An Opportunity For India To Emphasise Private Sector Credentials: Raghuram Rajan
China is doing a lot to harm its own private sector, for some good reasons and for some not so good reasons, according to former Reserve Bank of India Governor Raghuram Rajan. India, if it obeys the rule of law, looks a lot better, Rajan said.
"People are looking for an alternative to China and we were always the alternative until we started collapsing in growth," Rajan told editor-in-chief of Quintillion Media Pvt., Raghav Bahl, in an interview. If the country can revive its growth potential and protect the private sector then it has a great chance to attract much more investment, he said.
The Chinese government's crackdown on corporates—particularly on its technology companies—is doing a lot of harm to the prospects of its private sector, he said. According to Rajan, that's where a free judiciary could act as a differentiator for India to attract investment.
"We have a judiciary which works and is not under the thumb of the government and there is protection for the private sector," the former central banker said. “In that environment, India, if it obeys the rule of law, looks a lot better.”
"What we should do is emphasise that as a difference and say there is protection for the private sector here, we don't do it arbitrarily based on the needs of the government. We should emphasise that."
Rajan said the problem with China is not its potential to deliver growth— that has never been in doubt—but rather the fact that the government keeps companies on a tight leash.
"When the Communist Party says jump, everybody says how high? Right now, it said jump to the private sector, and you've got this spectre of many private sector CEOs resigning rather than having to face up to continuous monitoring and dialogue with the party," he said. "That is damaging in the long run."
Other countries can take advantage of this fact to draw investment away from China. "This gives an opportunity for other countries to say we're not them, we actually have checks and balances on our government," he said. "These kinds of things will make us look a lot better in the global evolution of services."
Watch | Raghuram Rajan's full interview with Raghav Bahl.
Here are edited excerpts from the conversation...
You've spoken of the fears that come with a two-paced global recovery. With the pressures on global interest rates, what happens to countries which are already running huge debts and pretty high deficit? Could that be a dislocation for the economy?
Raghuram Rajan: Absolutely which is why we need to not throw the rule books out of the window. We have to worry about the deficit, but we have to worry about it in a sensible way. That means, really the premium on effective government goes up. We need to be much more effective and we need to be very clear about what we're going to do and how we're going to do it. One example, even in this environment of rising potential interest rates of the Fed sort of drawing back on the stimulus and the potential for capital to go back as it did during the taper tantrum, there is a potential but you can look good amongst this by laying out a path, which suggests that you are going to bring back growth, you are going to have a stable polity going forward, you're going to do the right things. That means looking good on a number of dimensions.
For instance, I thought the settling of some of those tax cases was a good one because, we had gone through all the arbitration etc., and but it was going nowhere, and we were looking really an outlier. So, I thought it was high time that it was settled. I thought the initial idea was a bad one, but now that we were there, it was good that we settled.
Second, I think that China is doing a lot to harm its own private sector for some good reasons for some not so good reasons, we can come to that later. But I think in that environment, India, if it obeys the rule of law, looks a lot better. Now for that, we have some strengths, we have a judiciary which works, and which is not necessarily under the thumb of the government and so what we should do is emphasise that as a difference and say there is protection for the private sector here. We don't do it arbitrarily based on the needs of the government and we should emphasise that and actually make that much clearer in all the things we do. So, I think there are ways we can differentiate ourselves and make sure that capital sort of sees us as a safe haven, even when the Fed is raising interest rates so it doesn't flow out all the same.
People are looking for an alternative to China, we always were the alternative until we started collapsing in growth. If we can revive the potential for that growth but also emphasise our private sector credentials and the constraints on the government—unbridled government is problematic for investment and so if we can say the government is constrained, is going to respect the rule of law, we have a much better chance to keep the capital we've attracted in fact attract more.
We've seen spectacular vaccination numbers by China, that they've gone ahead and vaccinated over 80% of their population. Do you believe these numbers? China continues to be a black box.
I think it's easy to keep questioning China's performance and I think some questions are often warranted but I think they've also delivered in many ways, what they've claimed. I mean look at the high-speed rail network for example, I mean it's humongous in how much they've done and how quickly. There may be some questions about quality and so on but when the government puts its mind to something, they’ve managed to deliver reasonably effectively especially if what can be delivered can be measured. So, I wouldn't sniff at those numbers.
With China I would worry more about the dominance of the Communist Party and its unwillingness to allow the private sector—let's put it this way the absence of checks and balances. When the Communist Party says jump, everybody says how high? Right now, it said jump to the private sector, and you've got this spectre of many private sector CEOs resigning rather than having to face up to continuous monitoring and dialogue with the party. So, that is damaging in the long run.
Again, take the issue of services I talked about, would you want to do services with a Chinese company when you know that the data that it collects on you including your private medical services can be shared with the government, in fact must be shared with the government? How easy is it going to be for China to expand abroad with financial services, with medical services, with legal services, when everybody knows the long arm of the government is hanging over it?
My sense is this therefore gives an opportunity for other countries to say we're not them, we actually have checks and balances on our government. We have a privacy law which protects private data and prevents government agencies from coming in without the permission of a high court judge.
These kinds of things will make us look a lot better in the global evolution of services. So, I would say let’s not dish China for the wrong things. When they want to do something, they do it very effectively. They have a very effective government when it puts his mind to it. Issue is does it put its mind to the right things. So, we can have a march of them.
How about unicorns in India offering IPOs with bizarre valuations? Is it a good thing for the small investors? And you can link it to the China point that you said we will come back to.
I don't have a view on valuations I rarely give investment advice. So, I really think that what is important—now the Chinese, to their credit, are saying that some of the reasons we’re moving against big digital is because of monopoly practices, because they are non-transparent, they are not respecting the privacy of individuals and so on. That may all be important in this drive. The problem is there are no checks and balances on what one bureaucrat decides on what the private sector should do. I think this kind of video game is bad, so I ban it. Well, who am I to decide? I'm sitting in my room, and I decide on my own, without any inputs. That would be a pretty fearful imagery.
So, what we need is certainly government to do things on behalf of the people but with checks and balances so that there's some check that what they do is in the interests of the people and that is where we have a liberal society with civil society, we have the judiciary, we have the political opposition all of which are in attempt to keep the government in check and balance.
Now what about Indian unicorns? That was the last question, do these prices make any sense. Broadly, I think you could ask if the prices of any stock market in the world would make sense. Obviously, there are areas of froth, a lot of people think the unicorns, are a good way to get into the economy of one of the last remaining—China is already well colonised as far as tech goes and India, you're seeing some of the entities that are targeting the mass market come out.
People think there's a way to get in. Are those prices, reasonable? I don't know, I mean compare them with the prices of cryptocurrencies, well, you'll have a hard time trying to figure out which one is more reasonable. But broadly speaking, I would say, I'd far rather that the market decide and make mistakes perhaps, investors decide, and I wouldn't say small investors should put a lot of their money in very risky assets like these but far rather that they decide than the government decide what's good for the investor and what's not. I think governments tend to make big mistakes.