RBI policy of not allowing crypto is a good approach: Amiyatosh Purnanandam

He said that the government needs to incentivize good long term risk taking by banks to push private investments

India needs to improve on reducing regional inequalities and invest in human capital in order to become a developed country by 2047, Amiyatosh Purnanandam, economist, University of Michigan, says in an interview with Ruchika Chitravanshi in New Delhi. He adds that the government needs to incentivise good long-term risk taking by banks to push private investment. Edited excerpts:

India wants to become a developed country by 2047. Are we on the right track? 

You need about 7-8 per cent growth rate for the next 25 years. And there's of course a whole lot of uncertainty. That will be very hard to give one precise answer. The infrastructure reforms undertaken are certainly in the right direction. This is because the return on infrastructure comes for a long period of time. What we lack, in my opinion, is fundamentally two things: one, investment in human capital. There's a whole lot of focus on investment in physical capital - which is great, you need that. But human capital is still lacking. And second, regional inequality is going to be a big make or break. If you look at people from Bihar, Jharkhand and eastern Uttar Pradesh, there's a massive inequality. How do you bring that part of your country up? 

Growth has been driven by public sector expenditure. So, what is it that we need to improve the performance of private investment? 

You had good private investments till 2007 and 2008. A lot of that investment was on the back of bad loans that were discovered later. When we cleaned up the banking sector, the hope was that private investments would pick up. When you improve the banking sector’s non-performing assets (NPAs), sometimes banks become too risk averse. But then you are not making productive investments. So, we need to incentivise good long-term risk taking. 

How concerned are you about this over-financialisation in the Indian economy?

This obviously is a concern. Suppose a big crash happens, everybody starts losing money. The question is, will it stop there? Or will it require a bailout of systemic institutions? The whole financial chain from non-banking financial institutions (NBFCs) to banks and trading companies, they're all interconnected in this. If there is a crash, it may have this spillover effect across the chain.

Are you concerned about a situation like that — another financial crisis hitting us?

I am always concerned about a financial crisis. We all should always be concerned about a financial crisis because the job of policy makers and academics like us who work in this area is precisely that — when you sleep, that's when the thieves come. Yes, we are concerned, but the good news is that the Indian banking sector's ability to withstand this shock has improved a lot, because it is very well capitalised now.

What are some of the risks that concern you?

Among potential sources of risk propping up in the Indian financial sector, unsecured debt will be one. A lot of trading by retail investors in these speculative markets will be another. The growth of fintech lending will be another one, which has a good side; nobody denies that. 

How do you handle fintech to balance innovation and strong regulation? 

Some of the things that India has done have been absolutely marvellous, such as the way the payment system works in this country with the UPI. It has been a fantastic achievement. We have to worry about the financial crisis and risk. But we should not lose sight of the fact that there have been some fundamental things that have been done — same-day settlement in trade. The US is still not there. The solution to most of the problems is very simple. The question is whether there is a willingness to do that or not, which is more skin in the game.

India has been sceptical of measures such as the Carbon Border Adjustment Mechanism (CBAM). What is your view?

I think there needs to be some sort of concession given to developing countries like India. Otherwise, politically, I don't see this happening. I do think that there is an uneven distributional issue where people who have already jumped through the curve of economic development through fossil fuels should help people who are struggling to get to a basic level of decent living standards. 

Going forward, what is the future of crypto currency? And what do countries like India need to do in order to prepare themselves against any risks that may befall us? 

The whole premise of crypto is that we will escape all the regulation. There is no jurisdiction. And, it indeed is very cryptic. I think the RBI policy has been to not allow crypto in any meaningful way. In my mind, that's a good approach. Because it's a kind of financial innovation where the benefits are very small in my mind and costs are enormous.

RBI has come up with its own digital currency — the Central Bank Digital Currency (CBDC). 

It's like a solution, as I heard somebody say, looking for a problem. Crypto doesn't really solve any problem in my mind. So, I'm extremely negative on crypto, to put it very simply.