JR: India is in a peculiar position.
It does not invite international headlines from an economic point of
view. It is hitting headlines only for its nuclear confrontation with
Pakistan. This is a tribute to the way India has managed the external
sector: that India is not in the same crisis basket as Argentina, Turkey,
Russia Brazil or any other emerging market economies

RM: What about
China?

JR: India and China are the only
two countries that which have insulated themselves particularly well
against external shocks. The reason is very simple: India and China
maintain controls on inflows and outflows of capital and much of the
debt of the government sector is borne by the banking sector. The fact
that the Indian rupee is not convertible on the capital account for
domestic residents has acted as a shock absorber. So India does not
get international headlines.

In 2001, the world economy did not get into recession. It was largely
because both China and India posted economic growth rates in excess
of 5 per cent.

In a way, it is business as usual in India though it has dropped off
the radar screen, as we are not a crisis-prone economy. Even Enron being
consigned to the dustbins of history, did not draw many international
headlines as far as India was concerned.

The World Economic Forum is a good talkshop. My view is that all these
meetings add to global warming. There is a lot of hot air. In terms
of actual impact, there’s very little for India. It has been marginal
in India’s liberalisation and globalisation efforts. It is a good introduction
point. It is a good holiday for Indian businessmen.

RM: Is it
India’s fault that it has not been taken seriously?

JR: You have to understand that
there are very real tensions in Indian policy-making. We have been cautious
and we have been prudent. We also had inertia. But the fact is that
we have been cautious and prudent and it has paid off. We are not like
Argentina or Brazil; we have posted a steady growth rate of around 5.5
per cent which is lower than what we ought to do.

In modern macroeconomics, there is something called the Impossibility
Theorem: that a country cannot have a stable exchange rate, independent
monetary policy, and free capital flows all at the same time. Any country
has to choose two out of these three. India had chosen independent monetary
policy and stable exchange rate and paid a price for it in terms of
not having capital inflows of the type that have gone into Argentina
— which got $90 billion in the nineties. But look at where it is today.

Capital flows can soon become capital flaws. India has avoided that.
In retrospect, the way we have managed our exchange rate is a remarkable
success story and has not been adequately noted in the international
press.

Today our foreign exchange reserves are at $50 billion. Of course, we
have unsustainable fiscal deficits. Our problems have something to do
with internals of the economy. We are not exploding externally. We are
imploding internally.

RM: The world
is focusing on economic slowdown and terrorism. India has been affected
on both fronts. Do you think India could get to isolate states that
harbor terrorists or sponsor terrorism?

JR: India has not been affected
dramatically by the global economic slowdown because of the exports
account for only ten per cent of the GDP. We are not affected like Malaysia
or South Korea or other emerging markets. It is true that investor sentiment
is down and business confidence is down.

The fact that India is going through a growth recession has nothing
to do with the external world. India’s recession is largely because
of its internal dynamics. But India has an interest in the revival of
world economic growth.

We do have a problem of cross border terrorism with Pakistan. But it
is not just Jammu and Kashmir, but the long arm of the ISI. Pakistan
is the world leader today in export-oriented terrorism, and ISI is like
its blue chip company for terrorism.

India and the United States have formed a new alliance. The military
agreement between American Secretary of Defence Donald Rumsfeld and
Defence Minister George Fernandes who spent a lifetime tilting the American
windmill would not have been possible had it not been for September
11 and December 13.

These two events have brought these two countries closer. Of course,
it has increased the pressure on India to find a solution to Kashmir.
The fact is that India has gained because we have a friendly government
in Afghanistan. Its land will no more be used for terrorist activities
in India. We have a friendly relationship with America, which has greater
leverage over Pakistan. India has gained immensely geo-politically after
September 11.

RM: Do you
think the WEF meeting may result in more joint ventures, contracts..?

JS: No. I think this is a misreading
of the Forum meeting. I cannot think of any fallout of the meeting as
far as India is concerned. It is good for small economies. It is good
for new leaders like Hamid Karzai. It is basically networking. You get
to project your point of view. It is a feel good kind of feeling.

In recent times, the WEF has tried to build a bridge with anti-globalisers.
The soft power of the WEF is more important than the hard power.

RM: Is the
WEF meeting then a waste of time?

JS: It
is the influential and the beautiful who meet there. All the movers
and shakers are there. In the seventeen years that I have tracked the
World Economic Forum, I have not seen any great gains for India. It
is just a place for thinkers to meet at and learn. Basically for politicians
and businessmen, it is an opportunity to get the wider picture and expand
their intellectual horizons. There is nothing more than networking.
For countries like India and China, it does not mean much. It is a useful
exercise. That is all.

RM: Can India
utilise this forum to strengthen trade ties with other nations?

JS: India has to focus on building
bilateral linkages with the United States for instance. Apart from strengthening
multilateral institutions like the World Trade Organisation, India has
to have a bilateral dialogue with the American traders, European trade
negotiators and so on. I do not think the WEF provides this opportunity
or it can play a useful role in this regard.

RM: And trade?


JR: In trade, particularly after
Doha, India’s image has emerged as an obstructionist. We need to rebuild
our bridges with American trade negotiators. We need to recapture our
credibility within WTO forums. Unfortunately, our trade minister did
not go to the World Economic Forum. He should have gone there and repaired
the damage done to India particularly after Doha.

Had September 11 not taken place, the damage to India’s stance at Doha
would have been much greater. After that a lot got forgiven and forgotten.
But India’s stand at Doha along with France was completely negative
and went against India’s interest. If the Indian finance minister could
talk to his American counterparts about the fact that our stance in
Doha had more to do with domestic politics than international economics,
it will be a positive step forward.

The trade minister, had he gone to the WEF meet, could have made the
point that often in open democracies, domestic politics overrides international
economics. It is there even in the United States. Why is the US protecting
its steel industry? It has everything to do with domestic politics.

RM: Democracies
work in this way…?

JR: Both United States and India
are plural democracies. Democracies work in a very messy way. They work
one step forward, two steps backward. Democracies pander lobbies. But
the image of India after Doha suffered a great damage among trade negotiators.
It needs to be corrected.

The WEF has charted out a policy to overcome the overall slump in the
global economy. What India-specific activity do you see?

The best pill that the global economy can get is growth in the American
economy. A substantial chunk of the world economic growth anywhere between
quarter to two-fifths comes from the US growth alone. Especially so,
as Japan is mired in recession. Economic revival in the United States
becomes critical. The WEF needs to underscore the revival of growth
in the United States. Ultimately, it depends on US consumers.

RM: It will
be a confidence-building measure…?

JR: It will build confidence. The
sooner the United States revives, the better. Others will also boom
after that. Earlier, all countries that went through a financial crisis
recovered as the American economy was booming. The continued growth
and openness of the American market is absolutely essential for economic
growth.

The Japanese economy has completely collapsed and it is not playing
the kind of regional or global role it used to play in the seventies
and eighties. Whether growth in China or India will have global impact
remains to be seen. With China joining the WTO, there is a major change
in the economic scenario. Chinese markets will open. Will China take
over from Japan and become a regional or global locomotive also remains
to be seen.

RM: The US
and Japan are trying to cut back on official development assistance.
Do you see this as an impediment to foreign investment in India?

JR: No. I have always believed in
trade, not aid. In India, the policy has been aid, not trade. Aid has
made us a nation of beggars. I would love to see development aid come
down to zero. India should behave like a modern, self-confident economy,
which believes in trade.

India gets around $2.5 billion of Official Development Assistance. Japan
and Germany are the two big donors. Of course, there are things like
the Metro in Delhi which is being constructed with the Japanese aid.
But instances like the Metro should be the exception not the rule. Foreign
donors leaving the country would be good. We should look at domestic
funding for good NGOs. India’s biggest problem in the last forty years
has been having aid and not trade mentality.

RM: The US
has said that if the Dabhol plant dispute is not resolved soon, foreign
direct investment flow to India may be hit.

JR: I do not agree with this. How
can you make a bilateral relationship hostage to one issue? It is true
that the Americans have consistently raised the Enron bogey. On Enron,
we were guilty of not fulfilling contracts. I thought the Enron deal
was not in India’s interests. But once you sign a deal, you have to
honor it while renegotiating it in your interests.

Enron was a special case. India is a country which respects sanctity
of contracts. India should move quickly on it. It is a world-class,
modern plant producing clean power. Very soon, the Tatas, BSES, GAIL
or Shell should take it over and run it. I hope the government moves
fast on it. That is 2000 MW of clean power for India.

RM: But US
Ambassador Robert Blackwill said that many investors feel that contracts
have no sanctity in India.

JR: Blackwill, frankly, exaggerated
it a great deal. The investor community knows that India was taken for
a ride by Enron. They also know that India runs its power sector very
inefficiently. There is enough sophistication in the world to realise
that one Enron does not make the Indian summer. To what extent does
the WEF help India showcase itself as an attractive foreign direct investment
destination? Increasingly, states of India have had an opportunity to
showcase themselves directly. The story of India is well known. What
is less known is the story of emerging Indian states.

It is a good opportunity for India as politicians and civil servants
who are notoriously poor communicators learn how to use Power Point
and communicate. This is a good training ground for them. Chandrababu
Naidu is one Indian politician who has used the WEF to the hilt. He
has built a community for himself. He has networked well.

RM:
How would you rate India on a scale of 1 to 10
as a possible FDI destination?

JR: As far as labour-intensive manufacturing
is concerned, India has many disadvantages losing out to China. But
as far as knowledge-based industries are concerned, India has had an
upper hand. It is not that you need separate policies for foreign investment.
Any policy good for promoting investment in India will be good for foreign
investors. If you have a pro-growth policy, foreign investment will
automatically come.

RM: Do we
have that?

JR: We do not have world-class infrastructure.
Many R&D and technology companies are coming to India. But as far as
manufacturing is concerned, India has lost out in the global game. It
is because of poor infrastructure, rigid labour laws and small-scale
industry reservation. How can you get big players in?

RM: How would
you compare India with China as an FDI destination?

JR: Well identity politics has dominated
politics in North India rather than peninsular India. Nevertheless,
there are very real limits to what can be done without serious political
limits. For example if you want to increase fertilizer prices or reduce
food subsidies then you have very serious problems of resistance. There
is no question about it: the politics of it are just as important as
the economics of it. In 1991, Dr Manmohan Singh raised the prices of
fertilizers by 40% then he had to back down and restrict the price increase
to large farmers. Similarly, every time we have had to raise the prices
of diesel for example, we have had to rollback it back. So what governments
have learnt is that the initial hike should be much more than is required
and hen you should roll it back! In fact I argued with Mr Chidambaram
in 1997 that he should hike diesel prices by Rs. 4. He asked why and
I replied “so that you can roll it back to Rs. 1.” He then asked me:
“wouldn’t I look foolish doing that?” I said no: “you go on television
and say that you increased it by Rs. 4 because you are a responsible
Finance Minister and you have reduced it to Rs. 1 because you are a
responsive Finance Minister and that is the essence of political management!”

RM: What
are the concerns of investors on India?

JR: nfrastructure. And that is not
just power, roads, customs, regulations, communication and labour law.
People know that India is a market and has skilled manpower, but we
have not been able to put our act together as far as infrastructure
goes.

RM: Has the
Indian reform process attracted more investment?

JR: The Indian reform process has
been successful in the external sector. It has prevented India from
collapsing. But we are nowhere near an eight per cent rate of growth.
In the 80s, our average rate of growth was around 5.5 per cent. In the
90s, we reached 6.5 per cent. In the last five years there has been
a dramatic fall in growth. We have a long way to go.

RM: The final
goal of the WEF, when it was founded was to help Europe counter US industrial
power. To what extent can India use the WEF for a similar exercise?

JR: These are all networking possibilities
and for building friendships. I do not see the WEF as a political tool.
The WEF is a place where you must be seen as your absence is noticed.

RM: India
feels that industrialised nations do not provide a level-playing field
to developing countries in globalisation, especially by erecting various
trade barriers…

JR: The real barrier is domestic
policy. We could have become the world’s largest cotton exporters. But
because of our stupidity, we lost. The reality is that domestic policy
barriers stunted growth and not external barriers.

RM:India is
amongst the countries which get the lowest points in technology and
macroeconomic institutions. Do you think India needs to invest more
in R&D?

JR: The rankings are bogus. In India
everything is compared to the large population so you will always have
less number of telephones per 1,000 people. What we need is to make
regulatory institutions more transparent. Indians are comfortable with
bazaar economy where they can shout out loud and bargain and not a market
economy, which needs rules, institutions and transparency.

RM: Lack of
political will, widening fiscal deficit and a dying power sector are
said to be hampering India’s growth.

JR: The problem is a big one but
is being addressed in a homeopathic fashion. Ultimately, it is the question
of political leadership, which counts. The question of political leadership
is pathetic in India. Compare it with China, which has a remarkable
leadership. They are committed, knowledgeable and driven. Till we have
a culture change, we will fail on development.