Renowned economist Nitin Desai taught at two UK universities, worked briefly in the private sector, and had a long stint in government in India, where his last job was as Secretary and Chief Economic Adviser in the Finance Ministry.

At the international level he worked in the Brundtland Commission, where he drafted key chapters dealing with sustainable development, and then joined the UN in 1990 from where he retired in 2003 as the Under-Secretary-General for Economic and Social Affairs. After his retirement he has been involved in a variety of public policy activities. He is a member of the National Broadcasting Standards Authority.

In an interview to PRASHANT MUKHERJEE, Desai said he welcomes the Insolvency and Bankruptcy Code and recommends that the government abolish the Department of Financial Services and give public sector banks the same status as private sector banks. Excerpts:

Q: At a recent event in Mumbai, former RBI Governor Raghuram Rajan said ‘India had lost a generation of economists’. According to him, the country today lacks economists with good grounding in price theory and general equilibrium analysis that are fundamental to economic policy making. Your views.

A: I don’t agree with him entirely. But yes, it is true that for historical reasons in India the focus of government was not on market economics. Basically, we were in a controlled regime, so the focus was on quantitative planning, project appraisal and macro-economic issues.

The one area in which the market focus was more evident was agriculture because that was not controlled in the same way. But there too the focus was on cost calcuations. The idea of market economy is not just to calculate cost. Market economics is how the supply and demand interactions will shape prices. In that sense, Rajan is right.

Maybe there was a certain weakness, but this has started changing. However, much more needs to be done. Let me give you one contemporary example ~ auctioning of natural resources. How many people have studied auction dynamics?

In this sense, I would tend to agree that we need more and better micro-economists both in public policy, and at universities and in media. But I can tell you that the new breed of economists is doing great work and in fact they throw up challenges to their professors and are technically proficient and innovative.

Q: With the imminent departure of chief economic adviser Arvind Subramanian, there is a sense among bureaucrats that this government doesn’t take advice from its economic advisors or others. Was this the case before also, when you were the economic advisor to the government?

A: In my days, the political mindset was fixed on direct management of the economy through public investment. It didn’t matter because it was a controlled economy. Today, the situation is radically different. You can announce, we will have 175 GW of renewable power.

In old days, it could work as an instruction to public-sector companies. Now, you have set a target which the private sector has to buy into and implement. Are they going to do it? Will they be able to mobilise funds? What are the changes the government needs to make in the electricity Act or tariff policy? The nature of questions is different and yet the political and perhaps the bureaucratic mindset has not changed.

I describe what we are seeing now-a-days as “targeting without planning”. Now they have made this glorious announcement of “Housing for all by 2022.” Has somebody gone and worked out the details of what this involves? What does it mean in terms of rate of housing construction? What does it mean in terms of grid power, in terms of rural and water supply? No one has gone and worked this out.

And it is not that the government is going to build all this. Will householders place sufficient priority on housing relative to other needs? Yet a grand target is set as if the government can itself deliver the outcome. The mindset of being in this controlled regime has not changed.

Q. Former Finance Minister P Chidambaram said that the economy is running on four wheels with three punctured tires. There is little or no credit, tepid business and consumer confidence, struggling exports and zero private investments, virtually no jobs, he said. Yet GDP grew by a healthy 7.7 per cent during the fourth quarter. Is there some kind of financial jugglery which is thrown to the people?

A: I retain my faith in our statistical system. The partial explanation I can provide is that we have built up so much capacity in the boom years, that industry is operating at 70-75 per cent capacity.

So even if the demand is growing and returns are good and profitability is there, you will not get investment. Consumer demand is rising and there are some signs of recovery of the economy. The real challenge and focus area should be SMEs who have been badly hit by demonetisation and the way GST was initially implemented.

Q: There is a renewed concern on what happens to the country’s macro-economics as oil prices remain elevated. Shouldn’t the government roll back on those duty hikes instead of continuing to fleece the helpless consumer?

A: I reckon that the oil price will stabilise. The government is currently focused on not breaching the fiscal deficit target, and hence, they may not want to cut excise duties. They may have other spending proportions in mind, with the elections ahead.

Q: What is your assessment of the banking sector which is heavily stressed. Do you think the steps taken by the government will help public-sector banks?

A: Look in old days, heavy infrastructure funding was done through the Budget. In those days, the money came from the Budget or specialised term-lending institutions. The Budget was there to take care of bad decisions.

Hence, you could have sick public-sector enterprises but not a sick financial system. Then since 1991, we had this transformation to go for PPP (public-private partnership). I don’t think that this country was ready for such large-scale PPP for infrastructure. We got rid of term-financing institutions and put the burden entirely on the banking system for funding infrastructure.

Infrastructure lending from banks was three per cent of lending to industry in 1998. Today, it is about 35 per cent. Public-sector banks were not organised to appraise and assess risks of such large-scale project lending. But if you look at the private-sector banks they escaped because, by and large, they have not done such lending. We need to create term financing institutions and focus on developing debt market.

Q. What about the Insolvency and Bankruptcy Code?

A: I welcome IBC, since, for the first time the defaulting promoters can lose control of their own companies. This has never happened before. And they are scared. It is a very necessary step in modernising the capital market. What happened during the PPP phase was that a lot of people with no experience came in because they had access to easy money from domestic sources and abroad.

Q. Will this give a fresh start to the banks?

A: It is just going to clean up their books. It will not prevent future NPAs. There will be no fresh start unless you change management of the banks. The first step should be to abolish the Department of Financial Services. There is no reason why the government should be controlling the banks.

My recommendation would be to place them at the same status as the private sector banks and allow the RBI to supervise them. Merger of banks should be looked at. We have to change the system of choosing the top management of public sector banks.

Today, the top management of PSBs have very short tenures. Look at Aditya Puri of the private sector bank, HDFC. He has had enough time to build up the organisation. Give PSB managers space, longer tenure and then give them targets to prove their worth.

Q: You said RBI should be allowed to control. But after demonetisation, people have lost trust in this institution.

A: It’s good to be critical but it is not as bad as it seems. Let us be very clear that RBI is an institution which till this day has not had a scandal attached to its name.

Q: What about demonetisation?

A: Demonetisation is not RBI’s baby. I don’t know the details, only time will tell but it appears that it was conceived and planned largely in the PMO. Demonetisation was very poorly designed, poorly implemented and if I may say so it was an unwise decision.

Demonetisation was done at a time when the global economy was doing well and oil prices were low. That was the time we could have had an export boom and growth revival. But we missed that bus.

What demonetisation did was it set back the whole process of economic recovery by more than a year… I think historians will judge that demonetisation involved a cost that the government is not willing to admit. Now we are attempting a revival in an environment of global uncertainty.