Innovation, Export Discipline & Why India Must Never Waste a Crisis | Prachi Mishra | Ep 27

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[00:00:00]You need trade deals for export push. We need special economic zones. We need labor to be more flexible. You need labor cords >> and um you need the raw material. I think we are making progress on all of these four. You know, let's talk about the current West Asia war. Analysts are comparing it to CO. I don't think that's correct. CO was a health shock >> and then the impact on the economy was through direct impact on consumption [music] production. think about these lockdowns, >> right?

[00:00:30]>> This is a different shock.

[00:00:31]>> People say [music] autocracies should find it easier to reform because [music] they don't have democratic interest groups opposed to the reform. I think you found the opposite.

[00:00:43]>> Any reform has winners and losers [music] and whether a reform succeeds depends on how you can compensate the losers.

[00:00:53][music] >> [music] >> Hi everyone, welcome to another episode of Growth is Good. We're very lucky to have Pachi Mishra with us. Pachchi's been an economist at the International Monetary Fund. She's been an economist with Goldman Sachs. She's been at the RBI and now she leads the Isac Center for Public Policy at Ashwoka University.

[00:01:23]Welcome Rajie.

[00:01:24]>> Pleasure to be here Rahul.

[00:01:26]>> Thank you so much. Okay. So I'll jump in the way I always do which is to ask you what is your personal connection to economic growth as you were growing up learning about the world seeing the world? How did you discover economic growth? How did you start to appreciate that it is an important thing? What are the stories associated with it?

[00:01:49]>> Uh Rahul is an excellent question. Um so let me um put it this way. I think I'll start with the most recent and then go back with anecdotes please.

[00:01:58]>> So when you ask me this question my most personal connect relates uh to last year's uh Nobel Nobel Prize in economics.

[00:02:05]>> It's a great one. I'm so glad with Joel Mo who know so the last year's recipients were Joel Mkher >> um Philip Aon and um Hovit. So it was Moker Aion and Hobbit and the prize was for um the role of innovation in sustained growth and um whenever I think about innovation I think about a phone is the first thing that comes to my mind and why do I say that I I'm I'm sure how you did not grow up in that era but I grew up in an era where um we used to have these big homes >> I remember Um I grew up in Patna. So when uh and we had relatives in Delhi.

[00:02:50]So when um we had to speak to somebody in Delhi. Um we had to uh basically book something called a trunk call.

[00:02:58]>> Yeah.

[00:02:59]>> And uh so in the morning we booked a trunk call and then the trunk call used to come in the in this is all real. This is used to come at night somewhere very odd times at 10:30 11:00 p.m. or something. All used to rush. I don't I think maybe my grandfather was in Delhi that time posted in the language commission. He's former chief justice of Bihar. He was posted in the language commission. So maybe we were speaking to him. Um we used to run and then it'll even more interesting. Hello. Hello Baba. Hello. Hello. And look [laughter] at where we are now.

[00:03:33]>> So during my lifetime iPhone 7, right?

[00:03:37]So during my lifetime to see this kind of change >> is economic growth and when you know the Nobel Prize in economic sciences was awarded to these people >> uh it was like wow this relates so much to my own life and my own experience.

[00:03:56]In addition I would like to say that you know Joel Mir is an economic historian.

[00:04:01]Yeah, >> my field is not economic history.

[00:04:03]>> But when I read his work, I found it tremendously insightful and I'll tell you one key insight. Actually, I had to presented to students at Colombia, something that was organized by the research and development office. So, I had to read and learn about it >> and I really found Joel Mocher's insight fascinating. What was that insight?

[00:04:23]>> So, for the last 200 years, growth, there's been sustained growth.

[00:04:27]>> Yes. The only time in recorded history that this has ever happened.

[00:04:31]>> Exactly. So prior to that >> it was you know human history has been about stagnation.

[00:04:38]>> Yeah.

[00:04:38]>> And the point he makes which is very very interesting is that you know technological innovation happened even before.

[00:04:46]>> Yes.

[00:04:47]>> Printing press plow etc. But it but yet that was not most of human history was not a period of sustained growth.

[00:04:57]>> Yes. So only the last 200 years is when you saw sustained growth and a um you know continuous rise in living year after year after year.

[00:05:05]>> Correct. Correct. And he basically then makes a point that technological innovation is necessary but may not be sufficient for economic growth. So you need a number of other factors to confluence together. You know, you think about uh what he calls useful knowledge and useful knowledge is composed of um u prescriptive knowledge that is you know rule book tools >> and propositional knowledge. Why things work?

[00:05:33]>> How things work and why things >> why so why things why things work was basically an essential you know component of the last 200 years. then you know you don't it's not only about you know abstract ideas which also very much relates you know to the way I think about things you needed these skill competence >> yes >> to bring these ideas to the table >> and number three you needed a society open to change >> yes >> so when all and you know you know about the famous lite movement that is is so when all these three things come together >> then you know what the confluence was the industrial revolution >> so this is my I think personal anecdote and how you know I I relate to economic growth. I think about innovation and you know the way I've seen this innovation >> during my lifetime but the insight from you know Joel Mochir's work in particular >> that look this is necessary but not sufficient >> technological innovation in that yes so many fantastic things there right um let me start with the quicker side I think last year's Nobel Prize to be very frank restored a little bit of the Nobel's prestige for me because I had been losing faith in what the Nobel Prize was doing. But anyway, so I'm glad that it went to and I'm glad that you spoke about it and even your example right even that example as drastic as it is was starting from the point of view at least you had a phone in the house like for 95% of Indians there was not even a phone in the house and I have very similar memories of wanting to make STD phone calls. Um, >> yeah, STDs.

[00:07:17]>> STD. That was right. Like the the long distance phone calls. Most Indians watching this today won't even remember what those were. And you had to first wait until 11 p.m.

[00:07:26]>> for the rates to drop so that you could afford it. Then you have to wait till 12:30 because everyone else is also waiting till 11:00. And >> young people today have absolutely no conception of all this, right? The quality of life that's been delivered to them. Um, thank you so much for that.

[00:07:43]Right now if you now sort of broaden the ambit and look at okay the last 30 40 years have been incredible for India from a growth perspective we've come so far right and the phone revolution is just one of those uh what what is your take on this whole sense of where are we today what have we gotten done that we have managed to do well what is the unfinished journey uh both from what we have to do and how we have to do it.

[00:08:14]>> Uh as you said, I think over the last few decades, India's per capita income has gone from like from say $100 to $200 >> to $2,800.

[00:08:25]>> I think it was $150 in 1991.

[00:08:28]>> So we've you know this is a 15fold increase.

[00:08:31]>> Yeah.

[00:08:31]>> So that by itself for an economist that is tremendous.

[00:08:35]>> So um we don't and we have lifted a number of people out of poverty. uh we are no living standards phone is everyone has a phone everyone has a phone and a smartphone no matter there's no rich poor there's no uh um so I think to me I think the big fact is that >> the economy has transformed dramatically >> in terms of figures >> but also in terms of reality if people yeah people's lives aspirations I think um so I think this is >> I would term what we've seen over the last few decades as dramatic transformation in the Indian economy >> uh over the last >> few decades.

[00:09:17]>> Where do we go from here? I think our honorable prime minister has given us a goal of vixharat.

[00:09:23]>> Right.

[00:09:23]>> Now what does vix bharat mean?

[00:09:25]>> And again for economists it can have a narrow meaning in terms of per capita incomes. You want to become a rich or um a high income economy >> which is $14,000.

[00:09:38]>> So now you have to get from $2,800 to 14 $14,000.

[00:09:43]>> So that is a big leap. Again, if you do some calculations, simple calculations, how do you get from 2,800 to 14,000? Um, you uh you would need a growth in nominal per capita dollar terms, 8 8 and a half simple compounding.

[00:10:00]>> Yeah.

[00:10:01]>> And then you make assumptions about, you know, exchange rate, population, etc., inflation, >> and then you'll get to I think my calculation 7 to 8%.

[00:10:12]>> Real real terms, >> real terms. And you would need it every year.

[00:10:17]>> Yeah.

[00:10:17]>> You know for the next 20 years.

[00:10:20]>> This is a lot to ask.

[00:10:21]>> Yeah.

[00:10:22]>> Especially in a world where we have persist, you know, we have constant shocks one after the other.

[00:10:29]>> Yeah.

[00:10:30]>> We had COVID, we had Russia, Ukraine, we have now the West Asia war. So shocks have become, you know, a part of our life.

[00:10:38]>> Yeah. So you know achieving this kind of growth rates in a world which is uh where shocks have become very frequent where uncertainty has gone up a lot I think requires recalibration rethinking um and remember that you know we want to we want to have a growth we also have you know we want to achieve high growth but we want also want to achieve unemployment uh for um you know to seize the demographic deliver India is still going to be young for the next three decades or so unlike many other Asian economies.

[00:11:14]>> So we need to grow but we need to grow in an employment friendly way.

[00:11:20]>> Yeah.

[00:11:20]>> And for this we need strategic industrial policy which I think organizations like yours Rahood are working on closely. I think how to push labor inensive manufacturing so that which can achieve the twin goals of uh GDP >> right >> but also of diplomat >> thank you I'll I think two things that I want to you already touched on them but I'll just go deeper one is the sustainability of high and rapid growth rights um you're very right that this is a tall order even in the best of times Right. Uh I think the one of your papers even covers this, right? That how rare it is for high sustained growth to happen >> across economies, right? It's a very rare thing to achieve even in the best of times >> and now I think we have this volatility.

[00:12:19]So two-parter right here in a general sort of prescription from a I think we know that the 1991 liberalization played a big big role in where we have ended up from a growth rate perspective. Um if you keep the geopolitical volatility aside just as an exercise, what would your prescription have been from a what does India need to do from a policy perspective, from an implementation and administrative perspective and then maybe we can introduce the geopolitical situation into it a little bit.

[00:13:00]>> As I said, I think we have a goal of becoming a high income economy in the next 20 years. Yes, >> we need a per capita income per capita income to increase from 2,800 to 14,000.

[00:13:12]Yeah, >> for that we need a growth rate of uh 8% 8% 7 to 8% you know best of >> yes fantastic objective every year for the next 20 years >> which economies have done it Korea is an example right Korea went from >> less than a,000 to $33,000 >> um so massive increase if you look at the chart for Korea I think it's it's very impressive >> so how did Korea achieve it I think um and it relates to a discussion on technology actually >> and and and and and that's a relevant debate to have in India as well >> you know should we innovate should we adapt should we do both where should we put our you know where is the greatest bang for our buck >> right >> so Korea for example in its initial stages actually invested a lot like we are investing infrastructure roads etc and then it invested in adaptation of the technology >> so it had joint ventures for example with chap Japan and Samsung with Nepon etc. So Korea >> in its initial stages invested but also you know invested in adaptation of technology.

[00:14:23]>> Right?

[00:14:24]>> So I think this is an important debate to have in India. Should we innovate?

[00:14:29]Should we adapt? How should we adapt?

[00:14:31]And um the reason I say this is you know think if you think about a bike you know bicycle race and you can always aim to be at the at you know >> come first >> but actually if you are in the race >> you can come second >> you'll be shielded from >> air pressure >> from the windre because there's a first one you can still finish in good time >> so you need not be at the front most successful economies actually are not at the frontier >> absolutely >> so I I think we have to um you know think about technology adapting technology >> and adop adapting technology to our context as well because we are a labor abundant country >> and you know we need to have a you know framework for labor >> correct.

[00:15:18]>> Therefore you know and especially this becomes very relevant in this age of artificial intelligence etc. how to make technology complimentary and how to have successful adaptation of technology and we've managed to do in certain sectors I think but I think it's you know a larger debate >> absolutely and maybe this will end up feeding into the second half of the question but I think one of the other features of Korea and all of those economies was that their exam score of all the preparation they were doing was export performance right so they disciplined everything they were doing by does it help us improve our export performance or not. Right? And uh that's how they were able to do their industrial policy in a way that ultimately ended up being >> growth enhancing rather than growth reducing because the entire world has tried industrial policy and mostly they have failed. It is only these few East Asian countries that have managed to do it well and I think it's a pretty and I would love to hear your views on it but it's a pretty consensus view amongst many economists that export discipline was one of the key factors of that success. So a what do you think of export discipline and b when we come to the world today and how it's changing all of these shocks what do you think of where it's landing up >> so I think um you're absolutely right these economies which did >> had dramatic transformations Korea China yeah so exports were an important part of the story um and I think you know and of course exports provided discipline and there's literature which says that you know firms which export are larger they are more productive less technology transfer I think all all of that for us the challenge is even more because we are a labor abundant economy >> and we want not only to push exports but we push exports of labor intensive manufacturing >> and you know we are trying to support um you know then their production linked incentive schemes or other kinds of support um which which we are trying to give to some of these sectors. It has to come together with you know a number of other things which Rahul actually I've learned from the work of um you know the foundation for economic development that you need >> you know three four things you need trade deals >> for export push which we are having >> which actually yeah we're in a great place right yeah >> we need special economic zones um we need labor >> labor to be um you know more flexible you need labor cords >> and um you need the raw material ecosystem >> yes >> I think we are making progress on all of these four.

[00:18:03]>> You would know the best. I think it's um we need to scale up.

[00:18:08]>> We need to for example you know the ISAC center for public policy is doing a lot of work on how to leverage >> all these trade deals. We can sign trade deals but actually to fractify them >> you need a number of steps. One of our colleagues is actually working on how to make international trade a thousand frictions less. That's a great great agenda.

[00:18:30]>> There are a lot of regulations at the border which need to you know be simplified for exports to kick off. So I think in each of these pillars I think we are doing work.

[00:18:41]>> I think we need to scale up number one and we need to execute and you know we have these committees. I think um the Rajiv Gobaji committee we also have um >> the deregulation >> the deregulation task a lot of these are at the state level.

[00:18:55]>> Yeah. So I think scaling up, executing them and I I think fast because you know time is running out.

[00:19:04]>> Absolutely. That's a fantastic point.

[00:19:06]Right. And I the the the time is running out like our what we call our demographic dividend, >> right?

[00:19:13]>> Um I think you've written about this before. Uh there's not a lot of it left, right? We're not going to stay young forever as an economy.

[00:19:22]>> Yeah.

[00:19:23]>> No. And it's driven by particular states. Yeah, >> Bihar for example, it's a state which we are focusing on in the ISAC center. Um it's the poorest state in the country.

[00:19:32]Uh but the demographic dividend is actually coming um so Bihar's um so I think 60% of Bihar's population is below the age of 29.

[00:19:43]>> Yeah.

[00:19:43]>> So it is um >> Bihar is probably the youngest state in the country.

[00:19:46]>> Yeah. Bihar is is the youngest state and the total fertility rate is around three. So I think challenge for some of some states is even more you know how to push labor intensive manufacturing, how to push um you know how to export >> um you know what is export preparedness >> and this can go for example in Bihar we are thinking about at the same time you know while we are thinking about um uh you know how we can push labor intensive manufacturing manufacturing is a broad word for a state like Bihar it will be high value agriculture actually can you know it need not be manufacturing manufacturing etc. And at the same time you know how Bihar has all this talent.

[00:20:26]>> Bihar's talent is doing very well outside Bihar.

[00:20:29]>> So how can Bihar become a GCC global capability center not for rest of the world but for India?

[00:20:35]>> So how can we tap that and you know this can all go you know hand in hand.

[00:20:40]>> Yeah. So I think um uh you know absolutely I think it's um you know sees the demographic dividend but the challenge is you know the demographic dividend is very concentrated in certain states >> and we have to you know focus attention and by the way a lot of work is happening in Bihar. Bihar is going quite fast but still Bihar's per capita income is is much lower. Yeah.

[00:21:01]>> So by the time you know India becomes Vix Bharat I think for Bihar to you know become Vix Bihar Bihar has to have double digit. It's currently growing at 88 8 and a half%. Has to actually grow at double digit.

[00:21:12]>> Absolutely.

[00:21:13]>> Growth rate. So growth is very very important.

[00:21:15]>> Yeah. I I I remember a statistic that shocked me. I think if we think of Bihar as its own country, GDP per capita is perhaps one of the lowest in the world.

[00:21:23]>> It is comparable to Subsahara and Africa. Um but if you exclude but what is even more you know dramatic look within Bihar there are two districts in Bihar which um contribute to this um you know high relatively high per capita income. It's Patna and Beu Sarai, >> right?

[00:21:40]>> So if you exclude Patna and Beu Sarai based on the latest economic survey of the government of Bihar, you have per capita incomes for a number of districts in the range of like 20,000 rupees. So think about 20,000 rupees for the year as a whole. So an average worker in um making 20,000 >> outside Patna is making you know 1,000 or you know 1,500 rupees in a month. That's astonishing and I think >> but there is a lot to do but Rahul I want to besides that there's a lot of potential >> absolutely >> be >> in terms of demography in terms of soil in terms of fertile land um so there is a lot of you know potential to be exploited here >> absolutely I think Bihar suffers from our own version of the Dutch disease right like so much resource so much potential but it really hasn't succeeded in translating >> Bihar got you know so a lot of these traditional resources actually went when Bihar was Jarand is very rich in mining but Bihar has labor >> uh cheap labor Bihar has um has you know fertile soil Bihar is water >> so water has been you know ground water has been depleting in a you know throughout the country Bihar is actually quite rich in ground water >> at least as in as in as someone who studied development that actually leaves me optimistic >> right absolutely >> these are the kind of resources that you have no option but to fix your institutions and You know Bihar is doing quite well. The growth rate in Bihar is quite high. There have been success stories in Bihar in high value agriculture like Macana, Foxnuts. Um uh maze has been a big success story in Bihar. Um so there are I think again the challenges to scale up and to seize seize the dividend. If I have to link two of the things that you were saying, right? I think um a society that is open to change and adaptation and growth is about moving to higher productivity stuff. It doesn't have to be labor intensive manufacturing. As long as you switch away from whatever agriculture you're doing to whatever is higher value agriculture. If you switch away from higher value agriculture to higher value services and to higher value manufacture. Here I will just highlight one in term if you think you know we are living in a world of integrated value chain.

[00:23:57]>> You can be at the lower end of the value chain and but if you scale up at the you know the whole electronics and mobile story is about scaling up even at the lower you know end of the value chain.

[00:24:08]>> Absolutely. And as you know this flying geese model of development as um you know other countries vacade the space you can slowly move that but you can achieve your objectives >> of higher GDP per capita and higher employment even at the lower end of the value chain depends on where your comparative advantage is where you're relatively more efficient where the costs are relatively what is the opportunity cost of the resources and where the opportunity cost of the resources is >> the maximum >> these are such fantastic insights prai I think my what I worry often and I think one of the reasons this podcast exists is these are very unintuitive things because they're intuitive to us because we've studied them for 20 years >> but the idea of comparative advantage the idea that you are a follower and being a follower can actually be the best thing for you to do >> yes >> these are I think to the world they're too unintuitive and even in India I think I worry What are we excited by? We are excited by AI. We're excited by semiconductors.

[00:25:13]These are good things. And maybe some of these are important for strategic reasons. But the stuff you're talking about, right, that following exploiting our comparative advantage. These are things that don't necessarily need us to look at the sexiest technology out there and adopt that and leverage that.

[00:25:32]>> Right. Absolutely. Absolutely. Uh so I'm very glad that sort of you're saying this stuff and you're uh obviously you're working in Bihar on your own.

[00:25:40]>> Now let's talk about what what what you what you mentioned earlier >> and comparatively I would just want to give one example.

[00:25:47]>> Absolutely. And make it and make it and make it intuitive for people. Yeah please. Basically know Shah Ruk Khan you know Shah Ruk Khan is uh you know we know who Shah Rukh Khan is but very few people know Shah Ruk Khan is an economics graduate right and Shah Rukh Khan is probably better than me at economics is better than me at films he's better than me at many other things but does it make sense for Shah Rukh Khan to do economics it doesn't he has scarce resources and think about you know the value added from Shah Rukh Khan resources in in film versus economics So I think it's where you're relatively more efficient.

[00:26:24]>> Absolutely.

[00:26:24]>> Where you have a relative cost advantage. I think that is I think the way to >> that's a beautiful you know any part of the value chain I think that can be >> any you know activity >> and as long as you can scale it up >> you will have employment you will have GDP >> and you will you know advance towards your >> Exactly. And if you pick something that you have comparative advantage in it's much easier for you to scale that up.

[00:26:50]right? Like so uh for you to succeed as an economist although I don't know I think you're probably a good actor too.

[00:26:55]I think it's maybe much easier for you to succeed uh as an economist than it is to succeed as a superstar actor is a fantastic way to put it. Um >> thank you >> on now this complication that the world has thrown at us. Right.

[00:27:11]>> Um geopolitical shocks have unfortunately become the uh order of the day. Right. I think we haven't recovered from the last one and the new one comes and hits us.

[00:27:23]>> Is there much that changes? What changes in the classical prescription? How are you thinking about this geopolitical situation being what it is?

[00:27:34]>> You know, let's talk about the current West Asia war which is of course in succession to a number of previous shocks. Um so what um so how do I think about it?

[00:27:44]So first of all the nature of the shock >> many analysts are comparing it to co I don't think that's correct was a health shock and then the impact on the economy was through direct impact on consumption production think about lockdowns >> right >> this is a different shock because it's hit at the upstream and the and and and I'm using the term upstream I think economists like to call it downstream but I just use upstream because it hits um at the input level >> which then cascades to you know different kinds of outputs different parts of the value chain.

[00:28:21]>> So that makes >> you know the effects cascade through and first of all you know it's it's it's an energy shock.

[00:28:30]>> So this is I think the nature of the shock it's important to understand. I think um it's also more comparable to the OPEC shock or the Iranian revolution >> and few people know that you know after the Iranian revolution India went to the IMF in 1981 and it was the then largest loan actually >> um of like 5 million STRS um so I think it's important to keep the nature of the shock >> in you know in in in your mind. The other I think important um you know moving part is um the duration of the shock thing you know how long this shock is going to last and the duration of the shock doesn't people think about duration of the shock is today President Trump agrees with Iran or you know that the war there's a ceasefire >> but from an economic perspective that's not the relevant uh duration of issue what is more relevant is um is is is basically when through energy you know markets normalized >> right >> and there are a lot of moving parts then >> right >> refining premiums insurance contracts there's whole lot of so de facto duration is very important >> right and there the uncertainty could be on both ends right it could that shock could end before the war shock ends theoretically >> yeah you know that >> supply can expand from other places >> correct correct and which is happening which is definitely happening so I think de facto we have to take into account what is the duration of shock. Um the other I think the other important um aspect when you think about the shock is initial conditions.

[00:30:06]>> India enters into this shock with with much better initial conditions. I think it uh if you look at growth, >> if you look at inflation, if you look at the external sector, I think um we are um we have buffers.

[00:30:21]>> Uh these buffers are real. But remember that you know these buffers won't last forever right >> so I think we have to keep that in mind and um the impact I think our team has been working on it of course um our projections are suggesting if you know the de facto war um ends in uh a month or two >> I think the macroeconomic situation should be manageable >> however if it's it it escalates say to the end of the year >> I think then I think there is uh it's a much closer serious issue.

[00:30:54]>> There are also two, you know, a couple of um interesting points um which people often ignore in terms of shielding the short-term negative impact. There are offsets.

[00:31:05]>> So customs revenues for example, we still have customs duties. Customs revenues are an important buffer because customs duty is at the lower.

[00:31:13]>> Yeah.

[00:31:14]>> So if oil prices go up, our customs revenues go up. It's a buffer for the fiscal.

[00:31:17]>> Right. Similarly, India is the fifth largest exporter of refined products in um refined crude products um in the world.

[00:31:27]>> So that is a cushion for the current account as well.

[00:31:29]>> However, if the war escalates, you know, some of these offsetting effects start waning >> and for example, again, you know, think about um exports of refined petroleum products.

[00:31:41]>> Crude is an input into that, >> right? So if crude gets expensive increasingly expensive it is ripple effects. So this offsets way. So once if the war escalates there'll be cascading or ripple effects >> and that that is a most serious >> yeah because it's not just it's not just it's not just prices that will adjust quantities will adjust too right people will start demanding less. So all of these things will become >> and I'll just say Rahul one more thing I think for us I think you know >> the way I would think about it is never waste a crisis. So I think this is really an opportunity to um you know do some of the reforms on um you know building reserves our strategic petroleum reserves I think can cover 74 days or something but if you come compare other Asian countries uh Japan Thailand they're way more so building uh strategic petroleum reserves hedging mechanisms I think we've never been able to convince our oil marketing companies to hedge I think it's time to think about hedging and of course you know it's a time uh for example move to ethanol is a is is is is is a good idea but probably has to be weighed against overall costs effic fuel efficiency um you know move towards electrification so I think using this opportunity to reform so that you know we build structural resilience >> and we are not um we don't we don't have we have emergency response we have acted in a quite an agile way by the way we've you know targeted support to exporters the RBI has come up with um you know uh measures to curb volatility um >> we've dropped customer duties on some things. We we we've we so we've you know we've acted quite quite in a quite a quite an agile way but if you think about uh um you know emergency response of course you have to firefight but I think at the same time you know so that we are building resilience so that we are prepared before the next shock arrives >> that's such a great point and I would extend that well beyond just the energy sector right I think in maybe this insight you spoke about the current shock all of the other shocks have been slightly different right and not just energy sharks and I think getting our own house in order is very important both from a long-term strategic perspective but it's also the only thing in our control right ultimately >> so it's such an important never waste a crisis is such an important thing and I think this is a great opportunity for us u is there anything else you would like to add on the geopolitical side or like >> yeah I would like to emphasize this role of building structural resilience >> resilience >> and you know uh using so that you know you are we are um not firefighting >> but we are actually prepared before >> and >> before the crisis arrives and we are able >> yeah so and building dynamic adaptable ecosystems building ecosystems that respond properly to the incentives out there so I think >> absolutely >> all of these are and and the best part is all of these prescript ions follow what the best prescription would be in any case right that you should allow your uh factors to adjust appropriately you should allow people to hedge uh there should be an incentive to hedge >> I think it has to be I think like hedging mechanisms I think this is something um we have to start thinking about so that you know before >> the next oil shop we are you know there is hedging this hedging is something building hedging mechanisms is something we've not uh >> allowed I and and traditionally we found it very difficult. I think even if you just switch sectors and think about >> so I'm not sure whether it's not allowed but I think it's not we've not been able to convince the oil marketing companies >> well they're they're public sector companies so so in some sense whatever they do or do not do is completely related >> to the regulatory side right but if you think about for instance how we've treated futures markets in other sectors right we tend not to encourage them at the very >> Mexico is a country which is an oil exporter though but it has you know successfully been able to hedge develop hedging mechanism. So looking at some of these examples of countries who actually had hedging uh it's time to start thinking about >> absolutely and so all of this right so getting our reforms in order making sure that we build all of these mechanisms that uh are needed for resilience. It all ultimately ends up quite often running up against this challenge of political and what is politically doable, right? And so it's a very uh evocative term, politically doable, bureaucratically implementable, right?

[00:36:30]But I think politically doable always ends up being the big thing and I you have re a research paper on this topic of course but even beyond that, right? I think what is your sense on what is politically doable, how do democracies in particular and that was the finding on your paper. I I found it very interesting because uh the conventional wisdom often runs in the other direction, right? People say autocracies >> should find it easier to reform because they don't have democratic interest groups opposed to the reform. I think you found the opposite, right? your paper found that democracies carry out more economic reforms. How do you think about this whole space about uh how does the need of democracies interact with economic reforms and all of that? So um my research has focused on I think a number of questions related to this related to this >> on role of you know political freedom or democracy in reforming and also how to make it as you said politically palatable and of course I'm you know also working a lot on how to implement you know how to make take things which I think you are working on as well uh to action. So let me start with um you know the importance of democracy as you rightly pointed out it can go theoretically it can go in either direction. If you look at um South Korea, if you look at Chile and Pinocchio, Korean park um a lot of these contemporary East Asian economies they um actually developed when they were not democracies >> and you know democracy it's easier to take decisions you know you don't have to worry about protests etc. On the other hand, you can argue that um democracies have you know one of the essential ingredients of democracy is property rights, secured property rights. So they are you know particularly helpful. They are more sensitive you know democracies are more sensitive to the demands of the public.

[00:38:24]So there are theoretical arguments why you know democracy is >> correct. They set up the incentive to >> Yeah. Right. Right. Absolutely. You know the institutions [clears throat] and the structure and um you know demands of the public and also you know sensitive to the interests of the public. um property rights, you know, contract enforcement, property rights, etc. um so ultimately it's an empirical one. So what we did, my co-authors and I did is we assembled um quite a comprehensive database across countries on um different sector forms in different sectors including labor, financial, agri um a number of sector, external sectors and um overtime. So across countries, overtime and across reforms in different sectors. So we developed measures of reforms and then we you know we um you can measure you know uh quality of democratic institutions through publicly available data sets. So we found that on average increase in quality of democratic institutions is associated with higher reforms. So um and it was quite um you know quite a the evidence was quite robust. So I think this is systemat you can find instances but I think systematically I think this this is the evidence we have from our research. Let me move to the you know question the other question last so so you know how do you make reforms palatable in a democracy. Yeah.

[00:39:45]>> And there you know again I've done some work um think about you know globalization right >> globalization we know you know from theory all of us have studied aggregate benefits technological change um you know productivity increases >> but then you know why are we seeing all this move towards deep globalization particularly in the United it's it's um so basically you know >> any reform has winners and losers >> right And whether a reform succeeds depends on how you can compensate the losers.

[00:40:20]>> So generally throughout the world we've not been able to compensate the losers and that's why you see political backlash you know one after the other social backlash against for example um globalization. So compensating and think about you know compensating the losers can be through active labor market programs you know things like training, skilling etc. unemployment insurance.

[00:40:43]>> Yeah, passive labor market. They're called I don't know for some reason they called passive labor market program, unemployment insurance.

[00:40:49]>> So globally it's very small. Spending on these programs is also very small. These programs have not kicked off. Um and for emerging markets data is a little bit not that available. Um but I think India for example had Mandrea. um you know if you include all spending on all these programs still very tiny and the challenge is a lot especially in countries like India very large informal sectors where 90% of the jobs are actually informal right >> I think so so the challenge is um you know for any reform to make it palatable thinking about um you know compensation how you compensate the losers that's the only way you can make reforms palatable >> right and again I think this goes back this you laying out Mukir's uh perspective on how important it is for society to be adaptable open to change right like and even the ladites that you mentioned briefly were exactly groups that were losing out from new technology and hence wanted it to >> and Mo's work also um emphasized the importance of you know marketplaces you know forums where you can you know get together but ultimately I think you have to compensate the losers. You have to think about mechanisms to compensate the losers.

[00:42:06]Then only I think you can have a push towards >> how much of the role and of course again drawing on Mir's work a little bit he talks so much about the culture of growth right and how much of it is a cultural aspect and not just a policy aspect right like I think we we are trained to think in terms of policies that compensate losers. How how important is the cultural aspect of it?

[00:42:32]If you lose your job, it's okay. Find another one. You I don't know that kind of thing.

[00:42:36]>> Actually, it boils down to you know economics. No, I think you know you can be culturally open >> but I think you have to sustain a certain living standard. You have to you know sustain family. So ultimately I think they have to of course they have there has to be >> openness or culture of openness >> but then it has to um you know meld with uh economic incentives >> um you know economic opportunities alternative opportunities while I'm looking for jobs there's some support training skilling um you know unemployment insurance I think these are I think they go hand in hand Rahul and my >> very interesting that makes a lot of sense but now I cannot have the opportunity to have someone who's worked at the IMF for so long and let you go without a monetary policy question. So let me ask you something about monetary policy like one view I've heard from Land Bridget especially and it it ties in a little bit to our discussion on how important is politics and how important is a technical consensus and all of that. So Lant often tells this story that uh the technical consensus that the IMF helped engineer on monetary policy its importance on the importance of stability on the importance of independence has played a big role in sort of the central bank independence that we've seen uh across many parts of the developed world certainly but also developing world and that's played its own role in uh what we've seen in terms of monetary policy and development. I want to hear your perspective on this.

[00:44:13]>> Um, it's a great question, Rahul. If I may, you know, um, disagree a little bit. I have a different view.

[00:44:19]>> Land is the most disagreeable person I know. So, I think you would love that you are disagreeing with him. Yeah. So at for being you know central bank independence uh monetary independence is a very you know catch all all pervasive terms but this term has been coined by uh theorists in advanced economies and you know all the models we have all the economic models we have they are built for advanced economies and they take the advanced economy setup and let me explain the reason Why I say so?

[00:44:55]Think about the CO shock. Huh? So do you think you know dealing with the CO shock was possible with an independent central bank or especially in emerging markets or you wanted or you would have um the central bank and the government to work together in cooperation in tandem. you know fiscal for example you know you have to have uh you know the monetary space and the monetary support is very much a function of you know how much fiscal support you're given know how much direct cash transfers you're giving to households um so I think um for me you know by a different view I mean I think especially in emerging markets I think it's cooperation between the central bank and the government >> cooperation between different line ministries in the central government and in between central and state governments I think is crucial in terms of responding to a shock. So that is in more exceptional times but even in normal times think about food inflation know CPI we are we have a mandate now we target CPI inflation um food is the the weight of food has come down with the new revisions but it's still quite high you know it's it's it's about um close to 40%. So food inflation think about you know demand for food supply of food.

[00:46:20]There's a department of um you know uh food and distribution there is um you know there different ministries which are um uh responsible for and which have a lot of work towards um you know stabilizing food inflation.

[00:46:38]>> So how you know um you know how can you know what does independence ma mean in this context? So what does independence mean in in the context of an emerging market? What does independence mean in the context of um shocks >> and what does independence mean even in normal times? To me, I think the the guiding philosophy should be of cooperation of coordination as I said between um the center between us any central central bank particularly in an emerging economy and the government in the government across different nine ministries and most crucially you know we have uh seventh schedule of the constitution most health education agriculture they're all state subjects >> so I think most importantly coordination with with the states >> is absolutely crucial. So I you know my view is that you know this whole concept of independence is um textbookish >> very advanced economy uh specific and has little applicability in theory >> fair.

[00:47:46]I think again questions that coming to me right is the original evolution of this whole thing was from this perspective of uh governments having the tendency to vote themselves a high inflation rate print the money that they want if if they don't have resource generation right so you can't and we found that trying to print away your problems creates more problems in return, right? And I think that was >> except when you have sovereign debt.

[00:48:20]Sovereign debt, if you have high sovereign debt, you can inflate away your debt. I think it's it's >> Yeah. Yeah. But but then the people stop giving you debt, right? Like so it creates other problems in return, right?

[00:48:31]So I that's where it it evolved. When you're saying coordination, cooperation, I think I completely agree that if you have policy objectives that you need to meet, right? uh coordination with the different departments and the different elements is critical. whole of government approach is critical but surely you need more guiding principles or sort of reinfencing than >> for example we have now the inflation target we have a mandate of 4% we have you know band of plus - 2% to allow some flexibility um and you know I think uh and and there is independence in that sense right and I think there is um uh so the mandate is given by the sovereign and there is an authority to implement that mandate and um you know have to have and and and and day-to-day autonomy and independence that's but I think in the larger picture of things to me working together you know working to together towards a common goal >> I think that to me is the more predominant uh ethos the way I think about >> this whole issue >> and that's an ethos that goes well beyond just monetary policy right >> yeah absolutely I think absolutely it's you know monetary policy is an example but you know I think fiscal policy. I think in policy I think as long as you can work together you know across different branches across um different ministries and especially given seven schedule of our constitution I think is uh to me is is is uh what we should aim for. I mean uh it's happened by chance but I can't think of a better note to end on than let's all work together for the common objectives and common goals that we have well beyond just the government comes down to the people different departments states center everyone thank you so much pra >> thank you so much Rahul pleasure >> [music] [music]