An afternoon at the Gokhale Institute with Dr. Rajan and Dr. Subramaniam

What a day! The one dominating thought in my mind was that this was an event to parallel the likes of the Sawai Gandharva Music Festival, that Pune hosts so very graciously every year. Why should I even say it paralleled the Sawai? It was the Sawai, except that it was an Economics Sawai, hosted by the Gokhale Institute of Politics and Economics. The convocation of the Masters’ students of GIPE is accompanied by the very prestigious Kale Memorial Talk; the speaker this year for the Memorial Talk was none other than Dr. Raghuram Rajan, Governor, RBI.

Dr. Rajan chose today to speak of the Global Economic Changes and their implications on Emerging Market Economies (EMEs) and on India. The talk was typical Rajan, more in a story format that kept the audience engaged through the one hour that he spoke. He broached the topic by saying that typically, rebounds that follow sharp declines such as the one the globe witnessed in 2008 are normally extremely sharp and so, the current soft growth of the globe comes to be something of a surprise. The post WWII scenario in the globe was followed by a very sharp growth phase, especially in Europe and the US, a phase that saw women getting absorbed into the work force, more industrialization, more consumption, larger families and definitely, more trade. The Smoot Hawley legislation as well as the beggar-thy-neighbour policies were typical in the aftermath of the Depression; these were however rapidly replaced by the GATT and an understanding that faster exports would facilitate faster recoveries.

The decade of the seventies saw major turbulence and high inflation periods creep into the industrialized nations. The policies and policy makers of the likes of Paul Volcker were geared towards disinflating the systems so that growth could be re-started. Governments tried to push more growth through public spending; however, the weak growth meant that taxation would not really by available as an option. The only tax option left for the Government was that of inflation tax; print more and finance more spending. And therein was born debt. On one hand the public sector took on more debt; on the other, companies too started financing their operations more through debt as cash flow disturbances continued to prevail. There is no problem with debt driven growth when it works; if it fails though for whatever reason, it fails with a pretty big shock to the economic system and players.

There is another fairly interesting part connected to corrective reform actions that happen in the aftermath of such failures. When the process of correcting excessive debts starts, there is high amount of taxes that the younger labor force has to bear.

Switching to the 2008 shock, we find that the world was already in a debt balloon when this shock happened. Many countries tried to go Keynesian, to create public spendings but were unable to do so in the face of the huge outstanding debt. The only option left was to move into unconventional monetary policy, the types that has been followed by the US, Eurozone and Japan.

Now, the implications of this kind of behaviour on rest-of-the-world are broad ranging. Whenever Central Banks of the industrialized nations are quizzed about the rationale behind unconventional monetary policy, the responses are normally of the following types:

  1. The world will be a better place if we grow well. So unconventional policy benefits not only us, it benefits everyone over a period of time!
  2. We are inflation targeting economies. So long as inflation is under control, what could be the problem in following unconventional monetary policy?
  3. Corrective reforms are important and required, but they may inflict unnecessary pain on the system. So, QE can well be the panacea for creating the necessary momentum.

The point really is, that whenever EMEs have experienced any such kind of a crisis, structural reforms as a solution have practically been thrust on us. However, when the same kind of issues are faced in developed economies, suddenly the global institutions tend to take a much softer stance, talking about the “pain” quotient of the structural reform process. This really needs to change and EME Central Banks probably need to sit up and talk more about these issues at global meetings.

And for this, we need to consolidate our learnings, study the implications of these unconventional policies on our economy more sharply, so that we can formally present our views in international forums.

Whew! These were effectively, the main points that came through. There was of course, also a lot of talk for the new graduates. About enjoying the journey, about making sure that you enjoy whatever work you do, about making sure that while you yourself develop as a professional, you also try to give a bit back to the society. The young economists on the other hand were simply thrilled to have Dr. Rajan in their midst. The cheers and the clapping that happened when he entered the auditorium was something else!

Once this was done, we had a smallish break in which frankly, I was really wondering whether I could feel better than this at all. It was exactly the feeling that one would have after Kishori Amonkar had just wrapped up Raag Bhoop. The air would be filled with the swaras and every breath would be laden with musical oxygen.

I enjoyed myself talking shop with other economists, catching up with other friends/ faculty and of course students and was really a bit apprehensive about attending the second talk; I wanted to savor the thoughts for a while. The second talk on Making of the Economic Survey of India was by Dr. Arvind Subramaniam, Chief Economic Advisor, a friend of Dr. Rajan’s and also a collaborator on many a piece on economics that they’ve co-authored. As we re-settled in the auditorium, Dr. Subramaniam started by saying that he’s often wondered how much the ESI is worth. And he actually proved its worth some $48 billion; the market climbed 2% post ESI and pre-budget! The light note was perfect to connect to the audience; his style was so engaging, so intense and at the same time humorous, that it was a treat to watch him deliver the main points of the ESI.

Since the private investments in the country have been falling, the onus of creating growth would have to be necessarily taken up by the GOI. However, could this be done with limited fiscal space, given that more tax sharing would have to be done with the states? Yes! Since state record of fiscal consolidation is much more superior than that of the Center, despite this limited fiscal room, there would actually be an overall plus for the Indian economy. So, the ESI this time, redefines the concept of fiscal federalism.

The pedestrian notion of fiscal federalism is that states have to be given a share in the revenue of the Center and states very often grow at the cost of the Center. However, this time around, the ESI looks to understand whether the states grow and thereby enable the Center to do a better job in terms of delivering crucial output.

Another very interesting “factoid” that he chose to share was the interesting idea that those CMs who have been elected 3 straight times in state elections have all been those who post an agricultural growth rate of more than 8%. Clearly, agricultural growth by now, is not an economic priority, but a political one.

I found the comment on the new GDP series particularly wonderful. The new GDP series created by the CSO has shown a sudden blip in the growth rates. There has been a genuine effort to change the base to a relevant, recent year; to broad base it, to cover more manufacturing sectors in it and to benchmark it internationally. However, despite the genuine effort and willingness of all agencies to create a more relevant pattern, the results have been a bit mystifying. That, said Dr. Subramaniam, does happen in life. Processes are impeccable, but outcomes tend to be mystifying. Democracy is an example of the same type.

He also spoke about the almost irrationally obsessive nature of ratings agencies towards fiscal consolidation parameters. He was emphatic in pointing out that consolidation has to happen for consolidation sake, not really to please any agency. Having said that, good processes would automatically earn brownie points from the rating agencies in any case!

The content of the talk was pure pleasure; but the delivery matched the content head on. The light way in which he was handling questions, fun but extremely earnest, was pure sublime genius. Dr. Subramaniam talks economics with his whole body; I was reminded a bit of Pt. Bhimsen Joshi literally physically riding on the swaras of Shuddha Kalyan. Shuddha Kalyan to effortlessly replace the Bhoop swaras. ESI effortlessly added on to the monetary policy gupshup.

It was an evening to remember. A hall filled with economists. A stage reigned by geniuses. Thoughts concerned with optimum policy issues. And pure, pure happiness. Sawai kind of happiness.













One thought on “An afternoon at the Gokhale Institute with Dr. Rajan and Dr. Subramaniam

  1. Every post reveals a new side to your talent. To integrate a lecture on economics seamlessly with a shastriya sangeet mehfil requires great talent! Your post reminds me of that madhyalaya bandish in Raag Nand by Kumar Gandharva – eclectic, electric and elevating! Keep going!

    Liked by 1 person

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