GIFFEN: THE ECO-FIN SOCIETY OF MSE

THE MOST AWAITED INTERVIEW WITH

DR. C. RANGARAJAN
CHAIRMAN OF MSE, EX-RBI GOVERNOR OF INDIA
@giffenmse
Budget and Fiscal Policy
Question: In 2023-24, 8.09 Crore individuals filed Hopefully, if the growth goes up, then it creates a buffer in
income tax returns, and nearly 4.90 Crore of them the budget, which will enable them to increase the
reported zero taxable income. This means only about expenditure.
3.19 Crore actually paid the income tax, that is 2.2
percent of the population. So, given that such a small Questions: In your article, “A budget that is mostly
proportion of the population contributes to the direct good, but with one wrong move….” You mentioned your
tax, do you think such relief actually impacts the GDP concerns about the government moving away from a
growth? And also, given that the MPC is higher for the clear path of fiscal deficit and instead focusing more on
middle class than the rich, can this limited tax payer reducing the debt-to-GDP ratio. So traditionally fiscal
base still drive a substantial economic expansion? deficit has been the key indicator for the financial
The finance minister has indicated that the loss to the health and guiding investor confidence.
government because of the introduction of the concessions So, without a clear deficit reduction plan, do you think
is about One Lakh Crore. This is the information she has this shift could create uncertainty in the markets or
given in her budget speech. impact macroeconomic stability?
Therefore, this is the extent of stimulus that is available. In a sense, the fiscal deficit and debt-GDP ratio are
The relief to the income tax payers is one aspect of the interrelated. The debt-GDP ratio can go down only when
problem. This is a political economy problem. the fiscal deficit goes down. What is fiscal deficit? The fiscal
On the other hand, if we look at the stimulus to the deficit is the increase in the stock of debt from period 1 to
economy, it depends on the marginal propensity to period 2, and that is the borrowing that is being done in
consume of the households which get the concession and that particular year. Therefore, the government cannot
their consumption baskets. Because we need to look at not bring down the debt-GDP ratio without acting on fiscal
only the overall amount in terms of the demand but also deficit.
the types of commodities for which the demand will be Therefore, the point that I had made was that focusing on
created. Therefore, in that sense, one can argue that it is fiscal deficit is more transparent than debt-GDP ratio. We
limited in scope. can start from any level of debt GDP ratio and then derive
But at the same time, it can act as a stimulus because the what the implicit fiscal deficit is given the target debt-GDP
overall expenditure can be a multiple of what the ratio. Similarly, we can say that if the fiscal deficit goes
concession amounts to. For example, if the household buys down from the present level of 4.4% to 3% in a certain
durable consumption goods and uses the money that has number of years, then we can calculate what the debt GDP
been released as the first payment or the second payment ratio will be at the end of the period.
for it, then the total amount of expenditure that will The point that we were making was essentially that people
stimulate the economy will be much higher. Therefore, the now know what the fiscal deficit is, and it is the difference
point is essentially, whether it will sort of generate a between the revenues and the total expenditure, and that
multiplier effect in the system. indicator is well understood now, and therefore, shifting it
After all, if that is additional income that people have in to some other indicator is not that desirable, and I also want
their hands than they spend. And out of that, people to tell that the numbers relating to the fiscal deficit, are that
continue to spend, and you can get a cycle going as a the centre should limit itself to 3% of the GDP and the
consequence of that. Therefore, I had written in one of the states, each one of them, will limit their fiscal deficit to 3%
articles that relief is one thing, and the extent of stimulus of the State Domestic Product, and therefore, the total
will depend upon a number of factors. borrowing on the centre and states taken together should
But anyway, it is a sort of a stimulus that is provided in the be 6% of the GDP. Now, this is related to household
system, and it can work, but obviously, this by itself will savings in financial assets. The household savings in
not bring about all the changes that we want. I think, in any financial assets plus the net inflow of resources from abroad
case, the finance minister has estimated the income growth are the total investable resources.
modestly. The nominal growth that indicated in the budget My argument has always been that if the fiscal deficit is very
is 10.1%. large, then what is available out of the investable resources
Therefore, assuming that the implicit price deflator of the for the private corporate sector and others will be limited,
GDP is about 4% or less, then they are really talking about a and therefore, there is some clear relationship between the
real growth rate of about 6 to 6.5%, which is reasonable. fiscal deficit and the extent of what the government draws
out of the investable resources. If you want private different from the past trends, like in terms of policy
investment to pick up, and then the fiscal deficit cannot be direction or sectoral focus?
at a much higher level. Therefore, from this point of view, We all look forward to the budget, and we always get some
the fiscal deficit conveys a direct message, and therefore, we surprise or the other. Perhaps the biggest surprise was about
argue that it is better to keep the focus on fiscal deficit. the tax exemption being raised to Rs.12 Lakhs. One had
thought that it would be raised, but raising it up to Rs.12
Questions: Speaking of fiscal priorities, another key Lakhs which means almost everybody who gets 1 Lakh as
area that received much attention was about monthly income gets out of the net of the income tax.
agriculture. So, despite the government's push for But there is a critical question there. We all have been
initiatives like Dhan- Dhanya scheme and the mission talking about widening the tax base and lowering the tax
for cotton technology, the budget has actually reduced rate. That is the principle that has been followed. So, it did
the overall agriculture allocations, especially in key come as a surprise. Perhaps it should have come as a
areas like crop husbandry and the Pradhan Mantri pleasant surprise to quite a few people!
Fasal Bhim Yojana. Sir, do you think these budget cuts
contradict the stated goal of privatising agriculture, Monetary Policy 2025
and if no, what are the fiscal measures that could have Question: The recent repo rate cut by the RBI to 6.25%
ensured both financial discipline and a stronger aligns with global central banks easing rates to counter
support for farmers? economic slowdowns. However, this move widens the
See, when it comes to public expenditure, we must bond yield gap between India and the US, potentially
understand how much the government can increase the accelerating capital outflows and putting downward
total expenditure. In the coming year, according to the pressure on the Indian Rupee. Given your experience in
budget, the government’s public expenditure, overall navigating monetary policy challenges, how should the
expenditure, increases by 8% or 8.2%. When nominal RBI strike the right balance between stimulating
income is increasing by 10.1%, public expenditure increases domestic consumption through rate cuts and ensuring
only by 8.2%. currency stability?
Now, this is necessary because it depends upon the gross tax There are multiple objectives before monetary policy, and
revenue and non-tax revenue growth as well as the extent of therefore, the question of balancing them becomes
fiscal deficit. Therefore, in a sense that when the minister critically important. Largely speaking, the two objectives
brings out saying that I am spending more on this, more on before the central bank, particularly for the Reserve Bank
that, it all essentially means that somewhere else the of India, are stimulating growth and maintaining price
expenditure will have to be cut. Therefore, the most stability. There are also other objectives like what you have
important thing is prioritising expenditures. I mean, we said about taking care of what is happening in the foreign
know how much the government can spend given the exchange market.
constraint of the fiscal deficit. So, the inflation target, that is the flexible inflation,
Therefore, priority is critically important, perhaps even in targeting framework is trying to provide a balance between
agriculture that to what needs to be done in order to be able the two objectives of growth and price stabilityby asking
to achieve certain objectives. I believe, for example, the self- the Reserve Bank of India to maintain consumer price
sufficiency in oil seeds has been talked about for many inflation at 4 % plus or minus 2 percent. The flexibility of 2
years. This is not the first time we are talking about it. percent is given to the Reserve Bank. When the Reserve
Therefore, in terms of evaluating expenditures, the most Bank of India finds it appropriate to lower the policy rate in
important criteria is performance. Whether these order to stimulate growth, it is based on the assumption
expenditures result in achieving the purposes for which that inflationary pressures, according to them, are coming
they are intended. That is why performance budgeting down.
becomes critically important as far as expenditures are They are thinking now that we are moving in the direction
concerned. Therefore, we should really see whether the new of the target rate of 4 percent, and as some stimulation to
emphasis that is being placed within agriculture is most the economy is needed at the moment, it is appropriate to
appropriate or not. lower the policy rate. But at the same time, we are faced
with a situation in which,
Questions: So, budgets often come with unexpected because of external factors the value of the rupee is coming
elements. Was there any particular announcement in down rather sharply. And at that time, when the interest
the 2025-26 budget which you found surprising or rate is lower here and, if the interest rate is maintained at
the same level elsewhere, then the margin or the gap efficiency of capital, it will stimulate investment, and as
between the two rates widens. investment increases, the income will increase.
And it can stimulate the outflow of resources from India. The question is which interest rate. According to Keynes, it
That is, foreign portfolio investors maybe selling their is the long-term rate of interest because what he is talking
stocks in the market and taking the money back. So, in such about is the impact of interest rate on investment.
a situation, RBI has to balance things. Hawtrey, however argues that the impact is through the
The lowering the policy rate only by 0.25 basis point by short-term rate of interest. How? Because when the short-
RBI is perhaps an indication. They could have done even term rate of interest is raised then the cost of holding
more if they really wanted to stimulate economic growth. inventory will go up, and therefore, what the borrowers will
They could have done it by half a percent. But they did not. do is to hold less stocks and therefore, the availability of the
Therefore, they are balancing the intensity of the measure commodities increases, and that will lead to the fall in the
also. price level. The central bank raises the rate of interest when
Therefore, in some sense, they have taken into account it wants to control inflation.
what is happening in the economy and what is happening Therefore, Hawtrey said controlling inflation happens
to the value of the rupee. I think the decision they have because of the short-term rate of interest going up and the
taken is correct. stocks being released or the inventory being drawn down,
and therefore, that is the way it works. Therefore, there are
Question: With the RBI setting the Standing Deposit a large number of studies that are available analysing the
Facility rate at 6%, how effective do you think this rate impact of interest rate on various decisions. By and large,
will be in managing excess liquidity in the banking the conclusion that has been drawn is that a change in rate
system over the coming quarters? Given the current of interest will be effective only in the case of long-term
economic conditions, what potential challenges do you investments, that is, for example, housing.
foresee in maintaining this rate ? If they have a fixed interest rate lending system, borrowers
Given the situation, the first decision to take is whether are committing themselves for a longer period and
the Reserve Bank should act and they have acted by therefore, that interest change is critically important, but in
reducing the policy rate. some other areas, it is not important. There is also another
All the other rates are related to the change in the policy view, which is, for example, in the Radcliffe report in UK
rate. Therefore, the question to ask is what kind of an many, many years ago. They took the view which is called
impact the change in policy rate will have on the economy? the three-gears view. Mainly, that a small increase or
Will it stimulate growth, meaning that when the rate of decrease in interest rate will not have any effect.
interest is lowered, what happens as a consequence? First of You have to move from one gear to another gear, and then
all, the lowering of the policy rate by the Reserve Bank only it will be effective. So, there are a lot of discussions in
should now get reflected in the lowering of the other the literature on the impact of interest rate on the economy.
interest rates in the market. It is happening a little bit, At this particular moment, it is felt that even a small
maybe in the call money market, but not in the bank's stimulus can have an effect So, we have to wait and see how
deposit rate or the lending rate. much effect the change in the interest rate will have on the
Nobody has yet announced a reduction in the deposit rate economy.
or the lending rate. Therefore, the impact will come when
such decisions are taken, and bankers always view the Question: The RBI has highlighted global headwinds
problem by saying that they can change the interest rate and trade policy uncertainty as key concerns. What
only on, on new deposits. They cannot change the the rate steps should India take to reduce the vulnerability to
on deposits, which are already with the bank. these external shocks?
Therefore, it is only at the margin they can change the The external shocks are originating in foreign trade. The
interest rates. How and when the lending rate will change is most important decision of President Trump is in relation
also somewhat doubtful. Therefore, first of all for the to the tariff rates.
policy rate to have an impact, all the other interest rates in He is, of course, using the tariff as a weapon, actually. He is
the market should move in the same direction. weaponizing tariff rates. He threatened Canada and Mexico
Secondly, in the literature; there is a lot of discussions about with raising the tariff rate not because of trade, but because
what happens when the interest rate is changed. You all of other problems or issues like immigration.
probably have read the Keynesian theory. The idea is that if Therefore, that is one aspect. The other is that he is arguing
the rate of interest goes down, then given the marginal that employment in the US will increase if the US imports
are less but that I think is a very mistaken approach. He to act as and when things happen.
was, for example, arguing about raising the tariff on steel But given the situation relating to growth and price
almost by 25 percent. If the cost of importing steel goes up movement, the decision to lower the rate of interest is
by 25 percent in the United States. then the price of steel appropriate. If however things change RBI must take a
goes up. fresh view on what the policy rate should be.
The companies using steel will revise the price of their
products and find themselves non-competitive. Thus, this a Student & Professional Life
self-defeating exercise. It is very much mistaken. In fact, this Question: During the 1990s, India faced significant
is the kind of policy that was pursued in the 1930s after the pressure on its foreign exchange reserves, particularly
depression and this policy is called beggar-thy-neighbour during the balance of payment crisis. As RBI Governor,
policy, and it essentially ended in the depression you were at the helm of managing the critical aspect of
Therefore, to come back to India and to answer your India's economy. Could you elaborate on the thinking
question, I think we will need to watch what happens. For behind RBI's approach to manage India's foreign
example, discriminating between countries on the import exchange reserves during this period of time?
of the same commodity is a violation of the WTO The crisis of 1991 was triggered by a serious balance of
Agreement. Increasing the tariffs itself is a violation, but payments problem. Our deficit was already high. At that
increasing the tariffs of imports of some commodities only time, we had the Iraq-Kuwait war, and that worsened the
is a serious violation of the WTO regulations. balance of payment situation. First, because of the increase
Therefore, in a sense, what will happen or what can happen in the oil price, the import bill on oil almost doubled as a
is more and more of trade agreements among groups of consequence of that.
countries. So, the world will be broken up into various And also, because of the war remittances from the Middle
groups and the trade within the group will be at one level of East slowed down. Besides the people from the Middle East
tariff and the trade with the other groups will be at another wanted to come back to India and certain expenditures had
level of tariff. We need to watch, but I think the direction to be incurred on that score. Therefore, the already critical
in which Trump wants to move is a wrong direction and balance of payment situation worsened to a large extent by
India should organize itself along with other countries to the Iraq-Kuwait war.
fight that issue. So, the whole question was, what do we do in order to
handle this situation? And there was also a lot of political
Question: During your tenure as the RBI governor, the uncertainty at that time. The V.P. The Singh government
policy stance often shifted based on the prevailing fell, and then the Chandrasekhar government came. And
economic conditions. What lessons can we draw from that government also did not last.
the past about the effectiveness of a neutral stance Therefore, in that situation, the various institutions had to
during periods of high uncertainty? really play a big role. And the Reserve Bank of India had to
The word neutral stance is used by the monetary really take the situation in hand and do what is best.
authorities to say that the liquidity will be just Therefore, some major decisions were taken, like shipping
accommodative and it will not be liberal. gold and raising a loan from the Bank of England and the
I do not agree with this description. To me, the decision on Bank of Japan.
the policy rate itself gives what the stance is. Let us say the When I was visiting the U.S. at that time and tried to find
Reserve Bank of India has lowered the policy rate. out how to raise the resources, it came out very clearly that
Central banks cannot act like King Canute. You have to many people thought that India had such a large quantum
take action to enable the rate of interest to fall, and how do of gold in the reserves, but we are not using it to save the
you do that? Only by increasing liquidity. When liquidity is situation. First of all, let me clarify one thing. It was never
tightened, the rate of interest goes up. the idea of the Reserve Bank to sell gold.
When the liquidity is liberalised, then the rate of interest That is not possible. All that we wanted was to raise a loan
falls. Therefore, you really have to find out how much on the pledge of gold. And the Reserve Bank of India
loosening has to be done in order to get the market rates cannot borrow from any other authority other than a note
down to the level they have in mind.. Therefore, that is the issuing authority.
real approach. That means only from other central banks. It cannot go
We are certainly living in a world of higher uncertainty. into the market to borrow. Therefore, we contacted the
There are many things that could happen which would central banks and we found out that the Bank of England
warrant a serious reaction. But the point is that we will have and the Bank of Japan were ready.
But for that purpose, we had to export 44 tons of gold, not philosophy.
one ounce or two ounces, 44 tons of gold. And that was We could have continued with the old system. So, that was
sent by a chartered flight from India to England. It was kept the alternative. But I don't think that is the right alternative,
in the vaults of the Bank of England, and on that basis, the because, as Manmohan Singh said in the first budget, it is
loan was given. an idea whose time has come.
So, such decisions had to be taken. Actually, the But I don't think any alternative system would have given
Chandrasekhar government gave permission to do it. the the results.
Reserve Bank could not have done it without the
permission of the government. Question: So, many students today struggle with
At that time the Chandrasekhar government had fallen uncertainty in choosing their career path in economics.
from power, it was continuing as the caretaker government. So, when you were a student, did you face similar
So, I would like to emphasise to young people, who have confusion? And how did you navigate your way from
not lived through that period, I mean, in the sense of doing your thesis to becoming a professor at IIM
understanding everything that was happening around, is Ahmedabad and eventually serving as the governor of
not the devaluation that we did, not the shipping of the RBI?
gold, but the fact that after doing those things, which were Well, the point is that all of us have to make decisions as
required for introducing a certain amount of stability in the we go along. That is why I call the book Forks in the Road.
economy, we introduced the structural reforms. Look at Not in single, not Fork in the Road; it is Forks in the Road.
the foreign exchange market. Because as you move along that, after every point, you have
What did we do? We devalued, right? Yes, but that did not to make a decision.
end there. But we entirely changed the foreign trade regime. For me, as a student, the most important thing is to take a
We moved to a more liberal policy, reduced the tariffs, and decision as to which subject I want to specialise in. So, that
in the foreign exchange market, we moved away from the happened. In the 1950s, the Indian economy was such that
exchange rate system, which was prevailing at that time to a the best career path was going to the civil service.
dual market system and then finally to a market-determined And the best minds actually went into civil service. So, that
exchange rate system. was the one decision that I had to take, whether one wanted
This is exactly the opposite of what we used to do earlier. to go and write the civil service examination or go out and
Whenever there was a Balance of Payment problem, we do PhD. So, I chose to go abroad and do my PhD.
used to go on tightening it. But this time, we changed the So, that is a decision. But there were other factors also
policy framework itself. That is the starting point of the which made me take that decision.
liberalisation program. So the most important thing is that But I must say that the decision to move from academia to
the reforms that were introduced at that time had two the Reserve Bank was totally unplanned, and it came as a
components. One is ensuring stability, and the other is surprise in the sense that, when I was asked, I had not been
structural reforms, which would prevent such crises from thinking of it. And in some sense, it was unplanned.
happening. I would not say it is accidental, but it is unplanned. And so,
Post 1991, we have not had a severe balance of payments once I moved into policy-making, the rest followed.
problem where we had to go to the IMF and stand in a I taught in the U.S., I taught in India, and I think that the
queue to get money. years that I spent both abroad and in India in teaching, I
But the point is that we took the appropriate actions and must say, were very good. And therefore, as I said, I was not
some of these actions required to be made by the Reserve planning to move out of academia.
Bank. And that was the starting point to the new liberalised
regime. Question: The labour-capital dynamics is expected to
change with the arrival of AI workers. So, this will be
Question: Looking back, what do you think could have especially true in the manufacturing industry. Will
been done differently in terms of RBI's response to this change in dynamics affect inflation? If yes, how
global economic trends during your time as a governor? and why?
What is the alternative? The alternative could have been The point, the critical point, is not inflation. The critical
to say that we will go back to the old system and tighten the point is employment. The biggest thing that is bothering
system. Some people have said that. After all, this was only people now is that, with the new technologies, machine
a balance of payments problem. You could have solved the learning, AI, and so on, what will happen to employment as
balance of payments problem but not change the economic a consequence of that. Basically, what is happening now is,
for producing one unit of output, the extent of labour point to take into account is not only the decision to lower
required is becoming less. the rate of interest but also the extent to which the lowering
This is true even in the earlier period, from the beginning of should be done. I think they have managed to work out a
the industrial revolution. But then the increase in the compromise by sticking to lowering the rate, but not by a
output was such that it not only employed as many people very large extent, but by 25 basis points. Therefore, that is
as they were at the beginning but also more. Therefore, the way in which they have balanced.
many people say, even today, technology will not reduce
the number of people working, but it may actually expand. Questions: Recently the RBI reduced the share of the
But the now question really is, the nature of the technology weightage of food and fuel as a part of its consumer
that we are not talking about. AI has a dimension which is pacific. Was it because it was previously overvalued, or
very different from the earlier technologies. It is not muscle is it done with a motive to reduce the inflation figure?
power that is being replaced. It is the power of the mind You see, the weights in the price index are based upon the
which is being replaced. percentage of expenditure of one commodity to the total
Therefore, what we really need to look at at the moment in expenditure. Therefore, in the household budget how
a country like India is, what are the areas or the sectors of much food items constitute out of the total expenditure?
the economy in which relatively there is a greater amount of National Statistical Office conduct consumption
labour used.like the hospitality industry. Even if AI comes, expenditure surveys from time to time. Recently, the
finally, coffee will have to be served by somebody. And consumption expenditure survey for 2022-23 was released,
therefore, it will absorb labour. and the consumption expenditure for 2023-24 have also
So, I am using the word ‘relatively’ more labour intensive. now been released. These expenditure surveys now show
As compared to the steel industry, the labour that will be clearly that the food component is coming down. That is
used up will be higher in the hospitality industry. So, what what you will find whenever the economy is moving up
we need to do, as I said earlier, is to identify sectors of the from one level to the other.
economy or sectors of industry where there is a relatively Previously, the latest consumption expenditure survey that
greater labor use and expand them. was available was for 2011-12. So it has been a long time
Therefore, we need to have a combination of sectors of the since the last consumption expenditure survey was done.
economy where an intensive use of AI may be there. And Actually, there was a survey done once after the earlier
there are sectors of the economy in which relatively more survey but that was dumped by the government. So we
labour is needed. I think we have to move in that direction. don't officially have the data on consumption expenditures
Somebody said that, as the new technology comes in, the for a long time. Therefore, I don’t think that this was any
highly powerful minds will get absorbed anyway. They will attempt to really show inflation down by reducing the
be needed. But, it is the middle level that would be affected. weight for food component. I think what is happening
Because what the middle-level labour can do in a firm or in even in the rural areas is that the food component as a
a company can be substituted with AI. And that can reduce proportion is coming down.
the labour content. But we should really see or critically
examine the sectors of the economy in which, relatively
speaking, there can be more labour use .

Question: Given that the RBI is injecting ₹60,000

crores into the market through Open Market
Operations within just a month, isn’t this essentially a
short-term fix that risks fueling inflation, rupee
depreciation, and asset bubbles? Instead of addressing
structural economic issues, are we just kicking the can
down the road and creating bigger problems for the
future?
The point is injecting the liquidity is part of the decision
to lower the rate of interest because the policy rate can be
lowered only by injecting liquidity therefore the critical
question to ask is whether it is appropriate to lower the
policy rate given the situation. As I told you earlier, the
 Rapid Fire Questions
Question: What’s the most rewarding part of being involved in economic policy: the analysis, the
implementation, or the impact you see years down the road?
Dr.Rangarajan: I think what is critically important is the impact of the policy. Analysis must lead to policy.

Question: Favourite economist of all time?

Dr.Rangarajan: Keynes

Question: If not an economist, what career would you have chosen?

Dr.Rangarajan: Well, I could have chosen philosophy.

Question: One myth about RBI governors that isn’t true.

Dr.Rangarajan: That he is all-powerful.

Question: One economic term you wish people understood better.

Dr.Rangarajan: Marginal efficiency of capital.

Question: Favourite breakfast: idly or dosa?

Dr.Rangarajan: Neither.

Question: One moment of your life you want to relive.

Dr.Rangarajan: When we introduced the unified market determined exchange rate system and when the
market moved smoothly on the opening day. It was a great movement.

Question: Favourite economic concept?

Dr.Rangarajan: Growth dynamics.

Question: One motto of your life.

Dr.Rangarajan: Do your best.

Question: If you have 30 seconds to inspire someone, what would you say?
Dr.Rangarajan: Success often comes to those who dare and act. It seldom goes to the timid.