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The interview Narendra Modi MUST read!

Last updated on: January 22, 2015 16:42 IST

'Narendra Modi has had very good luck. Firstly, the fall of oil prices. You don't get that very often in your life and you certainly don't get that often when you are in government.'

'Secondly, the fantasy of Indian reforms has led to very strong capital inflows to have made his job much, much easier.'

'You ride the winds in times of fortune and he hasn't done that. At least, not yet.'

'Those winds of fortune which are blowing your way can certainly turn around easily. There are quite a few headwinds coming up. He may well, history will show, have missed the opportunities that existed.'

Indian Prime Minister Narendra Modi addresses a campaign rally ahead of state assembly elections, at the Ramlila ground in New Delhi, January 10, 2015.

India-born Satyajit Das wears many hats: An avid cricketer, a bird watcher, a banker, a consultant, an author, and most importantly the man who was one of the first persons to warn the world about 'The Coming Credit Crash' in his 2006 book, Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.

In 2011, Das, who left India for Australia in 1970 when he was 12, wrote yet another fascinating book titled Extreme Money: The Masters of the Universe and the Cult of Risk that exposed the arcane ways financial institutions devise to multiply wealth without bothering too much about the consequences of their actions on global economic growth, its financial architecture and employment.

A prolific contributor on subjects that range from politics to economics, Das, most recently, in an article in Market Watch (external link) stated that leaders had learned nothing from the financial meltdown of 2008 that engulfed the world in an economic crisis we are still struggling with -- excessive money supply, yet low growth and dismal employment opportunities.

A keen watcher of India's politics and economics, Das tells Prasanna D Zore/Rediff.com, in a fascinating two-part interview that the world is likely to face another economic crisis given the way central banks are opening their purse strings to pump in money into the system to create demand.

India too will be affected, he warns.

"We keep pretending, we keep believing, that our central bankers are saving us. But they don't know what they are doing," Das says about the competition among central bankers to pump in trillions of dollars, called 'quantitative easing' in economic parlance, into the system to revive growth.

"In the end, when it unwinds it will be horrible. We all know it will be horrible. It is going to make 2008 look like a picnic," he says about the consequences the world will suffer because of the policies adopted by central banks all over the world.

In the first part of this hour-long interview Das discusses why the 0.25 percent cut in interest rates by Reserve Bank of India Governor Raghuram Rajan won't set the growth bells ringing and why he thinks Prime Minister Narendra Modi may miss opportunities to initiate bold economic reforms that the crash in oil prices and strong dollar inflows have brought India's way.

"There's lot of talk about economic reforms, but in reality this is a very ideological government. There is disconnect between why people voted them in and what people expect them to do," he says.

"I think over time it would be interesting to see whether the ideological baggage which has come to the fore quite a lot is going to actually overwhelm this government. If the economy doesn't do well, it is very, very easy to go down the ideological baggage path. That's what worries me," says Das.

Are you surprised by the RBI cutting the repo rate by 25 basis points, almost a fortnight before the monetary policy announcement was slated for February 3? Is this decision dictated by economic logic or political pressure?

It is difficult to say. To some extent, you can make a case for it either way.

First being, obviously, inflationary pressures have somewhat abated. And the major factor underlying that, of course, is the decline in the oil price. So you could make a case for that (economic logic).

The second case you would make is that investment is not overly strong in India. Under these circumstances you could probably mangle a case together for a cut.

But clearly on the other side you could also make a case, and you will never know the truth of it, because unless you are a party to this discussion you will never know, but I think there would have been some pressure from the government who would obviously prefer to see interest rates a little bit lower.

Do you see the 25 basis point (100 basis points makes one percent and 25 basis points is 0.25 percent) repo rate cut helping the Indian economy, in the sense that investment cycle will now pick up? The government, the corporates, and the consumers were clamouring for a rate cut?

High interest rates were considered the villain that led to slow growth in the economy.

I think that is one of a number of factors. I actually think it will not make any difference at all.

The first and the most important thing is that in relative terms interest rates are high. If your project requires 25 basis points to make the difference between whether or not you go ahead, then you've got a serious problem.

Secondly, it is really not the rates, but availability of funding. Indian banks have a whole host of problems and obviously credit has not been forthcoming the way everybody would like.

I think the 25 bps rate cut won't make much of a difference.

Also, the great macro-economic instability globally and the domestic reform agenda is still kind of uncertain. I don't think this rate cut will lead to much investment.

Do you see the Bharatiya Janata Party's election victory under Narendra Modi's leadership will help him initiate bold reforms to help India achieve a sustained GDP growth rate of 7 to 8 per cent in the next five years?

I am amused you said bold reforms. I have not seen much in the way of serious reform actually. At least to date.

But that is what the prime minister promised in his pre-election speeches and the BJP's manifesto...

Indians like gods. They like to worship. And every new leader tends to have a period during which everybody worships him. And it's like all gods disappoint in the end.

I remember almost identical expectations of Manmohan Singh when he became prime minister, when, as you recall the Congress party unexpectedly beat the BJP (in 2004). I think the fundamental thing here is people assume that Narendra Modi is a reformer. I don't quite know what that means, but they assume he is a reformer.

That is because under his chief ministership of Gujarat, the state progressed tremendously. That created an impression of his being an impeccable economic reformer...

He was quite lucky in relation to his time in Gujarat, because the overall environment was much better. Running a state and running a country are completely different issues. And I think, in many ways, running a state in India is far easier than running a country.

It is the difference between running a petrol boat and running an aircraft carrier. Not quite the same thing.

At the Centre you have control of certain levers, but a lot of it is basically about making things work, in terms of a liaison between you and the state government and various agencies, which, I think, is a much more complicated task.

In Gujarat, he never had to really worry about external things terribly much and he could be domestically focused.

The other fundamental difference is that whatever you think about Narendra Modi, the problem is, he is part of the BJP. Everybody thinks they picked Narendra Modi, but the reality is it is a BJP government.

I am still unconvinced that the overall talent pool is up to the job. Time will tell whether they are up to the job.

There's lot of talk about economic reforms, but in reality this is a very ideological government. There is disconnect between why people voted them in and what people expect them to do.

They voted them in because the Congress party, like all governments after a couple of terms, got weary and were unable to get things done. The Congress party had all sorts of internal problems. The corruption and scandals surrounding them became a problem.

All around the world, governments lose office; the Opposition really does nothing spectacular to gain office. The people voted the BJP in because of the disillusionment with the Congress party. But at the same they thought this guy (Narendra Modi) can bring in all the changes.

Their election manifesto lacked any specifics. They were extremely vague. They could quite justifiably argue that 'we are doing what we said we would do.'

I think over time it would be interesting to see whether the ideological baggage which has come to the fore quite a lot is going to actually overwhelm this government.

If the economy doesn't do well it is very, very easy to go down the ideological baggage path. That's what worries me.

Narendra Modi has had very good luck since he has been in. The two pieces of luck are firstly, the fall of oil prices. You don't get that (such falls) very often in your life and you certainly don't get that often when you are in government.

Secondly, the fantasy of Indian reforms (really happening) has led to very strong capital inflows to have made his job much, much easier.

You ride the winds in times of fortune and he hasn't done that. At least, not yet.

Those winds of fortune which are blowing your way can certainly turn around easily. There are quite a few headwinds coming up. He may well, history will show, have missed the opportunities that existed.

Apart from the ideological baggage which you talked about, the prime minister is also hamstrung by the fact that he doesn't have enough numbers in the Rajya Sabha. Do you think that will act as a major impediment for his government to initiate bold reforms that India Inc expects from him?

It's like everything. You have to pass legislation, get things done. To some extent, though, that has become a very nice crutch for the BJP government to say 'we can't do anything because of the upper house. So we are going to sit around for two years, waiting, until we get control of the Upper House to do those things.'

That, I think, is a very flaccid excuse.

In my view, the government has won, and won a resounding victory in the Lower House (the Lok Sabha) and it could use that moral authority and you have to do some deals along the way, let's be pragmatic about it... they could pass a lots of legislation.

If you actually look at the things that he needs to do like reforming the Land Acquisition Act, infrastructure, tax system, which is where the Upper House will have to agree with him, then there may be some common ground allowing reforms.

But at the moment the BJP seems to have stuck in this very nice position of 'We would do all these wonderful unnamed and unspecified things but we can't.' This has almost become very interesting game of 'I want to use my majority to win more elections instead of doing things.'

I am not sure, how sustainable that is in the long run.

In your recent article for Market Watch you painted a very grim scenario about the likely resurgence of fascist tendencies because of the prevailing socio-economic conditions -- just like they existed post World War I -- across large parts of the globe.

It is not about fascism, but polarisation of politics. It could be the extreme Right or the extreme Left, which doesn't matter. There has been a betrayal of the social compact. The post (Second World) War period was built on a promise of constantly rising living standards, and getting wealthier.

That is not only in Western democratic societies; it was actually part of socialist ones and certainly part of emerging markets like India in the last two decades. Now, when that doesn't work, the whole thing starts to crumble. Then what you get is broad disillusionment with the middle part of politics.

The difference between the Congress and the BJP when you look at them is small. They need to be the middle part; they are slightly Left or slightly Right of centre. One is not advocating socialisation of everything (the Congress) and the other is not promising laissez faire, free market capitalism (the BJP) either. They are both firmly in the camp of mixed economies -- with slight variations in approach.

But when the economy doesn't work well, people move to the extremes. That is happening in different ways, in different parts of the world.

In Greece, for instance, you are seeing a push to the Left and in Germany and France a push to the Right. In India, the situation is much more interesting.

India has two elements to the Left and Right (the religious and economic).

At the political level you have all these fringe parties. Until these elections. coalitions had been crucial to get into government. The other is, unlike the developed economies, in India you have political heterogeneity, but you also have almost a hot underlying conflict, which is the Naxalite conflict and other insurgencies in different parts of India. Those things haven't really got any better.

This has been going on and on. The Indian government's approach to that has been to split states (create Chhattisgarh from Madhya Pradesh and Jharkhand from Bihar).

My view is that the world had a lovely period of relative peace in relative terms and there is no guarantee that this will continue. And under those circumstances India faces two problems. One is internal, which to some extent it always had.

The external one is if you start to see fragmentation in this sort of way you will see two trends which are not very helpful. These political movements, whether they are from the far Right or the far Left, are very inward looking.

There may be a move away from global trade and global capital flows to closed economies, which is not going to be helpful for India. Most importantly, they are unhelpful in a world of slow growth and high debt.

India to some degree is a closed economy, which means you can absorb some of it. But if that goes on for some time then India will be adversely affected.

Part II of the Interview: 'The Indian economy will putter along'

Image: Prime Minister Narendra Modi addresses a campaign rally ahead of state assembly elections at the Ramlila ground in New Delhi, January 10, 2015. Photograph: Anindito Mukherjee/Reuters

Prasanna D Zore/Rediff.com