RBI Governor Raghuram Rajan cautions: Don’t overspend to spur growth

Rajan said that macroeconomic stability during the global turmoil cannot be risked and the government and RBI should continue to bring down inflation.

By: ENS Economic Bureau | New Delhi | Updated: January 30, 2016 9:26 am
Raghuram Rajan, Rajan fiscal deficit, Rajan economic growth, Raghuram rajan Indian economy, RBI governor, Reserve Bank of India, RBI news, Raghuram Rajan news RBI Governor Raghuram Rajan. (Source: PTI)

A month ahead of the Union Budget, Reserve Bank of India Governor Raghuram Rajan warned the government Friday against a spending spree to spur economic growth. Citing the example of Brazil, another emerging economy in trouble now, he pointed out that “the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies”.

Delivering the C D Deshmukh Memorial Lecture in New Delhi, Rajan said: “Unfortunately, the growth multipliers on government spending at this juncture are likely to be much smaller, so more spending will probably hurt debt dynamics. Put differently, it is worth asking if there really are very high-return investments that we are foregoing by staying on the consolidation path.”

He said the country was already grappling with an increase in the aggregate fiscal deficit during the last calendar year, even as a newly implemented power reforms scheme would likely strain finances of state governments further next fiscal.

He also reiterated that the central bank would not change its monetary policy strategy of targeting inflation, saying that doing so would hurt policy credibility.

“As Brazil’s experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be very careful about jeopardising our single-most important strength during this period of global turmoil, macroeconomic stability,” Rajan said.

Last year, the government deviated from the fiscal consolidation path, postponing reduction in fiscal deficit target by a year. Finance Minister Arun Jaitley had redrawn the fiscal consolidation roadmap, stretching the time to reach the fiscal deficit figure of 3 per cent of GDP from two years to three years and setting the fiscal deficit target at 3.9 per cent for 2015-16, 3.5 per cent for 2016-17 and 3.0 per cent for 2017-18.

Rajan said that the consolidated fiscal deficit of the Centre and states had risen to 7.2 per cent in 2015 from 7 per cent in the previous year. “So we actually expanded the aggregate deficit in the last calendar year. With UDAY, the scheme to revive state power distribution companies, coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the Centre to adjust more,” he said.

He said while there is a public discussion whether the fiscal consolidation roadmap should be postponed and instead engage in fiscal expansion to generate growth, it may not hold true for India.

“Of course, the common man does not really care whether we stay on the consolidation path or not. But the bond markets, where we have to finance over Rs 10 lakh crore of deficits plus UDAY state bonds, do care. Deviating from the fiscal consolidation path could push up government bond yields, both because of the greater volume of bonds to be financed and because of the potential loss of government credibility on future consolidation.”

Stating that the fall in inflation has been on account of the “joint work of the government and the RBI, aided to some extent by the fall in international commodity prices”, he said this was “no mean achievement given two successive droughts that would have, in the past, pushed inflation into double digits”. He added though that despite the success on the inflation front, there were voices suggesting weakening the fight against inflation.

“Let me reiterate that macroeconomic stability relies immensely on policy credibility, which is the public belief that policy will depart from the charted course only under extreme necessity, and not because of convenience. If every time there is any minor difficulty, we change the goal posts, we signal to the markets that we have no staying power,” he said.

“Let me, therefore, reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the government. We look forward to the government amending the RBI Act to usher in the monetary policy committee, further strengthening the framework.”

Macroeconomic stability, Rajan said, would be the platform on which “we will build the growth that will sustain our country for many years to come, no matter what the world does”.

He also cautioned against raising tariffs to protect domestic industries facing problems. The RBI is scheduled to announce the next bi-monthly monetary policy on February 2.

Rajan began the lecture by stating that though the RBI is in “fine fettle”, the world today is much less comforting as industrial countries were still struggling, with a few exceptions, to grow. “Our fellow BRICS all have deep problems, with confidence about China waxing and waning. Indeed, India appears to be an island of relative calm in an ocean of turmoil,” he said.

Citing the example of Brazil, which is facing double digit inflation, he said it is confronted with financial problems because it tried to grow too fast on the back of substantial stimulus.

“While the Brazilian authorities are working hard to rectify the situation, let us not ignore the lessons their experience suggests. It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits, and lower growth in 2013 and 2014.”

“Of course, India is not in the same situation today. Given the inhospitable world economy and two successive droughts, either of which would have thrown the economy into a tailspin in the past, it is to the immense credit of the government that we have over 7 per cent growth, low inflation, and a low current account deficit. But it is at such times that we should not be overambitious,” he said.

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  1. B
    Brahm.dead
    Jan 29, 2016 at 5:27 pm
    Since you found fault with Great Modinomics, I declare you TODAY's , COMMIE, NAXALITE. Tomorrow I will on the lookout for whom to be bed.
    Reply
    1. W
      What.the.F
      Jan 29, 2016 at 10:37 pm
      I love to hear such things from an IITian in Electrical Engineering, who decided to become a high paying CLERK and destro the career of an enthusiastic potential Electrical Engineer. Raguram Rajan is an excellent example of how brahmins have been systematically destroying India. Not a single brahmins who get their IIT admission through their UNCLEs(MAMAs) aspires to be in India after their graduation. And those MAMAs knew that. ONLY HINDUS, MUSLIMS, CHRISTIANS, JAINS, (in other words HUMANS) like you and me DO NOT KNOW WHAT THE F IS GOING ON FOR 68 YEARS!!!
      Reply
      1. I
        IndianWellWisher
        Jan 30, 2016 at 5:32 am
        He was one of the few people who predicted the 2009 bubble in the US. I have heard him speak, I have friends of mine who took cles in corporate finance from him. We all have nothing but praise for his articulation of complex issues in simple language. His appointment as RBI governor was one of the better things any govt has done. Modi was smart enough to realise this and kept him. Whatever he has taken up he has done well. You have a problem with that ??
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        1. A
          Apoorv Swarup
          Jan 30, 2016 at 6:02 am
          I think the government too is well aware about this. Excerpts from various interviews of Mr. Jaitley clearly indicated that the government intended to increase aggregate demand initially through heavy public investments in infrastructure and farm irrigation. Subsequently due to the effected reforms (which have all been currently stalled by the Congress in the Upper House) mive private investment was to take the growth forward (i.e. pension fund money/ FDI/ Sovereign wealth funds etc.). The more the reform process is dela the more untenable the existing regime of mive public expenditure becomes with time. Its a pity that a party which was routed by virtually the entire country can threaten and hold an entire country to ransom.
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          1. A
            Arun Bhalerao
            Jan 30, 2016 at 5:57 am
            RajenEconomics Everybody makes their own Economics. The other day Mr. Raghuram Rajan, Governor of our Reserve Bank, was explaining to students that how only growth in GDP is not sometimes desirable for Economy. Explaining the argument, he gave an example of two mothers babysitting each other’s children and paying each other equal ry will increase the GDP but will not benefit Economy. Here is how the situation of Mothers A and B babysitting each others’ children will benefit the Economy: 1) When two mothers go out of their respective homes for babysitting, they will spend on more presentable dresses, cosmetics and travel. Apart from Babysitting ry, this expense would benefit the Economy immensely. 2) Husbands of respective houses would have good motivation in the housework and general upkeep of the house, since “other” woman is visiting for babysitting. 3) Normal mothers do their children’s upbringing as per time and means available to them from time to time. This may not be always be of professional quality. ( Children who suffer the deficiencies of their mothers would be good evidence for vouching for this.). When another mother is coming to your house for babysitting, the babysitting would be of much better and since is being paid for, would be of Professional quality. 4) Children in each house need not suffer their mother’s whims, since now they will be influenced by visiting babysitter mother. Hence we can expect a better quality future generation. 5) Since mother A is babysitting mother B’s children, the society in general would have more diverse methods of upbringing and due to such baby-sitting visits the society would be more tolerant and more pluralistic and that would benefit the naion. Mr. Rajen would have perhaps given better example if he was raised by some other Nobel-winner’s mother instead of his own biological mother. -----Arun Bhalerao ----------------------------------
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            1. A
              ashok
              Jan 30, 2016 at 2:13 am
              Mr Rajan comparing Brazil with India is unfortunate. International oil prices only came to the rescue the RBI should bring down the rate of interest immediately. The price for taking loans is very highflation should not be the first only reason to keep high quality interest rates.to say that common man is not interested at deficit is making a mockery of the common man. A man on the street is a better planner of budget than the economist.
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              1. B
                Bijan Mohanty
                Jan 30, 2016 at 8:16 am
                Dear Sri Rajan, pl. do not evaluate politicians by their face value. Govt. is now spending money not to spur growth but to catch votes. So many states are going to polls in 2016/17. The story of Vikash on the platform of which Modi came to power has not yet started since our PM was busy in foreign trips. Now he will spend some money on announcing programs so that the voters know that he is on Vikash track. Pl. do not create obstruction for him. Economics can wait, politics cannot.
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                1. B
                  BIS CHEEMA
                  Jan 29, 2016 at 5:01 pm
                  The Country needs a non political clear headed person, who is also an outstanding economist, like Raghuram Rajan, as Finance Minister. It is time to control the politicians going for any expansion of debit based stimulus of the economy, as a the short term, that appeals to the politicians to gain browny points. Inflation needs to be controlled, at all costs. The Government needs to reduce its wasteful administrative expenditure. The Big Fish Wilful bank loans defaulters, need to brought to book by enacting suitable legislation to cease their ets.
                  Reply
                  1. K
                    Karunakaran
                    Jan 30, 2016 at 3:35 am
                    About 200 million Dalits will be voting against the BJP and the selfie-hunting joker at the next Lok Sabha elections in 2019. BJP was super lucky to receive 31% votes at the last Lok Sabha elections. At the next Lok Sabha election, BJP cannot get more than about 15% of the votes. No Muslim votes. No Dalit votes. No South India votes. No Delhi votes. No Bihar votes. And believe it or not, hardly any Gujarat votes! So get ready for Mr Nitish Kumar to be the next PM.
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                    1. C
                      Cherian Varghese
                      Jan 29, 2016 at 7:44 pm
                      borrowing, debt, deficit, trickle down, these are some of the BJP economic policies- get somebody who knows the ABCD of economics-nation building is not slogan chanting!
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                      1. F
                        Fa Daf
                        Jan 30, 2016 at 10:34 am
                        Visit the following link to realize the damages and losses to Indians by the actions of Dr. rajan. India will be better without RBI, definitely without Rajan.
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                        1. D
                          Danendra Jain
                          Apr 10, 2016 at 5:12 am
                          Now even RBI Governor has praised performance of Mr. Narendra Modi , Prime Minister of India and BJP led government. I hope Modi haters will now tag even Rajan with Modi Bhakt. Modi haters do not have anything to genuinely criticize and hence they tag veryone with word 'Modi Bhakt' whoever hails Modi or priases any action taken by Modi government. lt;br/gt;lt;br/gt;lt;br/gt; Some of Modi haters, specially media men were making a false propaa that Jaitley and Modi are not happy with Rajan, some of them spread a news that Rajan may be removed and some of them spread rumours that Jaitley will be replaced by Parekar. All of them hav been provd wrong .lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;All these rumour mongers and Modi haters will now understand that all the three Modi,Jaitley and Rajan are on same platform, on how to grow, on how to clean system and how to improve system and procedures.lt;br/gt;lt;br/gt;lt;br/gt; There may be different opinion on any issue but there is no difference of mind and heart.lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;I hope people will always try to make them aware of reality and beware of such rumour mongers and blind Modi -haters who are bent upon putting hurdles in growth of the country and who are bent upon maligning image of Modi and bent upon tarnishing image of the country.Opponents of Mr. Modi are now allowing discussion on any important bill and wasting time of Parliament only on non-issues. Such opponents are real enemy of growth and development.lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;I take this opportunity to condemn even editorial group of Times of India and economic times which more often than ridicule and blindly criticize Modi.lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt;lt;br/gt; I condemn promoters of NDTV, ABP news, News24 like TV channels too who are spoiling Indian environment for the sake of their ego and for their TRP. They are more busy in carrying out debates on Kanhaiya and Rohit Vermula . They do not have time to give time for debates on issues related to growth and development.lt;br/gt;lt;br/gt;lt;br/gt; Country will grow fastly under leadership of Modi if media men stop their mis-information campaign against Modi. lt;br/gt;lt;br/gt;lt;br/gt; Journalism is good only if it is unbiased and positive. lt;br/gt;lt;br/gt;lt;br/gt; Unfortunately in our country journalists give more weightage and coverage to persons like Kanhaiya, umar Khalid, Rohit Vermula, Digvijay Singh, Sakchi maharaj , Owessi. Kejriwal and not good persons like Narendra Modi, Parikar, Piyush Goyal, Suresh Prabhu who are performing excellently well.lt;br/gt;lt;br/gt;lt;br/gt; In democracy , eevery elected representative is given period of five years to prove his ability and to work for the pleasure of common men. Kejriwal is given time for serving Delhi people , Mamta for West bengal, Raman For Chhatishgarh and so on. Let them work and finally it wil be voters of that area who will decide their fate. Similarly Mr. Modi has ben elected for entire India, if all opponents support him in performing good work, I think India will become number one in the world very soon. lt;br/gt;lt;br/gt;lt;br/gt; Let us learn to work together , learn to respect each other and give them an opportunity to perform.
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                          1. F
                            FRANCIS COUTINHO
                            Jan 30, 2016 at 6:08 am
                            increase in revenue if overrun by expenditure without proportional returns will take us nowhere
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                            1. G
                              Gag
                              Jan 30, 2016 at 12:39 am
                              Raghu Rajan is the best person and in right place fortunately for India. We need more people like him in government insutions.
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                              1. M
                                Mera Mera
                                Jan 30, 2016 at 2:50 am
                                Salute to This True Nationalist ! Mr Modi is taking India to dangerous path just because of his ego. We need nationalist like Atal who take decisions in long term benefits rather than headlines and political scores...Modi will damage our credibility which India has built over a long time and we did nicely during all global crisis. Rupee is free falling due to Mr Modi's wrong policies and we are not able to take advantage of falling China.
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                                1. L
                                  L bhadrapati Devi
                                  Jan 30, 2016 at 1:04 pm
                                  If our idle resources are properly utilized through public expenditure, there is no room for high inflation. NDA government high public expenditure in the smart cities, construction of road and railway expansion will create jobs and that in turn create demand. Same is the case of China domestic and foreign investment of Government of china through their public investment agencies create demand for industry of china which has been observed to have excess capacity. A mere prescription of western economic doctor can't solve the economic health problem of India and china. Their own economy is so fragile that their life support system depend on India and china.
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                                  1. L
                                    L bhadrapati Devi
                                    Jan 30, 2016 at 12:43 pm
                                    In any crisis situation government expenditure is the right strategy for activating economic activity. There is general demoralization of private sector due to loss and large scale lay off of employees. Falling of commodities prices and large scale unemployment and lower growth of economy indicate the symptom of economic stagflation. In such situation, it is natural to focus on growth despite inflation above 5 per cent. Deficit financing and fiscal deficit more than 7.5 per cent of both centre and state for boosting economic infrastructure will increase aggregate demand. Once demand is created for industry, there will be investment in industry and MSMEs.
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                                    1. L
                                      L bhadrapati Devi
                                      Jan 30, 2016 at 12:32 pm
                                      it is simple economic logic for normal economic situation. Now, world economy is in crisis starting from the western economy. It is so fragile of western economy that a wrong economic policy of India and china may not give any chance of their recovery. A strong government in India and china can create economic confidence to world economy. Let us see the firefighting mode of China in the form of circuit breaking during stock market crash and direct government intervention in forex market in China mitigate the economic crisis.
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                                      1. L
                                        L bhadrapati Devi
                                        Jan 30, 2016 at 12:19 pm
                                        Delhi people are trapped by false promises of AAP Arvind Kejri. So, such cheating can't happen twice. In case of Bihar, so call secular opposition are happy with looter Lallu Prasad.
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                                        1. M
                                          Masih Siddiqui
                                          Jan 30, 2016 at 4:56 am
                                          Yes, he is right. Initially, overspending results in increased prices of goods and services which is inflation and eventually devaluates the currency. Overspending also comes with another issue. People or government don't overspend from their incomes. They do on credit. Over the time credit builds up overtime and after it reaches a limit, credit and interest payments cannot be serviced by their incomes. People cannot borrow more to pay down credit payments because by then government will have increased its interest rates to control inflation. Consumer spending slows down and economy starts to contract. This is the period of recession.
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                                          1. R
                                            Ramesh Nittoor
                                            Jan 29, 2016 at 7:52 pm
                                            Finance Minster Mr. Jaitley recently spoke in Davos about commitment to fiscal deficit target. Both RBI Governor and FM are on the same page on fiscal policy. The problem with fiscal stimulus growth is that et formation is not market driven, it may be inefficiently allocated, consequently could have smaller multiplier effects. The income of poor is highly inelastic, they get hurt most when fiscal deficits fuel inflation. It is better to sell what a leftist leader once call, family silver, via rapid disinvestment policy and let global savings plus speculative investment converge for medium to long term opportunities in India via economic reforms. The foreign money shall come and go, but the skills and experience Indians shall gain in process will remain mostly within India, and spawn even greater capabilities.
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