02/11/2013 Talking Business with Linda Yueh

Now, on BBC News, it's time for Talking Business, with Linda Yueh.

I has had to take some deep breaths this summer. Investors were leaving,

the currency hit an all`time low. As one man brought India back from the

brink? He first gives `` he tells us quite India will now seek aid and

what he thinks about being called a rock star. Welcome to Talking

Business. Governor Raghuram Rajan, thank you

for speaking to the BBC. It is a pleasure to be here. I wanted to

ask, what does it feel like to be called a rock star central banker? I

try not to think about that. Inevitably, people will come to

terms with the fact central bankers are boring, conservative people.

While it lasts, let them talk about it.

I bet your wife really likes it. I don't know whether she likes it or

if she is worried. I want to ask you about the stop

markets being up, the rupee has gained lost ground, how long will

this rally last? Seriously, what we have been trying to do, the

government and Reserve bank, is try to change the perception about

India. We have been helped by favourable external circumstances.

The fact the federal bank decided not to act, Syria did not plunge

into an all`out problem with the bombardment by the US. Of course,

unfortunately, the fact that the US with its fiscal contretemps, has

perhaps postponed action even further. But, we have also done a

fair amount internally to try to change the perception India is a

country with severe macro economic problems. I think there was a point

at which people thought even the unimaginable, that India would find

it difficult to finance itself. People weren't willing to go beyond

the headlines. The headlines, the newspapers tend to pick out every

bad thing that happens and focus on it. That makes things even worse.

Our attempt was to change the dialogue. We do have macro economic

changes, high inflation, a fiscal deficit which is much too large. We

have been bringing it down but we need to do more. We had an external

deficit, again, much too large. We have focused on bringing down that

borrowing. I am happy to report that while the governments and the

reserve Banks say we will be borrowing 3.7% of GDP this year,

down from five last year, but it could be better than that, much

lower. We are happy with that change. We can certainly finance it

many times over with the money we have. We need to create a better

mood for investors. At the reserve bank, the best way is to give people

a sense we will control inflation. 9%, much lower when you look at

wholesale vices. But we do need to bring down the consumer price

inflation. The second thing is to give people a sense we have focused

on creating structural reforms for growth, and changing the financial

sector in India to make it stronger, more resilient. What is your time

frame? Your aspirations and reform goals? Yes, five pillars, monetary

framework, fix the banking structure to make it competitive. Deep in the

markets. Reach every Indian, whether they are in remote villages of

running a small or medium enterprise, bringing more people

into the system. Finally, the fifth pillar is to have better systems to

deal with distress, corporate distress, bank distress. Five years

is a reasonable horizon. A time of which many reforms can be

accomplished. The value of the rupee which affects

inflation. Different central bankers have begun to look at the currency,

the Bank of England, they said that looks about right. Is there a level

of the rupee you are comfortable with? I try not to say, this is the

appropriate value of the rupee. I do know when it has gone too far. 68,

which it reached at the end of August was, to my mind, a little too

far, relative to our fundamentals. 50 is probably too strong

relatively. There is a fair gap, fair range in between where I am

comfortable. Indian exports are competitive. Where we will generate

enough to pay for our large imports. But, the real issue is not

just the current level, but to give investors domestic and foreign a

sense that the value of the rupee will be retained and the key is to

bring down inflation. People will not need to think we need a steady

depreciation to maintain competitiveness.

You are doing a lot, but there is a limit to what central bankers can

do. I am going to make you identify your limits. Would you be able to

prevent a currency financial crisis? Of course, that we can. What we

can't do, one of the things that developing country central bankers

have, that developed central bankers don't have, the ability to use

structural reforms. If I can bring credit to a village which doesn't

have credit, a new set of businesses get set up. I don't have to change

interest rates or do anything else, just let them have access to credit.

So, the structural reforms we do can enhance growth. Considerably. We

don't have to deploy unconventional monetary policies. However, there

are limits as you point out to that. Finance is an enabling device.

You need real entrepreneurship will stop real businesses to be set up.

Real roads to be built. They have greater effect. That requires

governance implementation. Those are things the government has to do. In

India, one thing people focus on is just central government. We have a

large number of states. Like Europe. States which have populations bigger

than most populations, countries in Europe. But the point is each of

these states has an independent government. Different states have

been moving, enhancing the investment climate in their state.

So, don't think of India as one piece. Try it out and you see there

is a piece fits you. This is what increasingly investors are seeing.

Governments which are friendly towards their aspirations. If you

think of India with states looking to have industries that can use that

power. Some states have fixed land acquisition powers. For every

problem there is a state which can solve it. So it is worth looking

into India more finely. In your mind, I was like your take

on what the biggest impediments to something which is fairly

fundamental, industrialisation, for India. Access to finance is part of

it. For many, they would say the other big side of that would be

education, human capital. There is still substantial poverty in the

country. What is holding India back? I presume you mean the manufacturing

sector which is smaller than emerging markets. Our service sector

is much larger. If you look at the combination, the number of people in

agriculture, closely associated to people in rural areas. At our level

of GDP... China had more people in manufacturing, and services. It does

lead to the question why do we have so few workers in manufacturing. I

would say, there are four reasons. Infrastructure, we haven't built it

in the same way as China. There are reasons, including the fact land

acquisition is tougher in a democracy where we have to pay

attention to people whose land is being acquired. I am not saying

China is not, but it is easier in some ways to do it there. Secondly,

our education which you point out. People think India is over endowed

with educated people. Perhaps in some areas. Despite the large number

of engineers, not all of them are of top quality. We need an improvement

in quality and more people in certain areas, construction

engineers, plumbers, electricians. We need to improve the quality of

human capital and train it more for jobs available. We are similar to

many other countries looking for a revolution in human capital. We have

some programmes underway but need more. The third is business

regulation. Yes, these stories about Indian bureaucracy, there is a

reason for those stories. We are trying to improve on, edition

between states, bringing down the level of over regulation in some

areas. We have to find a way in some others, environmental regulation.

How do we make it effective? Not stop industry, but at the same time

have the effect of protecting the environment. Those are three

important things, and finance. If we work on those four things. Take

infrastructure, the image of infrastructure is creaky airports,

but you will see a world`class airport in Delhi. And in Bombay,

again. State`of`the`art. Probably in the next four years if you travel

between Bombay and daily, you will be travelling through the industrial

corridor. We hope to have high`speed roadways, rail links. Nine new

cities. A tremendous high quality infrastructure built up with the

scope for new firms opening up with lighter regulation.

These are all things which sound extremely reform oriented to get the

growth rate up again, but what would you say to those foreign investors

who say, I think you are on the right track and you inspire

confidence, but what you are describing is not something which

you can make happen, this is going to have to come from the

government, it will have to come from other parts of it. Should you

be Prime Minister? The macro I think we have a very, very good Prime

Minister. `` I think we have a very, very good Prime Minister. People

ignore the good in times like this, and there are good people across

government. The rock star will wear off here, but there are rock stars

everywhere else. Focusing on my current rock star, one of the

concerns with the raising of interest rates that you have done

while you have been in office is that you are trying to control

inflation but it is hurting growth, and people around Mumbai are very

concerned about the prices of goods, and I can see why it is that

you have done that, but looking ahead, do you think this is the

right trade`off, given how growth is so slow and generating the worries

of a crisis? I do not have the worry of a crisis. Secondly, these are the

consequences of some of the challenges we're, particularly when

you have `` the challenges were facing, particularly when you have

this kind of growth. We have the slowing growth now because of some

of the constraints to setting up factories that have emanated over

the last few years. That has caused supplied side constraints. We are

not producing as much as we should even when demand is high. This is

most felt in the culture. There are products that people want, such as

milk and poultry and so on, but we are still seeing relatively high

prices because it is not taking place with ink beast demand. It is a

disease of riches. As people are getting richer, they are changing

their patterns, and we need to produce more of the stuff that they

want, but it is taking time to do that. That is one constraint. We

have to get inflation back under control. Increased supply is one

aspect. We need to have investment. That is our challenge, how'd you get

investment even while consumption demand is slowing? You have to

muddle through, and a sense. `` in a sense, in these environments where

there is slowing inflation. We do not have a clear and easy answer.

You cannot compress too much because you will not get the investment that

you want to fix the supply`side problems, but if you have growth

that is too high, then you have the high inflation, which will again

come back to IQ. It is muddling through. `` to bite you. You have

said there is no chance of a crisis. Last year we talked about some of

the traits that India had that were reminiscent about `` with what

happened in 1991. The deficit is still fairly large. The fiscal

deficit is coming down but it is still fairly large. Money is leaving

the country. That has led to the fall of the rupee. Why are things

different now than they were in 1991? We are growing but we are

still growing at 5%. Secondly, our external debt, people did not

realise that it is about 22% of the GDP. That is small. There are very

few countries that have gone into a crisis with that kind of debt. Our

reserves are 15% of the GDP. We can pay back all of the short term debt

tomorrow if we wanted. In that sense, we have plenty of reserves.

This is why, when people ask me if I will go to the IMF, for what? We are

lending money to the IMF. What we get from them would be a fraction of

the debt. But would it help the IMF to have a structural programme? We

are doing the structural programme ourselves. But for the IMF give you

an external excuse to it, in other words, when it comes to the

politics, having an external force come in and say that these are the

things you need to do to get industrialization. It is not going

to happen. I love the IMF, I worked there for a while and I think it is

a great organisation. They give a lot of good advice and I am happy

for all of the advice they would give. But going to an IMF programme

is to some extent a sacrifice. If you can do it for yourself, if you

can take the medicine yourself, and there are plenty of economists that

can give us the advice that we need, but we will be happy if the IMF

gives us additional advice. But we have to follow our own path, and our

sense is that, yes, this will be affected somewhat by politics, but

that would be true of an IMF programme as well. Politics do

affect the eventual outcome. People did not just take the IMF as proof

and follow through because there are political constraints. We have an

economist as the Prime Minister of this country. I do not think there

is a lack of economic knowledge here. What we have to do is follow

through on the programme we have set for ourselves. Finally, I think one

of the reasons why India has been under pressure is because of the

possibility of the Federal Reserve. Do you think they are taking in the

impact of their actions? I think they are hearing the concerns of the

emergent `` emerging markets. This may not include foreign countries

and their growth. Nevertheless, I do not think the Fed would like to see

other countries go through these difficulties, and to that extent,

they are mindful to some extent, you might even think that the shots that

in burning the fired in May was to prepare for an eventual Fed

takeover. Certainly I think we will be better prepared when that

actually happens. I have no doubt that the Fed will be circumspect,

will take the rest of the world into consideration, but the primary focus

will be investing in the US economy. Thank you very much for speaking to

us. It is not hard to see why India has great growth potential. It has a

young, English`speaking population, the world's largest democracy

potentially has the best growth prospects of any major economy in

the world, that persistent problems like poverty and a lack of education

are white India has been brought to the brink of crisis time and again.

Central bank governor may have brought India back from the brink

this time, but he acknowledges how hard it is to support the rupee,

fight inflation and generate economic growth. But he remains

convinced that he will achieve his aims within five years, one of which

is to improve access to finance for Indian businesses, and that will

support economic growth. But it is likely to take more than one rock

star to have a lack `` lasting effect on India. That is all for

this week. Join me next week for more Talking Business.

Yet again, strong winds have been a big feature for today. It has been

particularly stormy and parts of South Wales. It will be a blustery

night wherever you are. Most places will continue to the showers. An

area of low pressure is spiraling away from the east of the United

Kingdom. Self of that, we have still got showers. `` south of that. It is

south of the area of low pressure where we will have the strongest

winds. For the next few hours, the risk of gusts of up to 60 mph. It is

a blustery night wherever you are