By Tarun Kumar G. Singhal
Raman Jokhakar Chartered Accountants
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In an interview to ET, RBI governor Raghuram Rajan made some points that should inform the public discourse, besides policy-making. One, India’s economic situation is relatively robust and not particularly vulnerable to turbulence sweeping across the world from its epicentre in China. Two, creating strong institutions and flexible markets is the best way to absorb shock; it would be silly to turn our back on the world. Three, macroeconomic stability, functional hedging mechanisms and their adoption by economic agents are the best guarantee of avoiding currency shocks. Four, sectoral remedies run the risk of shifting rather than solving a problem. Five, while fears in certain quarters about a secular stagnation across the world might be exaggerated, India should use their negative effect on commodity prices to consolidate its war on inflation and vanquish it.
While not totally ruling out an interest rate response to economic woes, Rajan’s preference is to kill inflation expectations rather than to prop up growth with negative rates of interest. He points to the quandary of those central bankers whose policy rates are already close to zero and cannot use rate cuts to boost growth to argue that the stimulus to growth has to come from other quarters. Introducing GST, labour reform and removing the obligation on mills to make 40% of the yarn they produce as hanks for use on handlooms are examples of such other boosts that he did not mention. And raising productivity is the surest response, as he argues, to the increased competition arising from imports made cheaper by a depreciating yuan. Rajan did not dwell on the added downward pressure on the rupee that would be exerted by an interestrate cut and the burden this would place on the economy.
What Rajan says is perfect economic sense. The trouble is to align this with political sense for those who have to worry about winning elections. This is possible when economic sense permeates the public discourse, so that political leaders find the courage to argue for it, even at the expense of short-term pain.
(Source: Editorial in The Economic Times dated 28-08-2015.)
