RBI Governor Raghuram Rajan used the opportunity to address the 12th annual convocation of the National Institute of Bank Management in Pune on Wednesday to reiterate and explain why he had used a well-known proverb, “In the land of the blind, the one-eyed man is king”, to describe the Indian economy. In doing so, he rendered “a teachable moment” for all concerned not just about the future of Indian growth, but also the role that any expert, such as the country’s central banker, must play. There are two aspects of this needless controversy. One, the merits of what Rajan said about the state of the Indian economy. Two, whether Rajan should have used “better words” to say what he did. On both counts, Rajan should be applauded and there is much to learn from the acuity of his insights as well as his boldness in speaking the truth.
To be sure, Rajan rose to fame for precisely these qualities when he presented his now-celebrated paper “Has financial development made the world riskier?” at the Economic Policy Symposium in Jackson Hole in 2005, pointing out, well before the 2008 global financial crisis, the serious risks facing the financial system. Few believed him immediately, but his diagnosis turned out to be spot on. Rajan has been at the forefront of criticising central banks across the world, especially the US central bank, for employing unconventional monetary policy tools, such as quantitative easing, and “doing more harm than good”. As a central banker, too, Rajan has argued consistently for adopting a more measured approach towards policymaking and practised what he preached.
As far as the Indian economy is concerned, Rajan’s remark must be read in context. While India’s annual GDP growth rate is faster than that of any other major economy, that is just one parameter of an economy’s health. The truth is that the overall size of the Indian economy is still much smaller, even in comparison to China. Incidentally, the Chinese economy was smaller than India’s in the 1960s but is five times our size now and the average Chinese citizen is over four times richer than the average Indian. That has to do not just with a delay of a decade in initiating reforms, but also in failing
to follow through with the desired structural changes in a timely manner. Instead of
asking Rajan to sugarcoat reality, policymakers should ensure India doesn’t fail yet again on its growth promise.