{"id":27320,"date":"2016-06-24T10:00:46","date_gmt":"2016-06-24T00:00:46","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=27320"},"modified":"2016-06-24T09:11:17","modified_gmt":"2016-06-23T23:11:17","slug":"indias-economy-rajan","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/indias-economy-rajan\/","title":{"rendered":"India’s economy after Rajan"},"content":{"rendered":"

\"Image<\/p>\n

Raghuram Rajan\u2019s<\/span><\/a> decision not to seek a second term as Governor of the Reserve Bank of India (RBI, India\u2019s central bank) was met with shock from those of us who\u2019ve been cheering on the Indian economy. While it\u2019s no secret that Prime Minister Narendra Modi\u2019s government had its problems with Rajan, few believed that the government would take a step that so clearly undermines India\u2019s interests.<\/span><\/p>\n

The government never liked Rajan\u2019s insistence on pursuing interest-rate cuts gradually in order to promote price stability; instead, it wanted to see them slashed aggressively, in order to spur growth. Nor was the government particularly enthusiastic about Rajan\u2019s role as a public intellectual. And then, in the past few weeks, a toxic and ludicrous outburst of criticism from those close to the government erupted, focusing on Rajan\u2019s performance and his supposed lack of \u2018Indian-ness\u2019.<\/span><\/p>\n

Despite all of this, there were compelling reasons to believe that Modi\u2019s government would keep Rajan on board.<\/span><\/p>\n

First and foremost, losing Rajan controverts the Modi government\u2019s commitment, unprecedented in recent history, to attracting foreign investment to India. Since taking office in 2014, Modi has spent more time than any of his predecessors selling the so-called Indian dream to foreign investors<\/span>\u2014<\/span>efforts that\u2019ve helped to spur a surge in capital inflows. The recent announcement that India will now, for the first time, allow 100% foreign ownership of firms in a broad swath of industries further reinforces the message that India is open for business.<\/span><\/p>\n

But the positive impact of these changes may be tempered by Rajan\u2019s departure. After all, his stellar management of inflation, which has kept the Indian rupee stable, supported Modi\u2019s efforts to attract foreign-direct investment. The strengthening of other macroeconomic indicators under Rajan, including swelling foreign-exchange reserves and narrowing current-account deficits, also inspired confidence in would-be investors.<\/span><\/p>\n

Given that a key motivation behind the official behavior that drove Rajan away was the ruling party\u2019s opposition to his hawkish stance on inflation, it seems likely that investor confidence will eventually take a hit, though it may temporarily be masked by the announcement on relaxed foreign-investment norms. Add to that the questions about the RBI\u2019s independence that are sure to arise, and the extent to which Rajan\u2019s departure could undermine Modi\u2019s hard-won successes becomes clear.<\/span><\/p>\n

A second reason why Rajan\u2019s departure came as a shock is that the Modi government has a record of making tough choices, rather than resorting to populist policies, in its fiscal management. Indeed, it has displayed remarkable restraint in keeping the fiscal deficit at prudent levels. Yet it continues to blame a lack of demand on Rajan\u2019s refusal to slash interest rates, rather than on, say, the finance ministry for failing to raise spending or cut taxes sufficiently.<\/span><\/p>\n

This isn\u2019t to argue that interest rates couldn\u2019t be lower in India. In fact, there\u2019s room for debate on that topic. But, in forming an opinion, a few facts should be kept in mind.<\/span><\/p>\n

First, almost all historical instances of disinflation have been associated with a transition period when growth was negatively affected. The countries that remained disciplined, such as Chile, ended up achieving sustained growth; those that gave up, like<\/span> Argentina<\/span><\/a>, ended up with high inflation and no growth.<\/span><\/p>\n

Second, in explaining low investment and job creation, there are many potential culprits besides interest rates. The debt overhang within India\u2019s biggest companies and the large volume of bad assets held by its biggest banks have created an unholy nexus that is blocking sustainable growth <\/span>\u2014<\/span>and that cannot be offset by interest-rate cuts. The experience in Japan, where not even negative interest rates have been sufficient to spur growth in an economy burdened by so-called zombie banks, makes this starkly apparent.<\/span><\/p>\n

Over the last two years, the hard work of the Modi government and the Rajan-led RBI has enabled India to distinguish itself among emerging-market economies. As countries like China and Brazil have slipped in their economic management, India signaled that it\u2019s a mature economy, where prudent macroeconomic decisions are taken based on technical expertise, not political whim. This raised its profile in the international arena substantially.<\/span><\/p>\n

But, following the episode<\/span> between Rajan and the government<\/span><\/a>\u2014<\/span>and considering the unsavory manner in which it played out<\/span>\u2014<\/span>there\u2019s reason to worry that India, too, may now stumble in its economic governance. With commodity prices recovering, risks of a Chinese hard landing growing, and the European Union facing an uncertain future, that\u2019s an outcome that India can ill afford.<\/span><\/p>\n

Rajan would\u2019ve been the ideal candidate to guide Indian monetary policy in this testing time. Now that he\u2019s gone, one can only hope that Modi and his government ensure that the next RBI governor is of comparable caliber, with the capability<\/span>\u2014<\/span>and independence<\/span>\u2014<\/span>to uphold the institution\u2019s credibility through decisive action. Once they find one, they should remember that good central-bank governors aren\u2019t dispensable.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Raghuram Rajan\u2019s decision not to seek a second term as Governor of the Reserve Bank of India (RBI, India\u2019s central bank) was met with shock from those of us who\u2019ve been cheering on the Indian …<\/p>\n","protected":false},"author":526,"featured_media":27324,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[433,1182,69,1055],"class_list":["post-27320","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-economics","tag-foreign-investment","tag-india","tag-narendra-modi"],"acf":[],"yoast_head":"\nIndia's economy after Rajan | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/indias-economy-rajan\/\" \/>\n<meta property=\"og:locale\" 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