Raghuram Rajan, Governor of the RBI Outlines Maintaining Growth in India

Reserve Bank of India, the Central Bank

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Mumbai – The global economy’s slowdown has not spared India. Sustaining the growth that it needs to continue to lift millions of people out of poverty will require rethinking its economic-policy approach. If India is to succeed, it will have to deepen regional and domestic demand, strengthen its macroeconomic institutions, and join in the fight for an open global system. Diminished expectations abroad should not lead India to lower its ambitions.

Fulfilling these ambitions will require efficiency-boosting investments, particularly in infrastructure. Every corner of the country should be linked to domestic and international markets through roads, railways, ports, and airports. Inputs, such as energy, minerals, and water, must be made available at competitive prices. The country should be linked to broader markets through mobile devices and broadband, and access to finance must be made easier, especially for those who traditionally have been excluded. Plans to achieve these goals are being developed; they must now be implemented.

Moreover, human capital must be improved. This presupposes higher investment in health care, nutrition, and sanitation, so that India’s citizens are healthy and able; education tailored to developing skills that are valued in the labor market; and the creation of jobs in firms that have an incentive to invest in training. Achieving all of this requires that the bureaucracy focus on serving the economy, rather than – as has too often been the case – vice versa. Promisingly, the political leadership has affirmed its belief in “minimum government, maximum governance.”

Fueling growth through domestic demand will have to be carefully managed. As a country that does not belong to any power bloc, India cannot afford to put itself in the position of needing multilateral support – a trap into which even developed countries, like Portugal and Spain, have fallen. There is the risk of overstimulation, with fiscal deficits fueling large current-account deficits and debts, which suddenly become unsustainable when money gets tight. The few emerging economies that have avoided booms and busts have done so by adhering to sound policy frameworks.

Fiscal prudence is essential. Whether India needs more institutions to control deficits and monitor the quality of its budgets is a question worthy of discussion. A number of countries have independent organs that pronounce on budgets. These bodies are especially important in providing budgetary estimates, particularly for unfunded long-term liabilities. As the experience of developed countries has shown, long-term fiscal commitments, such as universal pensions and health care, can be easy to make, but difficult to fulfill.

On the monetary side, the Reserve Bank of India should focus on keeping inflation low and stable, ensuring optimal conditions for growth. As it focuses on inflation, however, the RBI must recognize that emerging markets are not as resilient as industrial economies. They are more fragile, and their households’ economic buffers and safety nets are thinner. Disinflation, when necessary, cannot be as steep.

The RBI will also have to pay attention to financial stability. This is normally a secondary objective, but it may become central if the economy enters a low-inflation credit and asset-price boom. It will be important to remember that the central bank’s role is not to boost stock prices, but to ensure that the economy’s underlying fundamentals and its financial system enable sustainable growth.

India will run a current-account deficit for the foreseeable future, which means that it will need net foreign financing. The most stable form of financing, foreign direct investment, has the additional benefit of bringing in new technologies and methods. But India should not be railroaded into compromising its interests to attract FDI. For example, India’s requirements for patenting a medicine are perfectly reasonable, regardless of what the international drug companies say. But India must ensure that its policies are transparent, and that contractual disputes, especially over taxation, are quickly resolved. Efforts to ensure this have already begun.

Finally, as a country that does not export vital natural resources and is dependent on substantial commodity imports, India needs an open, competitive, vibrant system of international trade and finance. India’s energy security, for example, depends not on owning oil assets in remote fragile countries, but on ensuring that the global oil market works well and is not disrupted. Strong, independent, multilateral institutions that can play the role of impartial arbiter in facilitating international economic transactions are in India’s interest.

For now, the international monetary system remains dominated by the frameworks implemented by developed countries. Though this is slowly starting to change, there is a growing need for a rapid overhaul. As developed countries struggle with slow growth and large debt burdens, their interest in an open global system can no longer be taken for granted. Indeed, their policymakers’ attention is likely to turn inward amid growing demands for protectionist measures.

Responsibility for keeping the global economy open may thus fall on emerging countries like India. That is why these countries must press for quotas and management reforms in multilateral institutions and inject new agendas, new ideas, and new thinking into the global arena. India can no longer simply object to proposals by developed countries; it must put its own proposals on the table. Our research departments, universities, and think tanks have to generate ideas that India’s representatives can use.

India can continue to thrive if it invests in physical and human capital and pursues prudent fiscal and monetary policies. But this strategy also requires India to embrace its place on the international stage.

This commentary is adapted from his Bharat Ram Lecture, delivered in Delhi on December 12, 2014. Copyright: Project Syndicate, 2015.

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