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.