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AfricaMoney | October 19, 2017

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RBI governor says India’s central bank can learn much from Bank of Mauritius

RBI governor says India’s central bank can learn much from Bank of Mauritius

The Reserve Bank of India (RBI) governor, Dr Raghuram Rajan, spoke on how there are no easy ways to growth and countries must ‘bite the bullet’ by embracing necessary structural reforms. (Image: Marie-Lorry Coret)

At 51, Dr Raghuram Rajan is one of the youngest governors ever to head the central bank of India. But age is not all that sets him apart and it is his chiselled good-looks that cause heads to turn as well, with a columnist in India calling him the ‘Poster Boy of Banking.’ Be as it may, the Reserve Bank of India (RBI) governor gets people talking wherever he goes, and Mauritius was no exception to the rule.

Whether it was his keynote address as the chief guest at the annual dinner of the Bank of Mauritius last evening, or his press conference today, the RBI governor brings to the table a professor’s eagerness to educate his audience and a boyish enthusiasm to change the world (aka financial inclusion). That he is a professor of finance at the University of Chicago only helps sustain the feeling of being in the presence of one of the finest intellectuals of our century — and certainly one of the few who successfully predicted the global economic crisis in 2007.

At the press conference held today at the Bank of Mauritius, the RBI governor addressed concerns ranging from financial inclusion to recovery from recession and finally, sketched out his brief impressions of Mauritius, having been here just two days on his first ever visit to the island economy. Even as BoM governor Rundheersing Bheenick made it clear that the RBI had helped Mauritius greatly in setting up a Market Intelligence Cell against Ponzi schemes, Raghuram Rajan concluded on the note that Mauritius has much to teach India when it comes to coordinating among the different regulatory agencies across banking and non-banking financial services.

Key takeaways from the press conference:

Le Mauricien: Having predicted the global economic crisis, how do you assess the situation now, given that we know India has been one of the five fragile emerging economies?

Having been right once, by pure chance, I find myself being asked to predict the future time and again. Well, all I would like to say for now is that we are in a situation of recovery, but it is important that the global economy manages the process of recovery well. In particular, the recovery from the crisis of 2000 was not managed particularly well, and led to what we all know as the global economic crisis of 2007. The need of the hour is sensible and sustainable sources of development. It is developing countries that understand this requirement particularly well, and have discovered these sources of growth, even as they manage macro-economic stability well. That is what Mauritius is doing and that is certainly what India is doing. They are grappling better with recovery pangs compared to the developed world, which has much to learn from its developing counterparts, the first being the realisation that this recession is not part and parcel of a cycle of ups and downs, but a problem of growth. It is the same problem that developing countries have faced for a long time, and each time they have been told that it is not a cyclical issue, but a real problem of growth.

As far as India goes, we were hit by currency volatility last year, but over the last year and a half, we have undertaken significant reforms to the Budget and the monetary policy, and now with the new Government, a series of structural reforms have been undertaken as well. All this has combined to ensure that the volatility that hit us last year is no longer present and we are now one of the most stable currencies in the emerging market, with Mauritius being way up there as well. Fiscal deficit is down and we are seeing tremendous foreign inflows as investors look for reliable and stable homes. The fragility of last year is no longer true of our economy, but there is much homework to do to get Indian back on a strong growth path. The government and the central bank have put together a series of reforms which amount to big cumulative reforms. So my sense is, we will do what it takes (to get the economy back on track).

AfricaMoney: Last evening, you spoke about the need for financial inclusion. In this context, the Indian government has rolled out the ‘Jan Dhan Yojna’ under which 75 million accounts are to be opened by January 26, 2015. Any update on this initiative?

At last count, we already had 70 million accounts so the roll out is already happening. But, as the government is saying, the real issue is utilisation in these accounts. So, it is important to run public benefit transfers such as pension, cooking gas subsidy and next up, kerosene subsidies as well, through these accounts. Once people get money in these accounts, you can monitor how people use these accounts, which can finally act as a step to granting them credit.

Having said this, the ‘Jan Dhan Yojna’ is an important step in trying to include the country fully in the banking net. We as the central bank are also trying to help by resolving issues such as documentation, which inhibit people from opening accounts. Secondly, we need new kinds of institutions which will traverse the last mile, and help people in villages to open accounts. So we might need new kinds of business correspondents and perhaps get payment banks as the BoM governor spoke about last evening, to help people make payments through electronic transfers, near field communications, and so on. But, the real question is, can we leapfrog through technology and make banking cheaper and accessible? Unfortunately, in India, not only do we have more people than Mauritius has, but they are spread over a much larger area. So we have issues of distance, together with trying to reach out, and we are trying to bridge that gap through technology.

Le Capital: You were talking about reforms, but only in context of bank accounts. But what about subsidies, and targeting subsidies, especially since you are 1.2 billion while we are only 1.3 million in Mauritius and still face issues with targeting subsidies? How practical are you in your approach, as to some people, targeting is as simple as taking a leaf out of IMF’s book?

I don’t know which IMF book this would be, because the IMF actually doesn’t do this stuff. But yes, you are right in your statement so much as the IMF is always harping on better targeting of subsidies. The key in any scheme of direct benefit transfers, accounts and electronic transfers is to identify the beneficiaries well. An exception to this rule is universal schemes such as cooking gas subsidy where every household across India gets 12 cooking gas cylinders at a subsidised price, so there is no need to identify the beneficiaries. However, there are other subsidies where you have to identify, such as rice and wheat, which are only subsidised for the poor and village-by-village censuses are sought to be carried out. You are right insofar that there may be some noise in those surveys, and every last beneficiary may not be identified correctly but the thought process eventually is that we can also rope in village locals to help corroborate survey findings and arrive at the correct list. With unique IDs expected to be widely available soon, we can identify those who are claiming benefits, when they in fact own a home, or car, and ask such ‘beneficiaries’ the right kind of questions, at the very least.

(cross question) What about political support? Isn’t this kind of direct benefit transfer a sure way to lose elections?

I would actually argue the exact opposite. If you can give people money, there would prefer it to products and services that they can’t use as well. For instance, if I need milk for my children, rather than more food grains, I would prefer if I were to be given a direct cash transfer equivalent to food grains subsidy, and use it to buy what I really need for my household. Similarly, instead of providing me a school, if you can give me the cash to choose between one school or another, you empower me. Cash transfers, if judiciously targeted, can be a source of empowerment. So, I would argue, that this is not a priori obvious that it is a way to lose elections.

ExpatTimes: On a light note, when you took over as RBI governor, columnist Shobhaa De called you one of the most handsome men to get India on the growth path. Linking this to the statement made by David Cameron that a second crash is looming, what according to you can be done to prevent this crash from occurring?

Look, we can all see the weaknesses in the global economy. The key to my mind in preventing the weakness from persisting and getting worse is for every country to figure out the reforms it needs to do. In the short run, some of these structural reforms are very painful and don’t pay off immediately. But, one lesson in economics is that if you do the right things, it will eventually pay off in a big way. So, I would argue that the response to David Cameron’s concerns is that countries must do reforms – increasing productivity, bringing more people into the marketplace, easing access for those people to get into the marketplace and increasing capabilities of people who are left behind though education, healthcare, etc — all of these can work together to make the world more productive. There are no easy ways to growth – that is the one key message we must take away.

Le Mauricien: During your visit here, have you heard about complaints from bankers in Mauritius on difficulty to recover their money from loans made in India.

No, I haven’t heard any direct complaints, but I would believe that if some banks have participated in lending to projects in India, there are certain projects which are in trouble and they may be part of the banking consortium for those projects. For the most part though, if these are infrastructure projects, there are a variety of reasons why these are getting delayed. The current government is trying its best to remove impediments in such infrastructure projects. There may however be a time lapse before such projects take off, as some of them are projects which were conceptualised some time back, and there may be restructuring required for such projects to be relevant in the current context. Some of them may have to be rethought altogether to make them profitable at all, as they were conceived in a pre crisis scenario. But overall, we have very few roads that are going nowhere, no airports which do not have visitors, and tremendous energy needs that need to be met — making infrastructure plans in India very viable projects indeed.

MBC: Can we have your impression of Mauritius?

First up, I must say that you should take my impression with a large pinch of salt. I have been here for barely two days, and two days is very little to get my bearings, leave alone give my impressions of the economy. But for what it is worth, my impression is that Mauritius is a thriving economy which has achieved macro economic stability in the real world. The leaders are thinking seriously about the role the economy needs to play in the future, and how, as an island economy, it can strengthen its position as a linking pin between the great continent on your left hand side – Africa – and the great continent on your right – Asia. In this context, Singapore and Dubai come to mind as impressive gateways which have done a great job at being linking pins for trade and finance flows. We certainly in India have lots of historic ties to this country,  and these are ties that I hope will get strengthened as we go forward, but we would also like to see trade and finance flows through this country that will come by or be generated in India. And we very much look forward to this partnership as we go along.

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