India Appears an Island of Calm Amid an Ocean of Turmoil: Rajan

RBI chief Raghuram Rajan said reforms are the only way for sustainable growth

Here Are the Highlights of What Dr Rajan Said at CK Prahalad Memorial Lecture in Mumbai:

On Indian Economy

India appears to be an island of calm in an ocean of turmoil. What is different and how can it we be assured it will continue. We have to expand the sustainable growth potential. That means continuing to implement reforms that government and regulators have announced. That’s the only way to get sustainable growth potential up.

In this difficult (global) environment, growth has to be obtained in right way. It is possible to grow too with substantial stimulus as we did in 2010 and 2011 only to pay the price of higher deficit, higher inflation and lower growth in 2013 and 2014. Our own experience suggests that we have to careful. Of course, India is not in the same situation today. Much has changed since those days. With the world being an inhospitable place we have work hard to strengthen our current recovery and put it on more sustainable footing.

On Global Economy

Industrial economies are still struggling with a few exceptions. If we look around the world today, it would be fair to say it does not paint a pretty picture. Uncertainty about growth in US and as well as the world is what propelled the Fed to stay on hold yesterday. Our fellow BRICS have all got big problems.

On Monetary Policy

We have to keep inflation low not just today but also in the future. Monetary policy will accommodate to the extent there is room.

Message to Industry

While we understand the difficulties industry has and will work as hard as we can on improving the business environment. India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, subventions and subsidies – all of which have historically rendered industry uncompetitive, government over extended and the country incapable of regaining its rightful position.

We have to create business environment but then business has to run on its own footing because it creates effective business.

On Banking System

It is not clear India needs a so-called “bad bank” to deal with non-performing loans. It would be preferable to push banks to clean up balance sheets themselves. He would favour adding capital to India’s cash-starved asset reconstruction companies. A speedy bankruptcy code is needed to give creditors more ability to handle distress. There is need to clean up the banking system of distressed assets so that it can fund growth again.

On Lessons from Brazil

Brazil offers a salutary lesson. Only a few years the world was applauding its strong growth, its thriving democracy and the enormous strides it was making in inequality. It grew 7.6 per cent in 2010 and had discovered huge undersea oil reserves. This year is expected to shrink by 3 per cent.

Paradoxically it may seem, Brazil tried to grow too much. The 7.6 per cent growth came on the back of substantial stimulus after the global financial crisis. And an attempt to keep growth at that high level, the New York Times says the central bank was pressed to reduce interest rates fueling a credit spree that overburdened customers only now struggling to repay.