Former governor of Reserve Bank of India Raghuram Rajan. Photo: AFP
Raghuram Rajan, the former governor of the Reserve Bank of India. Photo: AFP

India’s former central bank governor Raghuram Rajan said he is concerned about the state of the country’s economy and has called on the government to decentralize power, focus on rural poverty alleviation and stimulate private spending.

Rajan said India was in the midst of a “growth recession” with signs of a deep malaise in the economy.

In his column in the India Today magazine, Rajan listed various recommendations to help the ailing Indian economy out of the ongoing slowdown. He called for reforms to liberalize capital, land and the labor markets. He also urged India to join free trade agreements judiciously to boost competition and improve domestic efficiency.

He said he felt the country’s economy was being run through the extreme centralization of power in the Prime Minister’s Office, leaving ministers powerless.

“To understand what has gone wrong, we need to start first with the centralized nature of the current government. Not just decision-making but also ideas and plans emanate from a small set of personalities around the Prime Minister and in the Prime Minister’s Office,” he stated.

He added that previous governments may have been untidy coalitions, but they consistently took the path of further economic liberalization. He said: “Extreme centralization, coupled with the absence of empowered ministers and the lack of a coherent guiding vision, ensures that reform efforts pick up steam only when the PMO focuses on them, and lose impetus when its attention switches to other pressing issues.”

Rajan said the Modi government had shown “surprising timidity” when it came to unfinished reforms on the business environment, land acquisition, labor and the role of the public sector.

Changes needed

He pointed out that the Modi government came to power emphasizing “minimum government, maximum governance.”

“This slogan is often misunderstood. What was meant was that government would do things more efficiently, not that people and the private sector would be freed to do more,” he said. “While the government continues the creditable drive to automation – direct benefit transfer to recipients is an important achievement – the role of the government in many spheres has expanded, not shrunk.”

The former RBI governor said the starting point to address the economic slowdown would be for the Modi government to acknowledge the problem and not brand every internal or external critic as politically-motivated.

The government should also stop believing that the problem is temporary and that “suppressing bad news and inconvenient surveys will make it go away,” he added.

India is in the midst of a growth recession, with significant distress in rural areas. Its economic growth slowed to a six-year low of 4.5% in the July-September quarter. With inflation rising, fears of stagflation – a fall in aggregate demand accompanied by rising inflation – have resurfaced, Rajan said.

He pointed out that the construction, real estate and infrastructure sectors are in “deep trouble” and so are lenders to these firms like the non-bank finance companies. The crisis among shadow lenders and a build-up of bad loans at banks have curbed lending in the economy.

He also called for an asset quality review of the non-bank finance companies. Rajan said he was concerned over rising corporate and household debt and the deep distress in parts of the financial sector.

Rajan said the government should desist from cutting personal income tax rates for the middle-class for now and should use its scarce fiscal resources to support the rural poor through welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act.

Repeated government allusions to a US$5 trillion economy by 2024, which would necessitate steady real growth of at least 8-9% per year starting now, seem increasingly unrealistic, he added.

“Furthermore, even if some of the problems are legacies, the government, after five-and-a-half years in power, needs to resolve them. A massive new reform thrust is needed, accompanied by a change in how the administration governs,” he said.

Rajan stressed the need to boost demand by means of a fiscal stimulus to encourage private spending. “With the stress in the financial sector, monetary policy has limited effectiveness,” he said. “On the fiscal side, recent corporate tax cuts, which were a short-term boost to stock prices, may not deliver much-needed business investment when there are so many other impediments,” he said.

‘An enormous liability’

He also advised the government against “endlessly” taking on contingent liabilities without recognizing that they come with a price. “Recent proposals to boost bank deposit insurance to 500,000 rupees per individual, while popular, will mean an enormous liability. The costs will be seen when weak cooperative banks, that will gain more deposits as insurance limits are boosted, fail,” he warned.

“Instead, deposit insurance should be raised only in parallel with improvements in the governance and regulation of the cooperative sector.”

As for the telecom industry, which is battling huge debts, he said it has morphed from a promising sector into a deeply distressed one and was heading toward a monopoly or duopoly.

“In the short run, the objective has to be to preserve sufficient competitors in the sector – once again, the Centre is creditably starting to move after disregarding mounting problems for a while,” he said. “In the longer run, India should re-examine its regulatory process and ensure a level playing field within the sector.”

He also cautioned against growing majoritarianism in the country, which is also gaining popularity across the world, and warned that apart from fomenting social tensions, it will also hamper economic growth.

He said the best way to integrate the peripheral states into the mainstream was to give them stronger justification to be part of India, to make full economic integration irresistible.

He said instead of building gigantic statues of national or religious heroes, “India should build more modern schools and universities that will open its children’s minds, making them more tolerant and respectful of one another, and helping them hold their own in the competitive globalized world of tomorrow.”

Rajan served as the governor of the Reserve Bank of India from September 2013 to September 2016 and returned to the University of Chicago Booth School of Business, where he was teaching prior to taking up the Indian central bank assignment.

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