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The Rediff Business Interview/Dr Shankar Acharya

'We welcome the PMO's support in project implementation'

Dr Shankar Acharya, who graduated from Oxford and holds an MA and Ph D in economics from Harvard, represents continuity at the finance ministry. In fact, in the recent upheaval which saw Montek Singh Ahluwalia and Co make way for Vijay Kelkar, Dr Acharya was the one person who stayed put. In fact, Dr Acharya has been an advisor to the ministry from 1985 onwards (save for a stint at the World Bank from 1991 to 1993).

As Finance Minister Yashwant Sinha tours the country assuring one and all that economic recovery is round the corner and pundits worry that it is not so, what with the global crisis and low demand within India, Dr Acharya took time off his busy schedule to defend his government’s track record on the economic front. Excerpts from an exclusive interview with Senior Assistant Editor Amberish K Diwanji:

There have been a lot of changes in the finance ministry, excepting yourself. Any particular reason?

No, I don’t have any reason to offer. You have to remember that a particular job that a civil servant holds is at the pleasure of the government, and change is normal. So it happens that some of the incumbents who were here for a number of years have now gone to different departments. One has been promoted to the rank of minister of state (as member-secretary) in the Planning Commission while another has been posted in the prime minister’s office. Nothing very unusual.

How would you describe the state of the economy today?

I don’t know whether my assessment will be fair, but what I’d say is that one has to look at the Indian economy in light of the global situation. We are in this year, beginning from the latter half of 1997, going through one of the worst global crisis, at least since 1979-82 when we had the second oil shock. In fact, I would say that it is one of the worst crisis since the 1930s depression, though some may say that I am being somewhat alarmist. Nevertheless, the international context is, unusually, very unfriendly to any economic development.

In that context, what is the debate in India? It is whether the economy will grow at 6.5 per cent as the government and the Reserve Bank of India say, or will it be at 5 per cent, as some private and more pessimistic assessments state?

To me that is not a very big debate in a world where Japan is going through a recession, a large developing country like Indonesia is going to decline by 15 per cent in its GDP as some reports say, and there are major declines in economies such as Malaysia, Thailand, South Korea…

…China?

China, according to reports, is only slowing down rather than declining. But the others, there is an absolute shrinking of the economies. And you know what has happened in Russia, which is falling apart in some sense. In that background, I really think that the growth performance in India, whether it is five or six per cent, is pretty good.

What happens if China devalues its yuan? How will it affect India? And how does the Russian turmoil hurt India?

The question is hypothetical. The Chinese officials have insisted that they will not devalue the yuan to add to the turmoil in Asia. So there is no reason to believe that they will go back on their word.

On the Russian front, you have to recognise that most of our exports to Russia is our paying back for the earlier rupee-rouble trade as per an agreement signed much earlier. I see no reason why that would not be continued. There is some hard currency trade between the two countries, not very much, which may not boom in light of the Russian crisis. Yet the overall impact on trade will be limited.

The finance minister had earlier said ‘Come September, and the economy will turn around’. Is he just being optimistic, as many feel?

Let us just say that he is being cautiously optimistic. I think that there are some clear signs of economic activities picking up, and I’ll cite a couple of them. If you look at what’s happening to disbursements and sanctioning of loans by major financial institutions such as IDBI, ICICI and so forth, these have grown in April-July this year by about 40 per cent this year. This compares very favourably with the April-July of the previous year.

Secondly, if you see what is happening to the non-oil import group, there again, one sees a strong growth. Oil imports are down because of oil prices are down worldwide. Most non-oil imports in India are either capital or intermediate goods, and this again suggests that some industrial activity is picking up. Thus, there is reason to believe that things are not as bad as they appear to be.

Thirdly, if you look at the Index of Industrial Production, data for which today are available for the first quarter (April-June), it shows growth of at least 5.4 per cent over the previous quarter.

This is not tremendous, but to put it in perspective with the figure of the previous first quarter last year, when growth was only about 3 per cent or so... so, there is something more positive.

I would be the first to say that some sectors are in the doldrums. For instance, one hears of depressing first quarter results from sectors such as cement, steel, some textile units, etc.

So is there a reason for optimism?

Against the depressing results, there is very strong initiative being taken by the government to push up public investment activity moving fast in infrastructure areas once more. These will, as they take off, create more demand for items such as steel, cement, etc. The Budget itself provided an increased allocation for the infrastructure sector.

Now it is a question of making sure that major projects in power, roads, telecom, actually get moving fast. And whether it happens or not, only time will tell, but I have reasonable confidence that this activity pick up, lifting the economy as a whole.

At the same time, I would like to draw your attention to private sector investment, that strong initiatives have been taken in sectors of power, ports, telecom and so forth. To take the example of power, the bill for regulatory authorities the central and state level was enacted in the last session of Parliament. Ditto the bill for the private sector’s participation in the transmission of power. Several of the counter-guarantees for some of the larger projects in the power sector, which had been hanging fire for several years, have been cleared in the last two months.

Therefore, I think it is reasonable to say that many infrastructure projects are likely to see the light of day in the second half of the 1999 and this should in turn have an effect on the demand for intermediate goods.

Another sector I would like to draw your attention to is the housing sector. As you are probably aware, the government has made some announcements on the housing policy and the Budget too has promised some incentives to promote housing. Now, all these will take some time to take off, but as they do, then activity will pick up, which will lift the demand for cement and allied products.

Many commentators say that now India needs another reform push, a sort of second stage. They argue that one cannot expect the economy to pick up unless there are some major policy changes.

I am not too sure that the government sees reforms in stages, like a first or second stage. I think reforms are seen more as a continuing activity and you reform as and when an opportunity presents itself and there is sufficient economic reason and political commitment to a change in policy. And I think there has been continuing forward movement as far as reforms are concerned.

For example, in the past four or five months, a lot has been happening. I mentioned the power sector, but in the area of deregulation, an example is the decontrol of the sugar industry. Many people had been talking about sugar delicensing for quite a long time and it has now happened. Similarly in other areas where several changes have been introduced.

Then look at areas like…uh.. like capital markets. Now, there has been forward movement regarding dematerialised trading. The SEBI (Securities and Exchange Board of India) has taken a lot of steps to make trading in stock investor-friendly and much more in the demat form so that there is no longer the problem of paper trading and papers getting lost, etc. So again, this is a case of a lot of little steps being taken over a period of one-and-a-half years. And now SEBI has asked that all new issues be made in the demat form. So these are all continuing things.

A lot of small steps rather than a giant leap?

Shankar Acharya interview, continued