Delivering the first Ramnath Goenka lecture, Reserve Bank of India Governor Raghuram Rajan spoke on how India should engage with the global economy at a time when economies around the world are going through a turbulent phase. Rajan laid out three key ideas. First, he emphasised the importance of macroeconomic stability. Improvement on this count is the main reason why India is being seen as a beacon of economic stability across the world, even as the fall in global demand and commodity prices, especially oil prices, has sent other emerging economies into a tailspin. Fiscal expansion in such economies as Brazil became unsustainable in a very short period of time. India, too, faced growth deceleration, steep current account deficits, sharp rise in inflation and expanding fiscal deficits in the wake of the financial crisis of 2008-09. However, unlike most of its peers, India has staged a remarkable comeback — despite two back-to-back droughts — on the count of macroeconomic stability. As against 2013, India’s inflation and deficits are well within prudential limits. “The last leg of this stabilisation agenda is to clean up the stressed assets in the banking sector so that banks can lend again,” said Rajan, reiterating the March 2017 deadline.
If macroeconomic stability is the necessary condition for the next round of economic growth, “structural reforms, typically ones that increase competition, foster innovation, and drive institutional change” will provide the sufficient condition. Rajan said that the debt-fuelled demand in the run-up to the Great Recession actually hid a fall in global potential growth, which, in turn, was perhaps due to the fall in productivity growth. However, India is better placed than developed countries to raise productivity. That’s because unlike firms in those countries, which are already working at the productivity frontier and can increase it only through innovation, in India, such improvements can happen by simply removing existing bottlenecks. By the availability of roads, for instance — a key area of focus in the latest budget as well. Similarly, Rajan suggested improving human capital, with better educational and vocational institutions, simplifying business regulation and taxation, and increasing access to finance. “Learning from the past… let us make sure we create a good business environment that can support any kind of activity,” he said.
India must also change the manner in which it deliberates at global forums, said Rajan. “Today, it is an unfortunate reality that international meets are still dominated by the old powers.” The fault, he said, lies with “us”. India needs to raise its intellectual capacity, through better think-tanks and universities, as well as build coalitions with other countries, to push its agenda effectively.