Interview

Rathin Roy is Director of the National Institute for Public Finance and Policy. Prior to this, he has served as Director of the Asia Pacific Regional Centre, UNDP, Bangkok, and Director, International Policy Centre for Inclusive Growth (IPC-IG), UNDP, Brazil. He has been appointed as part-member of the Seventh Central Pay Commission by the Government of India and is a well known figure in the world of applied macroeconomic and fiscal policy. Vivan Sharan met with him recently to assess his views on ‘making in India’.

 

Is ‘Make in India’ essential and how would you define it?

Make in India is essential as it is about telling everyone who wishes to produce anything, be it a good or a service, that it is possible, easier and more attractive to do it in India, instead of doing it somewhere else.

 

You have recently written that there is more positive news about the Indian economy today than at any other time this decade. How important do you think are strong macroeconomic fundamentals for Make in India?

Macroeconomic fundamentals are essential for Make in India simply because as long as the government continues to borrow to consume, the domestic savings available for private investors in different sectors will be very limited. In turn, investments will be expensive.

It is, therefore, important for India to be able to attract global capital to Make in India – for which strong macroeconomic fundamentals are a prerequisite. It is also essential for India to be able to use its negligent resources as optimally as possible to catalyze Make in India. Therefore without good macroeconomic fundamentals the country will end up with both these big things not being achieved. And so I must reiterate that strong fundamentals are necessary but by no means a sufficient condition to Make in India.

 

In keeping with this macroeconomic fundamentals theme, what are your thoughts on where India is as an economy in the global context? And also where it needs to go from here?

Well if you have good macroeconomic fundamentals, if you have revival of stalled projects, and your competitive ranking also goes up, then it cannot be the case that domestic industry waits infinitely for everything to be better before it puts money on the table. Undertaking structural transformation is a business in which everyone has to walk along the same road and preferably at the same pace. So, when certain reforms are affected and things are better than yesterday, one expects businesses to take risks and move into areas which they feel that they are more comfortable moving into now, than perhaps they were in the past.

This does not mean I expect Walmart to open up in Patna, but I do expect Walmart to open up in Coimbatore. It also means that I expect domestic manufacturers to understand that in a state like Bihar which has sound macroeconomic fundamentals, a government that does not run a revenue deficit, and a reasonably skilled labour absorbed largely within informal industry, that investments have to be catalyzed, at least along the main railway routes to bring manufacturing and services through Bihar, to make in the rest of India.

Without a minimum sense of animal spirit in the private sector, the government cannot continue to absorb the costs of political reform, of which there are many, and not show results. So the way I see it working is that the government takes a shot at some reforms, takes some political heat, and gets some payback in terms of better economic performance which in turn enables the government political room to manoeuvre in order to undertake more reforms. This kind of music cannot come from the violinist playing a lovely solo. We need India’s orchestra to work and there’s no point expecting the principal violinist to do so if others don’t follow.

 

Many claim that for India’s orchestra to work, the first thing that must happen is that the infrastructure sector needs to be kick-started. In your view, will the recent spate of interest rate cuts help this or is our liquidity problem systemic?

Our domestic funding is well short of our large infrastructure needs. What we need from domestic entrepreneurs is the expertise, the local knowledge and the strategic wherewithal to be able to partner with international finance and international technology and implementation providers to deliver credible infrastructure projects in India. I can think of no better example than Larsen and Toubro in this regard. We need to move from having only one, to forty Larsen and Toubros.

This in not contingent on how good or bad our banking balance sheets look, but it is to a large extent contingent on how difficult it is to keep regulatory risk manageable given the current discretion based system of governance. And the government needs to fulfil its commitment to do something about governance reform. We must accept that the less we do on the systemic reform front, the more modest will be our attempts to bring infrastructure up to speed.

But the ask from the private sector, even if the government does make doing business in India easier, is to be able to partner with international capital and international technology providers to be able to deliver local knowledge, bank on their historical expertise in building infrastructure projects in extremely difficult areas, and show the pathway to taking calibrated risks which are implicit in every infrastructure project. Unless domestic industry is able to do that, unless we are able to create industry leaders, we will not be able to progress in infrastructure even if our banking balance sheet is cleaned up by a fairy god mother overnight.

 

You have also written about how manufacturing growth has expanded this year but do you think there is reason to worry or is this a contradiction with the way our exports have contracted simultaneously?

No, because the expansion in manufacturing growth reflects a response to an improving domestic demand situation. India will never be a Taiwan or even a China. Our growth path is going to involve increasing exports so that we can afford to buy the things we need abroad, to be able to Make in India. But we are making in India principally for the people of India.

The big advantage we have is the potential market of 1.2 billion people, who are able to buy the things that 1.2 billion people can buy. And admittedly these things are very basic when 1.2 billion people are relatively poor. But the good news is that the demand side will become less and less basic as India becomes richer through consumption.

Add to that an ability to use technology, to successfully address things that earlier were thought to be niche but now can be done easily. Two examples come to mind. Of course, mobile telephony is well known and the other innovation a long time ago was shampoo sachets. So make no mistake, the power of consumption will be the driver of manufacturing growth.

We need to export much more to be able to afford to bring the things that we need to make in India; but ultimately that is where the logic of exports stops. So I would not at all be pessimistic when exports fall from the point of view of making in India. I would be worried because the contraction of exports reduces our ability to access things that other people make better than what we make in India.

 

What would be your message to the readers of this magazine in terms of how they can further Make in India?

The most important aspect of making in India is the reform of the state. India is not a country that is tractable with a minimal state. We will have to live with a state that will be interventionist and will be ubiquitous. It is, therefore, imperative that we make this state work in the service of those it is supposed to service and that we make it work better than it has in the past. This will involve technocratic reforms, administrative reforms, and it would also involve a social political transformation, which will only come from social and political dialogue that I think is in fact India’s strength.

The country has demonstrated its capacity to undertake this dialogue in broadly positive ways over the last two or three decades. The strength of our robust democracy is an ability to undertake this dialogue. The focus of the middle class, and perhaps the people who will read the interviews like the one you are taking, must really shift from the kind of quick-fix technocratic solutions that the education system trains us to look for, to a more thoughtful understanding of how we can engage politically to unlock potent governance solutions.