Challenges for India are lot more domestic than external: Vallabh Bhanshali, Chairman, Enam Group

In an interview with ET Now, Vallabh Bhanshali, Chairman, Enam Group, spoke about the new RBI Governor Dr Urijit Patel and the challenges that lie infront of him. Edited excerpts.

Now, that Dr Urijit Patel will be the new RBI chief, do you think the government's message is very simple, the vote is for continuity and business as usual?
I think continuity seems very obvious and is also probably a conservative view that if India is in a good moment and there has been a team which has been a part of the government, the majority vote and other institutions including RBI, why disturb the winning combination. More importantly, I think it is Dr Patel’s qualification. I think we should not underestimate that for 25 years he has been deeply involved in the Indian economics.

What would this mean for policy action going forward? Do you think there are challenges for India both in domestic as well as external markets and we need to contest with those economic risks?
I think Dr Rajan, his involvement in economics was much greater as professor at University of Chicago, a very-very respected institutions in the field of economics and deeper insight into economic forces was his forte. But Dr Urjit Patel has also been at IMF and multilateral institutions. The challenges for India are lot more domestic than external. Our external parameters are all fairly stable whether it is our reserves positions and so on. So I think pushing India to its potential is I think one single theme.

What will be the first biggest challenge Dr Patel will have to deal with? Will it be the FCNR conversion or tackling food inflation?
Each country has its own peculiar circumstance. India probably on a similar vein with countries that have achieved $10,000, $15,000, $30,000 per capita. Their challenges are very different from our challenges. If we can apply economic theory by reading a text book, you need a governor, you do not need an economist. So I think you have to calibrate the learnings, the insights of a theory and you have to be a grounds person that is where the skill comes, that is where the leader counts. So I do not worry too much about either the global part or what others are doing. The government showed fiscal discipline by limiting the budget deficit, by setting a target that was welcomed by RBI and that is the kind of jugalbandi which is necessary.

How do you think Dr Urjit Patel’s transition from deputy governor to RBI governor ideally should be? Since he will be heading the new monetary policy committee also, so the approach should be different too?
There are two-three aspects to this. One is, what he has done, in his role when he was asked to write a certain report or when he was a deputy governor. When you become the governor, it is a completely disproportionate leap. It is not an extension of what he was doing as deputy governor. He is the governor and should think of two things – one, leaving his imprint as a governor in continuing the great imperatives or working on the imperatives which may include macroeconomic stability, prices, banking sector reforms, etc. The second is - I would hate if people looked at me and if I were Dr Urjit Patel, said that look oh! he is continuing in Dr Rajan’s footsteps. I must follow the footsteps of all great traditions but I must have my own individuality that is the leader’s role. I am sure Dr Patel with all his experience and insight into India’s challenges, capabilities is going to come up with a solutions which are more balancing. I think and I wish that Dr Patel acts the leader that the governor’s position is expecting him to be.

Since food inflation is high and RBI has stated its intension to keep inflation under check. Another view which seems to be endorsing is that Dr Patel is slightly more hawkish because he was the author behind the new CPI regime. So in the short term, we should brace ourselves for no big rate cut?
Rate action is much more than just looking at the rates and so there are several tools available to RBI. We saw that the way rates were cut and liquidity was managed, they realised that it was not working well and need to release liquidity much earlier. But also, I think RBI did change that policy in this April and the bankers are no more complaining of liquidity management. The bond yields eventually fell. So we had a very incongruent situation last year that the rates were cut and the bond yields were not coming down. It took a long time for the dispensation to see that something was incongruent. But anyway, I is lot more complex and interesting also from the regulator’s point of view that I have to look at growth, at poverty alleviation, macroeconomic stability and where interest rates and liquidity are together, they are just two of the many tools RBI has.

Do you think controlling food inflation should take priority ? Government has also made it clearly that they are pretty much on the same side of RBI’s philosophy of 4% plus/minus 2?
I think as far as food prices are concerned they have nothing to do with interest rate. Food prices are linked clearly to demand-supply. Good monsoon is bringing prices down, also some proactive management of other commodities is helping. We need appropriate tools for what prices we want to bring down. Real estate has collapsed. Industry is not uniformly excited. There are lot of those challenges and I must highlight this, I do not find enough mention in the media and amongst the experts comments that the world is not facing inflationary pressures today. The world is trying its best to create inflation. The world is facing deflationary expectations. So I think if you look at the history of macroeconomic management over the last 100 years, this commentary on deflation and inflation has been alternating and the insight as to what is right has still not been established. We need to create strategies that are appropriate, so food prices can be controlled not by interest rates but by boosting supply. The last 25 years of economic management between the central government and RBY has been a good saga and I think that will continue.

Since the vote is there for continuity and Dr Patel’s name was already doing the rounds, so from market standpoint, are they unlikely to react?
I think the way Reserve Bank has built its credibility, the way governors have come and gone and the market already reacted to Rajan’s sudden resignation. Hence, this should be more or less a non-event, which is a good thing.