RBI Governor Raghuram Rajan has reiterated the deepening challenges facing the global economy. In an article this week, Rajan has said that the “world is facing an increasingly dangerous situation”. That’s because while all economies, both advanced and emerging, are straining to grow faster, few are succeeding. As repeated attempts to kick-start the growth cycle have yielded less than the desired results, countries have resorted to “beggar thy neighbour” policies, which have proved detrimental for all economies. This is not the first time that Rajan has pointed to this building malaise — he has been outspoken on the issue of actions by different central banks, especially the US Fed, which overlook their “spillover” effects. However, this time, he has argued for a new international agreement, along the lines of the Bretton Woods conference in 1944 that yielded the International Monetary Fund and the International Bank for Reconstruction and Development.
Rajan’s call resonates beyond India. The larger point he makes is about the breakdown of the basic rules that should be followed by central banks, especially “internationally influential central banks”. In the wake of the 2008 financial crisis, global demand has slumped and countries have been left with a massive debt overhang that inhibits a quick recovery. When even bringing down interest rates to zero per cent did not stimulate the economy adequately, central banks went for unconventional tools, such as quantitative easing (QE). In essence, QE is the creation of new money. But such unconventional methods have led to the depreciation of the domestic currency and the creation of asset bubbles across the world. Other central banks have retaliated by allowing their currency to devalue in a bid to corner global exports. But this string of competitive devaluations has arguably brought down the overall level of global employment.
Rajan’s call for a new set of rules — for assessing policies that are acceptable (green), those that are acceptable in the short term (orange) and those that are not acceptable at all (red) — must be deliberated upon. However, India cannot afford to wait for changes in the global order. The bottomline here is the need to focus on structural reforms, which lie in the domain of fiscal policy. As Rajan said during the first Ramnath Goenka Lecture on March 12, India should shore up reforms that “increase competition, foster innovation, and drive institutional change”.