In January last year, Harvard University economics professor and financial adviser to the Kerala government Gita Gopinath weighed in on some weighty issues in a chat with Shekhar Gupta on Walk The Talk. As she is appointed the IMF chief economist, we take you on a walk down memory lane.
Shekhar Gupta (SG): Hello, and welcome to Walk the Talk. I am Shekhar Gupta on this very sunny and beautiful Delhi afternoon. Such a sunny beautiful winter afternoon that I can take my jacket off and fold my sleeves. And Gita, it doesn’t matter to you, you come from Cambridge, Harvard. Professor Gita Gopinath, welcome to Walk the Talk.
Gita Gopinath (GG): Thank You
SG: You come to India often enough and you spend a lot of time in the rest of the world, not just Harvard. So as we come into the new year, give us Gita Gopinath’s view of the global economy.
GG: So we are going to see some very interesting trends starting 2017. This might be the end of secular stagnation, something that has been thrown around for the last two years.
SG: I think you spell it out in India. You say it’s the end of secular stagnation, people will start applauding, thinking it is something else.
GG: Now, in these advanced economies, especially in the US, we have had periods of very low growth. They have been stagnating, their growth rates have been low, their interest rates have been very low. And there has been a sense that they would be stuck in this particular low growth rate trap for the foreseeable future.
But 2017 could be the turning point because we have seen some big changes that have happened in the developed world, the biggest one of which is Donald Trump’s election win. And so we might actually, for the first time, see investments in infrastructure, which is something the US has needed to for a while. We have already seen the interest rates going up. So that would be the first thing.
SG: Any time you think phone signals are bad in India, think of the US.
GG: The other big event that we all have to wait and watch is what happens to the growth of populism in most parts of the advanced world. As elections come around in France and in Germany we are going to see whether there is going to be a shift more towards parties that are populist, home-driven, anti-globalisation, and that could be another big trend we could see coming around in the next year.
The third trend is that the commodity exporters might finally see some relief with an upturn in commodity prices.
SG: Starting with oil.
GG: And so we could see parts of world that may have been hit hard, like Brazil or Colombia, with a big drop in commodity prices, that they actually get some respite from.
SG: And Russia.
GG: And Russia, yes, of course.
SG: But at the same time, [do you see] parts of the world that have benefited from low commodity prices, like India, getting hit?
GG: So you will have a reversal in that trend. India has had this big gain in terms of low commodity prices, so that gain will certainly come to an end. I do not expect commodity prices to go back up to the level of $100 a barrel because we have had now many competing forms of energy supply.
SG: Starting with shale.
GG: Starting with shale. And these have become far more cost-effective in producing. And so we could see the price going up and it’s not going to go back up to the very high levels of four-five years ago.
SG: So, are you bullish or bearish at the beginning of the year?
GG: It depends on the part of the globe. It’s very hard to say something for the globe as a whole.
GG: For America, I would say I am bullish in the sense that we could see higher growth rates than the 2 per cent growth rates we have seen. Whether that’s good in the long run for the economy, I am sceptical. But you would certainly see higher growth.
SG: But this will be expenditure-driven. The government will spend money.
GG: The government will spend money. The government decides to cut down on corporate taxes and does a major corporate tax reform. That could stimulate private investment, which has been quite weak in the US for last several years. And so there seems to be many pieces of the momentum shifting towards higher growth in the US.
SG: And what happens in India, bringing you back right from your adopted home to your original home.
GG: With India, I would say that the first six months of the year would, I mean India is growing at 7 odd per cent. With demonetisation and its impact, that’s going to play out over the next six months. It will slow down. So if you look at the pieces of GDP growth, you have got investment.
Investment has been weak in India. It was weak prior to demonetisation. I don’t see anything that would change that in the next six months. Will you get consumption? Consumption has been hit by demonetisation, so that’s a negative hit. So two of the important pieces of GDP, there is nothing right now, that we know of, that is going to stimulate it. The demonetisation could eventually benefit the economy, six months past or one year ahead. But (there is) nothing that tells me right now that there is a nice spark in the economy.
Investment has been weak in India. It was weak prior to demonetisation. I don’t see anything that would change that in the next six months.
SG: So how could demonetisation benefit the economy six months from now, or one year ahead? Let’s look at the positive side of it.
GG: The positive side is the new narrative that we move towards a less cash-driven economy. There is more money in the banking system that hopefully gets allocated appropriately. For me, actually, the bigger event that would be a positive for India is the GST (goods and services tax). If that actually gets implemented, which it should before September, that would be a big piece of it.
So, for demonetisation, I think the biggest plus has been the shift away from a cash-driven economy to a cashless economy. Maybe more parts of the informal economy become formal, but everything we know on this transition process is that it’s a slow one. So I don’t expect anything to happen very quickly.
SG: Has it worked anywhere in the past. Is there a precedent or is this truly unprecedented if this works?
GG: This particular implementation is truly unprecedented, in the sense of getting rid of 86 per cent of the currency in circulation overnight. Not only unprecedented in terms of practice, it is also unprecedented in terms of theory. Because pretty much every single macro-economist colleague of mine, whom I have spoken to, would say that this is something that we probably do not recommend to any developing country. Even in an advanced economy, you wouldn’t do that. (American economist) Ken Rogoff has written a book on it.
Pretty much every single macro-economist colleague of mine, whom I have spoken to, would say that [demonetisation] is something that we probably do not recommend to any developing country. Even in an advanced economy, you wouldn’t do that.
SG: Although he is a supporter of less cash.
GG: He is an absolute supporter of less cash. I am an absolute supporter of less cash. You can find most macro-economists who would be supporters of less cash.
SG: You work with Rogoff.
GG: I work with Rogoff. He was my adviser; he is my colleague right now. Everybody supports getting towards a cashless world, everybody supports getting rid of high-denomination notes. Everybody supports getting rid of black money. But this particular implementation is really quite unique. So, in one sense, it’s going to be really interesting, and we will learn a lot to see how it plays out.
SG: So, here’s a counter question. What do you economists know, because you get everything wrong. I am giving you a counter view. You were not able to predict the downturn of 2008, the big global crisis. You did not see oil prices falling. Probably you did not see oil prices recovering now, or maybe you did actually, I don’t know. But it looks like economists never get anything right. So how do you trust global macro-economists on their view of India, which is so unique that two-thirds of direct taxes are stolen and a third of indirect taxes are stolen.
GG: Is this your view or are you channeling someone else’s opinion?
SG: I am reflecting someone’s view but that’s one side’s view. And it’s an important side’s view.
GG: So, firstly, it’s incorrect to say that economists did not predict the 2008 crisis. You will find economists who did talk about the possibility, including (former RBI governor) Raghuram Rajan, including (American economist) Nouriel Roubini. There were plenty of suggestions that this could happen. Secondly, if you want to think about it, the great recession of 2008, the one that comes close to it was the Great Depression of 1929. So if you go through a long period of time when you haven’t had a major crisis, it’s impossible to say that you are going to predict every single crisis every single time.
If you go through a long period of time when you haven’t had a major crisis, it’s impossible to say that you are going to predict every single crisis every single time.
SG: It was after eight decades.
GG: Exactly, it was after eight decades. And you never get praised for getting all the things right. But you get blamed for not predicting the one thing that happened 80 years later. And… it’s going to be impossible to predict something with 100 per cent accuracy. We don’t predict the weather with 100 per cent accuracy. We can’t predict the way the economy is going to function with 100 per cent accuracy. So, I am not going to be defensive about that particular line of argument that economists have trouble predicting the future. I mean you make an intelligent argument around it, but sometimes you’ll get ignored.
SG: But there is the Bhagwati school, which is not a lightweight school, which seems to be fully behind this (demonetisation). Do you take it seriously?
GG: It is (Indian-American economist Jagdish) Bhagwati’s opinion. I mean he is entitled to his opinion. And he has a particular view on demonetisation. And he is certainly open to holding it.
SG: But do you agree with this?
GG: I personally do not think that this style of implementation was the way to have done it. I am fully in support of the idea of getting rid of high-denomination notes, but doing this gradually, over time, would have been a much better approach than doing it overnight. And let’s think about what was gained by doing it overnight. The whole point of doing it overnight was that a significant portion of these old notes would not come back into the banking system because it would be too hard to recycle. That has not been accomplished.
SG: And they would be floating in the river.
GG: And they would be floating in the river. But that hasn’t happened. So if that wasn’t to be accomplished, then why not have done this much more gradually? And you could have had the same benefit without the immense cost.
SG: The other argument is, and I am being a journalist, and not an opinion-writer, for a moment. Another argument is that Indians are addicted to cash. That unless you arm-twisted them like this, they were never going to change their habits.
GG: You can argue for why it’s important to do a particular policy, but you have to look at the cost and you have to look at the benefit. You and I can agree that it’s very important for poor people to use toilets. But you can’t force them not to defecate outside. You can give incentives for behavioural change, like it’s being done right now, which is, providing cash-based incentives for people to use digital payment methods. And you can do all of that, but you can’t force people to switch very quickly. Again while there can be benefits to doing it, the question are the costs. And the costs are big.
SG: You have tracked the RBI for some time as a macro-economist. Do you think it’s a surprise that the RBI has sort of clamped up on data since this happened? The RBI is the monetary authority in India and the RBI controls currency.
GG: I am cautious about slinging mud at an institution like the RBI, so I wouldn’t want to play fast and loose with its reputation. But I have to say that I am quite puzzled that there has been less in terms of fact and data, and how things are playing out, from an institution that’s otherwise so data-driven.
SG: We are not throwing mud at anybody. Also, it’s too early right now to sit in judgement over anybody. But would you have advised the RBI to do this differently as an institution.
GG: I think a few things that could have been done better would have been the communication from the RBI, even in real time, about how they expect things to play out, where things stand. So, there could have been a more regular communication with the public than has happened. There could have been more transparency in terms of how they thought this particular policy would affect the economy.
Again, this is not an analysis to be done ex-post to say that we have been waiting for the numbers to come in and see. I mean, that’s obviously something worthwhile. But if you are putting a policy in place, then you also want an ex-ante system to see how you think this would affect the economy. So, I would have hoped for more communication on those fronts from the RBI.
I think a few things that could have been done better would have been the communication from the RBI, even in real time, about how they expect things to play out, where things stand.
SG: Do you know Dr Urjit Patel?
GG: I do, yes.
SG: And what do you think of him as an economist?
GG: He is terrific. I was very happy to see him appointed as the (RBI) governor.
SG: In fact, all of us who are not even economists, just from what we know of his reputation, were quite sort of enthused, and we still are, that it’s a very sound appointment. And I think the deputy governor now, Viral Acharya, is a sound finance person.
GG: Absolutely. Viral Acharya is also a terrific finance person to be appointed. There are very good people at the RBI.
SG: So, if you are walking down this lawn and we have Urjit Patel coming from the other side, and you chat for a while, what advice would you give him today?
GG: I would do it off-camera. I have no intention of doing this.
SG: Give him some advice on camera.
GG: I would only encourage him to speak up a little more frequently than we have heard from him. And to have more clarity on how this policy is going to play out now over the next two months.
SG: And how should the government now use all the money that is coming into the banking system? Forget taxation, forget raids, forget what might be black or white, but banks have a lot of deposits now.
GG: Banks having a lot of deposits right now also means that the banks have a lot of liability.
SG: Yeah, because they don’t have the capital for this and they don’t know what to do with these deposits.
GG: So, I mean the only way that this will translate into something good is if it gets channeled into actual loans and good investments. And you know we have had a period when the RBI cut interest rates. But the pass-through to the loan rate has been very weak. There has not been much credit creation; credit creation growth has been weak in India, investments have been weak in India.
So, now the question is, what has changed that all of a sudden there’s going to be this really nice big demand for loans coming from the banks? I think it’s a good thing that money is coming into the banking sector. I hope it’s not put in gold, it better be with the banking system. So, that’s a good thing. But that doesn’t automatically translate into more loans or more supply of credit.
Secondly, you are going to take money-lending out of the informal economy into the formal economy, which is a good thing. But there is going to be a transitional period when those who were accessing the informal economy aren’t able to access loans from the formal economy. And how do we fix that problem?
SG: What role should the State play in it? Should the government be telling the banks and financial institutions where to deploy this money and how to deploy this money?
GG: No, absolutely not. The banking sector has its own technocrats.
SG: Should the government be, sort of, indicating the larger areas where they should go, infrastructure, agriculture?
GG: You can always have suggestions for where the money should be going but the ultimate decision has to be made by the people whose incentive is in line with running a good functioning institution. If we need more infrastructure, then there would be demand for loans in infrastructure, and there will be a supply of it. But this kind of micromanagement is probably not a great thing.
SG: So, countries like India should actually embrace globalisation even more than before.
GG: I mean it has. India has. Under the Modi government, we have actually moved towards embracing. And we have moved towards attracting FDI.
Under the Modi government, we have actually moved towards embracing. And we have moved towards attracting FDI.
SG: Look at our startups. New startups have no protection compared to what the Chinese have.
SG: So these are much more competitive.
GG: Exactly. I think everything should be done to preserve that.
SG: So carry on to the markets? How do the markets redeem themselves now?
GG: The markets, I think, have gotten a beating for a good reason in some respects, especially in the area of finance. The lack of regulation in the area of finance was very costly. The second aspect is that there has been a rise in inequality, which has obviously created concerns about whether markets do the job. And I think there are some real concerns here.
For instance, going back to globalisation, we always argue that globalisation is good, but we have also recognised the fact that it creates winners and losers. I think the fact that there hasn’t been enough intervention on the second front, which is, providing a social safety net for these people who lost from globalisation, has been one of the mistakes that have been made. That is, we have focused on growth that comes from globalisation but we have not taken to account the fact that we have to compensate the losers from globalisation. And to save markets and to save globalisation, you are going to have to be able to address that particular…
SG: And who compensates them? The State or the market?
GG: In this particular case, the State would compensate them.
SG: So, you know Mr Modi well? You have met him a few times. What’s your advice to him?
GG: To say well is a bit of an exaggeration.
SG: But you have met him a few times.
I think my one hope would be that the one policy that I thought was absolutely spectacular for India, which is GST, gets implemented and that it gets implemented well.
SG: Chances are he would listen to you because you are a teacher. Everybody listens to you. What will your advice be to him on camera? Forget what you tell him off camera. That’s of no consequence to us.
GG: I think my one hope would be that the one policy that I thought was absolutely spectacular for India, which is GST, gets implemented and that it gets implemented well. GST was, in fact, one instrument that was better at attacking tax evasion than any other instrument we have right now. It’s great for the Indian economy.
SG: More than demonetisation?
GG: More than demonetisation, in my opinion. In the process of pushing through demonetisation, if that has been the collateral damage, I would be very worried about it. So, use whatever political capital you have to make sure that GST goes through in a form without too many tax slabs, without too much of discretion, and it gets done well.
SG: So, you are also an adviser to the Kerala government, which is at the other end of both these debates, GST as well as demonetisation. First of all, who’s more likely to listen to you, to your advice. Prime Minister Modi or the chief minister of Kerala?
GG: I have had very good conversations with the chief minister of Kerala.
SG: Because, ideologically and philosophically, you are much more distant from your home state’s government than the government of India.
GG: You know, when I have had conversations with the chief minister of Kerala, we have talked about issues that we have common grounds on. And so, again, I think it’s a bit extreme to say that all economists are bracketed in one area or another.
Ultimately, we all have the same goals and we might disagree on the steps towards it. But we have the same end goals and we can discuss it. So, even the Kerala government, everybody will agree that getting rid of black money is a good idea. If you want to get rid of large currency notes over a long period of time, that would be a good idea. It’s just [this] particular implementation that has been problematic.
SG: Talking about economists, let’s look at the larger issue of academics, intellectuals, the so-called liberal community. Just as globalisation is in bad order, capitalism is in bad order. There is also a situation where both liberalism and intellectualism is in bad order. Boring academics, boring intellectuals, what do they know? Liberal is now a pejorative. So how does that community redeem itself now? Will the wheel turn for them again?
GG: I think you are being a bit too dramatic here, Shekhar. I don’t think the wheel has turned in such a way.
Data is not perfect, but there is no other substitute for it.
SG: You don’t think so? Well, I think you have sort of closeted yourself away from social media, which is a good thing. But look at the political discourse around the world, from (Russian President Vladimir) Putin to Trump to (Japan Prime Minister Shinzo) Abe to (China President) Xi Jinping to Modi to (Turkey President Recep Tayyip) Erdogan to (Israel Prime Minister Benjamin) Netanyahu, it’s a different world right now. I have not even mentioned (Philippines President Rodrigo) Duterte.
GG: I guess I am an optimist on this matter.
SG: But you come from the most liberal real estate in the world.
GG: Yes, I have faith. It was troubling when Trump won the election. That was shocking for many people, and it’s troubling. But I still have the hope that ultimately we all care about outcomes. And if this particular approach doesn’t work, if disregarding evidence that we have from our economic studies, it’s not going to work, then it will come around.
SG: So, don’t dump data. You may disagree with those who bring data and analyse it for you, but don’t dump data.
GG: Data is not perfect, but there is no other substitute for it.
SG: As our friend Narayan Murthy always says, In God We Trust, the rest of you bring data. Wonderful conversation. I think we will pick up the thread again in your hometown Mysore the next time I’m there.
GG: Thank You Shekhar. That was great.
Watch the full interview here.