Welcome and Introduction:
Raka Ray, a professor at UC Berkeley, welcomes attendees to the second annual Bhattacharya Lecture on the Future of India. The lecture series is supported by the Bhattacharya Fund, established by Kimi and Shankar Bhattacharya to promote dialogue between India and the US. The fund also supports graduate fellowships and travel grants for research and conferences.

Bhattacharya Lecture Series:
The lecture series provides a forum for prominent figures to share their perspectives on India’s economic, social, and political future. The aim is to foster constructive dialogue and learning from each other’s experiences.

Shankar Bhattacharya’s Remarks:
Shankar Bhattacharya, the donor of the fund, expresses gratitude to the attendees and Professor Rajan for their presence. He highlights Professor Rajan’s forthrightness and straight talk, as exemplified by his presentation at Jackson Hole in 2005 and his handling of the financial crisis in India. He thanks the South Asia Studies Institute for organizing the program and emphasizes the importance of dialogue between India and the US.

Introduction of Professor Pranab Vardhan:
Raka Ray introduces Professor Pranab Vardhan, a renowned economist and public intellectual, to introduce the speaker.

Professor Pranab Vardhan’s Introduction of Raghuram Rajan:
Pranab Vardhan introduces Raghuram Rajan, a distinguished professor of finance at the University of Chicago School of Business. He highlights Rajan’s role as chief economic advisor in the Indian government and governor of the Reserve Bank of India. He also mentions Rajan’s international career, including his tenure as chief economist at the International Monetary Fund. Vardhan praises Rajan’s ability to predict the financial crisis of 2007-2008 and link it to rising inequality. He acknowledges Rajan’s stellar research and awards in corporate finance and banking.

Economic Growth:
India has maintained an average growth rate of around 7% for the past 25 years, making it the fastest growing large economy in the world. However, this growth rate is not sufficient to absorb the increasing number of people entering the labor market and create enough jobs. India needs to aim for higher growth rates to address the unemployment issue.

Demonetization and GST Shock:
India’s growth momentum was impacted by two major shocks in recent years: demonetization and the implementation of the Goods and Services Tax (GST). Both measures had a negative impact on economic activity, coupled with rising oil prices, further hindering growth.

Infrastructure:
India faces significant challenges in terms of physical infrastructure, including roads, railways, ports, and airports. Inadequate infrastructure hampers economic growth and efficiency, making it difficult for businesses to operate and for goods and services to be transported.

Human Capital:
While India has a large population of young people, the average level of human capital, including education and skills, is still low. This limits the country’s ability to compete in knowledge-intensive industries and achieve higher levels of economic growth.

Intellectual Capital:
As India approaches the frontiers of knowledge, the importance of intellectual capital becomes increasingly vital. However, India faces deficits in this area, hindering innovation and the development of new technologies.

Democratic Engagement:
Democratic engagement and participation are essential for India’s long-term success and stability. Recent trends have raised concerns about the state of democratic engagement in the country.

Private Sector Independence:
India has a strong private sector, but its independence from government influence is a matter of concern. A lack of independence can hinder competition, innovation, and economic growth.

Government Capacity:
The capacity and effectiveness of government institutions are crucial for India’s development. Institutional checks and balances are important to ensure accountability and prevent the abuse of power.

Vision for India:
India needs to articulate a clear vision for its future, one that encompasses economic growth, social progress, and environmental sustainability. This vision should guide policymaking and decision-making at all levels of government.

Economic Growth and External Headwinds:
India’s economic growth has slowed despite a global economic recovery, indicating significant internal headwinds. The growth rate of close to 7% is insufficient given the global growth rate, and the country needs far more growth to absorb labor force entrants. The significant oil windfall India received in recent years due to lower oil prices did not translate into accelerated growth. Rising oil prices pose a challenge as they lead to a wider fiscal deficit and a larger current account deficit. India’s aggregate fiscal deficit remains high at around 7% of GDP, with states offsetting the center’s fiscal deficit reduction efforts.

The Rupee and India’s Dependence on Oil:
The depreciation of the rupee against the dollar is partly due to India’s dependence on oil, which increases the current account deficit and widens the fiscal deficit when oil prices rise. The country’s fiscal deficit widens and current account deficit increases as oil prices rise, reversing the benefits obtained during periods of low oil prices.

Financial System Cleanup and Non-Performing Assets (NPAs):
The Indian economy experienced substantial investments in infrastructure during 2006-2008, but as growth slowed, many of these investments ran into trouble. The rise in NPAs led to the need for a cleanup process to deal with bad debt and restore the health of banks. India lacked the instruments and legal structures to deal with bad debt effectively, delaying the cleanup process. The implementation of the bankruptcy code is a positive step, but it requires a multi-pronged approach to address the NPA issue. Stabilizing and strengthening the governance of banks is essential to support the cleanup process.

Banking Access and Direct Benefit Transfers:
India has made significant progress in providing banking accounts to its citizens, bringing more people into the financial system. This enables direct benefit transfers, allowing the government to provide subsidies and assistance directly to individuals’ bank accounts.

E-Payments and the Universal Payment Interface (UPI):
India has implemented the UPI, a digital payment system that allows easy and convenient transfers between bank accounts. The UPI promotes competition among financial institutions and facilitates small-value payments. UPI has experienced a substantial increase in usage, indicating its success.

Improved Resource Management and Transparency:
During a period of strong economic growth, the allocation of resources such as spectrum, iron ore mining rights, and coal mining rights lacked transparency and accountability. In response to concerns about corruption and mismanagement, India has taken steps to enhance transparency in resource allocation.

Strengthening Governance:
Improved resource allocation through proper auctions, bringing transparency to the system. Bankruptcy Code as a shadow to resolve financial distress, emphasizing out-of-court negotiations to prevent clogging the bankruptcy system. Goods and Services Tax (GST) as a positive step towards a unified market, incentivizing tax payment, despite initial implementation glitches.

Swachh Bharat Program:
Clean Up India initiative focuses on cleanliness and hygiene, addressing malnutrition linked to lack of hygiene. Success stories like Indore, which transformed from one of the dirtiest to cleanest cities in India, demonstrate the potential for improvement.

Understanding Growth Drivers:
Strong growth can result from small changes, such as dairy farming, shops, and infrastructure development. Importance of maintaining 7% growth as a base for future progress, aiming for an additional 2% growth to create sufficient jobs.

Growth Bottlenecks:
Infrastructure deficit, especially in construction, hinders economic growth and job creation. Insufficient power distribution despite adequate generation capacity, leading to blackouts and holding back economic activity. Clogged banks due to bad debt, slowing credit expansion and impacting economic growth.

Challenges in Addressing Bottlenecks:
Persistent issues despite a government with majority power in the Lok Sabha and increasing power in the Rajya Sabha.

Centralization of Political Decision-Making:
India’s central government is excessively centralized, leading to delays and inefficiencies in decision-making. The Prime Minister’s office requires assent for numerous decisions, resulting in backlogs and headless organizations, such as banks. Projects that catch the eye of the Prime Minister’s office receive attention and timely completion, demonstrating the government’s capability when there is a clear directive.

Unwillingness of Bureaucracy to Take Initiative:
Bureaucrats lack incentives to take risks due to the anti-corruption statute, which holds them liable for any action benefiting private parties. Even if no money changes hands, the presumption of corruption can arise, deterring bureaucrats from making risky decisions. This cautious approach hinders progress and prevents the implementation of necessary initiatives.

Debt Renegotiation and Fear of Scrutiny:
Banks are hesitant to engage in debt renegotiation due to fear of being accused of corruption if the renegotiated debt performs well. The Central Bureau of Corruption (CBC) may question why a debt was written down to 50% of its value if the firm subsequently flourishes. This fear leads bankers to seek expert committees to make decisions on their behalf, avoiding direct responsibility.

Sins of Commission vs. Omission:
The current system punishes actions (sins of commission), regardless of intent, but does not penalize inaction (sins of omission). Banks can hold on to non-performing loans without consequence, hiding their growth, but are not rewarded for cleaning up the system.

Corruption and Bureaucratic Issues:
Corruption scandals in the past few years have led to a step back by the bureaucracy, resulting in inaction and systemic issues. Lack of follow-through and centralization contribute to recurring problems, such as the persistent coal shortage in India despite having large coal reserves.

Coal Monopoly and Inefficiency:
India’s coal monopoly, Coal India, is a public sector monopoly known for its inefficiency. Despite efforts to solve the coal shortage in 2014, the problem resurfaced two years later due to systemic issues.

Agricultural Unrest and Loan Waivers:
Agricultural unrest is high due to low productivity and incomes in agriculture, leading to loan waivers by state and central governments. Loan waivers are poorly targeted and create bad incentives, benefiting moderately rich farmers instead of poor laborers. This spoils agricultural credit and discourages investment in better irrigation, seeds, and technology. Political parties often make loan waivers a pre-election promise, diverting funds from necessary agricultural development.

Middle Class Unrest and Demand for Reservations:
Middle-class unrest is growing due to a lack of job opportunities, leading to demands for reservations in government jobs. The lack of jobs is a result of the slow pace of job creation outside agriculture. This leads to divisive politics, as politicians divert attention from their performance record.

Infrastructure Bottlenecks:
The key bottlenecks in infrastructure development are land acquisition and environmental clearances. Land acquisition is challenging due to high population density and political interference. The current land acquisition bill is not operational and needs to be revised to protect farmers’ rights while facilitating land acquisition. Environmental clearances are necessary but should be granted transparently and efficiently by a high-quality regulator.

Human Capital Challenges:
India’s education system needs improvement despite its success in getting all children into school. The quality of education at every level needs to be improved to meet the demands of the modern economy. India needs to shift its focus from rote memorization to critical thinking and problem-solving skills. Vocational education and training need to be expanded to provide job-specific skills.

Education Quality:
The quality of primary education in India is appalling, with kids dropping out due to insufficient education. China had a better schooling system at the start of its growth, leading to a more qualified workforce. India needs to focus on improving primary education to create human capital for the 21st century.

University System:
Many Indian universities are not up to the mark, leading to students leaving the country for higher education. While IITs and other institutions are excellent, the majority of colleges lack adequate certification processes and provide mediocre education. There’s poor targeting of courses to student needs and insufficient focus on teacher training and research.

Challenges in Higher Education:
Setting up new IITs faces a shortage of qualified teachers. Attracting teachers from abroad is crucial for improving the education system.

Skilling and Vocational Training:
India lacks skilled workers like carpenters and plumbers, despite the relative ease of training for such jobs.

Human Capital:
India faces a shortage of adequately trained civil engineers, highlighting the need for a significant improvement in the quality of human capital. The HRD ministry should be headed by the most talented minister in the government, given its critical importance in developing human capital.

Intellectual Capital:
India is approaching the frontiers of knowledge but needs to produce more intellectual capital to fully capitalize on its potential. The country has few universities ranked among the world’s top institutions and needs to enhance the quality of its higher education system. Indian corporations lag in areas like artificial intelligence and machine learning, underscoring the need for increased investment in research and development.

Diaspora Engagement:
China actively seeks its diaspora’s expertise and encourages them to return, while India has a schizophrenic attitude towards foreign return. India needs to welcome and listen to its diaspora, valuing their insights and contributions while discerning those with valuable perspectives. China’s historical experience, particularly the Opium Wars, has shaped its willingness to absorb knowledge and technology from the world.

Realistic Reforms for a Stronger India:
Raghuram Rajan believes that to create a stronger India, the country should take a balanced approach, neither accepting nor rejecting Western ideas outright. Rajan advocates for attracting more talent to India regardless of nationality, citizenship, race, or color. He emphasizes the importance of providing better working conditions to attract and retain skilled workers.

Democratic Engagement:
Rajan sees the need for increased democratic engagement in India. He credits decentralization and the rise of regional parties for promoting education and improving the lives of the marginalized, particularly in the South. Panchayati Raj, which empowers villages, is also seen as a step in the right direction.

Eliminating Patronage Politics:
Rajan believes that as India develops, patronage politics will become less significant. As people gain access to basic services without the need for bribes, they will become less reliant on politicians. Technology has played a vital role in enabling more direct service delivery and reducing the need for intermediaries.

Technology’s Role:
Rajan highlights the role of technology in improving service delivery. He points to direct benefit transfers and the increasing availability of services online as examples of how technology is making a positive impact.

Private Sector Independence:
A decentralized and non-authoritarian government requires alternative centers of power. In India, the private sector has not developed as a strong counterbalance to the government.

Government Influence over the Press and Industrialists:
The government exerts significant influence over the press and industrialists. Industrialists are reluctant to criticize the government due to fear of retaliation, such as increased tariffs or withdrawal of advertisements.

Government Control over Credit:
The government can use state-owned banks to control access to credit for companies, rewarding those that are compliant and punishing those that are critical.

Diminishing Government Control:
The reins of power in government are still significant, but the situation is improving over time.

The Problem of Private Sector and Government Collusion:
The private sector and the government are often closely aligned, which undermines the independence and checks and balances necessary for a healthy democracy. This collusion makes it easier for the government to become authoritarian if it desires.

Government Capacity and Institutional Checks:
India has become the world’s third largest economy by PPP and is on track to overtake the UK in terms of GDP. However, India lacks the administrative capacity of a first world country, which hinders its ability to defend national rights in international forums and pursue criminals who have fled abroad. The government lacks specialists, training, motivation, and morale, leading to weak government capacity.

Checks and Balances:
India has relatively unconstrained government capacity, lacking sufficient checks and balances to protect citizens from arbitrary government actions. While institutions like the Supreme Court and Election Commission serve as checks and balances, there is a need to strengthen and improve these institutions. The Election Commission, under Mr. Seshan, became an effective check against election fraud, demonstrating the potential of these institutions.

Strengthening Institutions:
India has a number of institutions, such as the Comptroller and Auditor General and the Competition Commission of India, that can serve as checks and balances on the government. Strengthening these institutions is crucial to ensuring effective checks and balances on government power.

Conclusion:
India is still in the early stages of the 21st century and needs to address its challenges in government capacity and institutional checks to succeed in the modern global economy.

Choosing India’s Future Direction:
Raghuram Rajan highlights the need for India to choose a clear path for its future development. He raises questions about the type of country India wants to be, such as politically liberal, muscularly majoritarian, centralized, or decentralized. India needs to decide whether to emphasize opportunity and market flourishing, focus on redistribution, or find a balance between the two.

Economic Policies:
Rajan discusses the choice between market-friendly and business-friendly policies. He questions whether the erosion of state-owned businesses is beneficial or if it should be addressed.

Engagement with the World:
Rajan emphasizes the need for India to decide on its stance regarding engagement with the world. Questions are raised about welcoming foreign companies, immigration, or adopting an isolationist approach.

Need for a Clear Vision and Policy Coherence:
Rajan stresses the importance of a consensus on India’s overall vision to achieve sustainable development. He calls for an articulated vision to maintain policy coherence in a complex and large country.

Questions and Responses:
Pranab Vardhan asks about the list of willful defaulters and decentralization issues. Rajan clarifies that he sent a list of frauds, not willful defaulters, to the government. He acknowledges challenges in decentralization, where state governments are often reluctant to empower lower levels of governance.

Divergence in Business and Politics:
The speaker mentions that the convergence of business and politics is a global issue, not just limited to India. Large corporations that rely on government protection, such as intellectual property, can more easily engage in deals with governments. Smaller corporations create a more competitive environment, making it harder for cronyism and deals to occur.

Creating Distance Between Business and Politics:
Creating a more competitive environment by having many competing firms can help reduce the convergence of business and politics. Reducing the use of favoritism in areas such as tariffs, credit flows, and advertisements can also help create distance between business and politics.

India’s Oil Dependence and Geopolitics:
India imports 80% of its oil, making it vulnerable to geopolitical uncertainties. India should explore renewable energy sources but also maintain a balance with gas or coal for storage and stability. A functioning global market with less dependency on a few suppliers is essential.

Predicting Economic Recessions:
Predicting recessions and economic market fluctuations is notoriously challenging. Focus on macro stability, reducing fiscal deficits, and implementing growth-enhancing policies during periods of interest rate hikes.

Effective Economic Policymaking:
Good policymaking involves using experts, institutions, and structures to challenge and implement policies. The US Council of Economic Advisors serves as an example of a structure that prevents bad ideas from going through. Australia’s Productivity Commission focused on improving economic productivity through research and implementation. China’s experimentation with policies on a small scale before rolling them out widely is another effective approach.

Preventing Bankruptcy and Promoting Settlement Mechanisms:
The new bankruptcy code should be implemented efficiently to avoid clogging and promote out-of-court settlement mechanisms. There needs to be a willingness from both bankers and promoters to come together and negotiate settlements. The banker’s freedom of action should be increased, and decision-making should be pushed to the board, with proper monitoring and control systems in place.

India’s Large Population:
India’s large population can be an advantage due to its youth and energy. The government should emphasize the advantages of this population and provide opportunities for young people to contribute to the economy. The focus should be on making the best of the current situation and utilizing the population’s potential for growth and development.

Raghuram Rajan on India’s Youth:
India’s youth is a strength, but it could become a weakness if jobs and capacity are not created for them. The young can also turn against society if they do not have opportunities. Creating strength in the youth is extremely important.

Raka Ray’s Appreciation:
She thanked Rajan for sharing his ideas and for refusing to give easy answers. She appreciated his example of thinking, talking, debating, and exploring issues, rather than resorting to easy answers.

Audience’s Comparison to an Oscar Ceremony:
An audience member compared the event to an Oscar ceremony.

Gift for Raghuram Rajan:
Raka Ray invited Rajan to return to receive a gift from the audience.