0:00 Normally RBI does 20,000 30,000 40,000 crores >> in a normal year. >> Normal year maybe 50,000 crores. >> Okay. >> Last year was 7 lakh crores. >> 7 lakh cr. >> That is purely because of all these freebies that the states are pushing. It is basically ticking time bomb. But it is also linked to the weakening of rupee. >> Yes. >> So we are again promising N to bring more money into the system. >> You know how much they already brought in? $45 billion. >> 45. >> And it's likely to be $80 billion. The scheme is on till September. If you have uncle NRA uncle, you should tell them to bring money to India. The last year money printing and on the rupee is adding risk which will show up later. >> How much late it will show up? >> This will be one or two years. So this >> so wouldn't that be closer to election? So why is the government not seeing that? >> I don't know. >> So time bomb
0:45 >> reduce capital gain tax. It's a very big factor. >> Namaste sir. How are you? >> All good after a long time. >> Yes. because we only meet to discuss very very important issues and uh today also you have a uh very important thing to say and uh there are some ticking time bombs in the Indian economy that uh may prove very disastrous in the next uh 2 three years down the line and uh so that's uh I wanted to discuss uh because nobody else is talking about this so can you elaborate what is happening on that RBI side uh what is happening on the rupee side because that is also related. >> I think uh we people if they look at uh our podcast before they will think that
1:33 we always complain you know whatever RBI does we complain. So we should give us some background. >> Yes >> that way RBI was like immediately postco we had a high inflation food inflation driven by food inflation. that time RBI kept interest rates very high you know and we were complaining that interest rates are too high that was a complaint now now we are on the other side so what has happened now is that one important thing that has changed all state governments and it's not central government you have to be very careful you know of course I'm not saying central government is blameless or anything all state governments now are giving freebies as you know and they are spending more than their taxes you know whatever they get from the center and what they collect Now if they spend more
2:19 obviously what is the option? They have to borrow. Now when they borrow usually if they borrow from markets like banks and banks is like you and me. What should happen? Interest rate should go up. >> If you let interest rates go up what will happen is of course your growth will slow down in the short run because cost of capital will increase. Investments will slow down. Growth will slow down. last time also because we said >> you know interest rates should come down and we were discussing it 2 3 years back also >> that uh interest rates are too high and this is why the cost of doing business is very high that's why growth is not happening at the level that we that it should happen >> exactly >> and we were asking RBI to please you know cut down the interest rates >> yes >> and now it's completely different uh
3:04 thing >> yes the thing is circumstances have changed So this was 22 23 that those time where this freebie business was not very popular. one or two states had started. Now it's become a compulsory thing you know any both the parties in any state election will announce it's only a matter of who announces 500 rupees more you know that's the only thing which means all state governments will run revenue deficits only states which are not running are those who whose election cycle is not yet over for example Uttar Pradesh >> once election cycle is over you will see what the numbers are going to be so now they are borrowing now when the state government starts borrowing usually in a textbook we say state governments cannot print Yes, they cannot print money when when they borrow if RBI should not fund it.
3:50 So what is now that is a variable that has changed when state governments comes and borrows and not for investment they are borrowing for what they are borrowing from this distribution interest rate should go up then so what what is happening here what are states doing what is RBI is doing yes states come and borrow so in the markets if RBI had not done anything what will happen when there is a big borrower interest rates will go up when there is a big buyer for mangoes what will happen to mango price mango price will go up >> interest rate would have gone up naturally I'm all that What I'm saying is RBI should not control that interest rate whatever demand and supply is earlier RBI deliberately kept interest rates high by you know sucking money out of the system >> under yes so they were they were sucking
4:35 money out of the system so that was deliberately high now what interest rate will be high on its own because state governments are borrowing what RV is doing is supplying money last year you know 7 lakh crores these 7 lakh crores. >> Yes. So this is called there is a sophisticated word. It's not called money printing. It's called open market operations. >> Okay. >> Normally RBI does 20,000 30,000 40,000 crores is what they do usually >> in a normal year. >> Normal year maybe 50,000 crores. >> Okay. >> Last year was 7 lakh crores. >> 7 lakh cr. >> 7 lakh crores. Yes. >> So wouldn't that lead to massive inflation in the country? >> Not immediately because it doesn't lead to lending. you know as we saw in the US after quantitative easing US brought in like uh from around uh uh if I recall
5:21 correctly around 4 trillion to 78 trillion >> you know in after the crisis but banks did not lend if banks don't lend it will not you know money doesn't circulate in the system it doesn't create inflation >> so here it depends on how much banks will lend because what RBA gives is called reserve money into banks >> now it depends how much you know in in an extreme banks can lend 30 times of this it can create massive money supply in the system but they don't lend as much so it can it won't happen immediately it has a potential to create inflation but having said that it kept interest rates artificially lower you know from 6 and 12% we brought interest rate to 525 so that 6 and 12% again you should not of course you can claim it's hypocrisy 6 and 12% was wrong in 2223
6:08 but 6 and 12% is right now because of these extra borrowing >> but this is not hypocrisy this is economics. >> It's economics. Yeah. People don't get it. >> Conditions change. So you have to change. >> Yes. Because that time these extra borrowers is not there >> and this this whole money supply that is increasing basically essentially 7 lakh crores of extra printing. Yes. >> Uh kind of printing uh is coming into the system that is purely because of all these freebies that the states are pushing. >> Mostly not purely mostly but I have to explain the economics a little bit more to your viewers. Imagine when borrowings is some 10 rupees okay and you are there are two savers I am one saver and you are another saver I am willing to finance the savings at 5% interest so as long as you're borrowing 10 rupees
6:53 interest rate will be 5%. >> Let's say you are somebody who is different who you care a lot about today's consumption let's say you are younger and you care more about consumption for you to save I have to offer 7%. >> Not 5%. So when I when the market when you borrow 20 rupees interest rate will not be 5%. Because you go up the supply curve I have to take it from you and once you give 7% to you you have to give me 7% to me also >> right? I I may be willing to buy mangoes at 50 rupees but if I if you get it at 30 rupees you know I'll also ask for 30 rupees. That's called marginal you know marginal investor matters. >> In economics price is determined by the last guy who buys not the best guy or the average guy. So when extra borrowings came into the market instead of 10 rupees when borrowing rupees 20
7:39 rupees who will finance it you will have to finance it but you are not inclined to save you want to consume. How will I incentivize you to save by offering higher interest rate so this is natural >> RBI should have let this happen obviously when interest rate go up investments will go down economy will suffer and all that instead what they did they brought in the 10 rupees of extra money into the system. Now money without goods and services. In the short run it it it you know doesn't increase prices because prices are rigid. Contracts are already signed. Your rent is already signed. Your school fees is already signed. Prices don't change instantly. There are lot of prices which don't change instantly. So even when more money comes in it helps by creating growth because same price more money there is more demand economic activity improves. But at some point in time when
8:26 prices change prices will change much more. And this was the history of India. This is why we used to have 10% 15% inflation and this was mostly driven by central government. Now this is a combination of state governments and RBI which which created this situation and state governments of all parties. I must tell you I'm not talking about any particular party here. All parties are >> could RBI have refused it? >> Of course >> we want to give you seven lakh. >> Shaky Gandhas did it. Shakti Gandhas did it to the other extreme. No, not only he not printed money. No no no I'm saying that for example they released 7 lakh crores in open market operations they could have not they could have not done it in that would have been the case would have gone up the market interest rates would have gone up >> and they would you know the interest rate would be higher they will have to
9:11 hike see increase >> then the cost of business increases then the growth >> growth would have slowed down of course growth would have slowed down now what you've done is artificially supported growth for a year or two now >> so this seven lakh crores may have financed for example only one year of freebies right? >> Yes. So >> then what are they doing now? How they are getting more money now? >> This year we'll see, you know, this year again >> we don't know. >> We don't know where it'll go. So next year you know the we don't need 7 lakh crores for freebies. It's not that bad. We haven't gone there because these are 20,000 cr 30,000 cr kind of thing and there states Andhar Pradesh comes in and when all states because now what has happened with freebies it's become indexed from 2,000 rupees now it's become 3,000 rupees 2 and a half thousand in some see some when Karnataka
9:59 started it was 2,000 Telangana it became 2 and a half,000 now the going rate is 3,000 so it is not these people are very clever it's index crazy >> yes so now imagine In 2029 if central government announces >> you know if central government >> end of India story >> no it's not end it'll create problems you know people will learn but it'll create problems you know I'm sure central government will have to do it they will I my guess is 20 >> where will the money come from >> print one thing that the BJP this government Modi government has done and it has learned from the UPA's mistakes that that you know no matter how high the unemployment rate is no matter how many problems the government is facing at the end of the day the middle class and the you know the urban uh people
10:47 they will not and the middle class definitely will not forgive you if there is high inflation >> exactly >> and that is good lesson they learned from UPA's mistakes >> and inflation becomes sticky the problem is once inflation comes in it won't go away that easily >> the single most achievement if you ask me what is the biggest achievement of this comment fiscal discipline >> you know and keeping inflation tight you know our inflation used to we average 8 9 10%. Now we have never crossed six and a half% one quarter here and there 7% in the last 10 years we never crossed it's not that world had inflation remember uh postcoid US went to 9%. We did not go to 9%. >> Because they did the same kind of extra printing. >> Yes, exactly. India did not do that. That's a single. We took cost during now you're telling me not taking cost. Now during COVID there was a case for money
11:33 printing. There was a case even someone like me would have been sympathetic if you print money during COVID and I would have said let's take inflation later because now it's a question of survival. We didn't do it. We took all the costs during co and that is why we came out pretty stable and we took it to other extreme where we kept interest rates high currency high our exports collapsed but at least the macro stability remained now we are giving up on those >> and it's not happening at the center level here >> so far so yes so it's coming the all the pressure is coming from below from the states level >> yes from the state level yes and that is >> it's basically essentially it will be the same thing because >> it will be the same thing because money will flow money does not matter who who gave you whether it's because of center or state. So this is what I used to say in class that state governments can never print money. Now that's apparently
12:20 they can >> they can because see all that it requires and again for your viewers if RBI finances anybody's borrowing that is printing money >> as simple as that it is done in an electronic manner it need not be done in you know it is done by crediting their accounts in a RBI account. It's called reserve account but that's all it is because it'll go to their bank account and then they can start spending. >> I mean for them it's you know kind of free money. It's coming out of like nowhere for them. But I have to point out why it has created another risk. You know this is another risk that is created. >> We kept our interest rate low. Now rest of the world interest rate started going up. Obviously currency will come under pressure. When you keep your real interest rate low and the other countries are giving you higher interest rate which are less risky and stable and
13:06 money started moving out of India. >> Now that has reduced value of the rupee. Now we are taking another risk. >> Okay. Wait, wait, wait. Yeah. >> So the first mistake we have kind of elaborated on what RBI did last year >> this extra money printing of 7 lakh crores which will you know reflect two years down the line it will it is basically a ticking time bomb but it is also linked to the higher you know there weakening of rupee. >> Yes. >> You know because rupee is at the danger of you know crossing 100. >> Yes. >> And the government clearly does not want that. First of all, I don't see 100 as a big deal to be >> because it is not. What is the difference between 96? >> 96 or but psychologically I get it. You know, it'll become highlight. People
13:52 will show videos of BJP leaders in 2013 saying uh it'll cross somebody's age and all that. Uh all that will be I understand politically it may be but to prevent this we have done another mistake. >> So in I have to give you 2013 parallel. In 2013 rupee was collapsing from 40 44 we went to 63 in no time in one year and that time the genius that we did was we we told NRIs that bring in money we'll give you higher interest rate and we'll we'll give you guaranteed exchange rate. >> See otherwise think about it interest rates in India is higher than interest rate in the US. The only reason money doesn't flood into India is that rupee depreciates to that extent and there is no free money. If you bring in a dollar from the US let's say it becomes 100 you
14:37 and and you make 5% let's say interest rate in the US is 4 and a half 4.7 now 10 year and in India is 6.8 date why doesn't everybody bring money to India you know you should borrow in the US and bring it to India why don't they do it because the extra differential reflects inflation differential and to that extent Indian rupee is expected to depreciate so when you take back you will have only same amount of dollars because the whatever interest rate that you gain that 2% you will lose on the currency currency will depreciate you get less dollars this is why money doesn't flood into India or any country where interest rates are higher otherwise any country with high interest rates should attract unlimited amount of money currency will depreciate and offset the whole thing. This is called covered you know uncovered interest rate parity that's a term right now what RBI did in 2013 you know it's not a new
15:24 thing you know we should not blame the current RBI 2013 and our situation was really bad that time I sympathize why they had to do it they said you bring in money I will guarantee you exchange rate if I guarantee you exit exchange rate then this 2% extra you are making becomes free money do you see that so if we can borrow at 4 and a half% from elsewhere come into India convert it into rupees make 6 and 12%. exit at the same exchange rate that you entered then no depreciation >> no depreciation at all no deprecation at all >> and that extra money real cost will be by the >> but why are they doing it >> they did it see I'll tell you this is risk right the hope is what if rupee does not depreciate then there's no cost >> by next in next 2 3 years rupee remains
16:11 where it is what is the cost this is risk right when you take risk you do all these calculations right so 20 I'll give you the 2013 story we But hang on sir just one big uh >> isn't it self fulfilling uh kind of prophecy because then the whole focus of the government of the RBI will be on you know ensuring that the rupee does not depreciate >> yes but then how do you do it >> then it will be tomorrow yes you can you'll have to increase interest rate one way you have to do it today what you have postponed you may have to do it even more >> you know let me complete the 2013 story so we got 20 billion we got $20 billion uh and that time our forex reserve was like $260 billion 2025 from NRIs and that stabilized the rupee
16:56 you know uh from it remained at 6667 fortunately after 2 3 years also rupee did not depreciate and RBI did not lose anything and we paid that 20 25 billion and it did not become a news now that was really bad situation like in 1991 we pledged gold but right now there was no need to do that we have 7 and 650 50 billion of forex reserves >> $650 billion but we did the same emergency step this time also >> I don't know so now >> so we are again promising N to bring more money into the system >> you know how much they have already brought in $45 billion >> 45 >> and it's likely to be $80 billion but the scheme is on till September if you have a uncle NR uncle uncle you should tell them to bring money to India >> it will not it won't be productive at
17:41 all it's not coming to equities or anything >> so where is it going >> it's coming to banks you know Of course, it'll lead to lending and all in India. It'll add to forex reserves of RBI. But $80 billion, you know, is likely to come. SBI raised a recent report. 40 has already come. Now, this $80 billion will come with a guarantee that RBI will guarantee them an exchange rate. In fact, they have given some guarantee to borrowings also that if you add that that is with the one and a half% depreciation totally some hundred billion will come into India. >> So, hundred billion will come. What kind of money? This is coming only for arbitrage. It is not to finance your uh you know factories or anything. It's not FDI. This is those people. And the worst part you will be surprised to know those
18:27 people borrow and send it here. It is not your savings. Let's say you have an account. I'll give an example. You have an account in HSBC and you have $100,000. >> Say I'm living in Dubai. >> Dubai. >> They will give you 20 times of that loan. >> 20 times of that. Mhm. >> And at whatever 4 5%. You borrow, bring it here and invest here. You know, invest here in debt not in equity, you know, buy some government bond, you make 6.8%. Now, usually what should happen? Rupees should depreciate to the extent of differential and you make no money. That is why you don't do it. Now, RBI said rupee will not depreciate. Even if it depreciate, they're going to guarantee you whatever 96 or whatever you commit. It's technically it's called a swap. Let's not get into that. Now, you will
19:12 do it. Now the problem is after some time all the 100 billion is going to go back. That is why you did it. Imagine at that time interest rate in the US is 5% or 5 and a half%. All of these money will go back. Then what will you do? You will create a crisis at that time. The market exchange rate there was no need to do this. There was absolutely no need to do take such >> they would have just increased interest rates. >> Yes. By 50 basis point. That would have done or cut capital gain tax. We need FTI RNG. We have to do a diagnosis. The problem right now is we don't have export import problem. Even someone even the PM spoke about gold. Gold is not our problem. People who already invested in India are pulling out. >> That is the problem. Even
19:57 >> why that why that is happening? >> Many reasons. So one is the AI thing. It's beyond our control. Of course, you could have said we could we could have invested in AI. All the money is going to Korea and all those places. People find that more attractive than India. So FIS have pulled out like some $16 billion last year. >> The other even the FDI long-term players like Samsung, Marauti instead of reinvesting in India, they have taken their money out. So we got $98 billion of FDI last year 91 billion went back. >> So basically effectively 67 billion. We need at least 50 to$100 billion of net FDI if you want to grow at 8 10%. We need hundred billion. We got $8 billion. That is the problem. It is not export import. We are doing really well on
20:43 exports. >> You know after a long long time our service export is now last year we we're almost touching $900 billion. You know last year we did 44 $440 billion of goods $420 billion of services almost $900 billion of exports. We we made doing a trillion dollar this year. We're doing really well on exports. Our current account there is no deficit. You know our current account is balanced. You know we don't have that means it is not that we are importing more than we are exporting that is not true the problem is investments so we have to address that issue instead of addressing that what we have now done is borrow even more in fact one of the good things about India G was we have not borrowed we are not levered as much why Pakistan Bangladesh Sri Lanka got into trouble they borrowed till neck one of the best
21:30 things about India what India has done recently our forex reserve till about a month ago was around 700 billion. Our total external debt including by private people is $750 billion. That means 90% of our external debt we have forex reserve. You know how much it was in 91? 7%. How much it was in 2014? Some 40%. You know 40 50%. Now it is 90%. Now what we are doing we are diluting exactly same thing. All these money which is coming is borrowing >> and we are going to mess up with that ratio. And then when it leaves and this is all hot money. This is not a long-term money. This is not money which is coming to your factories which is which will create jobs and all that. This is all hot money coming into bonds to government bonds to finance the same
22:16 freebies you know and when this leaves it wouldn't have created productive assets. It will >> like to finance freebies. >> They want to buy government bonds. >> Okay. >> So they'll give it to banks which will buy government bonds which will keep interest rates lower and you can borrow even more. See one check always remember bond market is a very big check on politicians. Bond market investors are very very careful >> and bond market keeps a tight check on government. When you overspend interest rates go up. Now if you do all these artificial thing you know they they exempted capital gains on inflows on government bonds. We need capital gain exemption on investments on factories, jobs and all that not on government bonds. You know recently one of the measures taken FDI money coming from
23:02 abroad if you fi investing in government bonds if they make capital gains that is exempt we need exemption for FDI direct investment into companies productive assets and all that >> so now this bond market the interest rate will not go up if interest rate doesn't go up you keep borrowing >> you know that is the problem I think we what we have done is by taking risk the way we are addressing the problem now both on the last year money printing and on the rupee is adding risk which will show up later today it won't show up >> okay later how how much late it will show up >> this will be one or two years so this >> so wouldn't that be closer to election so why is the government not seeing that >> I don't know why they're see how do I know you know how do I know that why did uh earlier governments not see it you
23:49 know I don't know why they not see it I don't know >> I mean I would understand if you do it in say 28 29 right I because then you can say then that I can understand but doing it now when there is you are saying there is no need to do that exactly I will tell you I'll give you some data and and you can push back see our exports goods export was stagnant for almost 3 years >> you know after co after co we got a jump you know we used to do like 300 $330 billion for a long time from there we took a jump to $440 billion and we were there about this year our goods export for the first time is growing double
24:35 digits in the last 3 months >> we are doing per month average is around 40 to43 billion if we continue this we'll touch 500 billion goods services is growing like crazy we used to do like $140 billion now we do $420 billion of services I'm saying this rupee is actually helping you this exports will create jobs. I'm saying forget about what measure to take. Why to take any measure >> when it is helping you >> helping there are costs I understand. >> So basically we are getting screwed everywhere in this process. >> Exactly. They should have let I understand suddenly from let's say from 95 it goes to 105 tomorrow morning that will create problem you know who the biggest problems will be those who are borrowed from abroad >> because they will have to pay a lot more. >> I understand you should smoon that volatility you know we should depreciate
25:21 to the extent of inflation and slightly more. This is what countries have done all throughout countries that have grown at 8 10% and none of them had a strong currency. All of them you should read your viewers should read about plaza. I'll just give you a small like 1985. You know how much was yen? 260 >> 260 to the dollar today 160 were crying. It was 260 to the dollar. The whole fight every country wanted its currency to depreciate. M >> US said you know I want my currency to go down my currency very high. So then he US called Japan, Germany all those countries UK uh West Germany, Japan, UK and Canada. I think they sat together in New York in that plaza hotel that's
26:07 called Plaza Accord and they decided to depreciate the dollar by 30%. And that's how yen came to 150 from 250 and then Japan has never recovered after that. this whole idea that somehow I understand currency should not collapse you know it should not Iran for instance now $1 is 1.9 million LAR you know that will lead to end of the world that will create inflation but this 5% 10% movement here and there is not the end of the world >> we go to I think we'll be better off at 102 than at 82 tomorrow we go to 82 I'll tell you there will be unemployment >> that's true >> yes because lot of these people who are dependent on exports how will the Indian goods will become expensive >> weak currency is kind of weak economy and strong rupees strong economy who who
26:55 gave this >> it is not totally wrong in the sense within limits I have to be very careful you know can I explain the idea of real exchange rate to your viewers >> it's a bit uh it's not very hard but let me explain >> but you are a professor >> yeah let me make an attempt okay imagine a world where all that we eat is dosas right a dosa costs 50 rupees in India and $1 in the US just for argument sake assume the exchange rate is 100 all that we your viewers have to remember is three numbers dosa cost 50 rupees in India $1 in the US what's the exchange rate 100 which means if you take an Indian dosa and go to US and exchange how many dosas you will get right you will get only half so in India for 100 rupees you can
27:41 get two two dosas and there you get one dosa this ratio is called real exchange rate this is called real exchange rate this is nothing to do with rises even if all the quality is same see in my theoretical world I can make quality same I can make environment same everything same in the theoretical world practically it won't be now the problem is that transportation is not free you know why will it remain this why ideally in a exact theoretical world this ratio should always be one because why will anyone have dosa in the US in a in a theoretical world where quality is the same where you can freely move around nobody will eat dosa In the US everyone will and dosa is the only thing we matters you know think about this as a representative good or service you know should not be taken literally
28:27 in an ideal world everyone should eat in India and the price of dosa in India should rise to 100 rupees and real exchange rate should become one right world is not ideal you know there are restrictions on movement quality differs you know the income of people in the US is more income of people in India is lower dentist may be better in India but the char he cannot charge as much as in US >> the person making dosa >> so many things happen >> more than more salary there than in India >> yes so that's why ratio is never one so it will settle at some ratio so let's say it settles at half right once and all those factors are taken together now it settles at half now real exchange rate is half let's say now if Indian dosa becomes 10% more expensive then the only way real exchange rate will remain
29:12 half is by rupee should depreciate by 10% % >> m >> right if if let's say US there is zero inflation India we have 10% inflation if rupee does not depreciate by 10%. Indian dosa now becomes expensive. >> Yeah. >> Nobody will buy. See, imagine 1 is to1 is not the good ratio. Let's say 1 is to half is a good ratio. If Indian rat dosa becomes cheaper than half, people will buy from India. >> They will buy more. >> They'll buy more. If it is more than half, they won't buy more because although US is costly, but there are so many >> to keep it competitive. You have to let currency depreciate to the extent of inflation. This is the difference between nominal depreciation and real depreciation. So if you have high inflation, your currency will depreciate. There is nothing it's it's not anything wrong with that. It's like
29:59 your age you know every day it will be all-time high. You know there is nothing the saying that it has reached a new level and all that there's nothing. So to that extent it should depreciate. Now the question is what was happening in India in 2223 by keeping our interest rates very high we appreciated our currency. People missed this point >> when our rupee was 82. You remember this you will remember 22 to 25 rupee was slowly depreciating 82 83 84 you know it was moving around that range it should have depreciated even more so our real exchange rate and another problem you know this also I have to point out to your viewers we are obsessed with the dollar it is not the only currency where we trade you know the real thing you know if you if your viewers go to RBI there's something called nominal
30:44 effective exchange rate and real effective exchange rate this is an average against all the currencies we trade You know that is what matters. US is not the only country that we trade with. So that number in 24 you will not believe it went to 108 which means our currency appreciated by 8%. Our dosa became more expensive. >> That is why export was stagnant. >> You know on the one hand we say atmana when our currency appreciate import become cheaper. >> Other currencies people will start importing right that is our current account was not in good shape. Now what has happened is the reason why it looks like very bad that got corrected and we have depreciated even more. >> So now we have a 8% 9% real exchange
31:30 rate depreciation we are at 91 compared to 2016 is taken as the base. Now this happened because of RBI's lower exchange rate and all that. Now the question is do you want to fight it? You know if you fight it in my view need not you know not through these methods you know by making people borrow and get money even if you want to fight it taking risk and all. So what it is already leading to our last 3 months our exports have gone up you know export means jobs you know this is what I point out you know this is very important let's say you start doing podcast in the US you know you you start developing US customers you will learn narhan gi you will not only learn you will learn lot of new things new skills way to manage those customers and now your competitors in India will also learn from you that is the benefit of
32:17 exports our people if they compete abroad Our big big problem is we are unable to compete abroad and win. You know export has that extra benefit. Of course imports will be expensive. >> Yeah. >> In the long term your actually the goal of becoming the world's factory will be a competent one actually. >> Exactly. We we'll become with with based on competence. So that is how Japan grew that is see there are not too many examples. We talk about 8 10% as if every country has no there only five six examples of countries that have grown at 8 10%. There are only five you know not even six. Taiwan, China, Japan, Korea, West Germany and Japan. West Germany and Japan is post war reconstruction. So then you have Taiwan, Korea and China
33:03 and Taiwan and Korea are small. Then the only comparison we have is China >> and they did not their currency did not appreciate. You know their biggest complaint of the US is they are currency manipulators. >> You know they kept their currency low. So what your viewers have to really if you have to see you should see at real exchange rate. Now there is a question to be fair you may ask maybe real exchange rate is depreciating because our dosa has become less tasty. What if our dosa making or we have lost dosa making skills let's say AI we are we are bad in AI and this is a permanent adjustment it's not a temporary adjustment from half to point 4 if it is happening. Let's say if it's a quality is bad then there won't be any expose. The test of that is whether exports are responding
33:48 >> and they are responding. If the quality was bad, export wouldn't have responded. All the times 3 months is a too short a time to make a very strong claim. I would have let it I would have seen another 3 months. Let's see what's going on. >> So what you are saying is basically this 3 months data we have despite all these things. >> Yes. But if by this logic if we had allowed it to depreciate further and not kept it like like this with all these artificial measures then exports would have been higher. >> It won't depreciate beyond a point because once export was >> I'm saying currently with all these measures >> exactly >> export should have been more would have been higher. >> Exactly. Exactly. But then what will happen is once exports become higher because our current account become
34:34 surplus more money will come that itself will stabilize the rupee. >> Yeah on its own. See this whole thing that we'll go to 200 is so wrong. >> But this sounds like very normal economics. So why the people in the government are not getting it? >> Because of this 100 this 100 thing >> this fear of getting >> I think 100 will make lot of headlines. I don't see any because they let it see to to its credit. Although I am not a big supporter of that low keeping low interest rate because that'll create inflation but the fact that they did not waste forex reserves to fight the rupee. They could have used forex reserves they had 700 billion and kept the rupee tight until this bad policy came in. I really appreciate that >> you know this was a good thing to do but moment it touched 97 you know 96.8 they
35:20 now come out with this emergency measure. There was absolutely no emergency. Now the question is do you want lot of volatility in the rupee to continue. See I'll tell you having said all of that volatility is not good. Smooth 2% depreciation every year is different. One morning it's 96 next day it's 102 tomorrow it's 98. Importers will not be able to do any planning and people who have borrowed money are >> no. So volatility you can control. Right. >> Exactly. So you need measures to prevent volatility and that is why you have forex reserves. >> You have forex reserves to prevent volatility. Having said that, even if you want to prevent outflow of money, let's say what if it becomes 130 tomorrow, I wouldn't support that 130 then it'll need to run on the currency. There are measures you can do it. One, this 50 basis point or the interest rate
36:05 that you kept lower, you can hike that interest rate or reduce capital gain tax. >> How big a factor factor that is? >> It's a very big factor for FDI or money that's coming in long-term capital gain. We have kept see you have to go back. This is where we don't behave like Indian state. When we imposed capital uh security transaction tax, it was a different government. I get it. The the promise was of the Indian state. We removed capital gain t we said we want long-term money. So therefore we are removing long-term capital gain tax but we don't want this trading every day. That is why we are imposing security transaction tax. Security transaction tax is on trading transactions not on your profits. So we we want to encourage but then we in the back door we introduce capital gain tax and we've
36:50 successively every year increased it. >> Now we need capital for growth and we are taxing the most important thing that we need and the argument we make is no domestic also pays fair enough then they will not come you know other countries are not growing at 8%. We want to grow at 8%. They don't want to be vishuru you know. So didn't didn't people in the government know that if you impose so much tax these people will take out their money. They thought that India is the only destination. >> Yeah. That time it was like that you know one one or two years when we start doing well we develop this overconfidence that you don't have a choice. But you buy into your own. Yes. Yes. Because we thought rest of the world is dead. Now Korea, Korea is you know Korea
37:36 for instance you know you should know this your viewers country of 5 crore people their exports you know forget about markets markets keeps going up and down their export per month is double more than double of ours $und00 billion we do $45 billion of goods right that is it's 5 cr people >> we are 140 cr people just think about per capita or anything right so that's what we did so taxing see for growth think about it going back to econ 101 there are only Two ways you can grow. Either you become more innovative or you invest. Where do you invest from? Savings inside or savings outside. Savings inside is going down. It's a secular phenomena. You can't do anything. People's habits you cannot change. That also we have discouraged. Aryan G. Do you know there used to be ATC, there used to be housing.
38:21 >> Yes. Now under new regime, you don't need to do anything till 12 lakhs free. >> Domestic savings also you discouraged. Foreign savings also you discouraged. Then how will you have capital formation? Now for capital formation now we are giving exchange guarantee we giving free insurance and telling people you know you gamble the guy is borrowing 20 times of his net worth and putting money because the government the RBI is guaranteeing I don't understand >> for example that would cost us 20 to2 billion >> I don't know that depend what will be last time what did it cost >> it didn't cost anything you know why exchange rate did not depreciate new government came I mean macro stabilized inflation went down because inflation used to be very high crude oil also
39:06 collapsed you know exactly at that time so this is the problem when you take risk right people who take risk if they don't fail the first time they think that there's no risk >> you know risk is on the long run when I say something is risky >> because but now for example at that time world was different this time you see so much volatility so many wars going on and you never know like 2 years down the line it might be worse than what it is. >> Exactly. See we suppose we get 100 billion now under this guarantee. Suppose rupee depreciates 10 15%. you know of that you know and then this 100 billion will go and then we give this guarantee 15 20% whatever another 20 billion 120 billion will go and that time that outflow of 120 billion remember this year's outflow was 16
39:52 billion I have to remind you viewers net outflow from uh uh FIS is $16 billion only FDI net inflow of 6 billion despite that so much depreciation happened what if 100 billion goes >> and this will go because they have borrowed income. >> You know what is worse? People like me and middle class people they put so much faith in this mutual fund business for so many years. Uh that was ELSS exemption was there till 1.5 lakh rupees. >> Everybody you know just kept putting putting that much money in kept saving kept investing and now they are taking it out they are getting taxed. >> Yes. So >> because at that time there was no tax it was all taxree. >> Yeah. exempt exempt tax. You know it's
40:38 kind of retrospective taxation >> in a sense because people put money 10 years back now they're getting you know having to pay taxes but when they put that money in their keeping the faith in the state >> that you know >> that that our state does gold you remember >> there was a soaring gold gold bond scheme where they said only if you had bought directly from the government it is exempt secondary market is taxable we didn't know that time so these things that they do but in this case the promise is to foreigners and the foreign money it you can't default. You default then your credit rating it'll have a big impact. So the point I'm trying to make is first of all there is no need to uh worry about the rupee that much if it goes to maybe it goes to 110 120 that time we'll see you know if it 102 103 is not a big deal
41:26 even if it goes and it can't go because exports are responding once exports start responding money will come that means export is dollar coming then the rupee price will stabilize on its own you don't have do anything at some point >> there is a difference between 2013 and now 2013 what you viewers should understand our forex reserves had fallen to $250 billion and we had a massive current account deficit 5% of GDP today we are last quarter was current account surplus our exports you know one of the big thing that is saving us remittances again there is a confusion here there is a difference between NR deposits and NR remittance NR remittance is an NR giving money to his parents here that is remittance it is a one-way street NR deposit is like we are borrowing from
42:13 them. >> What we are encouraging is NRA deposits >> and we are not borrowing from them directly. Basically they are taking money from their own country and then they're putting it as an investment. >> Worst case you will your your viewers will not believe this if I say that some of them some of them you will not you will believe it. They're borrowing from gift city branch of Indian banks >> because gift city is considered foreign. Yeah, >> they are borrowing from SPI GIF city branch and then putting money back into India >> scam >> you know and that is our total money in the forex reserve will not go up because gift city is considered abroad and they are borrowing from there and why was this you know see if you either there are two choices
43:00 either you increase your interest rate if you don't want rupee to fall increase your interest rate suffer some growth uh uh issues and then it's fine If you want to keep your interest rate low and if you still don't want rupee to fall which I don't think is the right thing suppose you don't want rupee to fall some reason there are other options you know again as I told you exempt capital gains money will come or your export itself will take care it's already picking up instead what we have chosen is the method which was adopted in 2013 when we were in really bad shape today we are not in such bad shape >> by doing this we will I fear we will be in bad shape 2 3 years from now. >> But don't you think that the government is doing all this keeping interest rates low just to keep the growth numbers up?
43:47 >> For example, if >> government is not doing interest rate is RBI. >> I mean it's >> if you don't want to be honest though you know RBI is really independent then it's >> no under you know I should tell you under Shaktiandas our claim was they were too independent. You know they >> the claim can be different. the guy he has been picked by the prime minister to be his personal secretary that is like the most powerful position after Modi basically the deputy prime minister >> no that that I don't that is true but he kept real rate so high it hurt the economy see RBI governor's independence test is simple >> are you willing to take interest rates high that's a simple test >> a test of a no finance minister likes high interest rates >> if any RBI governor who is willing to
44:34 take interest rates high and keep it very good or bad you you have to vouch for that person's independence you know so people who keep interest rates low are is where the question comes so I did not support that policy but then it shows independence that's there that you should appreciate right or wrong >> no maybe he convinced the government that this is a good thing >> that I don't that you people will know >> because finance minister let's be real she does not have that kind of independence that for example uh Chidamarram had during is you know >> how do you know all of this? >> Come on sir. Come on sir. >> Yeah I understand I I understand but then right maybe it it could be consequential. It could be two two mistakes crossing one. But he kept interest rates very high.
45:20 >> That is true. Extremely high. >> First he damaged the growth story and now when we need to keep the interest rates high they are keeping it normal. >> We have to keep normal. See there is a very simple this idea of natural rate of you know uh it's called you know natural rate of unemployment and and neutral rate it's a conceptual thing neutral rate is a it's a it's it's a it's a it's a concept but then around 1 and a half 2%. Our real rate that means if you have a inflation of 4%. Around 6% is the ideal interest rate to have that's what we should we should keep. Right now we have in inflation going up. I think it'll we'll be at already at 4 and a half will be 5 6%. And our interest rate is 5.25%. And we will be going at negative interest rate. You know when you have
46:06 negative interest rate nobody you know we are missing out this long-term part. If you have negative interest rate people will not save. >> Why did our savings fall? This is another thing you know you ask me this question right? Why doesn't government think this way? I have no idea. You just have to these days just go to any if if people in the government listen to what we say I don't know you just go to chat GPT very simple or in claude just plot this real rate and savings rate inflation minus uh interest rate minus inflation and savings rate you can see it you don't need to run any test you know as in in 2008 9 11 12 we had negative real rate our savings collapsed from 38 39% % to 30% because if I give
46:51 you less than inflation why will you save >> you're better off eating it today by saving you will get less you know giving you less than inflation means >> by saving you will get less rise next year than having more today why you do that you know so long-term we need savings so we are we are hurting domestic savings we are hurting uh hurting in the sense we are still doing 7% which is very good but to go to that see our goal is always you have to number. Our goal is 8 9%. We want to be whatever 30 trillion in 2047. Either we need domestic savings or we need foreign savings. What we don't need is somebody borrowing from GIF city and under exchange rate guarantee bringing in hundred billion making that free money and taking it away after 2 years. It is not going to help.
47:37 >> That is the problem. >> There is no upside for us in that >> immediate stability is the upside. I mean but if with if that stability did not exist we could have gained in terms of more >> exports and all these things. The worst part Aryan G is that many of your viewers I guess will be IT employees. They will give you gali for this to me and you. >> They are the biggest beneficiaries for God's sake. >> Yeah. >> In this AI world, the only thing that can help you if you become cheaper. How do you become cheaper? Either >> that is actually what is happening. Yes. You know the cost of all these servers and data centers that is much higher compared to hiring people. >> Yes. If rupee tomorrow goes to 80, none of these people will be very expensive. We want to attract investment for data
48:25 centers and we have become cheaper now. We are 8 9% cheaper than where we were in 2016. When it has happened on its own, let it be. Let's not make it let's not allow it to collapse. And that is why we have $700 billion forex reserves. You know when it collapses we'll bring in but this is not a collapse. 97 or 100 >> whatever you are telling me like every time it happens it it all seems very common sense to me but I don't know what >> I'll tell you some let's play let's play devil's advocate there are some issues right ura import you know we are critically dependent on ura >> right if rupee depreciates our ura bill is going to go up so our forex reserves will go down now this is a serious problem same with oil if if this price goes up our our oil bill will increase
49:12 what is the solution two solutions. Then we come back to our original solution that you know government don't spend that much you you you're you're doing 12 crores on your you know airport. Yesterday again Andhra Pradesh won 5,000 cr airport was inaugurated. I can bet there after 3 years there will be two flights moving around. You know there was this story just recently came out that Kajura airport I think >> or some airport in Madhya Pradesh they inaugurated and it was awarded the best airport in the world or in India >> and there are no flights there. >> Exactly. There are so many I can give you go on. So the solution to that is reduce government expenditure. If you reduce government expenditure your deficits will go down, interest rate will go down. You know the amount you
49:57 have to spend will go down and things will stabilize. See capex is very important but we are going in an imbalanced manner. We are doing too much of it right and in places where it is not required. So I agree ura and oil will be a cost. Again on oil also you know people have to know you know we become emotional with oil. You know our total oil import bill is $170 billion. We export $50 billion of oil. So total is $120 billion. Our total import is 1 trillion almost. It's around 10% of it. So it is not that world is going to come to an end if oil price goes up by another 10%. We have the cushion. So in fact neither gold nor oil have gone to the extent of completely destabilizing our uh uh uh situation. The main reason
50:43 is fi uh outflows foreign institutional investors outflow of $16 billion and lack of FDI. These are two reasons. We don't have a current account problem. We have a capital account problem, >> investment problem. Investment somehow and there also it's not completely our fault. India is not seen as a AI hot suppose AI thing is a bubble then we are doing a right thing by not attracting that capital. So there is that portion also and there is also our portion where we are not making business easy where we are imposing very high taxes you know where these are issues that we have to settle and I think attract more investment and there also again first 3 months you know our total FDI is already $7 billion net the entire year last year
51:29 what we have done we've already done in 3 months so things are looking the the thing is Aran G we took the cost of higher rupee petrol price because these are immediate benefits had just started showing and at the right time when the benefits started showing the tab >> we have closed the tab and we are doing this >> why and this will cost us two years later take any serious economist serious economist >> we'll always say that you know you take Arvin Panagara you take Gita Gopinat all of them are on record saying don't make 100 your target you know 100 is not and unfortunately despite all of that they did do that >> because at 97 is where they intervened with this kind of a measure and there also they could have intervened with
52:14 forex suppose they had spent some 50 billion forex reserve that I would have still appreciated because that doesn't create risk here what we've done now >> hide what they are doing kind >> we getting hundred billion dollars of hot money leveraged money leveraged money >> instead of getting FDI we are getting somebody who has borrowed 20 times of his net worth to exploit this 2% we are getting that 60 70 $80 billion And we are celebrating but don't you think that all this capital gains tax whatever we are basically gaining as a tax >> we have created huge mess and uh we have actually lost more than what we have gained because I'll tell you the side effect of this railways railways used to raise money from the market earlier now because we have sufficient money in the
53:00 budget the budget they are mostly funded by the budget so there is a Indian railway IRFC Indian railway finance corporation They have no job to do because railway does not need their money. But there you have jobs to protect. They are now starting lending raising money and lending to all kinds of random places where they have no idea about you know the the side effects of all of this right. The problem is this will all show up later. You will not be able to pinpoint is and all that. But you know so let if >> but our our podcast will always be a good place where we have documented all these. So if anyone wants to you know 3 years down the line if some bad things happen they can always come back here and say that these guys won't and these
53:46 guys were ignored. >> Yeah. Yeah. So so the point is again your viewers should not take a view that we are not talking about situation where we are going to collapse or something. Always remember of course not but the situation is are we going to hit 30 trillion or we haven't hit 5 trillion. You know I was talking >> I mean there so much promise was made in 2022. I think in 20 2015 the prime minister promised I think that we will be 5 trillion by 2022. In 2020 >> 24 I think >> no no 2022 75 years of independence >> that was doubling farmers income. >> Oh that was also there I don't think it was good that you reminded another promise that was not fulfilled but >> nominally yes they have won closer nominally not in real terms with inflation. So let's not
54:35 all those defenses people in 2021 2022 they were saying after co >> they were saying >> by 2025 we will definitely hit 5 trillion. >> Of course you know that's you know we were discussing the same thing you need investment you need see our you remember one episode we did the calculation we said to reach there you need to get $150 billion of FDI. >> Yes. >> And that year the net FDI was 1 billion. So how are we going to do it? We did this math. You know your viewers can go and see it. The same thing remains. So 7% are we going to do sustainably? You know if you ask me where are we going? I think 6 7% on a sustain for a for a long period of time. I think we are good because our savings rate is 30%. And we are learning you know skyroot we should not remember our finally we are doing
55:20 something you know some technology improvement or and the good thing is those people are pushing our people out also that's another positive thing and having because of all of this I think 6 7% we'll be able to do are we going to hit double digit growth 10% like 20 30 years like China did and become very different that looks difficult under these circumstances and it's not impossible uh but >> for that you have to >> yeah some long-term thing we have to look at you know we should not do all thing that you said this is this will all come from innovation. >> Yes. Innovation and get all the you know get get scientists and things like that. Those are things that we have to worry about. We should not do these small things like you know getting 100 billion on this emergency thing. Emergency you know it's for really emergency. You waste emergency during good times. When emergency actually comes that won't be
56:05 available. >> Yes. >> This is what we miss. tomorrow something you know I'm not as a citizen of the country we don't want things to go bad but tomorrow something goes back three years from now at that time if this situation was what you have to do you will not have this toolkit see what was our claim to fame during covid every government adviser comes and says we did not print money we did not do bad things you know I appreciate the finance minister there although I think they should have done because there's a lot of distress on the street that was our claim now there is nothing like that why are we doing this why did we print 7 lakh just to which we did not print during that prestigious 100 rupees protect. Yeah, we we we did not print seven during there was some sense to doing it at
57:06 normal times. So this is a big danger. Yes. And second this artificially propping up of rupee is strengthen through these indirect methods long and it will actually help the growth also capital gain tax because finance minister will she will not increase deficits tax collection she will reduce wasteful expenditure
57:53 economy you know there's no cost cut tax and rupee will stabilize or even otherwise it will stabilize I'm telling you exports have already started increasing it's only a matter of time >> you know it wouldn't go to 120 130 92 real exchange rate is 8% down which means Indian goods are 8% cheaper than our competitors not to the not just the US our trading partners we are 8% cheaper now after some time it won't be cheaper if it is not cheaper we'll be back so that is why doubledigit growth export >> so export means employment export means learning more than employment learning because you have to win in a foreign
58:39 market when you sell products abroad You learn new technologies and then you come here and propagate here. That's how countries have grown. I think domestic savings either encourage domestic savings. We are doing exactly opposite. or FDI instead hot money. >> This is the worst thing to do to getting this hot money which is borrowed money in a time when you have so much forex reserves. I don't understand at all. This is done when you're in bad shame like 2013 5% current account deficit gold you know you're importing you don't
59:24 know where it is going and your 50 billion you lost for election. Fortunately, imagine global economy grows that time and everything is very we'll be able to like See this is excent right we are sitting today I'm telling you driving at 200 km hour is risky% but
1:00:17 100 is fine more people will get jobs if your viewers are still not case study India case study 2008 rupee went to 39 that was a crisis exporters textile exporter sub people became jobless >> you know jobs the best way of promoting jobs is keep this at 8 10% not like Pakistan I'm not saying it should triple and all that 10% real depreciation is a best medicine >> so I think we should keep it there.
1:01:18 Unless Rajan or But bureaucrats bureaucrats have but having said that I should tell you bureaucrat only took interest very big time bombs down the line they should pay attention now. Exactly. Exactly. >> So, thank you so much, sir. Hopefully, things will improve. Yes. >> And we'll keep meeting. Thank you so much. Thank you.
