Shouldn't return to old pension system with same formula: C Rangarajan

Private investment needs to pick up if India's economic growth has to be sustained at 6-7%, says former RBI governor

C Rangarajan has been the governor of the Reserve Bank of India, chairman of the 12th Finance Commission, and head of the Prime Minister’s Economic Advisory Council to guide and direct the economy. Rangarajan, who is now in his nineties, told Indivjal Dhasmana in an interview some action may still be required to contain inflation. He spoke about issues such as the impact of the external environment and monsoon on the economy, GST reforms, and poverty estimates.

Here are edited excerpts from the interview.

The Economic Survey for 2022-23 had projected the economy to grow by 6-6.8 per cent with 6.5 per cent as baseline projection for the current financial year. But since then, various projections have put the growth in the range of 5.9 to 6.5 per cent with the external situation worsening. What is your projection of economic growth for 2023-24?

There are always difficulties in making short term forecasts. 2023-24 may perhaps be the first year for which the forecast is made over a near normal base. The growth rate of 2023-24 will indicate the possible rate of growth during the next few years. At present, the forecasts range from 6.5 per cent by RBI to 5.9 per cent by IMF. My own expectation is that the growth rate will be around 6 per cent. It will go below 6 per cent only if the monsoon is below normal because of El Nino. The other uncertainty is how far the Russia-Ukraine war will escalate. The developed economies will suffer a shock if it gets worse, with the attendant consequences for developing countries. The possibility of the growth rate touching 6.5 per cent depends on an improvement in the international situation. Domestically, the key to growth lies in a distinct improvement in private sector investment.

Many experts gave out pessimistic views when the economy grew by merely 4.4 per cent during the third quarter of 2022-23. What is your take?

GDP growth started declining from 2011-12, after a strong growth in the previous six years. In 2012-13, it touched a low of 5.5 per cent. Subsequently, there has been a rise but it touched again a low of 3.7 per cent in 2019-20. Then there was the onset of Covid with the economy contracting by 5.8 per cent in 2020-21. There was a sharp increase in the following year, followed by another year of positive growth. Over the three year period, the compound annual growth rate (CAGR) is 3.2 per cent. As already mentioned, the expectation is that in the coming year, the growth rate will be between 6 and 6.5 per cent.

There has certainly been a decline in growth rate from the high levels achieved during 2005 to 2010. India’s Gross Fixed Capital Formation (GFCF) at current prices has fallen to 27.3 per cent of GDP in 2020-21. It was as high as 34.3 per cent in 2011-12. Even with a GFCF of 28 per cent to 29 per cent, we could have had a higher growth rate. The slight pickup in GFCF last year is more due to additional capital expenditures by the government. If the growth is to be sustained at 6 to 7 per cent, private investment needs to pick up.

The monetary policy committee (MPC) sprung a surprise when it maintained a status quo on the repo rate in its April monetary policy announcement. However, it said it would remain alert to the developing situation on the inflation front. What are your expectations on monetary action, going forward in 2023-24 given the fact that the retail price inflation fell below six per cent in March and core inflation also came down to a 10-month low of six per cent?

The monetary authorities have taken a temporary pause. Inflation (CPI) has come down below the outer limit of 6 per cent. But it is still well above the mandated target of four per cent. Thus the task of controlling inflation has not gone away. It is wrong to argue that all inflation in India is due to supply disruptions or shocks. The major factor contributing to inflation is liquidity or money. During Covid period, all countries embarked on an expansionary fiscal policy and the fiscal deficit soared and liquidity expanded. Monetary authorities need to watch the expansion in liquidity. Even though policy rate may be the signal, it is intimately related to liquidity and Reserve Money.

The actions of Indian monetary authorities will also depend on how quickly they want the inflation to come down to 4 per cent. Developed countries despite many problems they face want to get their inflation down to their target quickly. Latest Monetary Policy Statement for India refers only to inflation going down to 5.2 per cent in 2023-24. What is important to note is that the story of inflation is not yet over. Some action may still be required.

States such as Rajasthan, Himachal Pradesh, Chhattisgarh and Jharkhand have reverted to the old pension system. The Centre has also appointed a committee to reform the new pension system. What is your view on how governments should decide the matter?

The action on the pension system depends very much on the priorities of governments in terms of expenditure. The Seventh Pay Commission recommended substantial increases in emoluments and pension benefits to government employees. These were accepted. A guaranteed pension system with DA attached is a big burden. The new pension system gives to retired government employees a pension based on the returns on accumulated savings and contributions of the government. This is a fair way of compensating employees. Already establishment expenditure constitutes a big segment of government expenditures. It is in this context the new pension system was instituted. Even if one wanted to go back to the old pension scheme, the formula for fixing pension cannot remain the same. It has to be modified taking into account the government’s various responsibilities.

While the India Meteorological Department has said that the monsoon would be normal this year, Skymet has said that there is a 60 per cent probability of drought. In case the monsoon turns out to be sub-normal, how do you see agriculture growth, rural distress and its overall impact on the larger economy?

The impact of El Nino is always a matter of concern. The predictions on its appearance vary. If because of El Nino, the monsoon is affected adversely in the current year, naturally it will affect income projections and consequently budget numbers. We have had a good run on agriculture for several years continuously. Even though agriculture contributes less than 15 per cent to GVA (gross value added) , a poor performance in agriculture diminishes production of vital food grains and also reduces rural demand for industrial consumption goods. The reduction in overall growth rate may affect revenue projections. Besides, government expenditures may also increase through additional allocation to Mahatma Gandhi National Rural Employment Guarantee Scheme and other relief measures. The impact obviously depends upon the severity of monsoon failure, if there is one.

The World Trade Organization has projected goods trade growth to slow to 1.7 per cent by volume in calendar year 2023, from 2.7 per cent in 2022. What effect will it have on our merchandise exports for 2023-24?

Merchandise exports showed a negative growth in six months in 2022-23. India’s merchandise export performance in 2023-24 will depend on the growth performance of developed countries which is not expected to improve. In fact, the global growth rate is projected to decline. If the global volume of trade is expected to fall, our exports growth may also fall unless we raise our share in world exports. India’s current account deficit has remained more comfortable because of the lower growth in merchandise imports, rise in service exports and remittances. Perhaps the same story may repeat itself in 2023-24.

A section of political voices has called for reforming GST by introducing one rate only with minimum tariff. Leaving the politics of that appeal aside, how do you view this kind of GST?
 

GST as a tax holds many merits and that is why it is recommended for adoption by all countries. But the induction of GST in India has had many twists and turns. We have multiple rates. One claimed merit of GST is its simplicity. This simplicity is supposed to flow from a single rate for all commodities. This does away with the need to define and specify commodities. But it is not easy to find acceptance of this view. We are not writing on a clean slate. We have had a long history of commodity taxation. There is always a dispute whether essential goods and luxury goods should be taxed at the same rate. What we can do is to strive towards a structure of three rates—one standard rate, one below for essential goods and one above for luxury goods. Even this will take a long time to achieve. What is comforting at the present moment is that we have finally reached a stage of raising adequate revenue.

What impact do you envisage from the collapse of some banks such as Silicon Valley Bank in the US on the Indian financial system? Should India have some kind of regulatory framework for the yield inversion kind of situations?
 

I do not see any immediate impact on India of the collapse of banks such as SVB. So long as the US financial system is not affected, there will be no contagion effect. The failure of SVB has lessons for banks not only in the US but also elsewhere. The excessive concentration of certain types of customers in deposits, high proportion of uninsured deposits and credit expansion in select risky activities are aspects which all banks have to take note of. There are also lessons for policy makers and regulators. One vulnerability of SVB was because of the fall in the value of fixed income securities including government securities due to sharp rise in interest rates. Meeting the liquidity requirements could be done only at a loss. Some warning signal from the Fed should have gone at the beginning of the rise in the interest rate cycle.
 

Various estimates of poverty have come out recently. Some estimated that poverty has increased since Covid struck during 2020-21, others held divergent views. As an economist who headed a committee on poverty estimates, what is your estimate?

The problem in assessing the poverty ratio after 2011-12 has been the absence of the required data. In India, the traditional method has been to estimate the poverty ratio from the consumption expenditure surveys. From these surveys, we can derive size wise distribution of consumption expenditures and by using a cut-off line for poverty it is feasible to estimate poverty ratio. Committees have been appointed by the government from time to time to look into the methodology for the estimation of poverty ratio. The last Committee was headed by me and no action has been taken on the Report submitted in 2014. The survey on consumption expenditures done in 2017-18 have not been released officially. In the absence of such data, many analysts have used alternative data to estimate poverty ratio and have come up with differing conclusions.

In the current year, the consumption expenditure survey is being conducted. For purposes of comparison, we need to follow one method. It is therefore best to wait for the survey results to be published. Earlier surveys clearly indicate that the poverty ratio comes down strongly during a period of high growth. Using the Tendulkar methodology, estimates show the poverty ratio fell from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12. This was the period during which India’s growth rate as mentioned previously was high. The Oxford Study on Multidimensional Indicator Index for poverty also confirms this trend. If you look at the recent years including Covid period, the growth rate has come down. There is ground to believe that the rate of reduction in the poverty ratio must have slowed down. This is at best a guess. We need to wait for consumption expenditure survey data.