Originally published on The Indian Republic, over here.
The Indian Republic’s Chief Editor Akhil Handa and the Editor-at-large Ashwini Anand caught up with Dr Arvind Virmani over coffee at the Delhi Gymkhana Club in what turned out to be a very candid and revealing conversation. Dr Virmani who has served as India’s representative to the International Monetary Fund and as the Chief Economic Advisor to the Government of India talks about a variety of policy issues, lack of public policy experts, what ails the policy reform in India and the all-so-powerful vested interests. In Dr Virmani’s assessment, the Modi government has done the right things and is making the right noises but needs to maintain the momentum over the next 2 years to see India back to 8%+ growth.
Experience with the government and public policy
TIR: Dr Virmani, you have been India’s representative to the International Monetary Fund, served as the Chief Economic Advisor to the Government of India, taught at top-tier universities and served on over 60 different committees, working groups and expert groups. What is your sense on the state of public policy in India?
Dr Virmani: There is a shortage of experts on policy issues. We have people with operational experience and we have academics. What we need are experts with a thorough understanding of operational issues. It is at the policy stage that the gap is most felt. This is the gap I have been trying throughout my career. In fact, I started a think-tank called Chintan to help create an impact on the policy discourse in India.
TIR: You have served the nation at the highest levels for over 30 years, something that is very rare. What has been your biggest challenge?
Dr Virmani: Bringing about systemic change is a mammoth task and is a huge challenge. It is not as simple as people often think it is. There are various vested interests with different objectives. Therefore, one has to be prepared to counter their arguments, for decision makers to approve new policies and economic reforms. For example, if a new policy proposal is put forward, you might have a bureaucrat saying, “All this sounds good, but what about so and so case? How will we deal with that?” And that is the end of the proposal. Since I spent so long in the space and made sure that I had a thorough understanding of the operational details, I was able to address all the edge-cases in my proposals and ensure that there were no loose-ends.
TIR: What do you see as the role of the bureaucracy in the functioning of the government?
Dr Virmani: The upper bureaucracy is very powerful in The Central Govt. Some of them are quite smart and knowledgable, particularly about obscure details. The good ones also understand the laws and processes. They need to be balanced with those with specialist knowledge and data based analysis.
There is also a huge lower bureaucracy (babus) at the State & local level whose power is derived from ability to obstruct economic activity.
TIR: Expectations have been sky-high ever since Mr Modi took office. How would you rate his term so far?
Dr Virmani: I think they have done well so far. It has only been a short while since the new government took office and the focus has been on breaking the government gridlock and improving governance and delivery. It is not easy to change the way the system functions in a sustainable way and that will remain a challenge. They seem to be doing fine so far.
TIR: What single big-ticket reform, if pursued, would change the course of the economy?
Dr Virmani: I don’t think there is one single reform that can change the course of the economy. It is not as simple as saying that item X or item Y will transform the economy overnight. However one generic problem is the jungle of laws, rules, regulations and controls built during the Socialist period from 1950 to 1980. Cutting this jungle to size can benefit every part of the economy& society.
TIR: Dr Raghuram Rajan has taken a hawkish stance by raising rates thrice since he took office despite lackluster GDP growth. Would you broadly agree that containing inflation should be a higher priority at this stage than reviving growth?
Dr. Virmani: Restoration of non-inflationary growth requires a “Macro Pivot”, a tightening of fiscal policy and a loosening of monetary, as I have been saying for many years.
TIR: Surjit Bhalla, has in a recent article in the Indian Express, seemed to suggest that inflation is influenced more by trailing MSPs than by RBI’s monetary policy actions. Would you agree?
Dr Virmani: His research confirms what several of us have been saying for several years, that mis-management of cereal procurement policy & excessive stock build up has played a significant role in agricultural inflation.
TIR: Paul Volker and Alan Greenspan, in a sense represent opposite ends of the spectrum. At one point of time when Volker was the Fed Chief, interest rates stood at 18%. Greenspan and to a large extent, his successor Ben Bernanke, kept interest rates at or very close to 0 for extended periods of time. At what levels do you think developed economies should keep interest rates? Obviously, there will be variations depending on business cycles, but a rough long term target in your view would be…?
Dr virmani: On the IMF board I was the first ED to warn about the negative effect of sharp expenditure cuts in Europe, and the likely emergence of a “lost decade” of growth a la Japan. I had urged a greater write off of private debt and emphasis on structural reforms to reduce fiscal deficits over medium-long term & QE by the ECB.
Future of the Indian economy
TIR: Where do you see the Indian economy 5 years down the line, in terms of growth, inflation and overall health?
Dr Virmani: if the Modi govt keeps its focus in next two years, on revival of investment & growth, the economy can be put back on a trend growth of 8% per annum.
TIR:. Which industries are you most optimistic about in the coming 5 years?
Dr Virmani: I leave stock market predictions to those whose business it is.
Dr Virmani’s future plans
TIR: What are you upcoming plans? You told us about your think-tank, Chintan. Do you plan to focus exclusively on this initiative or do you also have other plans?
Dr Virmani: My objective is to use all media (newspapers, TV, Internet, social media) to reach those potentially interested in public policy & to convey a sense of what good policies (economic. Foreign, security) are. I am always open to new learning and trying new things.
TIR: Would you be open to considering lending your expertise to the new government?
Dr Virmani: I am very happy that the NDA Govt has taken several issues that I have researched, written and talked about, some for decades(eg governance). Other examples are sanitation (Swach Bharat), e-edu & e-health, E-gov & UID. However, I don’t think anyone in govt is looking for my particular blend of experience & knowledge.