- 14 minutes ago
In an exclusive interview with India Today TV, former Reserve Bank of India Governor Raghuram Rajan shares his thoughts on how to deal with the ongoing conflict in West Asia's impact on the global and Indian economies and more.
Category
🗞
NewsTranscript
00:00Now, as we all know, the war in West Asia has shaken the global economy and India, and the fear
00:06of war clouds returning has sent jitters.
00:09As I said, handling the economy is now possibly the biggest challenge facing the Narendra Modi government in the next
00:18one year.
00:18And there are many worrying signs that we've seen.
00:21Remember, the rupee recently hit 96 to the dollar.
00:25It's among the worst performing currencies right now.
00:28Crude oil prices have risen, and the government has increased domestic fuel prices multiple times.
00:36Forex reserves have fallen from $728 billion on February 27th to now $682 billion on June 5th.
00:46Wholesale inflation is at a three-and-a-half-year high of 8.3%.
00:51Food inflation is at 7.1%.
00:54Fertilizer subsidy is expected to rise from the allocated $1.71 lakh crore to $2.5 lakh crore rupees.
01:03These are the worrying signals.
01:05I'm now joined by a special guest who I spoke to earlier, one of the world's leading voices on the
01:10economy.
01:11Listen in to Raghuram Rajan.
01:20So, in the backdrop of the uncertain global climate created by the conflict in West Asia, the focus remains on
01:27the Indian and global economy.
01:30What lies ahead?
01:32What are the headwinds that we will now face?
01:34Joining me now is one of the world's most distinguished economists, a former Reserve Bank of India governor, Professor of
01:41Finance at Chicago Booth, and also has been with the IMF in the past.
01:45Dr. Raghuram Rajan, good to have you as always on the show.
01:49Thank you very much for joining me.
01:52I recall speaking to Dr. Rajan in March, soon after the conflict broke out in West Asia, and then you
01:59had said if this conflict continues into the summer and beyond, then the world could be heading for a very
02:05grave situation.
02:06We're now in the month of June, and there is no end yet to the conflict.
02:11How do you see, therefore, all of this playing out in terms of the global economy and India's economic challenges?
02:21Certainly what has happened is that this conflict has lasted way beyond what the initiators, Israel and America, thought would
02:34happen.
02:35And negotiations are also underway.
02:38I think there is some hope that an agreement will be reached.
02:47The hope is always in the next week, but every week we are disappointed.
02:52So it clearly is harder.
02:55There are some issues which it's very hard to bring the two parties together.
03:00Of course, this is not even talking about the nuclear issues, which early science suggested will be postponed into the
03:07future.
03:08The world has actually managed better than one expected in the beginning, and that's because there have been all manner
03:18of adjustments.
03:19First, we have run down the buffers that existed, both the commercial buffers as well as the strategic buffers of
03:28oil and other forms of fuel.
03:32So that's one source of adjustment.
03:34Another has been kinds of substitution.
03:38Countries have moved towards using more coal.
03:41China is an example.
03:43We also have seen that in China, cars are not using gasoline anymore.
03:50They're using electricity.
03:52Of course, China has a big EV population, and that has taken some of the brunt off.
03:59In fact, if you look at oil production also, that has increased substantially in the United States, while oil consumption
04:07by China has fallen, in part because they're not filling their strategic reserves anymore.
04:14And a number of industries have moved away from high-priced oil to much lower-priced coal that they have.
04:21And I think such substitutions are taking place across the world.
04:24What is true is this room for maneuver is reducing.
04:30Ultimately, the fact that, you know, around 10 percent of world energy is shut out will play a part in
04:39slowing economies down because the buffers will run out.
04:43When the buffers run out is everybody's big question.
04:47Nobody quite knows when.
04:48But if we see this kind of impasse by the end of summer, almost surely we're looking at much slower
04:56growth in the world economy than we anticipated initially, partly because of the effects of oil shortages.
05:03And that, too, it will, you know, affect India for a similar reason.
05:12Let's come to India for a moment because you mentioned oil shortages and the energy crisis.
05:17We're already slowly feeling the heat.
05:19There have been half a dozen hikes of fuel prices at different times in just the last month alone.
05:26And when you then speak to governments, policymakers, they say, look, we're better off than the rest of the world.
05:32Compare the hike in fuel prices in India to what the hike in fuel prices have been in parts of
05:38the Western world or indeed in our neighborhood.
05:40Do you go along with that argument?
05:42Is that a good enough argument to make that, look, we are no different to the rest of the world?
05:46Well, in fact, we are better off, they say, than the rest of the world, even though we are a
05:50heavily oil import dependent economy.
05:55Well, the reason the government can say that it hasn't passed through is because it's taking the hit on the
06:02fiscal.
06:03There is a limit to how much hit you can take on the fiscal without concerns of serious long-term
06:10damage being done via, for example, the higher debt that has to be issued, the need to finance that debt,
06:18the interest payments that will go out and so on.
06:21Remember, we are trying to bring down the fiscal deficit.
06:29There is some leeway, the government is using that, but this is not a pleasant state of affairs where you're
06:36trying to cushion the blow from higher oil prices by either forcing the oil marketing companies to take it on
06:43their books,
06:43which ultimately is a hit to entities that are partly in the private sector, which you shouldn't be doing, and
06:50longer term, taking it on the government's budget and balance sheet,
06:55which effectively is postponing the problem to future generations of Indians.
07:00We have so many needs for government spending, including schools, health care, and so on, and subsidizing especially richer households
07:12who consume more oil by keeping the prices low is not the most sensible government policy if this continues into
07:19the medium term.
07:24So what would you suggest, given as you're saying that there is pressure on the fiscal, that this cannot be
07:29sustainable for an extended period,
07:31and there is, as I said, no clear sign of when the Strait of Hormuz will open, when those oil
07:37flows will be back to what they were pre-war.
07:40What is the solution? Particularly, let's look at the energy crisis first.
07:46The government keeps talking about the fact that we are diversifying our basket, looking for other countries from which we
07:52can import oil.
07:53What is it that we really need to do in the short term over the next few months?
07:57In the short term, almost surely we have to pass it on.
08:01Maybe not in one jhatka, but in steady sort of increases in the prices of all manner of energy, including
08:12gas and oil, petroleum.
08:16As well as diesel.
08:18So this has to be a steady process.
08:20And, you know, the longer it lasts, the more adjustment you will have made.
08:24You can't sort of wait and hope and pray that the Strait opens up, because it may take longer than
08:31you think,
08:31given that on both sides of the bargaining table, you have some very, very strong and determined interests who may
08:40not give in that easily.
08:41So I would say a steady sort of process of raising the price to make it match the market eventually
08:49is what is important.
08:51Because part of the adjustment to higher oil prices is lower demand.
08:57And it is important that if these prices stay higher, our industry, our restaurants, as well as our people,
09:06especially the richer ones who consume more of the stuff, adjust.
09:11Now, that doesn't mean that you can't find ways to help those at the bottom of the pyramid.
09:16You could still subsidize gas cylinders, for example, for those.
09:21But I would say, by and large, you know, any kind of subsidy should be very targeted at this point.
09:27And we have methods of doing that targeting, but pass on the prices more generally.
09:37Let's look at some of the headline numbers, Dr. Rajan.
09:40The figures that came out just a few days ago showed the Indian economy showing some resilience in FY 2026
09:48with 7.7% GDP growth.
09:51The government said, look, this is a sign that the economy is far more resilient than many believe.
09:56The RBI, though, has cut its financial year 27 growth forecast to 6.6% while raising CPI inflation, consumer
10:05price index inflation to 5.1% against earlier projections of 4.6%.
10:12So are we going to see possibly the concern over inflation and the impact that could then have on purchasing
10:20power of consumers?
10:23That is the real challenge, isn't it?
10:25Because the Modi government has been very successful, reasonably successful over inflation in the past, but they now could face
10:32a fresh challenge.
10:33Is that, according to you, going to be one of the big challenges?
10:35How do you keep inflation under control?
10:39It will be a challenge for sure because inflation comes in through higher oil prices and then feeds through to
10:45almost everything else in the economy.
10:47What the government and the RBI will be watching is how much this is a one-time effect with higher
10:55oil prices feeding into prices of goods and services.
10:59As you said, given that the prices haven't been passed through so far, it's not surprising that inflation is a
11:05little calmer than it would be.
11:07But eventually, as you pass through, it is going to show up.
11:11The real question for the Reserve Bank will be if these kinds of higher inflation, one-time higher inflation, starts
11:21prompting more of an inflationary spiral,
11:23that people start expecting higher inflation, and then it gets more out of control.
11:29Right now, projections are still that inflation will stay within the RBI's band, and it can be a little calmer
11:40about raising interest rates and slowing the economy while that is the case.
11:45But it may not last forever, especially if this war lasts longer and prices move.
11:51Right now, today's oil price is $93 a barrel.
11:54This, if it goes to actually slow down demand, would be much higher.
12:00You know, some people say maybe $150 to $200.
12:03That is anybody's guess.
12:05But if it gets to those levels, then you're seeing both prices go up, but also expectations of prices going
12:12up go up.
12:14And that is the killer as far as inflation goes.
12:16When people sort of start billing, inflation will be higher and make inflation actually higher because they themselves will demand
12:25higher wages.
12:26Businesses will pass through higher prices.
12:29Now, the other issue, and this may seem strange given the high GDP numbers, is that there does seem to
12:37be, you know, some spare capacity in the economy.
12:41I can't find other ways of explaining why investment by corporations is so tepid.
12:48If investment is so tepid and there is some spare capacity, it may well be that corporations themselves don't raise
12:56prices that quickly.
12:58So there may be another margin there for us, for India, to go slow on raising interest rates.
13:05That said, you know, either one or the other has to be a little leafy.
13:11Either the GDP numbers don't reflect the true state of the economy or corporations, for some reason, are overly pessimistic
13:19and are not investing.
13:21It's not clear how you can have an economy growing north of 7 percent, as the GDP numbers say, and
13:27investment, a corporate investment, really so tepid.
13:34Have you tried to – what is your view of that?
13:37As I said, the headline numbers showing the economy growing at 7.7 percent, slowing down, yes, and yet private
13:45investment not picking up.
13:46What could be the reason?
13:47Arvind Subramaniam the other day seemed to suggest that there is an element of fear factor that could exist,
13:53or a sense that cronyism has grown in the economy, and hence many others are not investing.
13:58The MSMEs, the smaller and micro enterprises, have taken a bit of a hit, is another view.
14:03What's your view?
14:04Why is it that investment is not picking up?
14:07If the headline numbers show 7.7 percent, why is private investment, in your view, still not picking up?
14:14I don't understand it.
14:15Or are the GDP numbers falsified?
14:18Look, I think if it was growing at this rate, you would definitely expect investment to be higher.
14:27You know, this was a puzzle 10 years ago.
14:30It still is a puzzle today, why corporate investment hasn't taken off.
14:33And so, I mean, the only answer with the kind of growth we've seen over the last 10 years in
14:40the official numbers
14:41is that perhaps we are growing less strongly than those numbers suggest.
14:47But, you know, again, I don't know where the discrepancy is.
14:53You know, Arvind Subramaniam, as you know, has pointed to a number of data points
14:58where growth is less than it should be, even while we are seeing very strong GDP growth.
15:05But I cannot fathom why corporate investment is not picking up.
15:12Because with this kind of growth, you reach capacity, you know, sooner.
15:17And one of the things you see in the capacity numbers that RBI puts out…
15:21So, do you trust the growth numbers?
15:25You know, I don't…
15:26Do you trust the growth numbers?
15:27Sorry to intervene.
15:28Do you trust the growth numbers?
15:29Let me put it this way, that something is off.
15:35And I have to believe that, you know, you can't just attribute the lack of investment to fear.
15:44Our industrialists are fairly money-minded also.
15:47If they saw the opportunity in investing, they would.
15:50The fact that they're not investing suggests that, you know,
15:54they're not seeing the kind of demand that would be consistent with these growth numbers,
15:58which suggest the growth numbers aren't fully reflective of what the economy is doing.
16:04Can I…
16:07Can I move to an issue which, of course, you've written about in the past, the rupee.
16:12When we last spoke in March, it was about 93.4 to the dollar.
16:16It's gone up to 95.6.
16:19You also had, you know, the depreciation of the rupee.
16:22Do you believe that, as one member of the Prime Minister's Economic Advisory Council says,
16:28there's nothing wrong if the rupee falls further, even goes, you know, above 100 to the dollar?
16:34Do you believe that there will come a time when that will stretch us, particularly on our forex reserves?
16:40Or do you believe it's okay to have a free fall?
16:42Yeah.
16:43Steady adjustment is okay.
16:45A free fall is not.
16:46So, you know, with our current account deficit larger, but more important,
16:52the fact that capital is not coming into India to the extent that we need to finance our deficit,
17:01you know, the rupee adjustment, some of it is necessary.
17:05What you don't want is a situation where the rupee falls because people think it's going to fall,
17:11and you've got a lot of investors abandoning rupee assets because they fear a further fall in the rupee.
17:19That kind of free fall can be very damaging because it can take you far beyond what the reasonable value
17:25of the rupee should be.
17:26This was a situation we faced in 2013 with the taper tantrum where the rupee plunged 25, you know,
17:35a significant amount over the space of two, three months.
17:38And, you know, there was a clear case for rescuing the rupee at that point because the free fall was
17:46unwarranted,
17:48which, you know, as the rupee recovered its strength, that was certainly the case that perhaps it had been oversold.
17:57You know, one could debate whether that's a reasonable place.
18:01We are in that kind of place today.
18:03I don't think we are.
18:04But nevertheless, what is worrisome is the fact that capital inflows are not coming in to the extent India needs.
18:13With all this talk about what a wonderful economy India is,
18:16the seven-point-something percent growth that we saw in the year so far,
18:24it is not consistent with the kind of, you know, investment from foreigners also.
18:32FDI is down significantly.
18:34They're not bringing in money to build factories in India.
18:39And portfolio investment has, they've been selling and getting out,
18:44which is consistent with a lack of confidence in the Indian economy.
18:48I mean, now, this may be, you know, headlines.
18:50India is not positioned well for AI, which I think is a debatable question.
18:56And second, India is not benefiting from the China plus one strategy.
19:00We're still not a manufacturing power despite all the efforts of the government.
19:04But this set aside, I think part of the problem is nobody knows what India's vision is,
19:10other than it wants to be a developed country by 2047.
19:13What are you going to emphasize?
19:15What is the economic resources, what is the economic growth going to be?
19:20How much are you going to invest in your people?
19:22None of this is particularly clear,
19:25even while we have probably the strongest, you know, government, politically speaking, in decades.
19:34What is the government trying to do?
19:36You know, what we had in the recent past is a bunch of...
19:42Yeah.
19:44Go ahead.
19:46Go ahead, go ahead.
19:47No, no, please go ahead.
19:48Because, you know, taking off from what you just said,
19:52Surjit Bhalla, former executive director at the IMF, was on my show a few weeks ago.
19:56He created a controversy by suggesting that while the Modi government was politically strong,
20:01it was at its economically weakest.
20:03And he argued that policy uncertainty, domestic structural bottlenecks
20:07were discouraging long-term capital formation.
20:10And that is why there was this sharp decline in net FDI.
20:14He said, inconsistent taxation, regulatory, unpredictability, compliance, burdens, retrospective disputes.
20:21So, obviously, it's not just the war, the conflict in West Asia that's obviously adding to the stress.
20:29But this is...
20:30There is a need for, as you said, a clear vision, direction, and specifics to be addressed.
20:36Absolutely.
20:37So, the weaknesses in capital inflows into India predate the war.
20:43We've seen slower inflows for the last couple of years.
20:49Of course, the stock market reflects some of that.
20:51But the FDI numbers most clearly reflect.
20:54And that's consistent with the fact that Indian entrepreneurs are not investing,
20:59the point we talked about earlier.
21:01So, both foreign investors as well as Indian investors aren't putting assets on the ground.
21:06That is suggestive that they see something that is not reflected in the headline GDP growth numbers.
21:13But to the point that what does India stand for, economically speaking?
21:19I mean, this whole, you know, make in India idea, yeah, it has had some successes.
21:28We brought self-holder assembly into India.
21:30But the kind of growth that we expected, both in terms of manufacturing output growth,
21:35but also job creation, is much more tepid than India needs.
21:40I mean, you saw the Cockroach Party take off, partly because we have millions of unemployed youth
21:47that we're not providing jobs for.
21:49What is the strategy to provide them jobs?
21:51And talking about 2047 is a little irrelevant.
21:56When you're not describing the pathway to 2047, what are we going to do?
22:00And to your point, you know, start first by reforming the kind of getting rid of some of the irritants
22:07that make it harder to invest.
22:10Now, what we had last week with the proposals on the, you know, attracting foreign investment
22:17are important band-aids, but they are band-aids.
22:22They are ways to, you know, bring in money, perhaps by liberalizing some of the frictions
22:27which kept the money out, but also providing a huge subsidy in terms of the foreign exchange swap
22:33that the RBI is providing.
22:35The question is, why do we still need to subsidize foreign investment if we had a strong growing economy
22:43which would attract that investment?
22:45And my worry is, yes, we'll get the money coming in, but we need to also accompany that
22:51with important reforms that actually make India a better place to do business
22:56and give people a sense of what the India narrative is.
22:59Is it going to be more services-oriented?
23:02Is it going to be high-tech manufacturing?
23:04If so, do we have the necessary inputs such as stronger engineers?
23:10I was, you know, I told you a little bit about being back at my alma mater, IIT Delhi,
23:15and it needs massive resources to be competitive with some of the universities that China is producing.
23:22Our engineers are going to compete with Chinese engineers.
23:25They were better than what China was producing in the late 1990s and early 2000s.
23:32Now I have to say China has far better universities than India has at the top.
23:37We need to understand that we risk not investing in our human capital.
23:43If we don't invest in our human capital, we risk our future.
23:47But again, what you hear about is talk about freebies to win elections.
23:51The government was trying to stay away from freebies, but now it's fully participated in that.
23:57What is its strategy for long-term Indian growth?
24:00I don't see it.
24:05Given what you've done and you've given us a broad sweep, in conclusion, therefore, given that we are in these
24:11stress times,
24:12given that the war in the Gulf has aggravated the sense of trust,
24:16what is your economic outlook for the next six months?
24:19Is there an opportunity that you see in this crisis, or do you believe that it will get worse before
24:26it gets better?
24:28I think the pain will have to be borne.
24:31There is no two questions about it because most of our pain is imported from the Middle East.
24:37If the straits stays closed for much longer towards the end of summer,
24:42I think we will have to absorb significant pain because we import so much of oil from that direction.
24:50But I think if it causes us to experience a wake-up call,
24:55that maybe all this presentation of a wonderful economy doing so well,
25:04we need to re-examine and find out what is really going wrong.
25:09And I would say the lack of investment is a canary in the coal mine.
25:14It's telling us something is not quite right.
25:17Can we figure out how to liberalize the economy, reform it, in such a way that we can propel investment?
25:25And that would mean also many more jobs to satisfy our hungry youth,
25:31many of whom legitimately now are saying, what is going wrong?
25:35I would say that we need to create those jobs.
25:40A rethink, forced by more tighter circumstances, would be very welcome.
25:46And there are so many ways we can move forward.
25:49But first, we need the willingness to acknowledge that something is going wrong.
25:58I'm going to leave it there, Professor Rajan.
26:00As you said, first, we need to acknowledge that something is going wrong.
26:06Thank you very much, in a way, for giving us that what you believe is a wake-up call for
26:12the Indian economy
26:13and giving us the big picture as you see it from your vantage point.
26:17Thanks very much for joining me on the show today.
Comments