Recently in an article in the Economic Times, popular Indian columnist and novelist Ms Shobha De, touted the newly appointed Reserve Bank of India (RBI) governor Raghuram Rajan, as the ‘rock-star economist’, the ‘Poster Boy of Banking’ who can easily top easily top ‘India’s Most Desirable’ lists and is also expected to pull India out of the financial mess.
The post has attracted lot of media attention and has succeeded in flaring up imagination and varied emotions of the readers, ranging from interesting, to disgusting or even revolting! To add substance to the article, it might have made better sense to also look at some of the problems facing India’s economy and the challenges that Rajan has to deal with while he tries to walk his talk. Let’s have a go at those less appealing aspects that are actually the areas of concern for all Indians.
The economic problems in India can be attributed more to the country’s fiscal policy and other government policies than to monetary policy of the Reserve Bank of India (RBI). The central bank often finds itself reacting to the consequences of inaction and policy conundrum of the government.
In fiscal year 2013, the Indian economy is characterized by an annual GDP growth rate of 4.4 percent in the first quarter (April-June) of the current fiscal year 2013-14, the lowest in four years, a high current account deficit upto 4.8 per cent of GDP and overdependence on hot money and short-term debt for financing the CAD. Crisis in the resources industry – coal / petroleum-gas, severe supply-side constraints, stalled infrastructure projects and stagnation of employment, all put together have resulted in the depreciation of Re against the dollar from Rs 54.77 at the beginning of 2013 to the current level of about Rs 64 after touching a record low of 68.83 on 28th August.
After taking over as the RBI governor, Raghuram Rajan has announced a number of steps to stabilize the rupee, measures to attract inflows from overseas investors, including the NRIs. Under the leadership of Raghuram Rajan, RBI policy is expected to first cushion the negative impacts as much as it can, control the volatility of Re and to lower the cost of doing business till growth cycle picks up, and monetary policy starts to work to increase the pace of broad based and inclusive growth.
Continued slump in growth, delay in structural reforms, impediments in project execution, and high perception of corruption can erode confidence of the world in India’s growth story, Rajan’s proposed steps towards reduction of price inflation and monetary policy for supporting India’s growth were well-received by the markets with the rupee recovering by 6 per cent and the Sensex rallying nearly 10% in four days between September 3 and 6. It may however take time for him to translate his words into action for the simple reason that monetary policy takes time in transmission.
- The Case for India by Raghuram Rajan