<div>National Institute of Public Finance and Policy professor and former finance ministry advisor <strong>Ajay Shah</strong> tells <strong>Anjuli Bhargava</strong> that monetary policy needs to move away from the cult of personality<br /><br /><strong> Are we back to the Hindu rate of growth or can we still aspire for an 8-10 per cent growth rate?<br /></strong>The Hindu rate of growth is 3.5 per cent. In the last 20 years, India’s trend growth rate has been around 7 per cent. There are business cycles — sometimes good (8-10 per cent), and sometimes bad (4-5 per cent). When things are good, we should not be over-optimistic, and see that as trend growth. Similarly, when things are bad, we should not be pessimistic; we should not extrapolate and say we have collapsed.<br /><br />Trend growth changes slowly in response to deeper micro-economic factors. The Hindu rate of growth is firmly out of the picture. We are in a trend growth range of 6.5-7 per cent.<br /><br /><strong>Have the last five years of UPA 2 been a factor in slower growth?</strong><br />The 2008 crisis had an impact. Then, the great corruption scandals made a big difference to the investment climate and the pace of investment. We are all disappointed at the opportunity cost as things did not get done. We cannot absolve UPA 2 on the last two counts.<br /><br /><strong>Where does growth come from and what do you think we will see in the years to come?</strong><br />If nothing changes, we will see trend growth of 6.5-7 per cent on average over the next 10 years.<br /><br />Growth comes from labour (quality of labour is going up), capital (we are at 30-35 per cent savings and investment rates) and productivity — firms are more inclined towards technology and improved business practices.<br /><br /><strong>How do we reverse stagnation in the manufacturing sector?</strong><br />Fix indirect taxation. Move towards Goods and Services Tax (GST). Make movement of goods outside and within India free. Remove customs duties. Implement GST on exports and imports. And, improve infrastructure.<br /><br />Indian manufacturing, all too often, is sub-scaled. Either we run too small an operation fearing labour laws or we overpay our workers and erode our competitiveness.<br /><br />I’d like to see fewer family businesses. A study by us shows family-run companies pay lower excise duties compared with the ones run by professionals. They (when the family owns 50-60 per cent) are more troublesome because the incentives are very powerful. So, if they can influence law and enforcement, the benefits that family members reap can be substantial. We should have more companies with dispersed holdings — professionally run — rather than family-run businesses.<br /><br /><strong>What would you like to see the government make its top priority?</strong><br />Corruption scandals, the incredible problems with tax policy and tax administration, the mess-ups on capital controls and the rupee crisis in the last few years have one common underlying factor that we need to face up to. How do we make the government work properly? That’s the secret sauce we need to figure out. I’d like to see them manage themselves better.<br /><br /><strong> Things have been run this way for the past 50-60 years. What makes you think that anything will change?<br /></strong>We have always had a messy, clubby way of doing things. We have always given our coal mines to friends and have procured coal from them. In 2007-09, I was very upset with the way things were going in India. While the economy was doing well, we saw unsavoury elements starting private projects, co-opting the government, influencing regulators, but all that has changed now. Today, liberal democracy has begun to exert excruciating pressure, and there is a change.<br /><br />Look at the latest spectrum aucauctions. Are we doing business as usual? The government, the politicians, the bureaucrats as well as the private sector are all scared. Today, investors look for ethical entrepreneurs. It’s a sea change.<br /><br /><strong>To what extent have interest rate hikes dampened growth?</strong><br />While it is claimed that the Reserve Bank of India (RBI) hiked rates 13 times, the change in the rate was smaller than the change in inflation. Inflation was rising fast, but the rates did not rise at the same pace. So, the real rate was actually going down. If you look carefully, India injected a very big monetary stimulus during that period, and we had an inflation crisis. India’s inflation has been brewing for a while...<br /><br /><strong> Weren’t you in the finance ministry at the time? Was there no realisation of this then?</strong><br />That’s what brings me to the monetary policy framework. Rather than leaving it to tactical decisions and to personalities — for instance, during Y.V. Reddy’s time, it was believed that exchange rate management was important and inflation was not as important — we need to depend less on individuals; a formally laid down monetary policy that does not depend on individual thinking and actions is called for. It should not be what Raghuram Rajan is doing as governor. The Urjit Patel report is a good way to proceed on this.<br /><br />(This story was published in BW | Businessworld Issue Dated 24-03-2014)</div>
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