Tuesday, September 17, 2013

Raghuram Rajan's diagnosis

Somebody sent me the link to an article on the Indian economic situation that Raghuram Rajan wrote just before he became RBI governor. It does not seem to have received the attention it deserves.

Rajan does not contend that the present situation is the result of serious economic mismanagement or that it can be rectified only through sweeping reforms, as many critics of the government do. Instead, his thesis - allow me to say that it is one that I have myself been peddling for quite some time- seems to be that the current situation is the result of a combination of adverse factors of a transient variety. They can be addressed through modest initiatives, it is not as if we need to unveil the entire panoply of 'second generation' reforms. I will let Rajan speak for himself:
In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Moreover, India’s institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.

Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly.

Finally, export growth slowed, not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated.
 And how do we fix these?
The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports.

Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.
There is no suggestion in the above of serious economic mismanagement on the part of UPA II. True, the fiscal deficit increased to an uncomfortable level post the crisis. But that is at least partly because the sharp slowdown in growth in recent years- caused, to  a large extent, by the sputtering of the Eurozone and the rest of the world- just could not have been anticipated. 


6 comments:

Anonymous said...

so economists you are no more predictors! you too gamble like the common man.

Anonymous said...

I guess the biggest sensation of this century is nandan nilekani standing for congress and running for elections against modi. Nilekani proved to be another desperado for power and politics. He has lost his brains. Simply lost it!

SC said...

Two humble points:
your point : the immediate tasks "clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. "... isn't that a case of easier said than done. each of these points have been a victim of the government's inertia and has been such a long standing problem that it no longer seems like a intermediate step but a long standing fundamental problem.

and a second point you make, "True, the fiscal deficit increased to an uncomfortable level post the crisis.".. This argument hides the fact that the reduction in deficit, seen earlier, was entirely on account of increase in revenues because of strong economic growth and with no correction on the expenditure side.
And as an IMF paper (http://www.imf.org/external/pubs/ft/wp/2009/wp09175.pdf) points out, the fiscal deficit numbers were worsening even before there was a need for stimulus measures, when the crisis of 2008 broke out.

chandramouli said...

“substantial fiscal and monetary stimulus” – the opposition and CAG says it resulted in wasteful expenditure of scare resources and corruption.
“As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.” That opposition and economists say as policy paralysis.
“the government certainly should have acted faster and earlier”- Very slow decision making is acknowledged.
There is nothing much different from what Mr. Rajan has said and what Govt critics have said. It is only that Mr. Rajan has been able to play with words better.

Chintan said...

Just read this article by V Vaidyanathan, Chairman, Capital First, on expectations from the RBI’s credit policy. What do you think? http://www.indiainfoline.com/Markets/News/Towards-a-Reformist-Credit-Policy-V-Vaidyanathan/5782705005

Anonymous said...

http://www.indianexpress.com/news/mayaram-real-value-of-rs-is-near-60-to-/1173381/

Is their analysis correct???