Happy Scribe

Regular listeners of the scene and The Unseen would have heard me complain about the predatory, parasitic Indian state, but this is a bit of a simplification. Yes, the Indian state is a parasite, but it is not just one thing. It is a vast, complex machine with many moving parts. And the whole is worse than the sum of its parts that are outstanding bureaucrats and well-meaning politicians within the system. But there are also bad incentives which lead to bad outcomes.


Also, the Indian state is a pointy headed monster and some of those heads are often at war with each other. Consider, for example, the constant tussle between the government and the central bank. Our imagination feasts on conflict and battle and winners and losers. But it must be said that no one is making the Netflix series any time soon on the life of a central banker. Maybe they should.


Welcome to the Scene and The Unseen, our weekly podcast on economics, politics and behavioral science. Please welcome your host of. Welcome to the scene of The Unseen. My guest today is Weedle Azaria, who was deputy governor of the Reserve Bank of India. Between twenty, seventeen and twenty nine, widely respected among economists, will quit the RBA six months before his term ended, reportedly because he wasn't happy with the way the government was preventing the RBA from getting up its duty.


And indeed, he wasn't happy with has just released an excellent book called Quest for Restoring Financial Stability in India, in which he lays out in great detail why we are in the middle of a crisis. At the core of it is a concept called fiscal dominance. If I had to sum it up, I'd do it. This fiscal dominance is a means by which a state tries at the expense of society using the central bank as it should. If you think this is going to be a boring episode about finance, let me assure you we is anything but a boring fuddy duddy technocrat.


He loves cricket, is written and composed of music album called Gado essentially, and can make economics and finance quite as lovely and interesting as both cricket and music. Before we begin our conversation. Let's take a quick commercial break. If you enjoy listening to the scene on The Unseen, you can play a part in keeping the show alive. The scene in The Unseen has been a labor of love for me. I've enjoyed putting together many stimulating conversations, expanding my brain and my universe, and hopefully yours as well.


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Help keep the thing going. Scene on scene. Dot and slash support. Well, welcome to the scene and The Unseen, thank you, I'm delighted to be part of your podcast and I look forward to the interaction. So, you know, before we start talking about your book and in a broader sense about the Indian system of governance and our financial system and all of that, give me a little bit about your sort of personal journey. Where did you study?


What did you do? What were your sort of intellectual influences that shaped you along the way?


Yeah, you know, I studied that. We used to live in South Bombay, in the bazaar, in the street called across the street. I grew up, frankly, like any other street boy. I used to play a lot of cricket tandia and and dance all the way confetti from our street to the party for to be the surgeon and all that. I was in a school in Gujarat, the school, which also had English medium called Fellowship School.


And the reason why I'm going to a little bit of my school journey is actually that was probably the most important intellectual part of my journey. And we were in this very interesting phase of the school there, a set of schoolteachers. They decided that our school should also be able to produce students who are in the list of the state for the SC standard exam. And, you know, the school was very balanced culturally, we are actually great music and cultural aspect of the school, but on the academic side, I think the teachers were excellent.


But, you know, cracking exams and getting into medicalised requires a slightly focused kind of preparation. And these teachers actually, around the time maybe we were in seventh or eighth grade, dissect this model for all of us that, you know, this is the challenge. This is the luxury that we have to achieve. And then, you know, it was they were so motivated. Of course, parents in India are always motivated for their kids to do well.


And then we also got a bit charged up and one of their teachers passed away two years back. His name is Shailesh said, as we used to call it. And in fact, my quest for restoring financial stability in India is dedicated to him. He was the one who kind of really set me on fire, so to speak, to me as a private coach, so to speak, without charging my parents a single person for three years ago.


But it was his single minded focus that in the end created that aspiration, that ambition. And I would think of him might think of this in all the discussions on from luxury, look at how it was that kind of single minded focus. And, you know, it then sort of all worked out. And I got into college, which was sort of the college to be an unwillingness to see that time. I took electronics and then I had a friend in my street just across our building.


You know, a lot of people you knew in our street because you could look into their balconies. And he had been at Mumbai. And so I spoke to him. Then we got into some correspondence courses. I got into it like everyone who goes at the entrance exam. I also took computer science without thinking whether that's the right field for me or not. But after that ambitious phase of the school, it was, I would say, more of a self discovery, self exploration phase.


I think that was the time I realized that computer science wasn't my calling. I had some aptitude for it, but I wouldn't say a great aptitude for it was still doing OK through sheer persistence and hard work. But I really felt that is not a subject that I'm breathing. I'm not sleeping. This is not what I mean is I'm not staying awake because of the problems in computer science.


And and I started exploring a bit and I took a course in international finance that was a push, but it was an elective course in the last year that I wanted. And I would say Professor Pushpa Trivedi was like my second critical intellectual mentor in this journey because her course was really the turning point. It made it clear to me that economics was a subject where you could really bridge the macro with. The micro economy is, of course, the study of the household wealth management, even though most people don't realize it because they use the term economy, etc.


so commonly that we think it is something to do in this kind of scheme of things. But it's really at the grassroots. It's really about the household wealth management and the fact that what central banks were doing, what was happening across countries on trade, etc., ultimately had its failings in what was happening to the household demand and consumption that the last might. I found that very, very appealing in some ways, and then, you know, again, we had a family friend would end be in finance at New York University's School of Business.


I spoke to him. He said, you know, this is a very interesting subject. It can be very analytical, very mathematical if you want. It can be very applied and detail oriented if you like. You can be an academic if you like, or you could be in the industry doing trading with the stocks, bonds, derivatives, whatever. And I said, you know, let's take the plunge and we will see how it goes. So it was too late by the time I left for my period in computer science.


So I did a one year sort of in computer science. But then I switched my major at NYU and it was a very interesting phase around 97, 98, when, you know, Southeast Asian crisis happened, Russian before it happened, the largest hedge fund at that time, long term capital management, was about to fail. And that was the time I realized that financial stability is actually very, very crucial to an economy, that if your banks and financial firms are not in great shape, they could become a source of huge deceleration in the growth of the economy.


I think of finance as the lifeblood of the economy. Sometimes I think of central bank almost like the heart that's regulating the pumping of these liquidity through various channels into the economy. And if these banks, which you can sort of think about as you know, the arteries along the way, if they are clogged up, then, you know, you can have problems in your organs. You could have problems all the way to the heart of school.


And so it dawned on me that this is a fascinating aspect of economics and finance. And what role do banks play? What role do other forms of financial sector firms play? What is the role of the central bank? Why is it that when banks and nonbank finance is not in great shape, economic outcomes that after typically don't tend to be very good, as we have seen in India, for instance, for the last decade or so, that give me a direction in economics on my research and basically I would say stay with that part.


That is one part that keeps crossing my mind over and over and over and over again. There are so many shades to it that you can analyze that is so much depth to that question. And there are so many settings all over the world because every economy is slightly different, every financial sector is slightly different. You get different shocks that that create these disturbances in a variety of subjects. So I did my research. I went to London Business School. I then came back to NYU, you know, around the time I was finishing my doctorate, Raghuram Rajan, I just heard, I would say is sort of fairly meteoric rise in the economics profession.


He was also starting banking and around that time, also banking crises. He then went on to became the chief economist of the IMF, the governor of the central bank. But I think in a way, I would say he was probably the third important mentor, even though he has never been my direct mentor. But I worked with him after my Ph.D. because I was at NYU in Chicago. But I think he has been a mentor more to setting the sort of like a role model in the sense that, you know, coming from India, coming from engineering into economics, finance, working in the field of banking, that, you know, you can make it know.


It gives you a little bit of confidence that you can break through these barriers and have your own standing, so to speak, in the field. And then the field is such the issue of financial stability, banks, central banking, that it's a natural culmination for many people working in this area who have a shot at the central banking management position because it allows you to apply your research. It allows you a little bit to, of course, done things on the job that you can't learn in academics.


And in some small way, I think you give back to society. And I said, you know, central bankers rule is exactly what appealed to me about economics at one level. And I always give this example. You're just earning this one the interest rate dial by 25 basis point like point twenty five percent. And it is supposed to go and touch people in the economy. Now, at some level, it looks kind of almost like a surreal party.


That is obviously impossible. But it. And sometimes it doesn't work and sometimes it does, and I think it's very fascinating to understand what are the preconditions so that sitting in your macro offices, you can actually have some micro impact on Main Street, such as the street that I grew up. So that's been the intellectual journey, I would say several important teachers and mentors or role models that have been important. I think the real life experiences of witnessing financial crises in their sort of FURI, so to speak, has been also a very important lesson.


And I think the stint at the Reserve Bank of India was probably the best thing I could have asked for personally, because I spent time with my parents, lived with them for 24 years professionally, because it is the closest I have been to executive decision making in a policy role. And because India is so complex, so interesting as an economy, and it it really challenges you to think too hard about what the right frameworks are and how to go about doing things in a manner that you are more intended consequences rather than unintended consequences.


So, you know, before we proceed with your career, there are many fascinating strands in what you just said, which I don't want to tease out. And, you know, one of the interesting things which struck me when I was, you know, reading up on you is that, you know, economics is considered a dismal science. So most economists also consider it fairly boring, straightforward kind of people know. I should tell my listeners that when we began this podcast, we had a baseball cap on with this headphone and T-shirt, but we are not shooting any video.


And one of the things that I'm going to ask you about later is, of course, a music album that you can compose Jadakiss, essentially, which I was listening to earlier today, and also your passion for cricket. I mean, you use a metaphor of cricket a lot when you've been talking about the economy and the role of banks. And when you were talking about Dr Rajan, it struck me that, you know, was he such into your target?


Perhaps, though? That's a that's a great question. Yeah. See, cricket is because I kind of grew up on the streets of Mumbai. You know, we used to play on this first. We used to play, of course, in our living room and all they used to play on the terrace, although I you know, everyone in India is everything and everyone is everything. You do whatever the team requires. It was very creative. You know, we used to play on the terrace and then the ball used to go down.


We used to have this the kite flying and Fergie and sort of the kite. We had a bag attached to it and we used to roll the back down. So when we put the ball back in and we would get to pull the Punjab to get the back up, of course, we used to then play cricket so it would be nice matches, floodlights and all that to take where the kids were to escape all these places for you to go with our team.


It was great fun. I think it became sort of part of your DNA. And of course, you watch cricket so much. You know, when we grew up, there weren't so many channels and probably had like maybe a little bit of to the heart and then maybe the Saturday Marathi movie and The Sun. So, you know, cricket watching cricket and Test matches was a very big part of the whole sort of pastime.


So I and I partly like to use the cricket analogies besides them coming naturally to me is because I think that's a way to connect to the common man. And to me that's very, very important. Sometimes a few of the speeches I've given are so barebones that people in academia sometimes feel when I gave these talks that, you know, does it really have to be so basic? Does it really? And my sense is it's a question of what your audience is and are you connecting with the audience or not.


And there is no point using jargon and fancy terms and methods and techniques when, you know, you have to convey something much simpler to the common man. But importantly, I think these being able to connect is equally important with people at the top. I think that even those who are doing very complex policy roles, they actually prefer when things are explained in a very simple and transparent manner. And I think that's why no analogy is perfect. But they work because when people see it in a different light, then they can relate to it.


They also start feeling that maybe there is something like a common thread of a principle here. You know, they start seeing that this is not about the specific suggestion. Maybe there is something deeper that that permeates across different disciplines of life. So that's the reason why I would say I use the cricket analogy. I think the driving analogy is one that's very close to my heart. It's actually linked to a question that a good friend of mine from Bombay asked me just before they'd given me a sendoff, before I went to the Reserve Bank of India.


So we met at one restaurant outside our place in Manhattan called Heroes. It's a Greek food place. I distinctly remember about 10 of them had come down and we sat together and one of them, my very good friend, he asked me, So what would be your role model as a central banker? Is Ben Bernanke, is it Paul Volcker? Is it Janet Yellen? And I said, no, it's going to be obvious. And I really genuinely mean it because I always thought he was the pillar of the Indian batting order during his time.


The rock bed sheet anchor, whatever you want. It was there were so many test matches. I remember watching the entire team would bat around. And because I think of the central bank as a little bit of this heart that is regulating all this pushing of lifeblood to the economy, I think that that is the role that is best captured.


I think in cricket, I don't have it, in fact. And, you know, I think, as I said, financial stability is very important. I think it's most important that you need someone with that persistent persistence, with that discipline and with that single minded focus of holding the guard. Then, you know, the situation is looking pretty good in some of the arteries. Some of the banks are not doing very well. In fact, if you remember in one of his last series in England, which we lost, I think three zero scored three centuries because he was the only one holding up one end and giving some hope that he might actually at least come out with a draw.


So I think that's very important. I think and it's it's all about, you know, taking the stand, knowing where you are off stump is leaving a lot of balls outside the office. So I think this is what a central bank has to do most of the time. I think there's a lot of bad ideas. I can't tell you how bad some of the ideas are in policy making. Some of there is this one feature that because economics is so rooted everywhere in each household's policy policymaking and of course, the households are making sometimes the most interesting decisions.


But it also this perception, though, that we don't need to acquire any expertise in this field. Anyone can just go into these policy roles and start doing things. Now, of course, there will be some talented people who are so smart by their training on the ground. But, you know, however imperfect and however young as a field, economics is not one 100 years old in some sense as a discipline. So it's a relatively young field, but a young and imperfect it might be.


It is still a field. There are some principles and ideas that seem to show up in different countries in different conditions on a very regular and robust basis. And so a big part of the central bank is just not dealing with bad ideas. It's this bonds which are outside the company. So I think that's the sort of part of it. Yeah, I think in some ways I think you could we could we. You are right. I think it could be here in the UK.


But my sense is he's also probably taken a fairly long term view, I think during his time as central bank moves, such as the beginning, the steps towards inflation targeting framework in India, then, you know, creating a differentiated banking system, opening up bank licences, and third, you know, creating this database as a repository for information on large corporates. I think all of these were very long term moves, actually. So I would say, by and large, to use them as an example, maybe he's like Rahul Dravid, but he also has without exaggeration at times.


I'm also a big fan of David, of course, and absolutely right. If you look at all of India's important test wins overseas in that particular decade, Headingley, Adelaide, Rawalpindi, the cities we won in the Western Indies, which was completely at the heart of it, I think the question for later. But since you brought up that subject and I just kind of ask it now, which is you spoke about the importance of, you know, communicating ideas and sort of keeping it simple.


And, you know, I teach in online writing goes where sometimes students will ask me that, listen, you know, I do academic writing and people. Academics expect the kind of a certain kind of job good and a certain kind of signaling and all of that. And my response to all of that is that in any context, your writing is a good thing. I can understand that sometimes there are those imperatives that people will expect you to use language that puts them in the comfort zone.


But as good as possible is always a good thing. And the imperative of, you know, writing clearly makes you think more clearly, because if you're reading something in simpler language, as you do throw in your book, then you're forced to put that kind of thought into it. But my broader question, which I wanted to come to, was that, you know, when you wrote this book, one of the reasons that you said for writing this book was that you wanted to start a debate, that you felt very deeply that these issues, which you're talking about, financial stability, fiscal dominance, they are of great importance that should not only be debated by policy people, but the public at large should understand them and sort of talk about them, which is an incredible aim.


But at the same time, it struck me and this is something that, you know, people who write about economics have been saying forever that, you know, a lot of the fundamental ideas of economics are deeply counterintuitive, you know, spontaneous order, a positive sum game, how complex systems work. And similarly, you know, there is both bounded rationality, which and what public service called rational ignorance, that for the common person to put in the effort to understand the economy, as it were, it's probably just too much of an effort.


It's much easier to pick a political side which everybody more or less has. And then you go with whatever that side is doing, you defend what they're doing. And if you're not with them, then you attack what they are doing, which is how most of our public discourse is today. So how did you approach that challenge? Because these are not easy ideas to sort of grasp for a layperson. So what were the thoughts? I mean, are your views, cricketing analogies and all that?


And that's worked beautifully and so on. But is that something you consciously thought about that how can I communicate this? Yeah, absolutely. And see, the important thing to realize in policymaking is that we see over certain functions. The central bank probably is given legislative autonomy. So what I mean is don't think about the inflation targeting framework. It is actually by an act of law as an amendment to the Reserve Bank of India Act that the central bank to this monetary policy committee can set the interest rate.


This is the objective function at all. But in many other functions of the central bank, the operational autonomy is very loosely defined. A lot of the decisions, especially in India, as I explain in the book, given the presence of public sector banks and other public sector financial institutions are very often taken either jointly with the government through some discussion and conversation consensus, or if the central bank has to even take certain decisions, the government has to empower the central bank through some legislative changes.


Now, why am I seeing all this? What I'm trying to convey is that for many good policy decisions to be taken, politics has to be aligned with the economics. The government has to want what is what makes sense in the long run for the economy as it is now a fundamental thesis of my work. The book, as well as the old rabbit analogy, is that there are pressures sometimes to actually not play the long test match that pressures to instead play 20 who go and entertain the crowds instead of actually winning session by session to endurance.


And because the political decision making can often be very geared by those short term considerations, then you you you put it exactly right. Why is it that short term growth will actually give them political gains? It's because the average person on the street may not be able to figure out that the short term boost in activity, either because they are getting a lot of credit or the government is distributing a lot of cash to a variety of schemes, that that short term activity is down the line at some future point of time in three or five years, time is going to come back with a lot of costs because maybe the loans that were made but made without due diligence or the cash that has been distributed is going to be very hard to repay down the line now.


So sometimes in the common man, both because of them having to work so hard on their own economics and perhaps because of limits to information.


Processing and rational evaluation of data and, you know, I think the counterfactuals what if that is the key question that you have to ask in policymaking? What if this were to happen? Those things are not always very easy for the common man to perceive. And if they can't, in a way that creates the opportunity for the short-termism to actually lead to gains, that if I do this pump priming of the economy, it can actually lead to some benefits during the electoral cycle.


Now, if that is not in the long run interest of the economy, in my view, those who can actually. Or see what the impact of these short term pump priming of the economy is, those who are in the job, such as the central bank, that your objectives are enshrined in the law to belong to protecting depositor interest, keeping price stability, guarding the value of the rupee, etc.. All of these require sometimes making short term sacrifices so that you keep the ship afloat and in good condition.


So I think it is it is the responsibility, in my view, of the central banker to actually use communication as one of the tools to advance the public discussion. And therefore, I think it has to go to the common man as well. I think it's not good enough that it reaches the circles of finance industry, bankers, market participants. You have to try and get it into mainstream media as much as possible. And I think the reason is that once you shift the public debate, once you create demand for the right long term reforms in people themselves.


Then the politics and economics, there's a greater chance that you will see sometimes politics aligned with economics because there may be a situation where the government has no choice but to do the right thing for the long run because otherwise investors will not give you money. I think of nineteen ninety one liberalization moving because a moment where structural changes to the Indian economy were thrust upon us by the IMF because we needed their support and there was no other way out. So that's one way to go.


But reforms do happen all the time. Sometimes they happen promptly. Sometimes they happen with delay. And why do we get these moments where the political consensus arises to undertake these reforms? Very often I think it's because there is a demand for reforms in the common man's mind, in the common man's perception, in media, on television and print media. Now, in part because Twitter, whatever it is, but you sometimes get this a good idea has been planted, seeded, and then they're sort of germinating and rising to the top of an agenda.


And as long as there is a critical mass of discussion around the right ideas, I think there's a greater chance that the politics and economics will align. I think we need to create more such opportunities. And to do that, we can't just wait and watch. I think we have to plant the seeds of ideas. Very often the ideas germinate and they are not even associated with you. And I think that's perfectly all right. I think you are just trying to get people to debate, because very often the person who comes up with the original idea and plant the seed may not have the right solution.


Maybe he or she doesn't actually appreciate all the realities of the political economy. But once the idea is debated, maybe a better solution emerges. But to me, this is absolutely crucial. Policymakers have to communicate. They have to communicate to the common man besides the more sophisticated parts of the in the relevant sphere of influence. And I think this is the way change comes about. So I think to cut a long story short, I think what I'm trying to say is that while it's true that there is bounded rationality, that is limited processing of information and of course, decision making is very concentrated, but we have to build a bridge between these two.


We have to get people to come a bit closer to the decision makers in terms of their discussions. And it's easier to get the decision makers closer to the common man by alerting them about the long term consequences of some of the policies and why some things make sense and others don't. And I think how do you bring them together? I think your communication is one of the kind of almost a it's a negotiating tool, actually, of bringing these two parties, which often seem far apart together to public debate and discussion.


Absolutely. I think this is a very crucial role. And I think I'm seeing this also in the modern day central bankers. I'm not on social media myself as a policy, but I can see that many central bankers are now actually using even social media to have an outreach of their ideas. Many central banks are now actually the quote unquote, organizing panels and sessions at industry events or academic conferences because they want actually to be part of the broader discussion and debates over three to four decades, we seem to have moved away from a very boring white central banker to a somewhat I wouldn't necessarily say outspoken always, but sometimes even outspoken.


But certainly I would say communicate to an interactive central banker who's using communication has a very, very important tool both as for this negotiation function, as I mentioned, between politics, common man and economics. And I think also to actually explain what they are doing, because that gives them the democratic accountability of that action, because in many cases, central bankers are technocrats. They're taking very technical decisions. As I said, what is this changing of this cycle of twenty five basis point two point twenty five percent of interest rates?


But if you can communicate and explain this well to the common man, that increases your democratic accountability from the technocratic decisions that you are making.


Yeah, I mean I mean, the challenge of doing that is something that I've been discussing with friends for ages now because a lot of my friends work in the policy world where and work with politicians and bureaucrats and try to sell policies. And my point to them always has been that, you know, if you think of the political marketplace, you have to focus on the demand and not the supply and that politicians will respond to incentive. So if you can change the demand and then you have people who demand something different, then you're far more likely to get those sort of outcomes.


And again, Andrew Breitbart once said politics is downstream of culture, which is, you know, again, that whole act of changing the culture, ceding these ideas, like you pointed out, is a decades long game. You saw it in America with, you know, Goldwater losing in 60 Ford and then Reagan coming to power in 86, many, many sort of years to play out. Before we get to the specifics of the Indian economy and your time in the Reserve Bank of India.


I'd also like to just for a moment, get some more background on where you're sort of coming from. I mean, we are essentially the same age. I think I'm a couple of months older than you. And therefore, this was a question that first struck me when I read about your journey that I kind of spent a certain part of my childhood in pre liberalisation, India and then my adulthood as a liberalisation India. And that's what happened. My dad was in the U.S., so I was, of course, deep in the received wisdom of that Fabián socialista of your state is your Mehboob.


And that's the way you look at the economy. And then you're an adult and sort of the blinkers fall off one by one and you see everything kind of differently. What was your sort of intellectual evolution through that period like? What did your notion of your country and what we were doing right and what we were doing wrong? Did your idea of India, as it were, you know, evolve during that period, especially, for example, when you went abroad?


It must have given you that distance where, you know, you can be a little more objective about it. You can contrasted with what you see around you. Take me a bit through your sort of mindset and your idea of India, as it were, how it evolved in that period. Yeah. So I think, you know, as a child, maybe even in my school, college, perhaps even days, I wasn't so clear about what exactly India was going to do for the rest of the world with great clarity.


Of course, what was very hard not to notice was the fact that. It's been very heavily controlled and administered economy, certainly until the early 90s. It seemed like everyone had very few career choices, so there clearly weren't too many thriving industries in the country, and you knew from all the the great demand for imported goods, smuggled or otherwise, that people in the rest of the world were producing goods that were far better than were produced in India.


And so you kind of knew something at the back of your mind that, you know, that that something is not happening. Right, that we were going to kind of put your finger on it. You know, that is everyone wanting everything that's produced abroad. And then I think when I first came to the United States, I saw the extent of that idea of producers of various types, the efficiency of customer service on the ground, the sheer Bazaine activity in the economy, etc.


. I kind of realized that this is a very different manner in which the economy is organized. And then you suddenly started realizing that at a deeper level, all countries are somewhere on a continuum of, you know, sort of like pure capitalism and at the very extreme communism and, you know, different countries, depending upon the policies they choose to, a given point of time are actually shifting their position on this. And, you know, that happens, including China, which started off at the very extreme, but now has embraced certain kinds of market reforms versus, say, United States, which used to be a lot more capitalistic at one stage.


But increasingly, people think that, for example, its entire housing market risk is socialized to guarantee programs that it has. It thinks that it has given way to very concentrated power in certain sectors. And maybe there's some forms of crony capitalism also coming in in some guise of the other. So, you know, countries are always shifting their positions along the spectrum. And then so that's also I don't so my view of countries is that each country is unique.


Each country has its own preconditions, which are very important in shaping the ideology that the people have. As we were discussing, sometimes this ideology itself needs to be shifted for change to happen. So the initial conditions are important because they have left a legacy of ideologies in people's minds. But in some ways they are also on the spectrum and you can actually think about them, understand them, understand the outcomes, the policy choices by actually using economics to understand then what kind of policies get accepted by the country more likely to embrace capitalism.


Is it more likely to progress towards inward looking protectionism combined with socialism or at the very extreme sort of communist policies?


But the idea that really struck me the most was actually this idea of Austrian economists, Hayek most the most, because he also was very closer to finance, but to an extent also von Mises and others that that what that was too much state control of the factors of production does in the end is that it makes the individual essentially use his or her entrepreneurial spirit, because you know that even if you are entrepreneurial, there are so many barriers to entry. There are so many regulations, licensing ET to go to.


And that's an extreme we are not even allowed because the entire sector may be nationalized and you don't even have a private entity that allows and that just talks the individualism, it chokes the entrepreneurial spirit of the individuals. And when I read about this, of course, Hayek speaking it was one of his most famous books, is titled The Road to Serfdom. And he's basically saying, you know, you're going to be producing serfs when you adopt these kinds of centralized decision making policies.


And and that appealed to me a lot that over long stretches of time, having too much control to the center is ultimately going to kill off entrepreneurship, innovation, enterprise. And that Keynesian idea that when you are going through a situation like the Great Depression or the Great Recession, you need the state to play an important role to kickstart investments, kick start job creation, give a softer landing to the economy. While it is good, it should only be interpreted as something that you should do as a temporary stopgap stimulus.


Quick and even a short stimulus can go pretty bad, as we know. But but at a minimum, it has to be seen as a temporary arrangement, because if that becomes the permanent style of the economy that the government tries to do more and more and more, then you will have less and less and less of the private sector because the enterprise is actually going to. And actually, in a subtle way, while I'm not so explicit in linking it to the Austrian economists in my book, that has always been at the back of my mind that this one does the addition of Memorial Lecture in the book, which is on the central bank's independence.


And then the last speech in the book is actually on how governments crowd out. And I focus there on finance. But when an individual loses the entrepreneurial spirit that is actually crowding out because that that entrepreneurial spirit has no role in the nationalized or very heavily centralized economy. And to me, this is a key theme of our times right now, in my view, because what has happened is the slow down of global economic growth, especially because of the global financial crisis.


Too many would contend this was happening even before in the 90s and early 2000s. But this slowdown has. Created a chain of events in which more and more is being done by the government, the government balance sheets the world over are getting bloated. They are spending a lot they are trying to take over significant parts of job creation, subsidies, guarantees, risk taking. On their balance sheets, in fact, many in the United States think that increasingly most financial sector risks are now socialized, whereas the gains remain privatized.


And what this has done is that I think we really risk the future be really risk the prospect of and we have to fear that prospect that we lose actually the entrepreneurial spirit of the global economy, the idea that the best solutions cannot come in the administrative bureaucratic offices of the government, that only a small part of the economy sits there. The billions are actually out there on the streets in their homes. They are the ones are the brightest minds are likely to be for a specific idea.


And if we don't find a channel for these entrepreneurial ideas to form shape for them to organize themselves as businesses maybe fail but fail fast and restart, or many of them succeed to becoming the best enterprises going forward, I don't see how we can arrest the slide we are seeing in the global growth and productivity. So at a very deep macro level, I think this is the shift that has happened. It has become more pronounced since the global financial crisis.


My view is that India is also undergoing such a shift. We were very nationalised and centralised until the late 80s. Then we liberalized. We also had a big set of divestment reforms during ninety thousand three. But my sense is the policy responses since the global financial crisis are in line with the rest of the world in the sense that we have now also moved towards greater and greater centralization of the economy. What doesn't help us is that the initial conditions feature already a big presence of the state in many, many sectors, even on strategic sectors.


We have a big presence of the government in the form of public sector banks, public sector and insurance companies and power finance companies, etc..


So again, on this spectrum, I see India increasingly regressing a bit towards more centrally controlled economy and not relinquishing. Actually, the control and the fear I have is that this is going to crowd out the private sector. I think, in my view, the reason why private investment in India are not high. It's not just because we had bad loans problem. Yes, we did have a very severe back roads problem because of the fiscal stimulus of nine, 10, 11, 12.


And, you know, those sectors are still not fully back up. But I think one big reason why private investments are low is because costs of borrowing are very, very high. Cost of capital is very high. And why is the cost of capital very high is because so much of the savings in the economy are borrowed by the government. And so I don't see it as a. As someone who grew up during denationalized era without any clear thinking, but with a lot of questions at the back of your mind, then someone who witnessed what used to be a very open capitalist society in the United States.


And, you know, I spent seven years in London between 2000. And that was the time I realized that everything is on the spectrum, because then I observed the European economies. I realized it's all on the spectrum. But having seen this global experience, I think this is the team that I would say has struck me the most, which is what is the right balance between the government, the private sector? The banks and the central bank, can you ensure that all four wheels are moving in tandem and together with no attempt to drive the car entirely on just one vehicle?


Because, you know, if you do that, there is only so far that your journey will take you.


So I've just realized that we are not just united in our admiration for Dravid. It's also an admiration for Hyeok. But I digress a bit, and I want to spend a lot of time talking about your book and your insights. And it, of course, but I'll continue digressing a bit and thought that kind of struck me as you were, you know, going through this narrative of how your thinking changed and yet how the world has moved in a certain kind of direction is that it seems to me that one of the great battles in our times is not a battle about what ideas work and what ideas don't work.


Instead, it is a battle about what narrative sells and what narrative doesn't sell. For example, after the 2008 financial crisis, if you ask most people what happened, they will say, oh, it's the private sector as greedy bankers, you know, as you've spoken about it yourself, you know, Fannie Mae and Freddie Mac had a big part to play in that the incentives that were there by the government. Perhaps you can go back to 1977 and talk about the Community Reinvestment Act.


A lot of it was the overbuilding, oppressive hand of government which created those terrible incentives and led to those players behaving in the ways that they did. And, you know, I've always found it dubious that when Americans say that, you know, losses are being socialized for profits are being privatized. Absolutely right. And that should not be the case. You create a moral hazard. You create the wrong incentives. But the broader point is that despite the fact that everything that's been happening across the world, all the economic failures, all the political failures that I see are in some way or the other linked to the role of the state and the incentives that, you know, they are setting.


And yet the dominant narrative is everywhere that it is greed, capitalism, the state is the solution, and the state needs to sort of calm down. And instead of Hayek, who is almost again a forgotten man today, you have Keynesian ideas again taking center stage. Is this something that you think about? Because on the one hand, you would like to imagine that, look, you know, you pick the ideas that work. You go through history, you know, you see everything play out.


You figure out what works and what doesn't go for what works. And yet it's not the idea that works as a narrative that sells, that is on the ascendant. Does what do you. Absolutely. It worries me a lot. And I think it but there's also a challenge in the as we were discussing earlier, which is that why does the narrative of the Keynesian stimulus or state control during the financial crisis or bail coming out of the deep recession work is because actually, even conceptually and in theory, there is good rationale for that to be the case because, you know, that is what economists call it, a market failure, which is that in a financial crisis, what happens to say one bank is going to have such a bad influence all over the system?


That or if a large number of firms fail the recession or house foreclosures, they are all going to affect adversely the rest of the economy. So there is a good theoretical rationale and it works. What is not well appreciated is that but there are conditions in which this begins to start doing harm because of political capture, of the government presence in decision making by, say, crony capitalists. Second, they could just be outright short-termism on part of the government.


In turn, that could be massive crowding out effects, including of the individualism and entrepreneurial spirit, leave us just higher borrowing costs for private sector and so on.


So I think what happens is that it's very appealing to describe these narratives as one zero. So you find that individuals are either all entirely pro capitalism or you see individuals who are entirely pro socialism and everything being done by the government. But the reality is that what works best is if you are nimble about the state of the world, which is based on your economic conditions, how much balance you need to put between these two extreme positions, because as we were discussing during the financial crisis, you need the government to actually backstop and get the system back up.


But then there should be a graceful unwinding of the extra government in print that God created. Now, that second part is always missing whenever the governments are stepping up their positions. Part of it is the fact that it's easy to sell a one zero idea then to be nuanced and balanced and say. We do this now, but, you know, in three or five years when things come down, we will withdraw. The second very important constraint is that very often the stimulus decisions are taken by one government.


And even if they were to put in place a decision to withdraw down the line, that is going to have to be implemented by another government. Now, before the first government, as announced, may not be binding on the second government for doing this.


And you could also get this kind of then possibly a populist trap, which is that once when government does this as a stimulus, the other governments want to keep on with it because it allows them to continuously do the short term pump priming of the economy to show that they will. But I want to come back to the challenge. What is the challenge? The challenge to me is that we need to have a more balanced debate about these issues. Whenever the stimulus packages are announced, we need to simultaneously assess their costs.


We need to think about the long run consequences and we need a lot more discussion, transparency, accountability, in my view of these packages. And conversely, sometimes when you are too much in what looks like a capitalist society, very often seeds are being sown either for crony capitalism or for banks. And the financial sector is taking on too much risk, which ultimately the government will have to backstop if the entire system collapses because in there to protect the depositors in the end.


And so you also need to guard against that. And so it's all about, I think, striking the right balance. And, you know, the giving a balanced perspective is, by and large, not not easy to gain popularity with. And I think that's where I think to the challenges that from a political standpoint, I think it is easy to give one zero narratives because that creates more polarization and might give you enough median voter outcomes that are desirable for you.


I think the job of the accountants, the think tanks, the economists, the policy makers, the independent policymakers, the technocrats, I think their job, in my view, is to continue to push the dialogue so that you make it clear, listen, it's not one zero. It's about striking the right balance. And this balance shifts a little bit in different points of time based on what kind of situation in the banking crisis. Yes, the central bank and the government need to do more.


But once you move away from that, the role of these two is to diminish and you have to let the private sector flourish again while recognizing that you don't want sort of another full fledged financial crisis. Again, in some ways, actually, this is what financial stability to me is all about. It's about allowing the system to flourish privately while safeguarding that in a stress scenario, it will have the right levels of resistance. And so if I could just end with an example here, which is the example I like a lot in thinking about financial stability.


And in general, this balance between market friendly versus government centered policies is is really about building a bridge. So I think of financial sector as basically a bridge that carries the savings from onshore across to borrowers on the other side of the to whatever you want to call it. Now, how do the engineers approach the construction of the bridges? So, yeah, there are standards. And what are these standards? The standards are that you should be able to withstand some fairly high cyclonic hurricane kind of.


Now, that is not the normal outcome. If you left a private constructor entirely to do this by themselves, they may not put in the number of trusses and extra robustness of the bridge, but there are some protection or safety standards that ensure that when the situation is going to be bad and you still need the bridge to actually stand there, either to transport that time itself or to be available right after the cyclone is going to be, you need that robustness investment to be made ahead of time.


And my sense is that if we took this approach, which is that we let the system function most of the time with the individual's entrepreneurial spirit, but we create defences so that when things go bad, the mop up by the governments, the central banks, etc, doesn't have to be heavy handed because you've already built so much robustness in the system that it's only in the very extreme wind conditions that the bridge might collapse. Then of course, you need to reconstruct or that.


You will have to do minimal repairs because actually your bridge was so strong to start with. I think I think this is the shift in mindset that is required. It requires thinking long term. It requires entertaining stress scenarios that are not your present day challenge, and it requires taking making some sacrifices. You're going to have to increase the cost of production of the bridge. It will not be built as quickly as you thought would be otherwise. But I very much see the role of the economists, think tanks, the policy makers, analysts are so important in the current times that everyone is going for one zero narratives that we need to bring the discussion towards it being about a better balance and one that is based on the conditions and the needs of the economy at a given point of time without disregarding what will be the consequences of the policies we adopt now down the line.


Yeah, I'm loving your metaphors in this episode. The Heart and the Arteries of Bridge. In fact, I thought, you know, when you say that, you know, you had one way of explaining this. I they're going to talk about innings in that famous in Headingley where he saw the new ball and made that phenomenal one hundred on Davon, partly the tangible good. And then the next day, Tendulkar and Ganguly big hundreds. And if you just look at the scorecard, it's like, OK, they all made hundreds.


What's the big deal of it for the storm? And then the other guys strive to build a bridge. I would say that for me with that analogy kind of falls apart is that this particular bridge that you're talking about has so many moving parts and all of them have their own incentives that it's just incredibly complex, I guess. No, no metaphor is perfect. You know, before we get to the book and the, you know, the the meat of our discussion today.


And finally, I guess the question, which again comes from an aside in your book, I think, and also something you said a while back where you were talking about the personal journey and you pointed out how countries are sort of placed along this continuum and where a country is on the continuum can often shape how its people think about the world and the world views. And one sort of, you know, thought that has been sort of going with for a long, long time is how institutions can shape a culture.


And very deep things like Jagdish Bhagwati had once some writing in the year 2000 contrasted China and India and pointed out that, look, China is profit seeking, India is rent seeking, are rent seeking mentality. People don't think of how can I serve the other person and make some profit to think about, how can I exploit the person who can I exploit the situation? And my sense of why that is and, you know, it's a speculation is that it is partly because of our institutions, because of the way our government was set up over the last seven decades since independence, that we are essentially return seeking society.


The role of the state for much of the state has been vastly oversized, and therefore the incentives for a person would always be to be part of the state, to be part of that entity that has a monopoly on violence and so much discretion. And that's where you'll make the money. And, you know, within the book somewhere, again, I didn't make that passage, so I don't remember the exact words. But you've similarly spoken about how the structures within the financial system can shape the culture and the attitudes of the players involved.


What are your sort of thoughts on this?


Yeah, I'm very much a fan of this view of both parts of your question. One, that it is about institutions in the end that the long term outcomes of the country I'm a big I'm convinced by the research of Acemoglu, Robinson, Fukuyama and others that, you know, in the end countries don't become like Denmark in the quality of living over a period of time and not able to offer that standard of living to its citizens. We are countries with institutions such as the rule of law enforcement, of contracts, the sanctity of the elections, etc.


are in good shape. In fact, in the 80 staff member elected I, my attempt was to say that even a central bank should actually be viewed as on the same pedestal as all these other institutions in a democracy. So it's an important part of checks and balances, just the way we would not want the judiciary or the election commission to be compromised in a democracy. We should also not want that the central bank is actually compromised in its decision making just for the short term populist gains of the ruling.


The government, in my view, because that will keep the financial sector policies anchored towards the long term stability. Now, turning that around, why is an institution of weak regulation or central banking a problem? It is a problem exactly for the reasons you mentioned, because when the presence of the state is large in the financial. Sector so that our public sector banks, this tremendous presence in insurance, venture on bank finance, etc, so you know that all along, then there is a constant tendency to lean on the central bank to make it easier for these entities to survive in spite of their performance.


There is also a constant pressure on the central bank to change the rules of the game, not the central bank. I would say even other financial regulators, such as securities markets, regulator, insurance regulator, pension regulator, so that all of these public sector entities in the financial sector, they are essentially all supporting the government's balance sheet to be large, allowing their programs to be larger by channelling the savings that are going from depositors, insurance, premium payers, pensioners, etc.


in one way or the other, make it cheaper for the government to get its hands onto these savings compared to the private sector. Now, once the private sector is crowded out, they have a higher cost of borrowing in general, higher cost of capital. So the economy is something that they can't compete that easily because actually they're to generate high returns because the cost of capital is very high. So now they start looking for converts. In my view, this could be one of the reasons why the overall evasion culture is up in the country, because you actually, by state being so large, you're subjecting them to such high required returns on their investments that they say, I have to figure out how to optimize my taxes in a very, very massive way in order to generate some return to those who are providing me capital.


That's one second. They know that the state is present everywhere, not just in financial sector, but even in some non-financial sector. Very often in countries where government is large, it is a reflection of this ideology, as we discussed, and they also start wanting to have to control decisions rather than making it like a seamless processing of licensing and granting of permissions, etc. and then you end up having to work with the government, so to speak. You know, even the tech sector firms in the country, my friends who are entrepreneurs, they tell me that they can't arrange physical space for their offices without actually doing some floor on the site with the municipalities or whatever the land or get access to the property and so on.


So and then third, because you know that the state wants to be so large, you know that there will be frequent interactions. And if you can just work with them to get a few decisions way, maybe this could be a very symbiotic relationship for that enterprise and the government, not necessarily always for the benefit of the economy. And, you know, you get this sort of hyperactive consolidation's not being crony capitalism, etc. to find that. And I'm familiar with Professor Bhagwati here, which is that the biggest.


The corruption of the society because of the strong presence of the state comes because it ultimately shift the focus away from value creation, entrepreneurship and enterprise to rent seeking tax evasion and essentially getting concessions from the government which are out of line. I saw that culture when I was in India. I felt that many of our banks, financial firms and industrialists, they are spending so much time interacting with the government offices rather than actually focusing on their core businesses, thinking hard about their strategies, etc.


That would seem like a complete waste. And this is the going back to the hike in Austrian sort of crowding out. I think this is a very subtle form of crowding out of the economy's productivity. And this is the fear that I have. My fear is that as the state, we already have a large state, so to speak, in terms of its presence in several sectors, in terms of its debt to GDP ratio, in terms of the fiscal deficit, the amount that they would borrow every year to meet the needs of their various expenditures, which are already very large.


If we don't reverse track, we really have to entertain the scenario of lost productivity crowding out of enterprise, and this will cost us in the long run.


So I think, as I was saying, without having referred to the Austrian economists very directly, this is actually the deeper undercurrent of the book and in fact, in my entire book on government sponsored enterprises in the United States. So I believe that explaining the role played by Fannie Mae and Freddie Mac in the mortgage debacle in the United States in their version of the book was called Guaranteed to Fail in the Endeavors. And I had a chapter on India as to what are the lessons for India from the failures of mortgages and Fannie Mae and Freddie Mac in the United States.


And, you know, there's a six world who will be coming down from centuries, I guess, which which I think has taught me more economics than anything else. And it Dheeraj everybody to be cutting. You know, it's a very deep it's such a deep saying, whoever wrote this in my mind, one of the greatest economists ever existed on the terra firma. And it is so deep because there are so many shades to how this becomes true, that when the government or the king is trying to be a trader and be in the business itself, ultimately you end up with people in poverty and being beggars.


And there are so many channels through which this arises and it does if I have found it. So thought-Provoking, by the way, this will also talk to me by my teachers. I said, who? I he was the one who told me this. Of course, as a student, I had no understanding as to how deep this message is. You got some idea. You know, there were these kings and, you know, they were not their citizens very well.


But it was only when I started doing economics that I realized, oh, that was such a wealth of wisdom and knowledge in this world. And I think that we have to worry about this outcome. And in the book, I try to explain this in the first chapter, if I could just finish with that part, which is that, you know, I refer to this concept of fiscal dominance, which is that the government is becoming too overbearing in its control of the financial sector policies.


And it's important to understand why this is shifting over time, because I think if you don't understand this shift over time, you will not understand what are the root causes of the problem.


You will not get the diagnosis. I think the shift is happening because we were first a nationalized country. So in 70s and 80s, it didn't matter if you controlled the financial sector via the government because there was no private sector to speak of for all practical purposes. Then we liberalize because we had no choice. We failed as a centralized nation, the IMF, and they required us to undergo structural packages. So then we there was a coincidence of politics and economics.


We got the right changes through and for about 16, 17 years, we were good with that. Also, the global growth was called into our post global financial crisis. Global growth slowed down and we had already read some of the low hanging fruit of the 90s reforms. And now we needed actually a next set. And I think this is where we stumbled. For the next 12 years, instead of actually moving the economy towards a more liberalized state, more undertaking greater divestment of the governments where it had not yet existed, we have adopted, I would say, a hodgepodge of policies.


Some have tended to liberalize, but many have also regressed in terms of increasing the state control. There have been attempts to directly control the financial sector outcomes through bank lending decisions, attempts to control the central bank policies, etc.. And I think it is because of these the growth slowdown, the demand in the narrative for the government to start playing a bigger role. Governments approaching it myopically rather than factoring in the long run costs of excessive state control that we are now seeing a gradual shift over 10 to 12 years in this direction.


Part of the book is written because I want us to reconsider that this shift that we are experiencing away from earlier liberalization, divestment, paradigm of 90s, back toward centralization and more control of their policies and regulations. Is this really what we want to do? We want to go back to the 70s and 80s state India. The fear is that we end up with the same levels of the rate of growth rather than actually realizing the eight nine percent that other kind of demographics and aspirations.


Come on, despite the fact that you sometimes say that there is a burst of optimism within you, that's a pretty sort of worrying note. You know, while you were sort of speaking, I remember an episode I done with a friend of mine on restaurant regulations, and he was a restaurant which perfectly illustrates what you said about the role of the state, where he pointed out that when he ran a restaurant and he used to run one in Bangalore, that he realized that there were two conflicting regulations.


The excise department, because they wanted to monitor the alcohol that was going into the restaurant, insisted that there be only one entry into the restaurant. And the fire department, for safety reasons, insisted that that there be multiple doors. So the poor guy, no matter what he does, is breaking the law and he's giving out at least one bribe every month, possibly two. And, you know, other businessmen have told me that they give up to 30, 40 bucks a month.


It's almost like you keep one person just for sort of dealing with bribes and doing all of that. And you've got a great illustration of how this kind of thinking can seep into the culture in your book, where, you know, you've pointed out at one point that you've spoken about the tech industry and the pharma industry and said, look at the entrepreneurial spirit. And that's because they're are relatively lightly regulated. But you said as far as a brick and mortar industries are concerned, you used to have a file called a lock and no data bubble because they would most often be writing, asking for, you know, restructuring bad loans or ever creating bad loans and so on and so forth.


And would that be an example of how the culture can shift? Because then if there are industries which are structurally like that, then that'll attract a certain kind of person and repel another kind of person. And they're exactly the wrong outcomes. Absolutely.


In fact, I my farewell speech at the Reserve Bank of India, this is exactly what I said. I didn't describe Everquest as necessarily one of just restoring financial stability. I described the quest as one of trying to convert the India businesses from around extraction society towards more of a value creation society, which is we need to shift the thinking that the way you generate value is not by gold plating and getting your own gold plated. And then we're borrowing and then defaulting and then siphoning off the funds of it.


The way you create value is by actually genuinely designing new products, setting up driving enterprises for the long run, repaying the loans and the borrowings you have undertaken and yet be creating a lot of value for yourself and for the society as a whole. Because when you create value, you are solving some genuine economic problem on the ground for the citizens. And I think we need a very significant shift in this culture. It is a very complex problem because it is partly because of the overarching presence of the state, but in certain sectors as well as in the financial sector, that has prevented actually laying down a set of rules to which risk taking is supported.


But it is with the right due diligence, monitoring and collection skills, especially at our public sector banks. And to do that, why is that? Because if you want the banks to lend, well, then it has to be the case that when they don't lend, well, that have to be consequences because that has. Or to be the most important disciplining factor on these facts. Now, what has happened with public sector banks is that neither is there any significant penalty for not lending there because there is the support of the state implicitly in one form or the other.


And the bank regulation has been compromised again and again and again, so that the government, which is the ultimate principal shareholder, also doesn't have to bear the immediate consequences of actually chipping in capital to these banks that are now the sum total of all this is that public sector banks have become a quote unquote vehicle through which the rent extraction by the brick and mortar industry has taken place in the country. Now, it may not just be the brick and mortar industry, I suppose.


Suppose you keep encouraging public sector banks to lend to micro, small and medium sized enterprises or to make them neutral loans. But these are not made then then once again, the taxpayers as a whole are simply doing a transfer to one segment of the society which is giving freebies without actually having the capacity to repay these loans. So I think we are in need of a very fundamental shift of the financial sector regulation so that those who bear the risks are made to pay for them.


And only if you make them pay for these risks will they actually make the right decision to allocate capital judiciously. Once capital is being allocated judiciously, businesses will have no choice but to actually go and come up with better value propositions. And once they are better value propositions, we will get more enterprise, more driving investment, more employment in these traditional sectors, which don't seem to be exactly as you said, doing as well as they can find my sector.


And then I think it's a great example because it can. Pharma is not that reliant on bank finance. They are very heavily reliant either on market finance or actually on just equity investments. And a lot of it is actually in the form of foreign direct investments or to just look at the number of unicorns we are creating in the tax base. It's very, very impressive. And you can see the shift when we came out of it, the Bombay in ninety five big into so much entrepreneurship in us because there was nothing happening that much of the ground was still the beginning of the decade.


Get you to I it now when you look at the entrepreneurship and that you all want to set up their own businesses by it because they see that it can be done on ground. And, you know, somehow, fortunately, at least in the tech space, we have not regulated the space it's managing to do well. That is one criticism that it hasn't created as much products of its own. But I think now gradually through the sharing economy, maybe even that is changing a little bit.


I think maybe the newer apps which are getting developed in India are more to serve the local needs of the Indians rather than just to be the outsourcing office of the rest of the world. So I think that that's a good contrast. We observe between brick and mortar in the tech space, and I hope that we can really fix the bank lending in a significant way. And that's why Dr Raghuram Rajan and I have actually just released a piece last week.


The Indian banks have time to reform that. We are actually laying out a full blueprint of also how to improve the lending decisions, the monitoring, the providing for the risks, especially at the public sector banks and how over a period of time to improve their governments and change that ownership structure.


That's quite insightful and wonderful. Let's take a quick commercial break. And once we come back to it, I promise our listeners that we'll get to the meat of the matter, which is, you know, firstly doctor ideas, experiences in the Reserve Bank of India and then the whole notion of fiscal dominance, which you call the theory of everything in India, which I found very convincing and I couldn't agree more with.


So after a brief commercial break on the scene and the unseen, I often speak about positive some games.


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I'm chatting with you about his time at the RBA and about fiscal dominance, which is a concept he explains in great detail and quite beautifully. You know, very often in my show, one of the sort of recurring themes in my show is sort of the shifting relationship between the state and society. And I often kind of point out that, you know, if you look at the incentives of the state, it's not the welfare of society is the welfare of the state itself.


And that's an interesting dynamic with the state, of course, is not a monolithic beast. There are many moving parts within the state which sort of have different functions and their own kind of relationships with each other. And central to the way our economy works, our financial system works is the relationship between the government and the central bank. So tell me a little bit about what conceptually it should be, why it should be that, and what are the sort of forces which then create conflict in that get in the way of that ideal state of being?


Yes. So the way I see it is that, know, the financial sector, as we discussed, is the lifeblood of the economy. And you basically need a heart to regulate that flow. And the central bank is sort of that controlling agency through its various controls, essentially controls indirectly the pumping of the lifeblood to the rest of the economy. Now, to give a very simple analogy, again, you know, people say that when your mind and heart start intermingling with each other, you get very serious problems in life.


And this is one way that I think would be the government and the central bank in my analogy, which is that in matters of heart, sometimes one has to keep the mind a little bit separated in matters of the mind. Sometimes one has to keep the heart of the brain outside. And why is that desirable? That's desirable because in the in the blueprint of the economy, so to speak, you know, the government is actually interestingly, that is is constituted what the elected officials are.


They are the ones who should take essentially any decisions that has a direct tax implications, sort of what one might call those fiscal implications. In contrast, the central bank is more of a technocratic office and it should ideally not take decisions which are of direct fiscal in nature. It should take more these functions which are regulatory in nature. Now, clearly, however, if if I'm quoting the central bank on the same pedestal as the judiciary or the election commission and in my analogy, giving it the analogy of being as important as the heart in the body, clearly one has to think about, you know, how it's supposed to function in the design of the economy as a whole.


So it's very important. It's very central and therefore. It has a lot of power. So Paul Tucker, one of the former central banker from Bank of England, he calls this the unelected power that the central bankers have tremendous power, but it is the unelected power. So how should such technocratic power work in a society? And to meet the right framework is that its objectives should be spelled out. So it should be made very clear what what it is that you are supposed to try and attain.


Its tools should be very well spelled out. And I'll give specific examples of each of these. And then there should be democratic accountability around the attainment of objectives and the exercise of the tools that would give it. So take a very specific example, a central bank is supposed to guard the interests of deposits. In the banking system, what are the tools given to the tools given to the supervisory and regulatory tools, and then it can be held accountable by seeing whether the deposit insurance fund is ever running out of funds or not, is it able to ensure that the system is able to pay for the safety of the deposits that it's providing?


The most common one where the greatest amount of transparency is there in the central bank objective is actually the price stability or the inflation targeting framework. Here, a central bank is given very specific targets around the consumer price index in India to maintain it at four percent with a band of plus minus 2%. And while paying attention to growth being a caveat in the objective, the tool given is the central bank policy rate, the rate at which it lends to banks and what it's India's democratic accountability.


There is a committee that makes this decision. The appointments are, of course, made by the government. The committee each member has to give grants, put in minutes as to why they voted to increase, decrease or keep the rates where they were. These minutes are published. They're scrutinized, analyzed. And if the central bank fails to maintain inflation within the band of two percent to six percent for three quarters in a row, it has to give a testimony to the parliament as to why what factors led to not attaining this objective.


So to me, this is the right way to organize the system, which is you give the central bank a very clear mandate. You tell what other tools you can allow for discretion, but specified that discretion. And I think when discretion is exercised, the central bank should be required to explain why it is that I had to exercise the discretion. What other exceptional circumstances is my discretion temporary or do I expect it to be there for a while because I've exercised this discretion?


What are the expected outcomes and what may be the unintended consequences now that this, I would say, is a reasonable democratic accountability process where you give power to unelected representatives or their technocrats, but within a certain framework? Now, of course, sometimes these frameworks change. We are constantly learning the needs of the economy are changing the financial sectors. Technology actually keeps changing the way they are doing intermediation and credit lending keeps changing and other forms of financial firms keep arising over it.


You just used to be traditional banks. Then you had banks which also started playing in markets and now we have very large non bank finance companies.


But the whole idea to me, and I think this is a bit of a novel, lends into the literature on central banking itself. To me, an important function of keeping an arm's length between the government and the central bank is so that the short term pressures that are there on the government during electoral cycles, the world over not just in India but the world over that are short term electoral pressures that those pressures don't compromise the functioning of the heart of the economy.


You want to keep an arm's length because you want the central bank to be continuously focused on its long term objectives.


You have appointed the technocrats to run this job. You have given them the tools they can factor in the relative importance of the short term versus the long term.


And if they fail in their mandate, they will be held democratically accountable. If they have to explain to the parliament why they failed, if they they're always explaining through reports by these changes. Now, this kind of an arrangement is important because it will prevent what is called US fiscal dominance and what is fiscal dominance. Fiscal dominance is when for short term pressures, the governments want to pump prime the economy's growth or because they have borrowed so much. They want the central bank to be focused on helping the government roll over its debts at the expense of its longer term objectives.


So fiscal dominance, the reason why it's called dominance is because you are trying to distract the central bank from what is its. Otherwise understood functions and instead focus too closely on the government's immediate needs and objectives, and the idea is that you have to tie your hands in advance because when governments do too much, that is in the short term interest of the economy, they leave a massive legacy of problems down the line. Take the example of subprime lending in the United States.


It was basically to make up for lack of adequate jobs and stimulus on the ground, and the system had to witness a massive financial crisis. Over time, government foray into subprime lending combined with private sector's foray into subprime lending. And it became a perfect storm. Look at the fiscal stimulus in India of two thousand nine to 12. We have still not cleaned up the mess that many of our defaulted borrowers from that time are still not fully restored. Bank losses are still not 100 percent fully recognized and time doesn't wait for you.


New shocks. Governments start hitting the economy. So the idea of keeping the central bank separate from the government is that you allow the central bank with all this democratic accountability framework to be run by technocrats who can remain at arm's length and constantly focus on the long term. And so it's basically the government trying to do as the elected representatives of the citizens what they think is the right. But you recognize ahead of time that they will be subject to short term pressures, especially around the electoral cycles.


And you don't want the entire engine to fail down the line because you pay too much attention to these short term pressures. And so you have to strike this balance in the independence of the operational autonomy of the central bank. In an important point to make here is that the Reserve Bank of India is an all purpose central bank. And this is one important point I would look at, which it's safeguarding deposits because it runs the deposit insurance fund. It is the debt manager for the government.


So it places government debt. It controls the regulations of the debt markets and the currency markets. It's supposed to manage the external sector. So safeguard against sharp volatility or the precisions in the value of the rupee. It is in charge of the interest rate setting process. So it affects the cost of borrowing in the economy and it also controls the liquidity framework in the sense of how much.


Reserves are being made available in the country to banks in order to help them manage transfers of liquidity in the system.


Now, with all these functions concentrated, in contrast, this with, say, United States will save the deposit insurance is the Federal Deposit Insurance Corporation. Supervision is partly with the Federal Reserve, but it's partly with O.S.S., the Office of Comptroller of Currency and so on.


With so many functions in one institution and with the simultaneous presence of public sector banks, the government controlled insurance companies, pension funds, finance companies, etc. the school of Fiscal Dominance in India is very large. It can permeate almost all policies of the financial sector very quickly. If the central bank is essentially compromised. And a part of the explanation in the previous chapter, and of course, partly exaggerating when I call it a theory of everything in India, but my sense is it's only a slight exaggeration as far as the financial sector is concerned, because I give the six examples, one after the other, of the pressure point of how many pressure points kept coming up, as I witnessed during my term of the center trying to influence the policies of the central bank without it being.


Clearly laid out through public discussion, public reports, research, facts, data as to whether this is in the long run interest of the economy and, you know, it can get done through backdoor compromises. It can get done through what I call a foreign central banking. It can be done through choice of the specific board members who are being appointed on the board of the central bank.


And essentially, if the central bank is not functioning with a rule based decision making system, that any exceptions are very transparently explained. To report as to why we are engaging in this exception, what is the sunset clause? When will it end? What are the intended consequences? Unintended consequences? It becomes too easy to start this compromise. As you know, no one wants to have a confrontation every other day with the government. And so you start hoping that if you make this one or two compromises, maybe things will subside.


Know you can call it politicking, what do you want to call it. But at the end of the day, it is an erosion of the operational autonomy and independence of the central bank. And what is misunderstood, in my view, by the central bankers, when fiscal dominance is very strong because the government balance sheet is very large, it's experiencing debt problems on a regular basis in terms of cost of borrowing in the markets, its banks, public sector banks are not in great shape, et cetera.


Is that when the dominance becomes so strong? Whatever you compromise, today is the beginning of a new compromise tomorrow. It's not a cease fire because the underlying problem, as long as the underlying problem doesn't go away, they will wake up with that problem every other day and then try to put pressure on the central bank to accommodate a lie, because if the central bank accommodates, this long run objectives can be kicked down the road and you get like the short term adjustments that the government needs.


Now, two points are important here. Sometimes it does seem that this is primarily a criticism about the government and that's not what it's meant to be. Fiscal dominance comes about because the institutional underpinning of the central banking is weak. The way it goes about its decision making rules is somewhat weak. Now, both parties are innovators, symbol for, of course, the letter of the law is with the government as to what institutional independence is given to the central bank by the act.


And as Dr. Reddy explains in his masterful forward in my book, RBI has one of the weakest acts governing it in terms of the operation. But the second point is that there is a difference between the law and the de facto. What is in the letter of the law and what is in effect. What comes about in effect is also partly a function of how central bank goes about its own decision making. And in my view, if the central bank uses will be decision making pushes for a rule based decision making, inflation targeting framework did come about by itself.


The central bank governors, Governor Rajan and Governor Patel had to push for it for this to happen, of course, when I was a deputy governor at that point of time then. So they have to push for this.


They have to be willing to speak truth to the power because you have to shift the debate towards the long run of the economy when electoral pressures are pushing them.


Otherwise, they have to be willing to say no to certain outcomes. They have to be willing to communicate and have a public engagement about these issues along the line, because you are to shift the public opinion and not just the opinion of the political system or of the system, the financial system around the central bank.


And finally, it requires, unfortunately, playing the game of chicken. Sometimes you have to not give in to the first compromise pressure that gets put on you. So I give the example of Paul Volcker, the late governor of the Federal Reserve, where, you know, once the Reagan administration came to power there, the very expansionary manifesto, they wanted to cut taxes and turbocharge the economy that way. And Paul Volcker had just arrested double digit inflation. He said, I can't do this.


I won't be able to keep the rates low simply to fund your fiscal stimulus, because the long end of the yield curve is already rising and telling you that this is going to be inflationary. And I have just arrested inflation. He had private meetings, backdoor compromises, but now he has openly disclosed that and he didn't give in at all. And he won the day because President Reagan, in the end didn't adopt as expansionary a manifesto that it could actually get worse in terms of the long term cost of borrowing for the US government.


And inflation was actually kept at bay. So it requires a certain amount of obduracy and doggedness. Now, of course, at times the fiscal dominance pressures can be so high that the central bankers may be left with no choice. And then you have to hear to see what to do about that.


So I have a broader sort of two part question here. And they both arise from what you have just described, this complex relationship. And one part is philosophical and the other part is practical. Now, you know, we often speak about the rules of the game, but it strikes me that what we have here is really two games, not one. One, of course, have in the past made your views, used cricket as a metaphor that the central bank should be like distributer.


You're looking at the long term. And the way it strikes me is that the game of governance, not just central banking, the game of good governance or keeping a nation going is a long term game. The policies take a long, long time to play out. You have to think of the long term, but the game of politics is like cricket. It's a short term game where politicians constantly have the imperative of the next election upon them and even win a general election or just away doesn't mean the next election is five years away because there are state elections on the time.


So you're constantly sort of in campaigning mode and there is a conflict between these two. And some could even say it's a conflict between a democracy and a republic that when. We talk about a country being a democratic republic. Is it really one thing know, and that's a fundamental conflict now at a philosophical level. Here is where the issue is. I don't see how you square the circle because the argument that politicians will often make is an argument of legitimacy where they will say, listen, Veera, democracy, we've got we've got a popular mandate, we are legitimate.


Why should we listen to unelected, unaccountable elites? They should do what we tell them. No. That becomes, you know, one argument. Whereas, you know, whatever you may say or I may say or even you may say as somebody in the Reserve Bank, it would just be what is your legitimacy? You are not elected. So I think at a philosophical level, that is a circle that needs to be squared. And at a practical level, it then strikes me that isn't the erosion of institutions over the long run always inevitable because of what we've seen, the pattern of populism, not just in modern times with, you know, people like Erdogan and Modi and Obama and so on.


But the pattern of populists throughout history is to rail against unelected elites and destroy institutions. And given that, even if for a long time you might have an equilibrium where there is a certain respect for relationship between a central bank and a government, isn't erosion inevitable on the incentives of politics or towards sort of ensuring that kind of erosion? Because then the less powerful the institutions get, the more powerful the government of the day is? And, you know, an example of that could simply be that, look, they control the appointments.


Now, it's a deal. It almost seems remarkable that people like Dr. Rajan and Dr Patel and you happen to work in the central bank and took the stance you did. But I don't see why that should not be an outlier. It's so easy for a government just to put its I mean, I'm not making a comment on the current incumbent, but it's so easy for the government to just put its own people in any institution, not necessarily just the RBI alone and therefore degraded.


And this is something like at a philosophical level, of course, I'm looking forward to your answer, but even at a practical level, you've been in the thick of things. You actually grappled with it. Tell me a little bit about your experience in that process.


Yeah, it's a it's a complex question with many shades. So let me try and see if I can do justice to it by picking it up in certain parts. I would say so. Firstly, I agree that at the end of the day, they control the point, the government controls the appointments. And to me, that's why I think once they have made the appointments and then the framework is in place, they have to let go at that point because, you know, the system is already giving you the right to appoint the people.


And so you don't you can factor in whatever considerations you have. And that's what I feel, that when your own elected officials are resisting the pressures being imposed on them, it's more likely that it's actually because you are trying to do something that's more in the short term interests for your electoral cycle outcomes rather than in the long run interest of the economy. The second seat, once a reasonable person, has been put into these positions, such as being the governor of the central bank, they will feel a mental responsibility to stick to the letter of the law, what is constitutionally and to the RBI Act, etc.


, being required for them to perform as their functions. The system has been run very, very well by people of very, very high integrity. And I think it's in the DNA and the culture of the central bank, thankfully, that a lot of attention is paid to what the institution is required to do as its mandate. And that could very easily mean that even the people appointed by the same government will actually disagree with the government. And I think there should be healthy space for these kinds of disagreements, because the idea that only the elected officials can take the right decisions for the country without necessarily a feedback from the rest of the system is I think it going be right.


You know, as I said, in a country of a billion people, the bright ideas for individual problems are likely to be distributed rather than just in the minds of a few individuals. And so you need that the feedback to the system of know and it happens through a bit of back and forth. Sometimes it means some resistance, some speaking of to the power, some those and playing a little bit of game of chicken, as I was calling it, etc.


. And the third point is that. Coming to very specific to the RBA, Tennessee, the advice, the RBI Act, in part, it's because there is this exhibition called the Section seven of the RBI Act, which got a lot of attention during our term. It had never been invoked in the history of the Reserve Bank of India. It was what does that Section seven clause do? It allows the government to basically give effectively a direction to the governor of the RBI, it seems, in consultation with the governor.


But of course, that just means that there has been some back and forth and yet they weren't able to resolve the problem. And it seems it's in public when it's in public interest. Now, clearly, therefore, the RBI Act is very clear. It sees if the government wants the governor to do something as an executive, do they have the powers to do it? But my point is that it is very clearly that it's in public interest. So if if such a direction is to be given, it should be made first transparent to the public as to what exactly are these points of disagreement?


What are the government's points? What is the Reserve Bank of India's points? What are the pros and cons of taking a decision as the government wants or not taking the decision as the RBA is pushing for, et cetera? And at a simple level? That is why that is the point of the list of memorial speech.


We were still in office when this happened, but we had to give the speech because if we had to take certain decisions, we had to actually be taught that given Section seven clause was to be involved in public interest, it has to be made transparent to the public at large as to what are some of the key points of contention, what are the areas of disagreement, etc.. And I think, as I say in the chapter, there are pressure points were all true.


There were tremendous interest in getting us to open up the credit and liquidity taps in two thousand eighteen just the way it was at the time of fiscal stimulus. After the global financial crisis. We all know what was the year 2013, the period of short term electoral pressures building up at that point of time. And, you know, in a way, we had to resist those pressures because we had just started the process of cleaning up the financial sector.


A few years back, the job wasn't complete. We knew how difficult it is to clean up an excess credit cycle after it has happened the way we saw it in 2009. So it all being in front of your eyes, I don't see how the central bank would have just tagged along just because the government wanted it to be. And in fact, as I describe in the book, in the first 10 to 12 months of my term, we were completely in sync with the government on cleaning up this process.


And then there was a bit of a reversal. And I think all of this circumstantial evidence, if I could call it, seems to suggest that the driving forces were actually the short term political pressure. There was also a tremendous demand to get a huge balance sheet dividend to be paid to the government out of the central bank. The numbers that started out were extraordinarily large and then they came down eventually.


So I think I agree with you that it is there is a natural tug of war here. All over the world. Governments are always wanting sometimes the central banks to do what is in their short term interests, keep borrowing costs low, keep a lot of liquidity high, keep bank credit conditions easy, etc, etc.. But I think our initial conditions are such where the government deficits are large. There's a big government presence in public sector banking. And the RBI Act is weak to start with in granting the central bank operational autonomy.


It is my experience that the fiscal dominance pressures in India now are way higher than in other parts of the world. And, you know, there is there's always a tendency in India to justify our own mediocrity and bad decision making by appealing to the rest of the world. I wrote about fiscal dominance, I wrote the entire book my manuscript was given before the covid outbreak had become significant. It was it was all finished in February, early March, and immediately people in India said, oh, but you know, the world over.


Now, the government and the central banks are working together to come out of. My question is no. They are doing it to come out of it. We started this process even before two or three years before or physically dominating the central bank. And you can see the damage that it has done. In my view, the long run, as much view is really played out. See what is the cost of dominating the central bank to rule over your debts or not recapitalize the public sector, banks, etc.


is that the market discipline on the government is lost on its balance sheet? The government has effectively run a consolidated deficit of eight to 10 percent of GDP plenković depending on how you do the consolidation post-Soviet, it will go up to 14 to 15 percent. The fact that we did bring our fiscal deficit in check before covid has meant that it has been hard to undertake fiscal expenditures right now in the midst of covid. That's a serious cost to the economy, in my view, that you choose to spend so much in good times rather than saving a capacity to spend if you had a difficult situation such as the pandemic.


Of course, no one knows. But that's what robustness, resilience and stress test planning is. You don't exhaust all your buffers in what are looking relatively calm. Second, the public sector banks problem has not been fixed either in terms of capitalization or in terms of governance and quality of lending, underwriting, monitoring, etc. not in terms of the government shedding stakes. Now, the losses during covid are likely to rise perhaps to 12 and a half to fourteen point seven percent as but a financial stability.


Now we are going to be dealing with a further loan loss problem even before we have fixed the old one. So this kicking the can down the road and justifying always doing what is in short term interest at the expense of positioning the economy structurally right. For the long run. And we do this year after year after year with more intensity in some years, such as 2018 than others. And this tendency of not positioning yourself structurally right for the long run leads to this tendency to put dominance, pressure on the central bank every year to get some concessions.


And, you know, in the end, we are gradually, in my opinion, losing our potential productive potential to grow our productivity, our ability to create jobs. All these are steadily deteriorating. And, of course, that is bigger collateral damage, as you pointed out, which is the fact that you are initiating the decision making processes, which in effect, granted the central bank a fair amount of operational autonomy, even when the letter of the law was not.


That was not that. And I think I want to stress one point here, which is quite important to me. Again, to quote Dr. Reddy from his masterful foreword in my book is, listen, in 70s and 80s, the government, the central bank and the public sector banks were a Hindu. And I believe that no one kept anyone's account. And it didn't matter that time. There was no private sector to talk of. And we were generating three, three and a half percent.


We had never embraced the ability and the opportunity to actually grow faster than that.


Even that failed. We could not even generate three, three and a half percent without running up imbalances on the external sector. Now, the economy is different. The economy has a presence of the private sector. The growth aspirations out of eight to nine percent per annum. They are in fact necessary given our young demographics. And if we want to continue on the path of eradicating poverty the way we have for two decades, since nineteen ninety one, then it's not good enough to function like a Hindu undivided, divided family anymore.


Where no one keeps anyone's property comes because if the government becomes very large now, the cost is not just there down the line you will have a crisis. The cost is even now because you are crowding out the private sector, you are crowding out its enterprise. You are converting businesses from value, creating enterprises into rent seeking enterprises. And so I think the danger of going down this path of regression towards nationalized economy, a centralized control of decision making and policy making, the danger is clear and present right now.


And therefore, I think we need deep institutional reforms on the fiscal side, on the financial sector side, and also on the real side to actually turbocharge the economy so that we get all the growth we can possibly generate in the post would be quicker.


And, you know, one of the key nuances which you pointed out in defense of your book, which is just an absolutely wonderful chapter, one of the key nuances that I'd like to draw my listeners attention to is the fiscal philosophy of our state, by which you don't mean this government or that government, but how the state has looked at spending all throughout there. You point out that a significant chunk of our spending is revenue expenditures like subsidies and so on.


And a very small chunk is capital expenditure, which is things like infrastructure and so on, which will, you know, have positive externalities lead to growth in the long run. So what's happening is that instead of building the. Instead of doing things which will, you know, help the economy grow, we are redistributing bits of the pie and that redistribution, that economic support and all of that also play into the short term populist imperatives. So here again, incentives take you towards a particular kind of spending.


And you've pointed out that how you know, when you combine the problem of the fiscal deficit with how the current account deficit has been changing, you say in accordance with these twin deficits, fiscal deficit and current account deficit make India vulnerable to a sudden stop in which a deterioration in the quality of government or corporate balance sheets, the rising inflation either due to domestic stimulus or oil price shock, Federal Reserve rate hikes and dollar absorption, or a surge in global risk aversion can trigger a withdrawal by foreign investors who are financing external funding of the government and the corporate sector.


The resulting fallout in the form of a sharply depreciating Indian rupee or rising oil import bill and inflation further widening of the trade deficit and the debt spiral or loss of investor confidence that ensures present a substantial risk India's financial stability. Such risk is materialized unexpectedly at least once a decade over the past 30 years, with several minor hiccups in between. And you point out that the way to address this would be to make structural adjustments. But instead what we do is to go to again, we instead do to what is more expedient, which is to economically and financially depress the economy to fund its borrowings.


And this phrase was very interesting to me, you know, depress the economy. So take me through some of the ways in which this happens and what the implications are. And all of this, of course, is sort of an elaboration of fiscal dominance, which is what the chapter in the book is about. So tell me a little bit of the different shades of meaning of, you know, depressing the economy in this case. Absolutely. So, you know, historically, the most common repression used to be that essentially the government and the RBI sat down together and said that we will impose a very high statutory liquidity issue, as it was called, SLR, on banks.


At its peak, it was around 40 percent. And what does that mean? It means that when you are I deposited one rupee into a bank, 40 percent would would necessarily have to be earmarked for holdings of government bonds.


Now, what is this doing? What this kind of repression does is that it forces an increase in the borrowing costs for everyone else because you can't compete with the government on a level playing field for about 40 percent of the deposit base of the banking system. Now, why is the government doing this? The government is doing this because it wants to keep running its populist programs. As we as you mentioned, more than 90 percent of sentosa expenditure is in subsidies rather than infrastructure or health.


And similarly, at state level, maybe 70 to 75 percent is on subsidies and other kinds of revenue expenditures, salaries, pensions, whatever, because, you know, there are only so many things all over the country and employing relatively unproductive labor, in my view, in cases.


So the cost of actually supporting that employment, providing all these subsidies is the fact that when a private sector firm wants to borrow. A micro, small and medium sized enterprises wants to borrow, are you and I want to borrow, say, in order to invest in a house or buy a car or fund an education loan for a child.


We are actually paying the higher cost because the government has to keep running its program. So this is the this is a form of borrowing related depression tax.


Now, second, then now we have brought down various government has brought down this statutory liquidity ratio down from 40 percent to below 20 percent. So, you know that repression has come down, but not what what that means is that because of lack of repression, the government has to borrow in the market. Now, what was the idea? Why should they borrow in the market? Because rather than forcing banks, let them borrow in the market, because then the market will reflect in the price of the government debt.


What do they see as the long run prospects of the economy from the day that you are undertaking? Will the inflation rise? Are you going to generate enough growth to generate taxes to repay these debts or not? Now then the government goes for home prices again. What do they do? They don't do the central bank and say, oh, now you must buy my debt, because otherwise the borrowing costs are rising. Even the pressures on the central bank to quote unquote monetize the government, they have been there, even Peachoid it are.


In fact, I describe that, you know, what is opening of the liquidity traps mean? Part of it was actually to just go and buy a lot of government debt to open market operations so that you would flood the banking system with liquidity. But of course, a part of that is to simply keep the government's borrowing costs low. Now, what do you do when you monetize the government deficit? Is that one you prevent the financial sector from taking on the government bond risk and earning a higher yield on it.


Instead, you give them a very low overnight rate with the central bank. And more importantly, you also reduce the fiscal discipline on the government. So the government balance sheet keeps getting larger and larger, aggravating the first crowding out problem that I was discussing.


And now, if the financial sector is not making much profit on its holdings of government deficits in one way or the other because the central bank is monetizing it, then, you know, you sort of reduce their profitability to an extent in the process. And third, and maybe a worse form of repression is that is the fact that because RBI is an All-Purpose Central bank, the government also wants to reduce its recapitalization amount into public sector banks and other governmental entities.


To do that, it asks RBI to relax the rules for recognition of loan losses, not require that you provide for anticipated losses ahead of time. And because you don't do that, the banking system is always like a tight rubber band that is stretched so hard that even a little bit of disturbance might actually run the risk of snapping it.


The bankers feel the pressure themselves because they have never recognized what their loan losses are in a true economic sense. So they're always dealing with legacy problems. And you get two kinds of problems in bank behavior out of this one. Banks are now very fearful of any further losses. So they want to keep everything and keep lending to the same borrowers who have already defaulted to do so-called zombie lending. You extend and pretend as though everything is fine on the loans, or they do lezzy lending, which is that they lend entirely to the government because that by regulation doesn't require any extra capital to be brought by the shareholders.


So that's called lazy lending. Now, therefore, what do you observe with public sector banks is that many times they are so much in excess of the statutory liquidity ratio they would have if the statutory liquidity ratio is 18 percent, they will have 25 to twenty seven percent of government bond holdings. Effectively, that's again, a depression because they have no capital. So they are going to lend to an MSME or a private sector borrower or a household only if they get a lot more extra return to compensate them for not having to provide capital on these other kinds of holdings that they have.


So in one way or the other, the repression is a repression of the civil. Because in the end, you know, the quality of deposit services, et cetera, being provided by public sector banks is not great. If RBI is being forced to keep interest rates low, then deposit rates will eventually follow. And the saver again gets low, low returns on deposits. It's a repression of the borrowers in the private sector because they are going to have to pay higher costs to borrow so they have higher hurdle rates.


Many investments don't look profitable or as we have been discussing, they switch from a value creation to a rent extraction mode in order to generate these higher returns, given that higher cost of capital.


And third, and importantly, that is also a repression of the overall allocation of capital in the economy instead of taxpayer money. Going to the government and the government being under fiscal discipline to allocate this capital well, to generate growth, to do the right kinds of investments, such as infrastructure, health and education, which will expand the growth part of the economy and build a credibility with the market that, yes, the government can repay even a higher cost of borrowing instead of the taxpayer money gets allocated into short term revenue programs of the government that have a lot of populist appeal.


They are an easy narrative to provide to the common man without ever spelling out what are the true economic costs of actually running these programs in the long run. And so I think it's a it's such a massive repression of the economy all around. So to me, it is not a surprise at all that investments in many parts of Indian real economy are very tepid, because when you have a government that is trying to do so much in the short term, pump priming of the economy, short term subsidy based narrative friendly programs, and so much to repress the financial sector policies to facilitate its own borrowing, that is the space for the rest of the economy to grow.


It's simply not possible. The only entities that are able to grow well in India are those who are able to go outside the country and borrow in the external markets or get foreign direct investments and those parts of the economy thrive. And of course, what are these? In the FDI case? It is mainly the tech and pharma space and in case of external borrowings, it has to be relatively large and well rated companies. But that leaves out a large chunk of enterprises which are small, who contribute very valuable lead to job creation in the economy.


And you can see actually that with a bit of time, gradually, the average young person in India is now saying that the job they want is actually with the public sector for the longer thinking about the job that they want is being with the private sector because we have gradually reshaped the economy to have more and more of the government and less and less of the private sector. And I think this is a fundamental, misdirected cause from which we have to correct our direction and strike the right balance.


And I think if I could essentially give one example here, which is that, you know, what is often lost in the political thinking of the economic management of the country is that. A small share of taxes of a larger pie may be much bigger than having a larger tax percentage of a very small pie, and basically what it's saying is that there's a simple concept in economics that if you tax too much at some point, the private investments collapse so quickly that actually the economy shrinks and even though your percentage tax rate is high.


Actually, you don't collect much tax revenue in the first place, and so beyond the point, your desire to collect more and more taxes backfires. No, I'm not saying that we don't need to improve our tax collection in a very fundamental sense. What I'm trying to say is that repression of the economy through public sector banks, through fiscal dominance of the central bank, to excessive borrowings and crowding out of private sector enterprise, all of these are forms of taxes, implicit taxes that are being imposed on the rest of the economy.


And in some quarters, they are now so large that the pie is actually shrinking. And even though the repression is very high, in the end the government is worse off because actually the pie shrinking at a faster pace, then you are benefiting from the pie in the first place.


I think the reason many people mistrust profound insight is that the whole idea that the pie grows or can shrink feels counterintuitive in the sense that, you know, our brains evolved at the time. You know, in prehistoric times, we lived in tribes of up to 100 to 150 people. There was natural scarcity all around. So we've evolved to think of the world in zero. Some ways, the fact that every transaction leaves both parties better off and the value in a society goes up and the pick and roll is deeply counter intuitive.


Sort another aspect in your book, which, you know, I was reminded of earlier in the show when you spoke about the problem of the origins of our party, the treasure becomes Picardy was, you know, again what the ownership of public sector banks does as a whole when the government is not only a participant through the banks, but also the regulator of the banks and the perverse incentives in play. And again, I'll quote from your book where you write, on the one hand, the overarching presence of public sector banks, other large state owned financial institutions and state owned enterprises creates the incentive that the government dominates the central bank and its financial sector policies to affect outcomes for the entities that it owns and for supporting programs.


The skews the market terms against the private sector and distracts the central bank from its long term policy goals. STOCKWOOD And this also affects the private lives then, as you point out, or the government has incentives to influence policies as such and that it is not at arm's length from the regulators in the private sector into hyperactive lobbying. Read an overdose of consultations with the government and regulators. This, in turn, induces an overall culture in the system of putting in place business friendly policies that have incumbents at the cost of market friendly policies that encourage creative destruction, asset reallocation, ease of doing business and new entry of the stock, which I think, you know, wasn't.


And I wanted to read this out. And it's an important point to make because in the popular imagination, most people conflate business friendly and market friendly. The two are often contradictory because what is business friendly is if you keep competition out and that's not necessarily good for the people at large or for society, that's crony capitalism. And what is good for the market is that you have this dynamism that leads to creative destruction, easy entry and all that. But the way the system is set up and a lot of it has to do with the, you know, the ownership of public sector banks, it seems inevitable, almost destined to just play out this way.


What are sort of your thoughts on this and how difficult is it to eventually move away from it? Like you pointed out in an interview that, look, it is possible for public sector banks to get sold. It happened all over Southeast Asia, but it took a massive crisis for it to happen. Now, we can't wait for a crisis. There doesn't seem to be much coming from the demand side of the political marketplace. So are things bleak for you?


Unless they get really bleak and we have a crisis? Yes. See, in the end, we have to recognize the cost of running the system the way it is. I think the reason why a part of the narrative hasn't shifted around to reforming the public sector banking. Most people don't even realize that these banks were nationalized, most of them in sixties and seventies, and be they used to be private banks. It was done under the political objective of running government programs for development and financial inclusion.


And lo and behold, after close to 50 years of their existence, we are still at least 60 percent of the credit to GDP ratio much lower than developed countries. Where are their losses? Are they in financial inclusion? No, no. They are in loans to the largest industrial firms. That is where the biggest losses have come from. So they failed on that front. In fact, increasingly, the quality of deposit service and accounts and branch services are so weak that even their deposit share is actually shrinking.


So depositors are not voting with their feet, largely by saying, listen, I would rather bank with a well capitalized good service. Providing better technology to run private bank than public sector banks, so I think my sense is this is this has been a disaster in the making for a while.


The public sector banking enterprise, the quote in the paper with Dr Rajan that injected more than four trillion rupees of capital over the last 10 years. And the opportunity cost of that, because you could have invested this capital in the market index or in the private sector banking index as to comparisons would be anything in the range of three to three and a half, like one hundred billion dollars. If we had that available with us, you know, we could have done such a more significant stimulus for relief and repair of the covid affected economy.


Now, why is the narrative not shifting? The narrative is not shifting, partly because this public sector enterprises have become O.Z jobs for a part of the middle class in India. You know, you get the secure jobs, they are not as well as well-paying as in the private sector, but you have the job security because these entities are not going away. But now the costs of actually keeping them in good shape have become so high because the government balance sheets have expanded on other fronts and the losses they've made are very large.


That actually it's not at all clear that these entities can even grow and provide the kind of security that was possible to provide earlier, you know, the example of Air India or take the example of the public sector banks that are losing their market share of deposits. It's not going to be that pleasant to be employed in these firms going forward. So I think the labor itself has to recognize that they would have more interesting growth potential, even if some more risk on the job, if some of these entities were, in fact, better governed at arm's length from the government and eventually privatized.


The second problem that always gets mentioned is, oh, you know, ultimately when a crisis happens, you have to backstop the banks anyways. Then what is the problem with public sector banks? And it's a it's a clever argument, but it's wrong on many counts. And let me explain three counts first. Yes, deposit insurance is in place all over the world. But the reason why it's not a blanket deposit insurance is because there are capacities to how much the government can provide insurance.


The sovereign can go on the brink if it takes on too much private liabilities of the system. Therefore, there's a line drawn on how much deposit insurance will get provided and that deposit insurance is provided even to private banks. So why do you have to suffer all the inefficiencies, misgovernance, behest, lending, you know, lack of adequate technology, etc., of a public sector banking system that is, quote unquote, as I said, failed us for 50 years in attainment of what it was supposed to be.


So, you know, you can strengthen your deposit insurance system rather than actually having to suffer all the consequences of government pollution. Second, by keeping them as public sector banks, as I explain in the chapter, you actually two, fiscal dominance keep the quality of the regulation weak at all times. And this also means weaker rules on private sector banks. We did not adopt better accounting standards such as the IFRS or in the US, which would require provisioning for losses in anticipation.


And now even our private banks are actually not providing as much in anticipation as we would like. So there is a common reduced denominator or a race to the bottom in the regulation of the financial system because you legally managed, weakly governed, weakly capitalized public sector banks in the system. So the entire system is made worse off because of their presence, in my view. And third, and most importantly, is about the efficiency of the allocation of capital in the economy.


As I explained earlier, because of the presence of public sector banks, capital is getting inefficiently allocated either to distressed borrowers in order to first place them in good times and then allow them to continue to borrow to zombies. In fact, times so eager to be lending or you get lending to the government lazy lending and the middle, which is the healthy firms, Ms. Emmies and the households, they are getting creamed out because they have to borrow at much higher costs of borrowing.


Now this has implications on productivity, investment, high quality jobs being created in the economy. And ultimately, even though as a saver in a public sector bank or as an employee in a public sector bank in the narrow, I may feel good about their presence. The entire economy is paying a huge cost for this. And I tell everyone who defends the public sector banking enterprise on the basis of the safety of the deposit or on the basis of the job that it has created for them.


I asked them if you were a child, then who do you want your child to work when he grows up? And, you know, in many cases the answer would be that they would rather have the child be working in the best private bank out there rather than in India or in a public sector bank. So I think my sense is that this has come at a colossal cost to the economy.


Even those who are inside are a bit blinded by the fact that they are leaving behind a much worse economy for the youth and the children, including their own, even though privately some of them might be better off themselves with the presence of these enterprises.


I think it's time to call it a day. I think the sooner we stop bleeding this wound, the better it is in my 2007. Speech on and Piers, I gave this analogy that we keep festering this world more and more and now we run the risk that we may have to not just impute some organs, but also be able to deal with the side effects of the wound spreading to other parts of the body. I think it's time to recognize this is a failed experiment.


It was entirely political when it was undertaken as nationalization in 60s and 70s. It has led to good returns on taxpayer money. It has led to poor quality of deposit franchise servicing. It has led to weak central banking apparatus in supervision and regulation. It's a form of cancer, in my opinion. It is. I have no two views about it, in spite of the resistance that has been provided in many parts of the society, because you have to listen to the facts on the table.


And now the multiplicity of books have been written explaining how bad it is to have come out of this. Yet another one is coming out later this year. This is a common theme that's running through my book and my paper on how to reform the banks with the budget that the government has to divest stakes.


It has to improve the governance, reprivatize some of these entities and prioritize some of the business models of the smaller ones so that they just do financial inclusion like microcredit or microfinance institutions, rather than trying to be universal banks.


Can they distribute flows the country? In fact, I couldn't agree with you more about bank nationalization, in fact, I often and this is something I feel strongly about, most people I don't think understand that economic policy has real humanitarian consequences. I think when I look back on many of the economic policies of the Indira Gandhi period, back nationalisations and so much else, you know, I think they kept millions of people in poverty for decades longer than necessary, which is, of course, an unseen effect and people don't get it.


And what you're saying about this also holds true that not only are we kicking the can down the road, we are kicking the children down the road. This is going to affect, you know, future generations.


If I could just add one point. I mean, this is the beauty and sadness of the government balance sheet, right? What is the beauty? The beauty is that you can touch the individual and spread the cost across. What is the tragedy of the tragedy of it? Is that because you are spreading the losses around, no one really cares about someone else's problem. And therefore, I think proper accounting of government balance sheet preventing off-balance-sheet accounting from masking the true picture of the government balance sheet, having an independent fiscal council that will evaluate every single program of the government before the budget is announced.


You know, the 14th Finance Commission, chaired by Dr. Reddy, make this very clear that the independent fiscal council should pick the programs before the budget is announced. Others emotions reasonable. What will be the recurring costs of this program? Begun to announce programs and then figure out what are going to be the budgetary and financing implications of this? And once you do this, once you do a proper accounting of what is the total borrowing being undertaken by the government across center stage, a different center and state owned enterprises, this is called as public sector borrowing requirement.


Once you have a council that is in the business of the government, budget will become very clear that the government is trying to do too much. It is pushing on a string. The borrowing costs and borrowing amounts are very large and that we need to embark on a massive disinvestment program. The baby Heideggerian ninety eight thousand three. In all non-strategic sectors, the government needs to shed stakes, be privatized wherever possible, including in the financial sector, in the banking sector, the insurance sector, Rexall.


I couldn't agree more. And in your book, of course, you lay out a bunch of ways in which, you know, we can fix the system now assuming and we'll come to the political economy later. But ignoring the political economy for the moment, assuming that all the politicians and bureaucrats fall in line, what are the sort of steps among what you haven't already mentioned? What are the sort of steps that should be done to fix the system, to get it functional again?


Yes. So I think I would say, you know, in my view, the fiscal stability and financial stability are now almost joined at the hips. They are very deeply intertwined through this fiscal dominance channel, as well as to the direct linkages between. So first and foremost, I would say we need to be honest about our fiscal side that we need to spend right now in the midst of covid, but that we didn't leave much space for it because of the slippage is pretty quick.


And I think the best way to do this is to put in place an institutional fiscal reform package which gives credibility to the market, investors and rating agencies that the country means business as far as consolidation and the reversal to better parties concerned in the medium term so that you can borrow more in the short term to meet the immediate fiscal needs because you are on a better path. But, you know, we need to reorient for that. The expenditure has to be good focused.


So we need to reorient from subsidies towards infrastructure, health and education. I would do a very deep analysis of the subsidies. There is a lot of wastage. A lot of money gets spent in administration and financial enterprises that run and house the subsidies on their balance sheets rather than the subsidies being spent and reaching the last mile.


The consumer or the citizen, they can all be rolled perhaps into a universal basic income. And a lot of these inefficiencies of administrative costs, the economies and that freed up space can be used to increase the infrastructure and ease of doing business on the ground. I would say that's first part of the fiscal institutional package. The second part of the package is something I wrote about in an op ed in the Economic Times. And I just mentioned we need an independent fiscal council and we need a transparent public sector borrowing requirement.


The council should be nonpartisan or bipartisan. It should report to the parliament and talk to the finance ministry. And the public sector borrowing requirement should be calculated by the independent office of the S.A.G., because if the government is producing these numbers itself, it becomes a prey to what is the Goodhart law, which is that if the measure by which I'm regulating you can be manipulated by you, of course the measure will have no economic meaning or content in the first place, and which is what has happened.


We have a real deficit and we have an official deficit. And the gap between the two has now become very, very large that we always talk about, both in the same breath when we speak about them. That's true. And third, I think we just need to undertake massive divestments. We need to unlock the growth potential of so much enterprise space that has been captured by the public sector. It would have the collateral benefit of reducing the government's borrowing programs and putting us on a better debt to GDP ratios.


Now, this requires conviction and commitment at the top in the government that this is a better path in the long run rather than continuing to repress the economy, which would be necessary if we don't course correct on the fiscal front. But I think the government is still in the early phase of the electoral cycle. It has a majority. So I think this is the kind of transformational institutional reform that one would hope the government would seriously undertake or at least start debating and discussing.


Second, I would say we need significant reforms on the financial front. I think something we pushed forward when I was at the central bank to a speech by Governor Patil is that the ownership of public sector banks, the the deregulation of public sector banks should be ownership, that they are owned by the government or whether they are in the private sector space. The central bank should be able to regulate and discipline them in the same way to bring replacement of management and dilution of the government stakes.


If government is not injecting the required capital this way, you know, problems happen even in private banks that are idiosyncratic governance failures, as we have seen. But at least the central bank is able to take corrective actions to fix that. That is that's not possible. Right now in public sector, we do need a calibrated, comprehensive plan for public sector presence in banks, insurance and other non banks. This would mean, I think, divesting states below majority to start with, then using that time to improve governance standards by becoming arm's length.


In the paper with Dr. Rajan, we suggest creating state linked banks rather than public sector banks, where you basically move all the ownership of the banks etc into an investment managing arm. It's almost like a sovereign wealth fund, so to speak, which would be run by professionals rather than actually run by the bureaucracy. And they would basically just appoint independent board members and then let these boards run these entities rather than having a lot of control to department of the government that we currently have.


And third, I would say that we need to continue with the process of strengthening bank supervision and regulation. This would mean actually creating buffers of capital in good times. So even right now, we are doing a lot of restructuring and relief for the borrowers, which is required because of the huge, unanticipated and unprecedentedly large nature of the shock. But we are not raising capital into banks on a war footing. Large private banks are doing it on their own.


But what about what about public sector banks? And we are asking them for capital if the losses start materializing when the debt moratorium expired. How are we going to capitalize these losses to planning for it ahead of time? Because if we are doing this recapitalization, then the economy is coming out of it. Banks are not going to be in a position to lend that time because they will still be dealing with the legacy loans. So we learn the lesson from the last five, six years.


We should be on a war footing, capitalizing the banks right now rather than leaving it for later. So that, I would say, is point three. So the first point was ownership, neutral regulation of banks. Second is a comprehensive plan to restructure the public sector banks. And third, I would say capital, capital, capital on an anticipated basis rather than back basis.


And lastly, you know, everyone has been saying this. We are done with the fruits of these reforms and capitalizing on the divestment gains of 98. I think we need a new round of reforms, at least on in that spirit. Several parts of the farm bill to me seem to be in the right direction. I don't know about the process to which it was implemented, but focusing on the economics of the farm bill, it is trying to actually get the farmers closer to the direct market prices rather than having giving a lot of power to the intermediary wholesalers in between.


I think that was a problem and hopefully this is a step in the right direction. But, you know, farming is only a small part of the economy, a GDP, since it's very large in a job sense, but it is not the best jobs in the country. We need the rest of the private sector in services and manufacturing to get an even further boost. Again, the labor laws are a step in the right direction. But to get manufacturing away from China as the world is moving away from China or diversifying supply chains, we are going to have to make land transactions to be done more transparently and readily.


So we certainly need reforms that we need better ease of doing business on the ground in terms of requiring fewer government clearances and reducing that implicit taxation in the government. And we just need better infrastructure. Even now, we barely keep up all the time. Every time I go to Mumbai, I feel it always does enough that I'm on the road. In certain parts of the country, the roads are very good, but in many parts of the country they are still very uneven.


And, you know, to have a national manufacturing and delivery system, the logistics, there is a lot of improvement happening because of use of tech, etc. But I think the physical parts of the logistics, the physical infrastructure that's underlying it can still be improved in terms of our ports, airports, roads, trains.


So I think we need fiscal, financial and legal sector reforms that are truly transformational. To me, this is like a 1990s moment. We are not in a crisis, but does not want the crisis to be required to force the decisions on us. I think we can use a bit of our sagacity in being able to see forward, visualise what the stress may be down the line, visualize what a low growth would mean for the youth and. It should not take all the way down the line, visualize that if we have to do it and sell other enterprises in the midst of a crisis like a Southeast Asian crisis, it would be the first time actually to plan for that.


Reprivatization instead laid out as a calibrated strategy ahead of time. If this is done in a decisive manner as a package. I think it will increase the confidence and the investor sentiment towards it tremendously and enable the government to undertake more fiscal expenditure in the short run without actually there being a backlash in the market. So if I could give an analogy, you know, I like watching birds. It is something I learned naturalist's when I was doing my arbeiter.


But the naturalist were also very adept at explaining the rest of the nature. And once we were observing an insect, I think it was a praying mantis which was trapped in a spider's web. And they explained to me how the spider builds of it in the first job of the spider is that it actually makes a massive leap from wherever it is sitting on to where it wants to be on the other end of the web. And to do that, it basically squirts and uses all the strength of its ties to make that one big jump, to lead that first them across.


It knows what the target point is. It has to make a big leap. Now, once you have built that first bridge to your target point, building the rest of the web around, it becomes very, very easy. And I think India is that that kind of we have to use all the strength that we have figured out where we want to be clear, but build a bridge to that by announcing the right set of reforms. Once we show that part as being a world trajectory, building the rest of the growth around it become much, much easier.


And I think we don't have to be paralyzed. We do not have to be in action mode. We also don't have to gamble. We also don't have to say, oh, we will just spend and we will worry about what happens later. No, we can actually anchor whatever medium term longer need to be with the right fiscal, financial and real size package. And once you do that anchoring, we would actually be on a very prudent and safe bottom.


I don't see why India can't grow at a very good rate, given the demographics, given the potential, given the hard working nature and the aspiration.


I think it's a matter, of course, correction and being on the right trajectory, avoiding the regression to the centralized nationalized state and allowing the private sector both in terms of space and incentives to flourish in a manner that it did during the 90s and early 2000s.


That metaphor of status, Vytautas is quite awesome because, you know, like some spiders, estate can also be rather predatory. Now, before I go on to talking about the political economy of this and the practicality and likelihood of these kind of changes happening, I want to take another tangent, because which came to mind when you sort of mentioned the fumbles. But what happens in the discourse in India, because, you know, everything is so polarized and everything is so terrible, is that typically we have chosen our tribe and, you know, we will stick with it regardless of what the issue is.


For example, what's giving me what's almost ironic now is that a lot of the people in the Congress opposing the incumbents are completely oblivious to the fact that in their manifesto in the election last year, they had very similar proposals. And intellectually, many of them in private will tell you that this is a step in the right direction. And there was a lot of reflexive opposition to the labor reforms a few months ago, only because they came from, you know, a particular government while earlier across party, there's pretty much been a consensus on the kind of reforms needed, especially since our labor laws hurt workers.


So does that then become an issue? Because on the one hand, we want to build a constituency for these kinds of ideas. But on the other hand, is it incredibly frustrating to see that in these polarized times people just respond that this base tribal level, but they're not looking at the ideas themselves, they are just seeing, which is a party they happen to be associated with at this moment in time. And therefore, any criticism of this government will, regardless of the merit of the criticism, be attacked by a lot of people as being anti national and being whatever.


And, you know, the whole discourse just gets toxic. Is this something you've thought about?


I think that, unfortunately, the politics of the times we are in, it's not just in India, it's actually all over the world. I don't know if you saw the presidential debate yesterday, but, you know, it was probably I don't know whether it was critical or comical, but it's certainly. Almost every thing that you said about the highly polarized nature of politics at the present time in the world, I think the only way out is to keep sending soundbites of reason.


I think we need more economic analysis of these kinds of reforms being laid out in a dispassionate, objective, non-partisan be, I think agree. Economists such as, you know, the social Gulati proclamation. And I feel the need to they need to be raised. They need to be heard. They need to explain what exactly were the failures in the existing system and how they are going to be tackled. Of course, it would help if the government, in the same week when they removed onions from the Essential Commodities Act, then banned exports, saying exactly the opposite signal at the same time.


But, you know, we just need we need we need more economic discourse. We need more discussions along these lines. And perhaps that needs to be greater preparation through written documents, laying out what the failures are with facts and data on the ground. But what are the reforms? What are the options on the table? What are the pros and cons and why specifically funds are being chosen? I think it would be nice if there was a little bit of a discipline of going about this in an organized manner with documents in the past, even though we never implemented many of the committee's reports, we used to set up committees at national level.


They would be chaired, audit the central bank. It would be chaired by the highest quality, highest integrity bureaucrat, former central bankers and so on. And they used to provide a blueprint. Even now, in my piece with Dr Rajan, we refer to the committee of the nineties, the Budget Committee of the 2014. And maybe maybe there is some usefulness in the bureaucracy of actually creating records of proposals which are very carefully laid out, reason for analysed with the merits and demerits and so on.


I think I think that is the only way forward that I see. I think in a way, I I feel quite strongly that we are at a moment when transformational reforms are needed. There's a sign that some of this is being undertaken in the farm, in the labor front. I would add three more pillars to that. One of the fiscal institutions, the financial sector, probably the public sector, banking and presence and insurance, pension, etc.. And third, on the real side, especially on the infrastructure front, I think if we can add these three pillars, I think we will be more decisively on a course correction from the last 10, 12 years that we had of, I would say, patchy growth, short term growth, back loaded with macroeconomic or financial misdirection, short term pump priming of the economy, but down the line losses that are materializing in a very significant way, constant fudging and bandaid kind of solutions rather than decisive action to stop the wounds from festering and spreading to other parts of the economy.


I think we need to do something very decisive, and I think if we do that, the 90s should show us that there will be fruit that will bear out for at least a couple of decades if we do that. I think I hope that it is not just a difficult humanitarian crisis for the country. It is. And tragic as it is, perhaps also offers an opportunity to also actually fix many of the things that were not right. And if we do that, at least the crisis would be we would have utilized the crisis to the best advantage of the economy under the circumstances.


No, no, no. I'm just sort of thinking aloud and adding to, you know, what we were talking about, about discourse is that I think people also are attracted to simple narratives and therefore are attracted to easy binaries. I mean, what's happened in the Farm Bill week was very complex. You know, there's a means versus ends issue. I think the way they pushed it through was anti-democratic. There are issues that you can raise against the bills by saying, hey, what about states rights?


And they should be left to the states equally. Many of the you know, the details of the bill are great. And in fact, what the Congress had in their manifesto last year, which makes it ironic. And as you pointed out, the also did the incredibly stupid thing of banning onion exports the same the so God knows what was happening. So the point is, it's all very complex. And the ones that are things took place. There are things to not raise.


There are things to withhold judgment on, but we don't have an appetite for that. Now, you know, before we kind of wind it up and I leave sort of the political economy question for the last, but I'll get to it by taking a Segway back into the personal, where you had once said that you chose the life of an academic because, you know, you were in charge of your day. You can wake up and you want to convert what you want and so on and so forth.


And at the same time, you chose to give up that life of an academic and actually come and work in the Reserve Bank of India and so on. What drove you to do that? You know what the problems that you thought you needed to solve and that you could contribute to? And what was it like the experience of then joining the government? You know, how was it different from what your expectations were? Yes.


See, as I say, for someone like me who was studying banking crisis, banking regulation, financial stability, I think a central banking job in some ways a natural culmination, at least at some point, to want to be able to take your your analysis, your research, your expertise to implementing things. In a policy sense, a central banking job can be fairly academic as far as allowing you to have the conceptual framework to solve the problems. So I'd always thought this would be a nice thing to do.


I engage a fair bit with central banks in an advisory capacity. Of course, most of the times advisory boards have no executive decision making capacity. Of course, in the end at the central bank, the governor and the board are the ultimate executives who are in charge. But, you know, deputy governors can shape the agenda a fair bit in their own prospective portfolios.


And I was fortunate that I was allowed to have a voice even in a portfolio such as bank regulation, which would not being actually effective, became one of my trust areas as the face of the FBI on some of this, even though I would say that the government and its Vishwanath and was was the main person driving the regulation side, then we were there.


So I think it was just a very natural thing to do. The opportunity came about. I applied for the job. I had a video conference interview with the Finance Committee of the Government of India. It was very serious grilling.


I felt inside I was the right person for the job. Of course, I didn't know who else was applying. So you go through with it in the relative sense you would look great on. But in an absolute sense, I thought I was the right person for the job. And even when I finished my term, I still think it was a very good fit. I you know, sometimes when you are doing what is exactly right for you, there is a magical feeling inside you of satisfaction that this comes naturally to you.


The job requires you to do certain things and you are able to bring all of your experience, knowledge and the ability to work with teams. And I think it was all kind of very nice. I think I enjoyed my experience thoroughly. I thank the government of India and the Reserve Bank of India for this opportunity. I had a great time working with the staff at RBI. I told them in the highest regard for the hard work as well as integrity and I.


I couldn't have asked for anything more. You know, it was also personally very rewarding for me because I spent two and a half years with my parents, it was also personally challenging with my wife things that were in New York. So I was going back and forth a lot. And at some point I just got better at managing the jet lag. But it was quite crazy. Now, when I think about it, you know, to have a family 10 and a half hours a week or nine and a half hours of a timing sense and, you know, total travel time, 20 hours each way, that sometimes I used to come to New York for a day or thirty six hours and go back.


I had my my son was in a play and I really wanted to watch one show. So I remember I landed on Saturday morning. I watched the show at two p.m. and I took the eight p.m. flight back because I had to be at the job. So it was quite crazy in some ways. But, you know, sometimes you are in the midst of things that costs don't actually bear upon you. So that was, I would say, second or third.


See, I have a slightly different take on central banking than what a lot of central bankers do. A lot of central bankers say even if they have been academics in the past, that real world is very complex. You can't use your books. You have to be willing to think on the fly, etc.. And of course, all of that is true. But I disagree with not being able to use frameworks. In my view, it is so complex, the problems are so complex that unless you discipline yourself and think through an organizing framework, it doesn't have to be academic.


But you do need to do analytical thinking that clarifies what are the big issues? What is the key diagnosis of the underlying problem? And based on that diagnosis, what is the ideal reform or policy that you want? What are the political or other constraints in the system? And what is the best way to actually then advocate for change and make it happen? Sometimes you can make the change yourself. Sometimes you have to work with others to make the change.


My approach was that my speeches, which are combined in the book, along with this detailed introductory chapter, I thought my speeches were basically an advocacy for change. They were sometimes written right from first principles. Some of them are a little more advanced, but whatever. We invariably at the end, whether it was resolution of bank loans setting up of a public credit registry to such a decent credit in India, whether it was about striking the right balance between the government and the central bank, whatever the issue would be, they were always meant to actually provide a diagnosis of the key underlying problem and then push for a new.


My ideas may not have been the best ones, but I think if you push for change, you advocate for change. What you want is a public discourse of public debate. And if that bubbles up, then, you know, you get better ideas and you get some movement of the towards the right solutions. As you rightly pointed out, it's not just about a central bank. It's about the fact that that is common man and the economy, that is the government.


And very often the narratives have to be brought together to me to the point that politics and the economics align with what in my case the central bank would do. And I think building that narrative is important. It's key to lend it some reason and then objectivity in the decision making. And I think that's a part of the challenge. And I think I'm very happy. I'm very grateful to the winners I've worked with, especially given the opportunity for giving me a lot of freedom to speak as a deputy governor and and sort of being this Egypt party.


And I see the book as just a continuation. I wasn't sure when I left the Reserve Bank of India of it that I would do something like this as a historical account. It's mainly my speeches, but with that historical account as the common lessons I learned in the introductory chapter on fiscal dominance, I thought I may just let it be one. But the more I spoke to the former governors and deputy governors and reflected myself, it became clear that that, you know, you are on a continuous trajectory of pushing for change.


There are no full stops. You want to use your knowledge, expedients, historical account to try and constantly push the system into the right direction. I think I've been very dispassionate and objective in my discussion of the problems I've I've tried to just push for economics wherever they are well grounded in whatever I see as the clear stream of reason emerging out of that thinking and, you know, hopefully travels to the right place.


I mean, I was just quite alarmed to know that you had contemplated not writing the book, because on my own behalf and on behalf of many of my listeners who I think are surely going to be future readers of your book, I want to thank you for writing it. You know, while you were just talking about why you took up the assignment, you pointed out that, you know, one of the things that reassured showed you was that you knew you would have a voice.


And I have heard you say elsewhere, and I found it very poignant that your exit was a kind of voice. And, you know, in an interview that you did with the girl, you spoke about the time you left and the sort of how you push back against the short termism of whatever pressures over. And you said, quote, When this came to a head, the central bank has to have the ability to say no. Again, that is not in the public interest.


We did say no. We put up exactly the right defensive resistance that needed to be put up in the face of such pressures. Whatever defense we put up was entirely in the public interest. The country is far better off that our banks are not in worse shape than what they could have been given the pressures on us at that time. I think it came at a huge professional cost to some of us. But given the mandate of the RBI and given what we interpreted that mandate to be, we thought we had to pay the price structure.


And a couple of questions here. And one is, of course, the question about the political economy itself that you go into. You have a clear framework of professionals. You know, what is the right thing to do. But all of these reforms that you laid out earlier in the episode and that you've elaborated upon so lucidly in your book, how likely are they to happen just given the incentives of the political players in question number two, how hard was that struggle for you?


Did it get frustrating? Did it seem rewarding? And at times. At times. And thirdly, what kind of struck me is that, you know, when I think of the way some of the protagonists here involved really fought for the good ideas, which in this case by volume, you meant yourself. And Governor, you know, in a democratic republic, we can't depend on people of principle to come and do the right thing. You know, we need rules of the game to be laid down.


Everybody who comes won't fight for the same principles and some will toe the line. And that's just over the long term. That's completely inevitable. So what is your sense of it once? Was it a futile battle to end the battle actually be won, given the way the system is already designed and the way it exists and the way everybody's incentives are? And this is basically my penultimate question. I'll have one more after this.


I think let's go to the three questions in sequence, because it's a very interesting trade, actually. So first, I would say I think the question to me is I think this goes back to the team you have been racing on and off. The question to me is, what is it that the people of India want? Is economics on the region or not? Who they want growth or not? Do they want their children and youth to have high skilled jobs down the line or not?


Or do they really want what looks like easy distribution of subsidies by the government, low growth, low productivity and cozy public sector banking jobs which are highly unproductive for the rest of the economy and eventually also for themselves and their children? And you down the line? I think this is a this is a deeper question I just want to raise. I would think the economics should be a lot more on people's minds than what it seems to be. Maybe it is, but it is not getting vocalised as much the distractions of various types and maybe they are taking over.


But as we say, the right reforms will happen when the politics and economics align or when they are thrust upon us by an unfortunate shock or a crisis. It's better to be in the first situation where politics and economics align and do that. Everyone has a responsibility. I think they have to want the reforms. They have to want the economic change for the long run. I think the narratives, the public discourse, the debate are an attempt to bring together that confluence of politics and economics.


But I do think that no one individual can just simply relegate the responsibility to everyone else in the end. Second, was it frustrating? Not at all. You know, I expected the problems to be severe. As I told you, that India chapter in my Guaranteed to fail book just yesterday, I read it again and I actually felt that. Did the same thing happened, it all happened all over again. Whatever the problems flagged in that chapter after eight or nine years, and sometimes that is the beauty of economics, that when you learn robust lessons from past experiences and you are able to extrapolate that, I'd caution you actually realize that the underlying economics and political forces are likely to play out unless you fundamentally shift.


I think the pressures that we faced were anticipated. I think they were a bit more, if I could say they were a bit more open and maybe a bit more concentrated because of the short term pressures that people are looking to in. 2013 was also a challenging period because there were some other shocks. You know, oil prices were going through the roof between April to October 18, creating a current account deficit problem, the nonbank financial sector and related banking sector issues in September, August, September of 2008.


So it was a very complex mix. I try to describe it to an extent in the first chapter. But no, I was never frustrated. I think I tried to do my job. At some point. I had to take a column on whether what I thought were the key issues, which were now the intertwining of the fiscal and financial, whether being in the central bank was the right position to raise these issues are being outside. And that, combined with my personal situation, meant that it was better to be outside, but it was a form of choice to raise these issues.


And therefore, in the end, I decided to write the book because I wanted to flag these issues. Both as a historical account, but for everyone to see in fact, I've even put my minutes verbatim, I have not even changed the description of the speeches. I have not tried to provide any narrative in hindsight because I wanted to record them as they were given rather than the benefit of hindsight around them. And of course, the introduction chapter is entirely new and binds everything together.


The good news is I wouldn't have done anything differently if I was given a rerun. And I always had this clarity inside me that I want to be able to sleep at night with no regret outcome for the day. If I could change something in the right direction based on my assessment of it, I should make an honest effort to do it. And, you know, you accept whatever comes out of it is a very complex problems, complex sets of forces in war, not just economic, but also political, as you mentioned.


And third, and the last question, can you can you repeat what was the last point?


My thought was sort of thinking aloud of how we cannot depend on Middle East affairs.


Yeah, yeah, absolutely. And in fact, this is my trust all along the book, which is that we have to strengthen our institutions. I think I'm very clear that this idea that a country can be made just on the basis of a few individuals, of course, it is about individuals. In the end, it's individuals who have to make the institutions stronger. But as a framework for thinking about what the country needs, I think what we lack in a significant measure is that our.


The key institutions, enforcement of contracts, rule of law, the independence of the financial regulatory processes, I think these need to be given greater sanctity in the letter of the law in their execution and implementation. And they have to be more robust over long stretches of time through short term political, industrial or other kinds of captures where the pressures might come from. I think I see the independence or the operational autonomy of the central bank as a small piece of this bigger puzzle that we have to solve on one strengthening of our institution.


I think if our institutions are strong, if we get the right individuals, we will blossom even further. But if our institutions are weak, even with the right individuals, we might not be able to make progress. And I think that to me is what we have to tackle. A lot of the reforms I proposed, a lot of the reforms that are proposed in the individual speeches, they are all about actually strengthening the institutions of the country in the financial sector decision making.


And I think it has in a difficult way, I think offered us the right opportunity to undertake some of these institutional changes.


So my final question, which is something I ask all my guests on, whatever is the subject we're speaking about. And, you know, you've been an insider in the system. Your you know, you're intimately aware of all the nooks and crannies of the politics and the economics of it. If I ask you to look forward 10 years for the year 2030 and where India could be, then what's like a best case scenario and a worst case scenario for you to phrase it differently?


What gives you hope and what gives you despair about the trajectory of events? Right. See, I think what happens with having a financial sector that is not doing very well, what happens with the fiscal situation that's overstretched? What happens with lack of. Adequate decentralization and privatization of the sectors of the economy is that outcomes become very risky, they start depending too much on political decisions that will be taken. And of course, many people think this is actually a defining characteristic of what's an emerging market versus what a developed economy, which is that politics should not matter much to the outcomes whose politics is mattering more and more even in developed economies.


To me, that's a sign that they are also actually down, not such a great but in many cases.


So what I'm trying to say is that I think the risks have risen, in my view, not just because of covid, but because of political conditions as well, which has exacerbated these risks if we take the transformational institutional reform path on fiscal, financial and real economy, I think given that the rest of the world is on average also sliding on not such a great but we could actually emerge as very important winners in the process, in my view. This way, this could be a golden opportunity for India without doing much on our own, that the world is looking to diversify its supply chain away from China and given our size, given our work because we are a natural contender.


So the question is, do we contend with, given that this opportunity as it is and you know, will be what is required to really make it? I think as I see in the first sentence of my epilogue, no country can take growth for granted because like it, you have to invest it every single day. Sometimes you have made a big investment and then you can milk it for a while, but you have to keep at it. You simply can't take it for granted.


No country is so good or strong that they can grow for decades without actually undertaking more transformation along the way. So. So that's the rosy. But that if we take the right institutional reforms and fiscal, financial and real cite, the global situation is such that India could actually manage to be a very significant beneficiary. See, we have always been well in services where we have not done well is in manufacturing and where we have, I would say, finally shown signs of some conviction and intent is on the agri side.


But on agri side, I think you need also consolidation of the sector so that a lot of other agri labor can actually go into higher paying and better skilled jobs over a period of time. So to me, that's the rosy outcome that politics and economics indeed align, recognize the opportunity that exists both in the global and in the mystic sense. In the global sense, it's an opportunity. In a domestic sense, it's a necessity, but it's not going to come without taking tough actions.


What is the scenario? The bad scenario is one in which we don't get out of this regression of the last 10 years in going for more centralization, going for more quick fixes to pump priming of the economy, rather than actually putting in real pillars of fiscal, financial and real stability for the next two or three decades. If we go down that path, we just keep doing bandaids on our fiscal, financial and real economy side. I think we will see an erosion of the growth potential of the economy on a steady basis, loss of productivity, loss of the ability to create good jobs and high skilled jobs.


And it could just be it could be sort of a stagnation of growth. Whether our supply side remains benign and doesn't allow inflation to pick up down the line or whether inflation also starts rising. If inflation starts rising with stagnating growth, that would be a very, very terrible stagflationary outcome. Typically, high debt situations also have their own deflationary pressures. And so my sense is a bad scenario, a really bad scenario would be stagflation, a scenario not as bad as that would be stagflation, stagnation of growth, but with also the kind of very low inflation or even deflation.


I think so. I think a course correction, if undertaken, could put us closer to the to the rosy part. But if we don't course correct, I think I do fear that we are slipping in terms of our growth potential. And that that worries me, therefore, I hope that the book, the chapter, some of the messages in there, at a minimum, they get more individuals to think about economics in what they are demanding from the system.


As I said, the ideas, I hope, may not be the right ones, but I think they certainly seem to be relevant questions for India. And so hopefully public debate can push the system to closer to the ROUZIER. But then the worst scenarios that I outlined.


I love reading your book and I enjoyed talking to you today. I think I've learned so much energy taking some time to listen to the episode again and process everything. Thank you so much for your time and insights.


Thank you. It's been a terrific conversation and all the best to you and all the listeners and to your loved ones for staying safe and healthy during these challenging and difficult times. I hope that the curve is about to peak soon. It's showing some signs of declining over the last week or two, and I hope it has a steady decline as New York City Post mid-April for the last three, four months. I would love to see that every day I wake up and I see I type in the coronavirus cases.


That's my first thing. I type because I want to see that the curve is steadily declining for several weeks in a row so that we can start dealing with the post-conflict recovery phase very soon. Thank you.


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