‘A lot of reforms in India happen subtly,without big confrontations. I feel frustrated because big reforms aren’t being done’

SG: This is a wonderful time to be having this conversation. It is the twentieth anniversary of our reforms.
Absolutely,and we have had splendid growth. But lots of countries have stopped where we are and some countries have gone back. This is the time we need to think what should be our next step. And this is also the time when the world is changing. You see,you have had the world in recession and now,the industrial countries are recovering. The confidence that the emerging markets will sustain this growth will come into question because the emerging markets are overheating,some of the capital that’s come in will start flowing out. This is the time to ensure that we have the right kind of resilience,it’s going to be tested. So,I worry that we have this complacency that 8.5 per cent growth is the new Hindu rate of growth. But it’s not. It is an extraordinary rate of growth,and we need to fight to even maintain this growth and go to the next level.

SG: If the government has to focus,what are the things we have to do?
I think there are some short-term things we have to do and some longer term things that we have to put in place. Short term,of course,the fiscal deficit is a big concern. When people look at India,they look at the rising current account deficit,they look at the rising inflation and they say—is there a problem with this country? So,when foreign investors start questioning,and when they have a lot of options,they have the option to withdraw also. So,that’s a little bit of a worry. So,can we do what we have been talking about for many years? Get rid of inefficient subsidies,get rid of the kind of subsidies that have been causing problems recently? For example,the kerosene subsidy which causes adulteration,black-marketeering,etc. The whole point of liberalisation,which started 20 years ago,was to reduce this kind of distortion in the system. So what we need to do,going forward,is take all the steps to finish that process. That is one. The fertiliser subsidy is another. Can we do food subsidies in a more efficient way? And then,the second stage of reforms is on all the cathartic constrains we have. Education, we have to do far more,and not just in primary but also in tertiary. We need people who have the intellect to deal with the new economy,and for that we need universities that foster discussion,foster intellectual debates. We have some existing universities,but we need a lot more.

SG: Let me take you back to the issue of subsidies. You know,demands coming out,for example,the NAC,the new Right to Food Act,universal PDS,spending more money on the poor…how do you look at that?
It’s important that as we grow richer,we take the poor along with us. The question is,what is the best way to do that? Clearly,in this time of stress,expanding the food subsidies right now,when we don’t have the fiscal capacity to absorb it,is going to be costly. Also,when we don’t have the right distribution structure for this. So,I would think that we should certainly do what is best for the poorest of the poor. But wait till you have a better distribution system in place,a system that leaks much less. And use things like a unique ID to deliver in a more efficient way,and then expand.

SG: But that’s the whole intellectual debate. The biggest criticism against the unique ID by the NAC is precisely this,that you can have unique IDs,but don’t use them for social schemes.
I think the whole lesson from other countries is that,eventually,you want to empower the poor. You don’t want to use the food distribution system as a job creation mechanism for the distributors. If you want to empower the poor,give them cash. And if you want to give them cash,give it to them directly,in an identifiable way.

SG: This is being done in other countries?
It’s being done in other countries,and they have excellent systems. For example,in Mexico. We don’t have to ape them. We’ll have to figure out what works for us. What’s being done in Mexico and Brazil is,they tie the cash transfer to measurable things like—do you have your kids in school,are they staying there,have they taken vaccinations— we can think of what we need to do.

SG: Nitish Kumar had done something like that in Bihar to prevent students from dropping out of school. He gave bicycles to students going from class VIII to class IX. But the clever thing he did was,he did not buy the bicycles. And he told us,had I bought the bicycles,I would have lost the elections after another five years because there would have been scandals,the bicycles would have broken down,and I would have been confronted with bicycles wherever I went. He just gave money to these kids.
I think that’s an example of trusting the poor. You trust the poor to make decisions. You can shape them a little bit in the social direction that you want,but the whole ethos of our social delivery is that we don’t trust them,we confront them with a government monopoly. You got to go to a fair price shop that is run by the government. Why don’t we trust them to make choices,and give them the choices? That is the best way to empower the poor. They will admire you for that.

SG: What has gone wrong in the UPA’s second term? I am talking about economic governance and decision making. You have been talking about growth of capitalism for quite a long time and,in fact,you made a great speech in 2008,when you said India was heading in the direction of Russia. What’s gone wrong,and what has been done wrong?
I think the next stage of reforms really requires some deep,fundamentally-rooted reforms. For example,education reform is not easy. Some big changes need to be made,and similarly,land reforms. The whole process of trying to ensure that we have registered land—these are deep,difficult reforms which immediately encounter vested interests who prefer non-transparency because that’s the way they can manipulate the system.

SG: But do you get a sense of an opportunity being lost?
A lot of reforms in India happen subtly on the side,without big confrontations. There is no magic moment where it happens. Now,we won’t know that’s been going on for some time. Only when we look back will we realise that some things have been happening. Maybe that’s what’s been going on. But yes,as an outsider,I feel frustrated because magic,big reforms aren’t being done.

SG: So,what are the magic things that can be done now?
Clearly,the infrastructure side,which will be crucial for generating the jobs that we need,especially in the rural areas. You need to connect the countryside to the coastal areas and to the world. That,to my mind,is an important task which needs to be done. We have to figure out a way to execute it in a much (better way). And infrastructure includes power,connectivity and all those things.

SG: One thing you have been trying to say is,please do not fall for the temptation to throw more money at the poor. No more yojanas now.
Yes,at present we can’t afford any more yojanas,certainly not in the short term. In the long run,we need to think about not just income transfers but also capacity creation. How can we make it possible for the poor to earn a better livelihood? This is where we certainly need more investment than agriculture. Thinking that India will remain a country where more than 60 per cent of people will remain in agriculture is just a pipe dream. It shouldn’t be that way. The people dependent on agriculture should be brought down to five per cent over the years. What we need to do is create jobs and services.

SG: That so many people are dependent on agriculture is a myth,because agriculture does not need so many people. They are underemployed and under-rewarded.
Exactly. You have to move those people from those jobs into industry,into services and that’s where most countries get their productivity from. It’s not from doing stuff more cleverly. It is by moving people from low productivity areas to services and industry. So,we have to create those jobs,which means we have to link the market to the areas where the production is.

SG: And do you think,going by the quality of Indian politics and governance,they have what it takes to do this?
Well,the competition between the states is creating some of the energy to produce these things. Of course,the example of Gujarat and its economic progress is very well known,but Bihar is coming out as a state which is doing a lot. Between states,if we can get competition…

SG: And Chhattisgarh. It has a brilliant PDS system.
I think experimentation,and learning from it,is a very Chinese way of progress. And that is something we need to adopt. But let’s not agonise till kingdom come over what the perfect way of doing something is. Run a few experiments,see how they work,and then say,yes,this works better than that and so let’s do more of this. I think we are still in a stage that China has already gotten over,we can cross the river by feeling the stones. Let’s experiment,not be afraid of doing that,and then push forward.

SG: In your book (Fault Lines: How Hidden Fractures Still Threaten the World Economy) you described the mentality of the Indian state as that of a bicyclist: bowing on top,and kicking in the bottom. It means that it rewards the rich,but really punishes the poor.
Yes,our governance system is not responsive to people at the bottom and,to some extent,excessively responsive to people who have the moolah. It’s either influence or money. How do we change this,because this increases the frustration among people who don’t have access and,of course,the way they find power again is by bypassing the system—which is why we get movements like Naxalism and things like that. That requires a change in culture,where you treat every citizen with dignity and as an equal.

SG: Compared to two years ago,are you worried,disillusioned,despondent? Tell me what’s the degree of your concern.
No,I think the attitude towards India is always hope tinged with impatience. And a little bit of apprehension and concern. But I think in the long run,we have all the right attributes to grow,to become a big nation,to become a nation that contributes to the world. And I think we underestimate the kind of message we can send as a democracy that has grown without stamping on its people,without resorting to repression like some of the other nations. That is a lesson that needs sending. That we can grow while being a democracy.

SG: The questions they asked you at Davos this year were not so nice. About corruption,capitalism,the Parliament not functioning.
Well,what’s good about India is that it is honest about its problems. We put it all out,we debate it. And that’s good. But I think we also need to get a hold of these and move ahead. That’s what we have to do next. Get a hold of our problems,and move ahead.

SG: Do you see a course correction in six months? Or do you see it veering more off-course?
Truth is,I don’t know. It depends on how the politics play out. I hope the sense of complacency—which is broadly out there,that we can carry on without a problem—goes away.

SG: If we carry out some reforms now,do you think this could slip up in the years to come?
I think there are short-term issues which could trip us up,I think there are longer term issues…Think about problems that we have,like malnutrition. By keeping children who are malnutritioned,we are creating people who are less intelligent. That problem is going to be with us for the next 80 years. If forty per cent of the children are malnutritioned,think what we are doing to future generations.

SG: The answer just can’t be free food grain.
That can be the answer for the poorest of the poor,but in India,even as households grow richer,malnutrition persists. So it’s not the lack of food which is the problem; it is the way people eat,the way children are fed,the lack of hygiene. We need to change that. There are lots of things we can change,which does not necessarily mean that we have to give more.

SG: I bet you find what’s happening in India so fascinating. I know you love Chicago,but do you sometimes think of moving to India for a while?
I think about it all the time. I am an Indian,so I feel very strongly that I should be a part of the story.

SG: The report of the committee on Financial Sector Reforms—are you disappointed that more was not done after that?
It’s happening,slowly. Mobile banking,for example. Today,we saw a presentation by Mittal which suggests that we may have 10 million mobile accounts in the next two years. I thought that was very encouraging. Of course,in India everything takes a little longer.

SG: I like to say that in India,a reform happens by homeopathy.
It happens by faith,it happens slowly,but eventually it happens.

SG: Raghu,I think that is good advice. Let’s keep the faith. And meanwhile,I do hope that you someday come back to India,because I think India needs you.

Transcribed by Jimmy Jacob
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