Episode Number 245 / February 9, 2024

Ex-RBI Governor: Dr. Manmohan’s Legacy, India’s 1991 Reforms & Future Economic Plans I C. Rangarajan

1 Hour 9 Minutes

Episode Number 245 / February 9, 2024

Ex-RBI Governor: Dr. Manmohan’s Legacy, India’s 1991 Reforms & Future Economic Plans I C. Rangarajan

1 Hour 9 Minutes
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About the Episode

This week’s episode is in discussion with India’s ex-RBI governor about Dr. Manmohan’s Legacy, India’s 1991 Reforms & Future Economic Plans as we welcome C. Rangarajan to the Neon Show!

What Was Life Like After Independence?

What Was RBI’s Role Before & After Rangarajan Came In?

Why Did The Partition Of Tamil Nadu Happen?

Was Manmohan Singh A Good Prime Minister?

All these SPICY topics and more in this PREMIUM conversation about India’s economics. A deep dive into how India became a powerhouse economy in the world since 1991 & the man behind reviving India in the 90s… Tune in NOW!

Watch all other episodes on The Neon Podcast – Neon

Or view it on our YouTube Channel at The Neon Show – YouTube


Siddhartha Ahluwalia 00:00

You had one of the best financial teams a government could have, you were there, Montek Singh Ahluwalia was there. How did this team get assembled?


  1. Rangarajan 00:06

Whenever we went to the US for example to raise resources, the lender used to ask a question, you have so much gold as part of your reserves. Why don’t you use that if you want to raise resources?


Siddhartha Ahluwalia 00:16

Devalued the currency consecutively in various successive days and P. V. Narasimha Rao, almost said that he had a collapse—


  1. Rangarajan 00:20

Half of the 50 years of the 20th century, the average annual growth rate of India was 0.89%. And at that time, population was growing at 0.84% therefore per capita income almost remained stagnant over decades. Well, they did many other things in the railway, Infrastructure, good administrative system, judicial system was established, but the whole objective was not to improve the country as such—


Siddhartha Ahluwalia 00:48

How was the Tamil Nadu partition? If you remember—


C. Rangarajan 00:50

Definition for a developed country is, one is a country which has a per capita income of at least $13,000 US , India’s per capita income today is about $2,700. So we have to really increase the per capita income by five times in order to become a developed country.


Siddhartha Ahluwalia 01:07

How was Mr. Manmohan Singh as the Finance minister and the Prime Minister?


Siddhartha Ahluwalia 01:15

This is Siddhartha Ahluwalia, Welcome to the Neon Show. Today I have a very, very special guest, someone who has graded the railroads of the Indian economy, someone who has played a large part in building the Indian economy as we see today. I welcome Dr. Chakravarthi Rangarajan, one of the leading economists and policymakers of India, former member of parliament, the 19th, governor of Reserve Bank of India. He’s also the former chairman of the Prime Minister’s Economic Advisory Council. He is the chairman of Madras School of Economics, former president of Indian Statistical Institute, and I can go on and on with his honorary titles.


Siddhartha Ahluwalia 01:57

Sir, welcome to the Neon Show, so grateful and thankful to have you today with us.


C. Rangarajan 02:01

Thank you very much.


Siddhartha Ahluwalia 02:03

Today we are going to discuss your book ‘Forks in the Road’. You know, I have been amazed reading this book, it’s seminal, you know how much of India that we see today, in 2024. The groundwork of it was laid back in the 1990s, almost 34 years ago, and the role that you played in building the India of today. First of all, thank you so much for building the culture of our economic fabric of India.


C. Rangarajan 02:35

Thank you again.

Siddhartha Ahluwalia 02:36

I would love to first get into the few stories of that era. The first one is what was the BOP(Balance Of Payments) crisis that led to the economic reforms of 1991.


C. Rangarajan 02:52

The crisis essentially was a rise in the current account deficit of the country and the inability to bridge that gap. We were not able to raise adequate resources to cover that gap. And therefore, we were in a situation in which our reserves were inadequate, totally inadequate. And we had to face an acute situation in which the imports had to be curtailed by a very large extent. And that had a very bad effect on the economy. What happened was in the 1980s, the economy grew well. But that was also marked by a situation of high current account deficit and high fiscal deficit. Economists will say that the two are interrelated. And as a consequence of that, we face a situation in which we had to raise resources to fill the gap and also bring about the change in the whole economic system. So that we do not get back into such a situation. So the reforms came as a consequence of the grim situation that we faced at that time, and to introduce measures aimed at both stabilisation and reform. Stabilisation was required because we need to correct the situation that we were facing immediately. Then followed by a series of measures, which will create a situation in which the economy can go strong but will not face the kind of situation we faced in 1990 and 1991.


Siddhartha Ahluwalia 04:55

Sir, for our audience who are new to these terms, the current account deficit for them, I would put in a layman’s language is the amount that we owe to international agencies for our imports, would that be correct?


C. Rangarajan 05:12

No. That is not a total description. Very simply, the current account deficit essentially means a situation in which we are importing more than we are exporting. Therefore, there is a gap between the imports and the exports. And this is not being met by any inflow of resources adequately to fill the gap. Therefore, it’s a combination in a sense, of the… both the gap and the inability to find an object. But the current account deficit is basically the difference between the import of goods and services, and the export of goods and services. If the export of goods and services is higher than the import of goods and services, we have a surplus on the current account. But on the other hand, if the imports of goods and services are higher than the export of goods and services, we have a deficit.

Siddhartha Ahluwalia 06:23

And what led to a situation that we didn’t have enough resources to pay for this deficit during the 1990s?


C. Rangarajan 06:31

Well, how exactly is this deficit met, the deficit is met in a number of ways, for example, if foreigners invest in India, but then they bring resources and therefore that fills the gap, or the foreigners invest in our stock market, then they bring resources that also fills the gap, or if you borrow, if the country borrows or the citizens borrow, then money also comes from or the resources come from outside and that is also a way of filling the gap. So borrowing either by the government or from the market or from banks or international agencies, plus the investment in India, or investment in what we call “Portfolio Investment”, investments in stocks and shares, all these are the resources that come and fill the gap between the two. If it is still not met, then if you have results that we can draw on the results and meet the gap.

Siddhartha Ahluwalia 07:41

And for our audience, you know, I would like to say that, in the beginning 40 years since independence, we were a socialist state. It was not the fault of the government or the policymakers, they saw the Soviet Union as the ideal that a developing economy or underdeveloped economy could follow. And thereby India followed a socialism model where everything was owned by the state. And this led to the disasters of the 1980s. And the initial 1990s When you were brought as a leader, as a team to solve it.


C. Rangarajan 08:18

Yes, I think what we decided was that we need to make a break with the past. The break with the past happened in three important ways. One was to dismantle a large network of permits, controls and licences and free, so to say the market to decide, Where to set up a company? What to produce? How to produce? And all of that. Earlier on, under a strict planning routine, these were decisions actually taken by the planners or the government and passed on. Therefore, in some sense, the first thing was really to move away from controls. The second is also to define the role of the state in a better way. Earlier on the idea was that it was the government that used to come in and do everything that either was given up or modified. While we recognise the role of the government or the state in economic activity, we did not think that it is the role of the state to take over everything on its shoulders and do it. That was the second, one. Third one was earlier on, we followed a policy of import substitution in the sense that whatever we are importing, we should produce, but that resulted essentially in a high cost economy. Because if we were able to produce a commodity, economically inefficiently, then we will not have imported so the reason why we imported was, it was cheaper to buy it from the outside. So this process of import substitution earlier on, essentially meant that we became a high cost economy, we abandoned that idea. We moved away from that and said, Well, we are going to become part of the world rate, we will compete and try to show that we can do things efficiently. That is why we dismantled the high tariff system, because the protection was given to domestic industry by levying heavy import duty. So the import duties were brought down. And sometimes we also simply banned the import of certain items, so that they can be produced to a very large extent, we dismantle the physical controls on imports. But there were still on which we continued, and most importantly, automobiles, I mean, even today, I think we are very reluctant to import automobiles from outside. And we impose such a heavy import duty, but that it is not possible for any normal person to import the automobile. But the basic point is, we moved away from high import duties, and dependence on controls. So this actually created a situation in which we will move on towards the production of commodities, efficiently and economically. And in that particular process, we would be able to really set up a situation in which we can compete effectively with the rest of the world.

Siddhartha Ahluwalia 11:50

And sir, in the balance of payment, right, you mentioned in your book that we were just on the verge of default. So my question is, who was the default that we owed to, we we’re doing the default.


C. Rangarajan 12:01

See, default essentially means that we have borrowed, we have borrowed from international agencies like the World Bank, the International Monetary Fund, and others. Other people, our entrepreneurs, and our businesses have also borrowed from outside. That was not that much or that time. I forgot to mention an answer to an earlier question. But the other important thing that we did as part of the transformation was essentially to allow foreigners to invest in India more freely than before, and also bringing resources from outside to invest in our stock exchanges. These were not permitted prior to 1991. And yet it was a very, very limited way. So similarly, I think, I think therefore, this is the way in which we try to expand the inflow of resources, and at the same time, reduce the current account deficit.


Siddhartha Ahluwalia 13:13

So it’s a very interesting story that to meet this default, the IMF (International Monetary Fund), was putting pressure on you and the entire government to sell India’s gold.


C. Rangarajan 13:24

Well, it is not correct to put it that way. It was not the IMF, which forced us to do that. Let me say another thing, we never sold gold, we only sent out gold to be used as a security, it can switch, we borrowed. And as soon as we repaid that thing, the goal became ours, there was no idea at any time to sell gold, only to pledge gold and the pledge of gold to borrow money. So I can tell you why I was so much involved in it, I can tell you the story.

C. Rangarajan 14:10

The point is that when we were faced with a difficult situation, we had a high current account deficit and we wanted to fill the gap. Therefore, we wanted to go and raise resources. Whenever we went to the US, for example, to raise resources, people used to ask the question, I mean, not people meaning the lenders, the lending institutions used to ask the question, you have so much gold as part of your reserves. Why don’t you use that if you want to raise resources. So this became a kind of repeated statement, but that we were hearing. Therefore, we thought that the only way in which we can reassure those people and raise resources from them was really to do something on our part. But as you know, doing anything with gold has so many emotional implications. And it is not easy to make the people realise that we had to do it, but I believe that it is the shipping of the gold, that it really brought home to the people, the gravity of the situation in which we were placed. Until then they didn’t know they thought there was a current account deficit, these people talk about these things. And they didn’t realise the impact of it, when we really shipped gold in order to raise resources, then they realised how bad a situation in which we are placed, but the point is that the idea of pledging gold did not necessarily emanate from IMF, we had ourselves thought of that. And first of all, what we did was that the goal that we had in the reserves of the Reserve Bank of India were not valued at market price, they were valued at their original price. So, the first thing we did was to value it at market price. So, they indicate the quantum of gold reserves we had. Second we decided to do it, but then these results were part of the balance sheet of the Reserve Bank of India, this gold was not in the hands of the government. So if we the Reserve Bank had to raise resources, and it can see pledge a goal that is possible under the RBI act, only with another central bank. RBI cannot borrow generally. RBI can borrow only from your central bank. Therefore, we contacted the central banks. Governor S. Venkatraman and I at that particular time went around and tried to knock at every door that was willing to open and try to see what we could do. And then we found out that the Bank of England, and Bank of Japan were willing to give us a loan, but then they insisted that the gold should come out of India. We were saying we have the gold again. The pledge of gold gave us the loan, but they insisted that the gold should come out of India. So, that put the real issue of whether we shipped the gold from India or not, we had no option at that time. So, we did, we shipped gold to to Britain to England, and then against that, it was done but the book describes about the various problems that we had in shipping the gold—


Siddhartha Ahluwalia 18:27

It started within the Chandra Shekhar government and then the government changed, P. V. Narasimha Rao and Manmohan Singh came in.


C. Rangarajan 18:30

The permission to ship gold was given by the Chandra Shekhar government. But the actual shipping happened, the greater part of it happened only after the new government of P. V. Narasimha Rao and Manmohan Singh took over, but Narasimha Rao and Manmohan Singh did not raise any issue. And therefore, we shipped gold, but we had to charter a flight, because the ordinary airlines refused to take gold because they thought it was very risky. And therefore, we had to charter a flight and it went. And the story ended well, because it reached there. Against our pledge of gold, we had something like 500 million or little less than that of dollars, resources from both the central banks, but then, since we took all the actions which I mentioned earlier, within about six or seven months, we are able to raise other resources and therefore return this loan. And the goal came back to us and we have kept the goal outside India because we thought that for any eventuality, we can do it because that is also a system prevalent in many parts of the world to loan gold also, in which case we are the lender, not the borrower. So, I think that in a sense we kept it but we have not done that, but the point is, the gold was redeemed very quickly within within six or seven months and that is a very drastic action, which had to be taken to reassure the people that we are willing to do anything in order to meet the crisis.

Siddhartha Ahluwalia 20:38

And I think at that point of time, the role of Reserve Bank of India was also changing, it was getting more empowered at that point in time. Can you describe how the role of the Reserve Bank of India has changed like before you came in and during your tenure?

C. Rangarajan 20:53

Well, the point is that these powers were with the Reserve Bank all the time, the RBI Act gave these powers. But the really one big issue was the relationship between the Reserve Bank and the government. And this is what many people talk about the autonomy of the central bank, independence of the central bank and so on and so forth. The one major decision which was taken and implemented was regarding the way in which the government obtained resources from the Reserve Bank of India, there was a system of the government issuing what is called Ad hoc Treasury Bill in favour of the Reserve Bank and against that, to get money into the coffers of the government. So, this system was provided for a long time and because of an agreement between the government and the Reserve Bank of India, I took up this issue and fortunately, Dr. Manmohan Singh, who had also been previously Governor of the Reserve Bank agreed, and we revoked the earlier agreement in two steps. And therefore, the government cannot automatically now get money. I mean, I think that there are other mechanisms to get money, but it has to be gone through whereas, in the other method, simply issue the Ad hoc treasury bills in favour of the Reserve Bank and then get the money. So, that is a very important way by which the Reserve Bank of India assumed a certain independence from the government. Therefore, even know for example, that when government needed resources, revenues were falling, but expenditures have increased and therefore, they needed more resources, even then, at that time, they did not resort to the direct method, the Reserve Bank of India in its wisdom also decided that more liquidity should be provided in this system. So, they provided more liquidity, therefore, the banks had more results, the commercial banks, the public sector, commercial banks and as well as others, and as a result, they were able to contribute to the bonds floated by the government. Therefore, in a sense, that essentially means that, there is no automatic monetization of the deficit or the fiscal deficit, it has to be an arrangement between the Reserve Bank and the other government. So, that is an important step that followed and made the Reserve Bank of India a different institution. The other important thing that happened was the modification to the exchange rate system that was provided. Previously the exchange rate of the that is the value of the rupee in terms of the foreign currency was determined by the Reserve Bank on every working day. And this is therefore, the exchange rate was not determined by the market. So, to say and therefore, when we moved away from moving to a more free trade regime and so on and allowed others to invest in India both in real investment as well as in stock market. We decided that we should also move towards a market determined exchange rate system and that also transformed in a big way, the Reserve Bank of India was dealing with the exchange rate of the rupee. So, that’s another major change that happened, it went through two stages. Finally, we went to a system of what I would call more or less market determined exchange rate system, because I am using the word more or less, because we recognise from the beginning, there may be occasions when the Reserve Bank of India may have to intervene in the in the market in terms of reducing the volatility or in terms of reducing the rapidity with which the value of the rupee was changing. Therefore, we recognise the fact that it may become necessary for the Reserve Bank of India to do it and therefore, we did that. So, this is another important change. And the third is of course, about banking reforms, I mean, people have been talking about banking reforms, you earlier also, actually 1969 was a very important milestone in banking development in our country when the major private sector banks were nationalised. But, as the functioning of the banking system evolved, we found out that it is necessary that we have to improve the safety and soundness of the banking system. And therefore, we need to introduce what we call Prudential norms, which must be conformed to by all banks, so that banks are solvent safe and secure. I think this is one of the important things because, as you know, the 1969 nationalisation was essentially to correct a situation in which the credit flow was confined only to a limited set of people, and therefore, it was thought at that time that we needed to change that pattern. This is what we call allocative efficiency. So, the efficiency in terms of allocation of resources for credit, the second change, which changed that happened in 1991′ is about operational efficiency with the banks or to function as efficient institutions, then they have to regulate industry and so on, they must be efficient physician heal thyself, therefore, it is important that they are efficient. So, therefore, we introduce a set of rules and so on and so forth. So, in some sense as I conclude this part, I want to say that the Reserve Bank of India during this period acquired more and more powers to regulate the banking system even to regulate the behaviour between the government and the Reserve Bank and also, as I mentioned about the exchange rate system. So, these are some significant changes that happened during that period. They have been carried forward almost in a sense that the markets have become more complicated, more complex now than they were even in the early 1990s. And they had to be handled as they evolve.

Siddhartha Ahluwalia 28:44

And a very important step that you took as a governor. And I believe you were a very new governor, back then you’re just, I think, gone from a post of Deputy Governor to Governor that you devalue the currency consecutively in very successive days. Right. And Mr. P. V. Narasimha Rao almost said that he had a collapse. And during that, we’d love to know that story—


C. Rangarajan 29:11

The point is that—


Siddhartha Ahluwalia 29:13

I remember skip, hop and jump—


Siddhartha Ahluwalia 29:13

Why did you do it?


Rangarajan 29:13

Actually we are going back because this is the beginning of the changes that were introduced. Actually, the devaluation happened before shipping of gold. And the devaluation was also one of the steps that we have to take to reaffirm and to make the others the lenders abroad, to feel that we are taking all actions that are required in order to correct the situation. The devaluation is always regarded as one way of curtailing imports and encouraging excellence. And that is the reason why you devalue the currency. The expo imports become more costly, therefore there is a reduction in imports and exports become more attractive as a consequence of devaluation per dollar you get more rupees and therefore, as a consequence it encourages exports. Therefore, this is what is normally thought of as an appropriate measure to, in terms of encouraging in terms of, correcting the current account deficit. So, we have to do it and we are also to decide on the extent of devaluation because if the devaluation is of a small magnitude, then it doesn’t bother too much, but if it is significant, that is what we had to do. And this, we thought, we should do it in two instalments because we wanted to see, for example, what the reaction is after the first devaluation and then follow it up. Another important thing which many people may not have noted, but I have indicated in the book is this devaluation of the rupee was not done by the government, it was done by the Reserve Bank, the Reserve Bank did it in a very interesting way. As I mentioned to you earlier, the Reserve Bank determined the exchange rate of the rupee every day. So, in the process of determining the exchange rate or the rupee one morning, I suddenly announced a steep fall in the value of the rupee. So, it did shake the market, because the market was not prepared for anything like that. And then we felt that we should go ahead because that is not enough. So, we went two or three days later, and did that. It was at that time, there was some feeling in Delhi, because this was not happening in Delhi, this is happening….. There was some concern about whether this is appropriate, whether we are going too far and all that, but I was anyway cut off from there. And therefore, on the appointed day, I went ahead and did it, but then Dr. Manmohan Singh called me and then I said yes, I have used the word I have jumped, I am taking the second step of the devaluation.


C. Rangarajan 30:19

Hop, skip and jump—


Siddhartha Ahluwalia 32:44

Hop, skip and jump that you mentioned in the book. And you mentioned you were almost absconding because it was a minority government at that point in time, right. And—

C. CRangarajan 33:00

Not only that, I think devaluation is always a controversial issue. And the extent of devaluation is also a controversial issue. How much should you do in order to correct the disequilibrium that is a privilege. So we had decided, at the meeting in Delhi, that it was not done by a reserve bank without the permission of the government. On the exchange rate, the government has also had an important role to play, we met, it was decided this is what we should do. And we should do it in two steps. Whatever concerns that were expressed were laid after the decision that we made. But anyway, I think it happened to me to be the person to do it, and I did it.

C. Rangarajan 34:15

Well, in some sense that. The only time when India gained independence, I have just finished school. So bulk of my school career was when India was under the British—


Siddhartha Ahluwalia 34:36

And which city were you in?

C. Rangarajan 34:37

I cannot talk about the city, because my father was in judicial service. And being a transferable job. We moved from one place to another place. Believe it or not, I studied in five different schools. And it had an advantage, I saw diversity, but it had a disadvantage that every time I had to go acquire new friends and get adjusted to a new environment. But that was it. But the whole point is that I need to say this, that those who were part of the government service at that time, were also in a difficult situation. It is not that they really did not realise that we need to get away from British rule, but they were part of the government, like my father. So it was a very uneasy feeling they all had. And that got reflected in my house. Also, I think I remember not always being happy about everything that was going on. But that was it. I think the point is that, when you look back, the last chapter of my book also indicated that the first half of the 50 years of the 20th century, that is between 1900 & 1950 the record of British rule was dismal. Between 1900 & 1950, the average annual growth rate of India was 0.89%, that is less than 1%. And at that time, the population was growing at 0.84%. Therefore, per capita income almost remained stagnant over the five decades. Well, they did many other things, which may be good, like the railways, good administrative system, the judicial system was established and all that, but their whole objective was not to improve the country as such, but only to really run the administration and to an extent possible, transfer as much of the resources from India to England. I mean, I think this is what it was. The point really, is that I think the British rule did a good job maybe in terms of law and order. I mean, I think because that is that life blood(Inaudible). I mean, I think they, they depended on it. Because it used to be said, even the railways were laid only because of the desire to move the troops from one end to the other end, so taking the passengers came as a secondary consideration. So the point is that I would say that, as far as my childhood is concerned, it was comfortable, and reasonably comfortable. And I said that, ‘One learned many things’, there was an intellectual environment at home. And I benefited from it. And I obviously did reasonably well in my studies. And that is it. But the point really, is that under British rule, there was such a big dilemma in the minds of the people, even those who were part of the government.

Siddhartha Ahluwalia 38:49

You said that you saw the turmoil in your own house. Right. As your father was part of the judicial services, and how was it after independence? Right, Did you feel a change in the house and subsequently your environment?

C. Rangarajan 39:05

I mean, I think there was a real change at the time and I think many people really felt that the change has occurred, and we have now the freedom to mould India in the way in which we want there was genuine joy and satisfaction at the time of independence. But the whole question later on was essentially how much debate there was and how much consultation there was and so on. But essentially, there was a big change in the environment in the atmosphere before the British rule and the post British rule and we got drawn into discussions about how to move the economy. And as you yourself mentioned earlier, if you want to grow fast, perhaps the best example is that of the Soviet Union. But the Soviet Union was never a democracy in the true sense of the term. So, to combine democracy with economic planning or nationwide economic planning was a new exercise. And that is where India has struck a new path. And as we move along, the point is at what point we should have made the change the role of the state was well understood, because at the time of independence, there was no clear idea, even in the literature, regarding what should be done in order to grow fast, that literature is also growing at that time, development economics was not well known at the time. Therefore, we had to experiment, but the call question is that, could you have changed direction? Or could you have modified not change direction fully, but modify the direction? I think that is where I think perhaps, we slipped a little bit, we could have at least done a decade earlier.

Siddhartha Ahluwalia 41:40

Could India have been in the position of Singapore or China, that’s the real question.

C. Rangarajan 41:44

Well, that is, I mean, we had a problem of population, which many other countries did not have. But the point really, is that in the light of our own experience, what should we have done? Could we have changed a little earlier, because the famous speech of Deng Xiaoping in China was on December 13 1978, when he asked for new ideas and new ways of doing things. So, even then, even at that point, we did not change as compared to China, we were perhaps one decade behind in terms of reforms. So that’s it, but on the other hand, the whole idea of democratic institutions, people exercising their rights and all that is a big change from British time.

Siddhartha Ahluwalia 42:50

And, you know, you were also there when there was the Tamil Nadu partition, like, how was the Tamil Nadu partition if you remember?

C. Rangarajan 42:58

Tamil Nadu partition is what between you see, when I was studying and all that, and when my father was in the judicial exam, we were then in the Madras Presidency, as it was called did it come comprise of some parts of Kerala some part of the whole of Tamil Nadu the whole of Andhra Pradesh and so on. So, this was the big thing. So, the first thing that came before even the linguistic states were formed was to separate Andhra from Tamil Nadu. So you see, the moment democracy took root language became an important issue, because if institutions are to be run by people, and people speak a particular language, then that gains importance, therefore, for you the the language of the state assemblies became basically the language of that region, but multiple languages didn’t seem to fit in with that, and therefore, the linguistic states are a natural consequence of the spread of democracy. That’s the way I look at it. Therefore, the idea of partition of the old Madras Presidency into Andhra and Tamil Nadu became inevitable, because how long will I mean you know, given the size of let’s say, the Tamil speaking people and the Telugu speaking people, if democracy holds good, if one language group is in majority, the chief minister will always be from from that region. Therefore, this could not continue for long. And I think Tamil Nadu had a good administrative system and I think Tamil Nadu gained a lot because of the good administrative system that we had. And had very good industry ministers and chief ministers at the time and which made Tamil Nadu progress quite fast.

Siddhartha Ahluwalia 45:28

Today, Tamil Nadu has become the industrial hub of the South. All industries are coming from here for example, for Tata they left the spring all because of communism and many other things and came to Tamil Nadu, electric vehicle factories are getting set up in Tamil Nadu companies like Ola, which are Bangalore based Karnataka based company are coming here, why do you think that it has suddenly become one of the most popular destinations within the country and for outsiders also to set up in Tamil Nadu.

C. Rangarajan 46:02

I think basically what the investors are looking for, if it is becoming the destination of the investors, we need to look at that. So, they want to come here and produce something which they have been producing elsewhere, but producing that thing efficiently. So, they needed a good infrastructure, good skilled manpower and so on. Therefore, in some sense in all of these respects, Tamil Nadu is one of the states which has moved forward the infrastructure in terms of roads, railways, availability of power, all of that has been on the agenda of the policymakers in this state for a long time. And therefore, it did create a situation in which all of these were available, I know of a time when power was a big issue in Tamil Nadu it is not as if that it was not an issue here, but we have reached a stage at which the availability of physical infrastructure and social infrastructure like good colleges good schools are also became available. Therefore, the main reason I think for many people coming and many investors seeking to come to Tamil Nadu is because of the sound administrative system and a physical and social infrastructure which is good.

Siddhartha Ahluwalia 47:45

And there were new terms coined during your administration like NPA(Non Performing Assets), FDI(Foreign Direct Investment) didn’t exist before your time, neither did FDI, how did you come up with these?

C. Rangarajan 48:05

The term “Non Performing Asset” was not used prior to 1992 or something like that, but the idea of non performing asset has been there in the other countries and therefore, in some sense the banking reforms that we introduced, were also taking into account what is happening elsewhere in the world. For example, capital adequacy is what is very often called the Basel norm, because it is a Basel Convention, which introduced the idea that against the loans, risk weighted loans, a certain percentage should be kept in the form of capital. So, we introduced that also for example, capital adequacy ratio, which we use now, came into vogue at that time, because we thought of introducing Non Performing Asset is because the, the whole prior to 92′ and 93′, What happened was that, when the payments due were not forthcoming from the borrowers, the lenders, which means the banks did not necessarily classify them as non performing or performing, they were all said yes it will come someday or some time or something like that, but it is now, it is after the introduction of those norms of then a particular asset will be treated as non performing. That is the six months nine months I mean, it changed from time to time and the period has been shortened from time to time. Then we could identify or We call that as non performing assets. So, these terms like capital adequacy, non performing assets, all came along with the reforms that we introduced, it is a consequence of the reforms introduced that these classifications became more well known and now people talk about adequately capitalising how high is the non performing loans and so on.

Siddhartha Ahluwalia 50:32

Yeah. Sir, I would like to ask right, you had one of the best financial teams a government could have and India has till now. Right, you were there, Montek Singh Ahluwalia was there and couple of other folks right, how did this team get assembled and Mr. Manmohan Singh was also there as part of that team.

C. Rangarajan 50:54

Well, I don’t think it happened at a time when so, many of us were involved with government, somewhere around that time, it was decided that the government will also take in people from outside who are competent into the system, essentially the government was run by the bureaucrats, particularly the civil servants, the IAS officers and other similar offices, but from time to time, they decided that it is good to get people from outside and make them part of the the system. So, what do you have at that particular time, is a mix of people who come from outside at some particular point in time. So, I had spent for example, in academia for almost 20 years, before I came into the Reserve Bank and therefore, part of the system similarly, about Montek Singh Ahluwalia, and there are many others Shankar Acharya and others, but there are also people from within the IAS, who are also efficient and competent and who could also do things like encasing Geethakrishnan and others, therefore, the It so happened at that time, there was a mix of people who had domain knowledge acquired outside and coming into the system, as well as people who are very competent in their own civil service and work who could really contribute to it. And I think I suppose, it’s also part of the management skills of the policymakers, I mean, the political policy makers at the time to recognise the (Inaudible) people.

Siddhartha Ahluwalia 53:31

If you could remember right, how was Mr. Manmohan Singh as a finance minister, and as a prime minister?

C. Rangarajan 53:39

Well, I have known him in both respects, as finance minister, he had when he became finance minister, he had very little political experience directly. I mean, he has dealt with politicians, because he has been in the government and therefore, is dealing with politicians who are finance ministers or who are commerce ministers and so on and so forth. But he was himself not in politics, that was his first experience as a politician. It is also true that he went in as a finance minister, because of his technical capabilities and technical powers. It was a recognition of his capabilities as an economist, as a practising economist that brought him into the position of the finance minister. And then he delivered a very competent regime. And all these reforms were work could be introduced. We were part of the team, but he led the team And in a sense that Narasimha Rao played the role of providing political support to the new economic regime. So, Narasimha Rao’s role is also very important. And many people do not realise Narasimha Rao at that time as prime minister was also minister in charge of industries and therefore, the whole system of controls licences and all were knocked down by his ministry, that are many other things that were done, for which Dr. Manmohan Singh was directly responsible, but the point essentially is that as finance minister, he functioned for most of the time as a technical expert, but he delivered I mean, I think that is important they do and, but as prime minister, by that time, he had already been the finance minister for almost five years, but he was also leader of the opposition in the Rajya Sabha. And therefore, as prime minister, he had by that time a lot of political skills also under his control, and the data made the difference, but I think the most important thing as prime minister was that he was able to keep a direction to the, the way the government is being run, not only from the technical angle of finance, but also from various other perspectives, also, whether it is foreign policy or whether it is Jammu and Kashmir or whether it is something else. Besides finance, he was able to guide and the first term of Manmohan Singh as Prime Minister showed that he can handle all of this. And really, it led to a situation in which the country grew at a very fast rate and, and gained acceptance in all other areas. Also, the second term, as prime minister was slightly different, because that is a period beset with too many political problems—


Siddhartha Ahluwalia 57:44

Yeah, there were too many scandals happening left, right and centre—

C. Rangarajan 57:47

And therefore, it did not come up as well. But as finance minister, he did an excellent job as prime minister, he did an excellent job in the first term, the second term was somewhat clouded by other factors.


Siddhartha Ahluwalia 58:06

And I believe that if he had contested as a prime minister for the third time, the Congress government would have a fair chance in 2014. But he withdrew at that point of time that he didn’t want to be a prime minister again.

C. Rangarajan 58:22

No, I don’t think that is the way I think the situation at the end of 2014 was very different. Because in any case, he did not stand for election even earlier, because he was always a member of the Rajya Sabha. So that is different. So in 2014, it is not the fact that he did not stand because he did not stand for election even—


Siddhartha Ahluwalia 58:57

But it was clear that if Congress wins, he would not be the PM, it’s either somebody Rahul Gandhi or somebody else would have been the PM.


C. Rangarajan 59:05

Well, I don’t think it was made up that quickly. But it was made up that way. But the point really is there were too many things which came into conflict at that time, and whether the Congress Party would have been able to clear them and get a chance, but it was no it is doubtful, even at that time, it is not as if it was very clear that Congress will lose it or not. But the point was that there were problems in the second half, if I may say so of the second term.

Siddhartha Ahluwalia 59:47

And you also decided to step back from active roles in 2014.


C. Rangarajan 59:55

Yes. See, I the point earlier is that by the time I had become chairman of the Economic Advisory Council, and all that, I was also deeply involved with the policy making. Therefore, There was a system change—


Siddhartha Ahluwalia 1:00:16

New Guard—


C. Rangarajan 1:00:18

I don’t think it was right on my part to continue. I mean, I don’t think it’s appropriate. So I left and I think that is the right thing to do.


Siddhartha Ahluwalia 1:00:29

But then it becomes the responsibility of the new government to tap into your rich experience of the last 32 years. I don’t know how they did it, or how they were not able to do it—


C. Rangarajan 1:00:40

But I really don’t know.


Siddhartha Ahluwalia 1:00:44

You were one of the very few people who spent 32 years in policymaking?


C. Rangarajan 1:00:50

Well, the point is that it all depends upon the synchronisation of ideas also—

Siddhartha Ahluwalia 1:00:59

Yes. You have contributed so much to India, like almost 32 years of your active life. What’s your message to the young India that is right now in 24? Where is India headed and what do you want to give them that take the battle forward from me?


C. Rangarajan 1:01:25

In a sense that we have to set a new goal post Russia, Ukraine war, post Gaza war, we need to decide where we are heading and where we are moving. People talk a great deal about the fact that India is the fifth largest economy and it will move to be the third largest economy in the next few years and so on. That is true, I think we can be proud of that. But at the same time, we also have to remember that in terms of per capita income, India is almost 142 out of 197 countries. That shows the distance we have to travel. We talk about India becoming a developed country. What is a developed country? The definition that we normally use for a developed country is one is a country, which has a per capita income of at least $13,000 US dollars. India’s per capita income today is about $2,700. So we have to really increase the per capita income by five times in order to become the developed country. It is a good aspirational goal. I think we need to set that before us. It’s good to do that. But we really need to understand also the problems that we will face and the challenges we have to meet. We really need to raise the investment rate in the country by another two or three percentage points. And we also have to reckon with the fact that the growth rate of the developed countries is going to somewhat be slower year after OECD(Organisation for Economic Co-operation and Development) has almost said a secular decline in the growth rate of developed countries. Under the same time, we have problems about climate change, the need for reducing emissions and all that it will essentially imply that the world as a whole cannot be growing at the rate at which it was growing in the past. If you have to reduce the emissions, you will have to reduce the production of certain output. Therefore, there are problems that lie ahead of us. I would really think that even though we may not achieve exactly the developed country status, we need to grow at least at about 7% per annum and if the incremental capital output ratio is 5:1 , then the investment rate has to be at 35%. I think that is one good goal to keep in mind. The second is really we have to deal with the technological changes that are happening, these technological changes are somewhat different in character from the technological changes that happened earlier. The AI generic, AI and other things. Essentially substituting not the manual labour, but even the intellectual labour that imposes that creates a situation in which the the demand for human labour itself could could go down to put in the language of the economist, the employment elasticity of income may come down, that is for a given increase in income, you may need less people than before then that creates a conflict between employment growth and output growth. Previously, when there was output growth, there was automatically employment growth, but that may be affected to some extent, in the coming years. The third thing that we need to look at is also on which we should focus on, on which sector should we focus on, some people say that South Korea and even China moved fast because they focused on exports, that is true, but that is no longer possible when even the developed countries are not going to grow fast. And the attitude in the developed countries is also changing. In terms of free trade, they taught us about the advantages of free trade. Now, they’re retreating from that position. Therefore, the point is that the growth strategy hereafter will have to be multi dimensional, it is not just manufacturers, it is not just services, it is not just exports, we need to be able to excel or we need to be able to have control ability to move into various areas, whether it is exports of manufactures or services, that is why I say the strategy must be multi dimensional, not like an earlier time saying that look, exports will do it will pull the country out and so on and so forth. So, in this context, the challenge before young people is very great. But the first thing that is essential is that we need to adapt our young people to the new technologies, we have to be skillful in development. We cannot ignore, I think the new skills which are required, must be inducted, and our people must be capable of handling the new technologies. Therefore, the young people should really do that. The second of course, is efficiency and efficiency in what way when I think we must be capable of not only adopting the technology, but also using it efficiently that is where the skill again comes in. Therefore, the problem before us really and therefore the problem before the end because of the next 30 years through which we have to go in order to achieve the status of a developed country. That responsibility lies on the shoulders of the young and therefore they have to do it. Therefore, they have to adapt themselves to the new technologies and the new environment in terms of production that is happening.

Siddhartha Ahluwalia 1:09:18

Thank you so much, sir. Been really grateful to have you today with us. I can’t express how delighted I am to share the stage with you and share your message with our audience right, who will look up to you for what you have done for the country.


  1. Rangarajan 1:09:37

Thank you. Thank you very much. I also enjoyed the conversation with you.


Siddhartha Ahluwalia 1:09:41

Thank you so much.

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