Now he has downgraded it to 4 to 6 per cent, saying he would be surprised if it settles outside that range. I have changed my view because of overseas developments, and because the recession is deeper and more widespread than was anticipated a month or two ago.
When told that his new range could mean close to zero growth in the second half of the year (since growth in the first half was 7.8 per cent), he does not flinch from the possibility, though he argues that it will not be a depression.
With that pessimistic scenario in view, he says: The cardinal lesson is that you must take anticipatory action. And when it is a short-term loss of confidence, then you must do more than what is needed on the basis of technical reasoning. Also, don't go by what other countries are doing, do what works best in your own country.
Asked to elaborate on that last point, he says India has a large number of poor people, whose consumption basket comprises essentials, whereas government duties are on non-essentials.
Therefore, cutting taxes to reduce prices does not help the poor. It may not even lead to increased demand for other goods, because people are scared of losing their jobs. In short, he is not in favour of tax cuts as a solution.
So does he think the government should be spending more? Yes he does, but he agrees that the governance and government capability are such that governments are unable to spend the money that they are given.
If the government should be doing more than is technically needed, does he think that the fiscal deficit should be taken even higher than the likely figure of 7 per cent for this year, including off-balance sheet items? Yes, he says emphatically, though how that is to be done is not clear, if greater spending is not feasible and tax giveaways are not advisable.
Asked to comment on what the government and Reserve Bank of India (RBI) have done so far in response to the downturn, and whether the monetary authority responded late to the downturn, Jalan says he will not criticise RBI.
I don't want to point fingers. I am a policy person, they have taken a number of small steps, but their sum total has not solved the problem. Now they are thinking of a second dose. So it remains self-evident that what they have done is not enough. Partly, he says, this is because no one knows the extent of the problem. The issues keep changing every day.
Asked how long he thinks the downturn will last, and whether it will go beyond 2009, he hedges his bets. No one anticipated the severity of the international meltdown. I would not bet against a third year of recession.
But he concedes that it is logical to expect a bit of an upturn by the fourth calendar quarter of 2009 by which time the monetary easing will have begun to take effect, and a low base effect would also kick in. Also, by then the US recession would have been twice as long as the average post-War recession.
Reverting to the issue of whether the government has handled the situation well or badly, he argues that the issue is not what you did in 2008, it is what you did not do in 2007. We are paying for yesterday's exuberance. The argument is that if stock market excess and the asset price bubble had been tackled earlier, then the pain now would have been less.
There was a lot of corporate excess last year, they were buying companies at home, companies abroad. Companies were over-leveraged because of excessive optimism and policy was myopic.
He contends that RBI had seen the excessive exuberance and signalled that it may not last. When the cycle was on an excessive upswing, we should have put sand in the wheels.
Finally, asked to comment on whether India should integrate with the world economy, he answers emphatically in the affirmative. The results are there to see, integration has benefited the economy.
But on financial integration, he is more cautious. You should be open to the extent that you can use those funds. Don't open up in such a manner that someone investing in dollars gets an 80 per cent return on the stock market, which is what some FIIs got.
