Lord Meghnad Desai has been known in the country as a critic of India's economic reforms and policies.

But the feel-good factor that is sweeping through the country has not left him untouched either.

From carping that India is moving too slow, Lord Desai now grudgingly agrees that the country has been on the right economic path in the last ten years.

Lord Desai is a globally renowned authority on globalisation and the director of the Centre for the Study of Global Governance at the London School of Economics.

The cumulative benefit of the reform process is what is manifesting itself in the high GDP (gross domestic product) growth rate, he says.

A much-respected development economist, Lord Desai was born and educated in India, and is now a professor at the London School of Economics and director of the Center for the Study of Global Governance.

A member of the UK Parliament, he spoke to Priya Ganapati about the sustainability of India's growth rate and the economics problems that the country still needs to tackle.

Do you think that the 8 per cent GDP growth rate that India is likely to show this year sustainable?

No. I think these numbers are for the latest one-quarter and in the future these numbers could be revised downwards.

I think what is possible is that there would be a growth rate between 6.5 and 7.5 per cent on a sustainable basis for the next 10 years.

It may be that there might be a drought and we may go below 6 per cent, but I think we are in the 6-7 per cent growth band.

There is a potential for growing faster than that, but it will need a much better policy environment that what we have currently.

In the past you have been a strong critic of India's economic policies and the reform process. What do you feel now?

I think the cumulative effects of the reforms of the past 12 years are finally paying through. (Former finance minister) Chidambaram was able to sustain reforms through a government that was generally hobbled. It helped people's perception that reform is not reversible.

What is really interesting is that the Bharatiya Janata Party was able to show that they too were not against reforms; they were going to sustain the reforms and indeed accelerated it, which was a big surprise because when BJP was in the opposition it was making anti-globalisation noises.

Now we see with the Congress behaviour that every party makes anti-globalisation noises when in opposition.

What is interesting is that the BJP did not yield to the RSS (Rashtriya Swayamsevak Sangh) or the Swadeshi Jagran Manch.

They marginalised the protectionist, capitalist alternative that RSS wanted and that gave everybody the confidence that India was quite serious about globalisation and therefore the portfolio inflows stayed up.

Had that been badly managed, the current scenario would not have been possible. I used to criticise these people because they were not fast or serious enough but what they achieved was a persistence of reforms.

I think BJP has come through on reforms without really declaring it. Just like it abandoned Hindutva without really declaring it, it has abandoned all the RSS ideas without really announcing it.

What is India doing right today and where are we still going wrong?

What India is doing correct is continue with the WTO (World Trade Organisation) agenda of cutting tariffs. What it is doing correct is maintain a responsive policy that is not overtly interventionist.

What they are doing is running a loose fiscal policy, which is not good. But at least the fiscal policy has not been allowed to get looser than it already was.

We have a stable deficit rather than a deficit reduction programme, which leads to a monetary policy with high interest rates. That is a bad patch.

But what is important is that India was able to give international investors the signal that it will not go backward to its pre-1991 economic status.

On the one hand not only portfolio capital has improved, but domestic business has also been able to count on that and go into serious restructuring.

So what are we doing wrong?

We haven't made a tight enough fiscal policy. A lot of government expenditure is misdirected. It is not concentrated in human development issues.

A lot of money is still going into subsidies to produces and tax concessions. Because there is no single ruling party, the economic costs of political accommodation are very high.

That is one of the reasons why the fiscal deficit cannot be reduced because you have a coalition government which results in an absurd-sized Cabinet and you have to let go of tough choices because you can't implement them.

I think, overall though, the harm has been stabilised.

The other problem is that the financial structure remains fragile. There has been capital account liberalization, done quietly without announcing it, but the banking structure still remains fragile. I do worry, just like China, about the viability of the banking structure.

Also the regulatory structures are still not completely in place, so you cannot trust the equity markets. To that extent somebody investing in India, either domestically or from abroad, to that extent does not get a fair deal while investing in equity.

Despite the feel good factors that are being floated around like high forex reserves, investment opportunities and continuing reforms, why have the international credit agencies never revised their estimates about India? Why is India still being rated somewhere near the junk status?

India is still not a fiscally sound country. There has been divestment but it has not been as rapid as it should be.

The budget deficit is still large. So in a sense some of the assets of the nationalised government banks are government paper and of a government that I am not quite really sure can repay the debt really seriously with sound money.

But we have been prepaying many of our loans. . .

That is foreign debt. The domestic debt structure is still very large, which means large interest payments and the deficit persist.

The banks are holding government paper which represents some of the assets that are nationalised companies and many of those are practically bankrupt. So international agencies look at that and say this country is technically a bankrupt firm.

At some stage, when India will have to get serious about not printing any more money and repay the debt, we still don't know where the surplus will come from.

The debt will then have to be retired. Either many more state corporations will have to be sold for real money or the debt will have to be retired. Nobody is thinking of that problem seriously enough as yet.

India has concentrated on retiring foreign debt, but internal debt is an equally big problem.

How big is this problem of internal debt?

When I looked at it three years ago, interest payments were 50 per cent of total tax revenues. Even now I think it's a substantial part of the revenues.

In midst of all this, are basic issues like poverty, illiteracy being adequately addressed?

I certainly think there has been more awareness on human development issues, especially in the last four years. I think Amartya Sen's Nobel Prize shamed India into taking human development issues seriously.

At the state level, I think states are becoming conscious that they have to pursue a human development type strategy else they are not going to get re-elected.

I think unemployment is still a black hole because there are restrictions on employment generation. Also because the government is taking away a chunk of the savings that is not being invested and so there is a shortage of capital.

Foreign capital is not a substitute, you have to generate domestic capital. Foreign capital will come if you have more domestic capital -- like in China.

China is saving 43-45 per cent of its income and its deficit is much smaller than India's. . . So people see that the Chinese government is not eating into its savings. So to reduce unemployment, India needs to have a good fiscal policy.

So is much of this feel good factor a purely urban phenomenon?

I think it's probably right that certain urban areas are way richer than the rural areas and small towns. But I also think that an economy growing at 6-7 per cent will eventually benefit those in the rural areas too.

I think that for an economy that went through a bad patch in the late eighties this is a genuine feeling of a high growth rate. But the sustainability of it remains to be seen.

There's a budget coming up. . . Is there anything that you would like to tell the finance minister?

I don't think that there is a budget coming up. They will probably have a short vote-on-account with the elections in April.

I think after the elections there will have to be some serious deep thinking because while this growth doesn't look unsustainable it can become so. India's credit rating is still not very good.

If Arun Shourie is given a hand and if he succeeds in divesting a lot of the stuff, money comes in and the debt reduces, India will get a lot of breathing space. But it will be better to not just do that but also contain the deficit.