HC's Jan Ruzicka interviews Harun Rashid Khan

You have been a central banker for about 40 years. What is your assessment of current situation of India?

To answer your first question let me try to provide a context by doing a quick SWOT analysis. I believe India’s strength mainly comes from Demography, Democracy and Diversity.

First, the demographic advantage is that there are more than 1.3 billion Indians and their median age is about 27 years. In a few years we are going to be the largest population in the world. And there is growing young aspirational middle class and rising above the bottom of the pyramid population which are the key to the economic future.

Second, have a vibrant democracy with checks and balances. I don’t want to get into political debate about quality of our democracy, but the reality is that it provides us the opportunity to express our views, and, even more importantly, the ability to correct those who are in charge of policy making.

Third, diversity is especially important for India, which is not only a country, but in a fact a continent. We have 29 states besides seven union territories and many of the states are bigger than large European nations. And these states are very different: culturally, by language, by economic output. This provides us a lot of resilience; for example, if some states are not well due to some economic headwinds there are others who will be growing aided by some other tailwinds. And because we need to connect this diversity into a well-functioning mechanism, we believe in democratic policy making in a federal framework.

And what are the weaknesses?

Even before the Covid19 pandemic set in we have been facing a very weak growth trajectory, for example, the last year our GDP growth rate declined to 4.2%. And logically due to lockdowns, economy is plummeting.

Slow growth, obviously, brings a low per capita income and insufficient employment with implications for demand in the economy. This of course is not only a phenomenon in India but globally. In many places we have seen a “jobless growth”. We do have growth, but jobs, both in desired quantity and quality, are not there, partly because of automation and also because of lack of skilling and reskilling of the workforce.

Structure of the economy with people engaged in low productive agriculture and services sectors, mostly by way of informal linkages, and slow growth in the manufacturing sector has also been a persistent problem.

Another weakness is the limited fiscal space of the Indian government. The public finance has already been under stress and of course the current situation when large parts of the economy is facing the consequences of epidemiological impact will make things even harder.

And finally, high number of non-performing loans of Indian banks. Previously, our banks had shown stellar performance. Especially during the last crisis in 2008, from which we came out almost unscathed, our banks were praised by everyone including the international institutions. But recently, both public and private banks, have been passing through difficult times because of low growth and weak demand. Going forward this will have implications for asset quality and risk aversion of the banks.

What is the economic situation right now?

Our forex reserves are very high at about USD 510 billion. This is equivalent to more than 12 months of imports. One rule of thumb for adequacy of reserves is import cover of about six months. So, we can cope with any external sector shock as we can use the reserves to stabilize the currency against undue volatility if need be and they provide a good insurance and act as confidence booster for the foreign investors.

Another thing we have is a well-functioning central bank, i.e. the Reserve Bank of India (RBI). Maybe you can call me biased because I was central banker for about four decades. But I truly believe RBI has been largely successful in creating a stable financial system for India as well as recently in tackling the impact of Covid19 pandemic. It has been very proactive in terms of monetary measures, liquidity measures, supporting the financial market and the financial institutions and ensuring smooth operations of the payment and settlement systems in coping with the current crisis. So, a stable financial sector, well working regulatory regime and enough liquidity are our big strengths now.

The other major strength which is manifest now in this current Covid-19 context is the resilience and revival of our agriculture and the rural economy.

According to International Monetary Fund, India will be hit hard by the Covid19 pandemic. The Fund says that the Indian GDP will contract by 4.5%

Well, that is the result of more 70-days of lockdown, which has been the longest lockdown in the world. Now we have started opening up, but unfortunately the number of cases is still rising. And we don’t know how the pandemic going to play out. Another spike could come in a few months. So, we are all waiting for a vaccine and the medicine.

Another problem is geopolitics. I don’t want to elaborate much on this, it is not my field. But the fact is that protectionism, trade tensions and technology related issues, can be seen everywhere and they will have an obvious impact on Indian economy.

But Indians often excel under pressure. That is our nature. For us this crisis provides an opportunity for a large number of structural reforms, so I believe the future is bright.

In that case, what kind or recovery can we expect?

After the IMF’s prediction of negative 4.5 per cent growth subsequent estimates by various agencies show that the decline could be sharper, some even predicting 9.5 to 10 per cent contraction. This is primarily because the opening-up of the economy has not happened in a big way and many areas restrictions are being re-imposed due to spike in the Covid19 cases. Next year the world will grow from a low base so we will see some gradual recovery. Some analysts believe recovery in India will be in a form of “V,” some others as either “U” or “W” but maybe it is going to be “V” with a long tail, something like the NIKE logo. But after a couple of years the intrinsic strengths of the country and the structural reforms which will gather further momentum should put us in the sustainable track of 6-8 per cent growth, a growth rate not to be seen in many countries.

Martin Wolf, from The Financial Times,believes that Indian government shall provide a lot more support to sustain demand. That government is not doing enough…

Some people criticize government’s slow or shallow fiscal reactions. But let’s bear in mind the fiscal constraints we have. The pandemic crisis is still unfolding. It is not over yet. We have to keep some more gunpowder ready for later. I believe if the pandemic prolongs the pain of the economy the scale of stimulus has to be expanded despite fiscal constraints with assurance of early return to the path of fiscal prudence post the crisis.

But for the present, what the government has been doing things creatively without using much fiscal space, is to take a host of measures which will support SME segment by providing guarantees. A lot of guarantees and credit enhancement supports have also been given to banks to lend money.

Along with that, the central bank has also done quite a few things, both conventional and unconventional, in terms of easing the market by providing ample liquidity; more than 4.5 percent of last year’s GDP and cutting down the rates; 115 basis points reduction in policy rates has happened in the last four months.

Finally, regulatory measures, including the six months moratorium during this period to ease life of people and businesses who have problem to repay their loans, have been taken.

As regulator you spent big part of your professional life in supporting the countryside, bringing services there, pushing banks to be active advocating financial literacy. So how do you perceive this quite large portion of Indian society and also economy?

If you see our level of urbanization, only about 32 per cent live in the cities and the rest in the rural and semi-urban locations. And around 47-48 per cent of population depend on agriculture which contributes 17-18 percent of India’s GDP. One should note here that agriculture and allied activities account for about 40 per cent of rural output and the rest comes from rural microenterprises, construction, and services.

“3 Ms” are affecting our agriculture: Monsoon, Market and Money.

Why monsoon? Only about 42% of India are irrigated. Rest depends on rains. Therefore, not only farmers, but the whole country looks at weather predictions and at the end monsoon shapes the mood of Indian people and the policy makers. Hence, the efforts are on to enhance the areas under assured irrigation along with the interventions to produce “more” from “less” water, meaning its efficient use.

Marketing of agricultural along with post-harvest management is a big issue. The Indian farmer is squeezed due to market infrastructure deficiencies. In most cases farmer does not get much out of what the consumer finally pays due to pricing imperfections.

And finally, money – specifically financing. Farmers need loans to buy seeds, a new tractor or chemicals. Even though financial inclusion and rural banking are a massive success, still there are large areas where institutional finance is not present, particularly small and marginal farmers. And therefore, many farmers need to rely on informal unstable lenders.

India has the second largest cohort of unbanked population in the world, 190 million. Women are more affected than men, unbanked adults are disproportionately young and like everywhere else, poor people are affected the most. How to change that?

For more than century, we have been trying to bring formal financial services to the countryside and other excluded segments of the population. Considering the size of the rural population, this is not an easy task. But for the last 15 years, financial inclusion has been really a national project and I was honoured to have played a small part in it.

The Holy Trinity of successful financial inclusion in recent times has been cheap deposit bank account for everyone, universal electronic national ID and mobile phones, affordable and accessible to everyone.

Firstly, we supported general deposit account to be really for everyone, even for people with very low income. Now almost billion people have bank accounts. Secondly, the national identity card with biometrics was introduced, which is crucial for KYC of all range of services, communication with institutions, elections, banking facilities, everything. Thirdly, there is ubiquitous mobile phone, which can serve as an e-wallet and other means of banking transactions, and source of advice and financial literacy.

These three things are vital for financial inclusion – now we can provide affordable savings products, small loans, small insurance, payments and money transfers.

Especially digital money transfers are important because the whole country is always in motion and hundreds of millions of people are informal workers and they need to be able to send money home.

So future is digital, there is no need to open more brick and mortar stores. Just digital.

May be “omnichannel” in the transition phase: brick and click as also mortar and mouse. It’s cheap. It’s convenient. And it’s important, even more now, when people are scared to mingle or touch cash because of the virus.

Hence digital financial inclusion has been the buzz words in the recent times.

You also served in the G-20 forum focused on reinforcing international cooperation on market integrity. It seems that disruption of global trade is truly everywhere, and not only because of Covid19, but also for the growing nationalism. So, what is your view on cohesion of the global business?

Even before pandemic, we were moving towards what many people call de-globalization. But for me there is no escape from globalization. People move, capital flows, and technologies penetrate rapidly in a seamless world. You can’t stop these forces. That is not possible.

But we might think how to tackle some ill effects of globalization. In some countries, there has been a perception that large parts of the population have been left behind blaming poor income of the farmers, in some countries they blame immigrants for job losses.

But study after study shows that immigrants really don’t create problems for the local population.

How will globalization shape up in future will depend on whether we care to address the concerns of people seemingly affected by hyper globalisation, how we balance between national interest and international cooperation. Also, on how we deal with the pandemic. Will the small and vulnerable countries will get their share of drugs and vaccines?

For the sake of humanity, we should stand together. This crisis is not a crisis one country can win alone. Let me draw from our ancient Indian philosophy here: in Sanskrit it is said: “Vasudhaiva Kutumbakam.“ It means “The World is One Family.” I think this is something what we should practice more in challenging times like this.

Maybe I will just use this opportunity when you’re talking about Indian philosophy and be a bit personal. In Indian business, you are known by nickname “Vegetarian Khan.”

Well, I personally don’t attach any special importance to me being vegetarian. It is a personal choice. You know, our father of the nation Mahatma Gandhi was vegetarian. And so was Adolf Hitler! So, I don’t like to draw the conclusions about who we are based on these choices.

But in some sense, it is a matter of simple sustainability: to raise a pig is much more complicated than to feed a chicken and that is more complicated than to grow a salad. So, there is moral and practical dimension to it. And we have only one planet.

I just would like to make a small point here about hygiene and safety about how we deal with non-vegetarian food. I don’t mean anything wrong about any country, culture or society, but one of the major problems this pandemic has shown us is the way wet markets are often poorly managed.

Let’s finish again with International Monetary Fund. It is Chief Economist, Gita Gopinath, who is originally Indian, predicted that developed world be hit by pandemics much worse than BRIC countries with a negative growth of minus 8%. What is your view of the global outlook?

I believe developed countries are in a similar situation as India: all depends on how the pandemic is going to run its course. Global trade is already down sharply and may decline anywhere between 12-15 per cent this year. In some countries, fortunately, the Covid19 curve has started to flatten or bend. Some parts of Europe, for example, the Czech Republic are for the present not very much affected by the virus. So, their economies will restart. Also, China. But plenty of countries including large economies like US or Brazil and or India are still facing problems. Overall, as per current estimates, the world will contract by about 5 per cent and the advanced countries by about 8 per cent. And it is going to be minus 5-8 per cent for India. And next year global growth is expected to bounce back to around 5 per cent from a lower base. In India too we could see a slightly higher growth rate next year and beyond that, as I said, earlier, we could settle down at a sustainable trajectory of 6-8 per cent.

But as I mentioned, I think there is a need for a global cooperation and coordination, whether for combating the climate change challenges or the Covid19 virus. And we should also create a very resilient, an interdependent global supply chain and not become insular and protectionist while being mindful of addressing the concerns of affected segments domestically. This will be beneficial for everybody. That would be a true tribute to Indian philosophy of the world is one familywhich I alluded to earlier. I think we must live together, work together and prosper together.

Harun Rashid Khan used to be the most senior central banker and Deputy Governor of the Reserve Bank of India (RBI) serving for about 38 years. Currently he is a Senior Adviser to KPMG India, non-Executive Chairman of the NSE Clearing Corporation and a Board Member of the Bandhan Bank and the India Mortgage Guarantee Corporation. Post retirement from RBI he has been part of many committees of Government of India, the RBI and the Securities Exchange Board of India (SEBI) including those on digital payments, foreign portfolio investments and the corporate bonds.

During his career in RBI he handled diverse central banking and regulatory areas and spearheaded major projects relating to financial markets, payment and settlement systems, financial inclusion and banking operations.

While in RBI he chaired the Committee on the Rural Credit and Micro-finance (popularly known as the Khan Committee) which helped in bringing the formal financial services to the unbanked npopulation of the country through a network of agents/Business Correspondents and ITC interventions.