been an academic professor and taught several leading bankers and private-equity professionals who now run their own funds and institutions, is also a former member of Parliament.

Edited excerpts:

What led you to finally write an autobiography?

The idea of writing a book has been there for quite some time but I moved on from one thing to the other and it just got postponed. But by 2014, I came out of Delhi, I mean, the day after the change of government. And I thought that this is the right time to start writing.

There were some doubts in my mind about writing the whole thing, because I thought the history of the Reserve Bank of India, when it gets written, will be good enough, as that will record all the events that happened during the years I was there. But, after reading that history, which is thorough and complete, I still felt that there was a need to emphasize certain things. So, it is not a particular event or particular incidents that made me write, but just the fact that in some sense I'm finally settling down, finally retiring.

Given all your experience and the cycles you have been witness to, what is your view: fiscal versus monetary tightening, what do you think suits our country at this point in time?

See, these are relative terms but the fact is at different times, different things needed to be done.

In some sense, the inflation that we are seeing now is also part of the decision that we took earlier. At the time when COVID-19 was at its height, everybody advised the government to increase government expenditures. Now, government expenditures were sought to be increased at a time when government revenues were falling so what is the net result? The net result is an expansion in borrowing, because expenditures exceeded revenues. When the borrowing increased, then it had to be supported. Even though the central bank may not be willing to accept it openly, the fact of the matter is without the adequate liquidity support from the central bank, this borrowing could not have been met.

You see, the way it has happened. In the United States… they really expanded government expenditure to a very large extent. During the (Donald) Trump days, every citizen in the country was given a check. In the UK also, if you’ll find it, and in India too, they expanded, the net result is what you find now is the expansion in liquidity, which came as a result of a policy which everybody accepted. I mean, without exception everybody wanted government expenditures to go up. Now, in addition to the factors operating because of the increase in liquidity, there were specific commodities in relation to which prices started rising after the Russian Ukraine war, petroleum products rose and prices of many important commodities, so supply disruptions happened. So, the two together in a sense have resulted in this situation.

At the same time, as far as the rupee is concerned, there was this outflow of funds. And it is an outflow of funds from India to the United States because the US went in a big way embracing the rate of interest. So, as a result of it, the value of the rupee started falling, but as you all know, that it is… it's coming back in a sense, because the outflows have stopped, inflows have also started coming. Therefore, in some sense, the monetary policy here in India will also… take into account what is happening globally, then it is no longer a case or a closed economy situation, the central bank of the country here cannot ignore what the central bank of some other countries are doing. Therefore, monetary tightening is also required, both for domestic reasons as well as what is happening in the rest of the world. So, you cannot be doing the opposite, exactly the opposite of what others are doing.

As far as the fiscal is concerned, the tightening is not what one is talking about... one is talking about the expenditures increasing, but we cannot go on repeating what we did in COVID-19 period, you cannot do that, and therefore, some normalcy has to come back and therefore, the tightening of monetary policy is, as I said, imposed by domestic and external considerations, as far as fiscal is concerned, it is also to come back to normalcy and slowly move towards or travel on a fiscal path, which will take us back to where we were in terms of the fiscal deficit.

I'm sure there are many, but share something that you look back on again and again as a turning point, or as a moment of great insight or learning, for you?

The one set of situations which really caused a great deal of concern, and where action had to be taken, was in 1991. It was as a consequence of the difficult situation we were placed in; we had to find ways and means to raise resources. At that time, we also decided to send gold out of the country, pledge it and raise money. So, 46 tonnes of gold was sent out. At that time, a special charter plane was waiting in Bombay and the gold was put into it and then it travelled all the way to the UK, which helped us to raise what would now appear to be very small money – less than $500 million. So that was a traumatic experience... packing the gold, putting it in a plane and sending it out. But it , we were faced with.

The other is the... decision that we took on... the downward adjustment of the value of the rupee... we always avoided the word devaluation. Downward adjustment to the value of the rupee was done in two steps. Since we did it in two steps, I used to call it hop, skip and jump... There was some drama also to it, on the second time, not the second day, on the second time when we did, there were apparently in Delhi some rethinking whether we should go ahead with the second time or not, but I was not aware of it. So I went ahead... I was Deputy Governor at that time, and in charge of the exchange rate management. In those days, the value of the rupee was announced every day by the Reserve Bank at 9 in the morning. And at 9.30, I had a call from Dr Manmohan Singh who was the then finance minister, and he asked what's happening? And I said, I have jumped, I have done the second dose also. So, this is something that… as later on it turned out that P.V. Narasimha Rao was Prime Minister had some second thoughts on, but if he had delayed too much, perhaps that might not have happened even. But I acted as we had decided and I went through with it.

What do you think of inflation on the ground? How high is it and how high do interest rates have to go before we see a fall in demand and all that?

Right now, I think the USA is bent on taking inflation back to 2 percent...we are going to see for many more months now raises in the rate of interest of Federal Reserve System by a substantial amount... And so long as the Fed is bent on that, and the UK is also bent on that, we face a situation in which our policy options could also be constrained.

We need not repeat exactly what they are doing, or we may not raise the rate of interest exactly to the same level as they are doing, but it will require that for some time to come, at least till the middle of 2023 or something like that, we may have to raise the rate of interest, but probably after some time, it can come down.

In 1992, we first moved from the exchange rate determined by the Reserve Bank to what is called dual exchange rate system, and in 1993, we moved to a system which we might call the market determined exchange rate system.

Despite having raised customs and duty levels, why is our trade deficit so high, at around almost $300 billion?

If you're talking about the current account deficit, then before COVID, we were hovering around about 2 percent of the GDP; there were some years in which it was even lower; therefore, the situation was not that bad. But I think COVID-19 created a very acute situation. Now, the import bills are also up, because of the rise in the price of crude oil... even though we have been able to get away a little bit because of importing it from Russia. This is a situation in which the trade deficit and the current account deficit goes up.

But we have been doing very well on the services side. In fact, the deficit is very high on the trade side, the trade in goods side, compensated by the surplus on the services sector. And I really think that once world trade starts picking up, which depends to a large extent upon what happens in the rest of the world - our exports are dependent upon the level of income elsewhere because those are the imports of some other country - and the higher their level… or the faster the rate of growth in those countries, then our exports will also pick up. That's a very important determinant of our exports. So, I think that in a year or two, if the world trade environment picks up, then we will get back the current account deficit over to 2 percent and we should not really let the current account deficit go beyond 2 percent forever, and in the long term.

You are described as being one of the more impactful governors of the RBI, in terms of the changes you brought to the monetary system. What were some significant steps that you consciously took, which in your opinion, shaped and benefited the financial ecosystem?

Let me pick two or three. One is, in ensuring the independence of RBI, particularly in the pursuit of monetary policy, I moved in terms of revoking an agreement between the Reserve Bank and the government of India under which there was an automatic monetization to the fiscal deficits. That is whenever the cash balances of the government of India went down, they would issue what was known as ad-hoc treasury bills in favour of the Reserve Bank of India and get money. So, this is what is called the automatic monetization of the fiscal deficit, which was revoked and this enabled the Reserve Bank of India greater control over the issue of money supply, over the control of money supply. Therefore, that I think is an important step forward in terms of letting the RBI gain autonomy in terms of pursuit of its activities.

The second important change about which I would like to talk is, we talk today about the rate of exchange being determined by the market, we talk about capital flows coming in and going out and which have an impact upon the exchange rate. Prior to 1993, the system that we operated was one which I mentioned earlier, where the Reserve Bank of India determined every morning what the rate of exchange would be. And that was also accompanied or that also coexisted with the system of import controls on goods. So, a particular rate is fixed, then the only way to bring about effective implementation of that is really to control the activities. Therefore, that was a system that operated. In 1992, we first moved from the exchange rate determined by the Reserve Bank to what is called dual exchange rate system and in 1993, we moved to a system which we might call the market-determined exchange rate system. We said that we will intervene in the market when needed, but otherwise we will let the market determine what the exchange rate will be and subsequently we signed what is called the current account convertibility clause with the IMF; that we will not put restrictions on current account transactions. Current account transactions mean transactions relating goods and services, capital transactions mean movement of funds and others, this is what is called capital account convertibility. We did not agree to capital account convertibility. We said we will move slowly on that, but current account convertibility was signed by us during our time.

Also, on the banking system, we introduced prudential norms and various other measures in order to strengthen my capital adequacy ratio, in order to strengthen the banking system, make it more sound, and so on.

We also wanted at that time to enhance the competitiveness of the banking system. For a long time, the government and the Reserve Bank had not issued any licences for the private sector… for banks to be set up by the private sector. That was changed during the period. The new set of private sector brands came into existence. Now of course, since then, it has been followed up, many new private sector banks have come. And many of the leading private sector banks...now, were the ones for which licenses were issued at that time.

What can we do to encourage Indian business houses to increase their investing and their confidence in India?

After the fast rate of economic growth between 2005-06 and 2011-12 when the average rate of growth of the economy was up to 8 percent, the economy started sliding from 2011-12. Since then, there have been some years in which the rate of growth has been high, but certainly, we have come to a lower level than the high level we had seen in the earlier period. The investment rate is the total amount of investment made as a proportion of the GDP. At the height of the high-growth phase, it was quite high: 35-36 percent gross fixed capital formation rate. I will use the loose term, which is the investment rate, but the strict word is really the gross fixed capital formation rate. Now since 2011-12, it has fallen from some 33 percent to 28 percent, and that is a significant decline.

We really need to create an appropriate investment climate in the country. One can understand your foreign investment rate after a period of fast growth, because every economy reaches a peak or full capacity utilization, then thereafter, for some time at least the investment rate begins to fall because there is adequate capital in the system. Therefore, two things need to be done; one in terms of the general environment, and the investment environment, and what can be done. Then the other is really to look at specific industries and look at the bottlenecks which may be coming in, in the way of adding to investment and removing industry specific problems.

So even though we are not planners in the way in which we were planners before '92, we still have the responsibility to guide the economy, I think that the NITI Aayog is still there, and their main purpose should be to chalk out what, over the medium term, (are) the difficulties the economy will face. And secondly, to find out the roadblocks. Therefore, that is what we need to do.

Now, to some extent, the world environment, particularly the trade environment, is not very happy, because those who at one time argued heavily in favour, like the United States, about free trade, and all that, are now even talking about restrictions.

So we really need to look at the domestic investment rate and see how we can raise it, create the appropriate climate. And secondly, to look at sector-specific industries, and not sector-specific measures. For example, we need to find out what the sunrise industries in our country are. We must be able to identify, where in the more recent period, for example, people have been beginning to talk about it. In my own opinion, the leading sunrise entry industry in our country like ours must be the food-processing industry, from time to time, we hear about tomatoes being thrown on the roads and other things, and it's only by developing the food-processing industry, we will be able to avoid the situations that you sometimes read about.

The second thing about India becoming an investment destination, India becoming a country where investment can be made, that again, will depend upon once the economy starts picking up. So, it is, by showing that we can grow at a rate faster than many other countries that we will be able to attract investment into India. So, these are some of the steps that can be taken in order to promote investment in India. And in the final analysis, investment is the driver of economic growth.

What is your next book going to be?

I'm not promising anything but let me say that the current book describes my days at the RBI and beyond. That means from 1982 onwards, I have lived almost 50 years. So whether something can be done on what happened before those 50 years is something that I think about, but at the same time, I am more than 90 years old, so the question is whether time will permit me to write another book.