Global Economic Outlook:
The global economy’s recovery has been hindered by factors like the ongoing COVID-19 pandemic and the geopolitical tensions, particularly the war in Ukraine, leading to concerns of a potential recession. The IMF’s prediction that a third of the global economy may face a recession is a reflection of the economic challenges.

Causes of Inflation and Central Banks’ Response:
The war in Ukraine exacerbated inflation by causing disruptions in supply chains and increasing commodity prices. Central banks, such as the Fed, underestimated the inflation problem at the beginning of 2022, leading to a delayed response. The rapid rise in interest rates to combat inflation has increased the likelihood of a recession.

US Inflation and Federal Reserve’s Actions:
US inflation remains elevated, exceeding the Fed’s target of 2%. The Fed is determined to bring inflation back to its target range, but this may come at a cost to the economy. The Fed’s hawkish stance involves raising interest rates further, potentially leading to a slowdown or even a recession.

Impact on US and Global Economy:
The Fed’s actions to control inflation will affect the US economy, potentially leading to a slowdown or recession. The impact will also extend to the global economy, especially emerging markets like India.

Challenges in Inflation Fight:
The tight labor market in the US poses a challenge in controlling inflation, as wages may increase to meet rising prices. The Fed aims to create some slack in the labor market to prevent a wage-price spiral. The path to bringing inflation back to the target range of around 2% remains uncertain.

Complexity of Economics:
Economics is not a precise science like physics, and involves political and technical factors. The willingness of governments to spend more, especially in Europe, contributes to inflation. The inflation fight faces political and technical challenges, as central banks navigate the complexities of economic conditions.

China’s Economic Turmoil:
China has faced several challenges in recent times, including policy shocks against the private sector, trade conflicts with the US, concerns over Taiwan, and a strict zero COVID policy that has caused havoc and suppressed true death figures.

India as a Potential Beneficiary:
India is seen as a potential beneficiary of China’s economic turmoil, with many MNCs looking to relocate from China.

India’s Challenges in Becoming China Plus One:
India is not necessarily the top choice for companies seeking alternatives to China. Countries like Vietnam, with its policy certainty and favorable characteristics, are also attractive options. Mexico, with its proximity to the US and NAFTA membership, is another option for companies seeking diversification.

India’s Path to Becoming the China Plus One:
To become a true China plus one, India needs to address its challenges and create a more attractive environment for businesses. This includes providing policy certainty, reducing policy volatility, and improving infrastructure.

Current Account Deficit and Distributional Consequences:
* India’s current account deficit has ballooned to 4.4%, raising concerns about twin deficits.
* The increase in private spending due to economic recovery and high government spending has contributed to the widening deficit.
* Distributional inequality, with the lower middle class facing job losses and limited spending, has led to an increase in spending on imported goods by the wealthy, further contributing to the deficit.

Addressing the Current Account Deficit:
* Raising tariffs and import substitution is not a viable solution, as it deters foreign investment and stable fund flows.
* Significant reforms are needed to boost growth and reduce the reliance on external savings.

Inflation and Monetary Policy:
* While recent CPI inflation numbers have come down due to factors like vegetable prices, core inflation remains high.
* The Reserve Bank of India’s goal should be to bring inflation to a comfortable level around 4%, rather than just within the 2-6% band.
* Keeping inflation under control is essential to protect the ordinary person and maintain relative currency stability, even in the face of global growth slowdown and domestic growth disparities.

Challenges Ahead:
* Navigating the current economic situation, with a large current account deficit, slowing global growth, and domestic growth dependent on upper middle class spending, is challenging.
* The Reserve Bank of India faces a difficult task in managing monetary policy to address inflation while considering the broader economic context.

Interest Rates and Liquidity:
Central banks aim to tighten financial conditions to control inflation by raising policy rates. Abundant liquidity can offset the impact of interest rate hikes, potentially hindering efforts to curb inflation.

Chakravyu of Liquidity:
Central banks flooded markets with liquidity post-financial crisis, leading to a situation where markets constantly demand more. Withdrawing liquidity too quickly can create financial strains and potential failures of financial institutions.

Tread Carefully:
Central banks must strike a balance between tightening liquidity to combat inflation and avoiding financial instability.

Re-evaluating the Inflation Targeting Mandate:
The debate on whether the MPC should oversee liquidity management alongside the repo rate is complex and ongoing. The primary objective of monetary policy remains tightening financial conditions through various tools, including interest rates, liquidity management, and quantitative easing.

Monetary Policy Tools:
Central banks should control all tools that determine financial conditions to effectively manage yield curve control and monetary policy. The Monetary Policy Committee should oversee these tools, with details varying across countries.

Transparency in Inflation Targeting:
Raghuram Rajan advocates for making letters written by the RBI to the government regarding inflation targeting publicly available. The public needs to understand why the central bank has failed and how it intends to rectify the situation. This transparency is crucial for affecting public expectations and maintaining trust in the central bank.

Cryptocurrency Concerns:
Cryptocurrencies have largely failed to live up to their promise as a payment method. They are more appropriately viewed as securities used for speculation, not a central bank concern. Securities regulators should focus on due diligence and appropriate use of proceeds from token sales. Regulators should also warn the public about the speculative nature of cryptocurrencies and provide caveats about their risks.

Regulating Cryptocurrencies:
Rajan believes that regulators should strike a balance between allowing for potential future benefits and protecting the public from harm. A collapse of a major cryptocurrency exchange like FTX can ease the central bank’s task in highlighting the risks. Rajan suggests minimum due diligence and public awareness campaigns to educate investors about the risks.

CBDCs and Digitization:
UPI has significantly improved retail payments in India, making CBDCs less necessary for this purpose. For large wholesale payments, CBDCs could potentially offer advantages. However, Rajan cautions against overrating the benefits of CBDCs, especially given the rapid digitization already achieved. He emphasizes the need for caution and careful consideration before moving forward with CBDCs.

CBDCs:
Raghuram Rajan expressed concerns about the urgency to implement a central bank digital currency (CBDC) in India, emphasizing the need for a cautious approach. He stressed the importance of understanding the technology and participating in global rulemaking to avoid disadvantages in the future. Rajan highlighted potential risks associated with CBDCs, including the displacement of bank deposits, volatility due to easy conversion, and the need for flexibility to keep up with technological advancements. He suggested experimentation with CBDCs but advised against a large-scale rollout until the benefits are more certain.

NPAs:
Rajan emphasized the need for a two-pronged approach to address non-performing assets (NPAs) in the banking system. He called for improving the quality of lending decisions by tracking and allocating responsibility for large loans within public sector banks. Rajan criticized the lack of responsibility allocation and tracking of loan decisions, stating that it enables incompetence or corruption. He also highlighted the need for better recovery mechanisms, expressing concerns about the tendency for schemes to become more draconian for small entities due to their limited power and resources.

Re-examining the Bankruptcy Code:
Large entities find ways to circumvent bankruptcy laws and regulations, such as debt recovery tribunals and the Sarpesi and bankruptcy codes, after an initial period of effectiveness. The judiciary’s excessive intervention and delays in the resolution process have significantly contributed to the problem. Slow resolution discourages banks from invoking bankruptcy proceedings, leading to unfavorable compromises with borrowers and hindering lending. Rather than creating new codes, a thorough review of the bankruptcy code’s shortcomings is necessary.

Engaging the Judiciary:
The judiciary needs to be involved in the re-examination process and encouraged to limit its intervention in bankruptcy cases. Allowing cases to go through multiple levels of appellate bodies, including the bankruptcy court, High Court, and Supreme Court, significantly hampers resolution. The judiciary should recognize that efficient resolution is crucial for business growth and credit availability.

Fiscal Prudence in Budget 2023-24:
Given the rising fiscal deficit and inflation, caution is required in determining budget expenditures. Targeted spending on essential areas, such as infrastructure, education, and healthcare, should be prioritized. The government should focus on improving the efficiency of its existing spending programs. A gradual reduction in the fiscal deficit over time is necessary to maintain fiscal sustainability.

Government’s Focus on Growth:
Rajan emphasizes the need for the government to prioritize economic growth, especially in light of the upcoming election year.

Slow Growth and Job Creation:
Rajan highlights the issue of slow economic growth, stating that the current growth rate of 2.5% per year is insufficient to create the necessary jobs.

Investment and Growth Environment:
He points out that despite the government’s infrastructure efforts, industrialists are not investing due to a lack of optimism about the growth scenario.

Tariff Increases and China Plus One Strategy:
Rajan expresses concern about the impact of tariff increases, stating that they will make India more expensive and hinder its ability to become an alternative to China.

PLI Scheme and Mobile Phone Production:
Rajan discusses the PLI (Production-Linked Incentive) scheme, acknowledging the increased production of mobile phones but raising concerns about the import of components.

Value-added Requirement and PLI Benefits:
He emphasizes the need for a value-added requirement in the PLI scheme to ensure genuine production in India and prevent temporary assembly for incentives.

Cost-benefit Analysis of Subsidies:
Rajan questions the rationale behind subsidizing sectors where there might not be a need for government support, calling for a cost-benefit analysis of job creation.

Subsidies for Chip Manufacturing and Transparency:
He expresses skepticism about the effectiveness of subsidies for chip manufacturing, questioning the expertise of chosen players and the transparency of the process.

Bharat Jodo March and Democracy:
Rajan clarifies that his participation in the Bharat Jodo March was motivated by his concern for democracy, communal harmony, and debate, not by political ambition.

Interview Ends:
The interview between ET Now and Raghuram Rajan concluded due to time constraints. Rajan expressed his gratitude for the opportunity to share his views with viewers. The host extended well wishes for a great 2023 to Rajan and the viewers on behalf of ET Now. Rajan reciprocated the well wishes for the host and viewers.