His unconventional style and utter disregard for norms and processes remain intact   even after moving into North Block (on January 15) as Adviser to Finance Minister. Dressed in a blue kurta and white pyjamas, the Cornell University   alumnus and noted economist, Shubhashis Gangopadhyay met with Sonal Sachdev and Ashish Gupta in his office for a characteristically candid chat on economic and policy issues. Excerpts:

What is your reading of the global economic environment and its implications for India?

Today India is a far more open economy than it was before. So what happens globally affects us. The major problem today in the global economy is the high price of both crude and primary articles, including food. And that’s affecting our economy in a big way. Earlier, when domestic food prices were high, it was easier to import and bring down prices. But today, import prices are much higher, so we cannot take the usual route. It is a difficult situation.

The standard argument in textbook economics in such cases is "to beggar thy neighbour’’, where each country raises its tariffs to get more for itself. The net result is highly distorted trade, with nobody being better off. Since India is a net exporter of some of these high-priced food items, the tendency of farmers would be to export such items and domestic prices could go up. But this is a temporary distortion in the supply chain, and should be relaxed as soon as prices stabilise.

See, I’m not in the business of forecasting. But if you were to ask whether such a situation would continue, the answer is no. Supply will have to adjust to demand, but how long will it take for the supply situation to improve is difficult to say. In certain things like crude, it is far easier to adjust demand by moving away to other sources, becoming more efficient, etc. In food articles, it is easier to make supply adjustments because it is usually a one-season thing.

You mention LPG, and that’s a clear case of subsidy that should not be there. Whatever data you look at and from whatever sources, LPG is not used by the poorest of the poor. So there is absolutely no reason for an LPG subsidy. The purpose of subsidy is to allow people to get their basic necessities in a way that it does not affect their level of subsistence. Again if you look at data, close to 80% of the rural households and 50% in urban areas depend on firewood. Such usage is bad from the point of environmental and indoor pollution. Kerosene too leads to indoor air pollution. So why move them to kerosene, move them straight to LPG. Get the subsidy away completely from the richer section of the population.

One lesson we did not learn from the pre-1990s era is that we do not control markets. If there is somebody who is being hit by the market mechanics we need to directly subsidise that person. So if you need diesel for something, first of all you need to justify why you need to subsidise it. Once you justify it, give a direct subsidy to that group, instead of subsidising diesel, because then it subsidises the rich also.

Well, fiscal policies have been tried and we will continue to do so because keeping food prices down is the government’s responsibility. But to curb overall inflation, as it is happening now, we need a tighter monetary policy. That is not to say that there is a loose monetary policy right now.

A tight monetary policy with a rising interest rate will affect both investment and consumption that’s driving growth. There’s no denying that. Its impact on the government’s finances is not too well known. The only positive thing in all this is that most of the investment in the country that is being planned or is taking place is through internal resources. So, borrowing rates and other such things don’t affect these expansion plans. But if corporates are planning to raise fresh loans for new investments, that might get affected. Again, growth will slow down, but not too much.

I said earlier that I’m not into forecasting. Growth will be impacted, but not that much. Remember, even if we continue to grow at 7%, it will be good because it is a year characterised by such a high inflation rate. We should not stop managing inflation by worrying about the growth factor.

While it is true that the recent reduction in tax rate may mean a loss of revenue, you must remember that when inflation goes up, profits tend to go up. And therefore tax collection too goes up. So, the fiscal deficit is not an immediate worry, although the off-Budget items are, especially oil.

We will have to be consistent. If we don’t want prices of petrol, diesel and kerosene to go up, we will have to continue running off-budget expenses.

We change our policies. When the first oil shock happened, it took most of the nations by complete surprise but they changed accordingly. Cars became more fuel-efficient and people started talking about managing exhaustible resources, which became a forerunner to the environmental issues of today. So the world will learn to adjust. The only thing that the government can do is coordinate this change.

If you’re asking whether people should be allowed to use new instruments, the answer is a resounding yes. In financial markets new instruments are the new technologies and innovations. The problem is that in India we have to proceed on the knowledge and capabilities of the regulator, not on the capabilities of the person.

There is no denying that flip-flops happen, and this also impacts the investment climate of a country. In the case of taxes, much of what is termed as flip-flops is actually a clarification that comes from the court. I think the more serious issue here is what is happening in SEZs in Goa. The only way to address such issues is to be more transparent. Much of the time people respond to something after the event has happened because they had no clue that the event was about to unfold.

That’s because acquisition of land is treated very differently from company takeovers. We have spent a lot of resources, brought in the best experts and read up the best takeover codes, and then prepared our own takeover code. But when it comes to land, it is a different issue. Some wise people sit down and snap their fingers, and come out with a policy. So, upheavals are bound to take place. We must treat the farmers exactly as we treat the shareholders of a company that is being acquired. There is already a bill in Parliament, and I do not know why it is not getting passed.

First, let me explain a few points. The waiver will not lead to higher inflation because the government is not printing any new notes. Second, banks couldn’t have asked for more because most of their outstanding debt is being repaid. The only thing that could be a sticking point is what we call the ‘moral hazard issue’—that farmers will borrow more because they feel they won’t have to repay loans in future too. But for that they will need to start a mass movement and involve some political parties. So, the moral hazard that we talk about is very different from the individual moral hazard that is cited as an example.

Again, the farm-loan waiver is the best we could have done under the present circumstances because there is so little data on farmer incomes and so few channels to make funds available to them.

But the real question to ask is: Is this enough? The answer is no, just not enough, because all that we are doing is cleaning up the slates of some people. We need to do much more in agriculture in terms of providing technology, market access, investments and also state-level laws that govern agricultural trading and marketing.