Raghuram Rajan calls for second-generation reforms

Noted economist Raghuram Rajan on Thursday called for second-generation reforms in India to tackle the current crisis of a slowing economy and to set the stage for strong growth in the next few decades.

Addressing the third Business Standard Lecture on ‘Rise of the rest: Opportunity or threat for the West’, Rajan said, “We need to go back to fundamentals and think about what made us grow. The first generation of reforms was very important in this process. We need a second generation of reforms.”

C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, who chaired the event, said growth of the Indian economy might slip to seven per cent this year and there was need to pay special attention to inflation. He said the trade-off was not between growth and inflation, but inflation and medium-term growth. Therefore, he said, in the short term there could be fiscal expansion but consolidation was needed over the medium term.

The event, which also featured the release of the fifth Business Standard Annual edition, a compilation of essays on contemporary issues, was attended by over 100 eminent people from the fields of policy, economics and corporate, including Planning Commission Deputy Chairman Montek Singh Ahluwalia, Competition Commission of India Chairman Ashok Chawla, UIDAI head Nandan Nilekani, former RBI Governor Bimal Jalan, MCX Stock Exchange non-executive chairman Ashok Jha, and former CII mentor Tarun Das, among others.

Rajan, the former International Monetary Fund (IMF) chief economist, said the silver lining of a crisis is that it can make countries focus on what is needed to be done. In the past, too, crises had led to reforms in India, be it 1991 or the late 90s, when after a period of monetary tightening inflation was brought down, he said.

He also urged the industry to come together and push for reforms instead of focusing on narrow, individual gains.

The first generation of reforms in 1991 had pushed India to a high growth trajectory. The reforms marked an end to the licence raj era, opened up the economy to foreign investments, and introduced trade liberalisation and tax reforms.

India’s GDP grew at 3.6 per cent from 1950 to 1980, at 5.6 per cent from then to 1991-92, and at 6.5 per cent from then to 96-97. It grew at nine per cent in three quarters preceding the 2008-09 global economic crisis. However, in 2010-11 the growth fell to 8.5 per cent and is expected to come down to 7.5 per cent this year.

Prime Minister Manmohan Singh is credited for the reforms 21 years ago, but the current government under his leadership is not able to move ahead, with some of the key reforms stalled and the government accused of a ‘policy paralysis’. Many of its proposed reforms, including opening of multi-brand retail to foreign investors, higher foreign direct investment in insurance and the pension sector, have not seen the light of day.

Rajan said the problem in India was due to low growth in rural productivity, unlike China where rural entrepreneurship was the biggest growth driver for years. According to him, India has simply shifted resources to rural areas through transfer programmes like the guaranteed rural job scheme and minimum support price for crops, without the concomitant rise in farm productivity. That has fuelled demand for goods and services and led to high inflation.

“We don’t have the luxury of high growth (any longer) to indulge in populism,” said Rajan, the Eric J Gleacher Distinguished Service Professor of Finance, Booth School of Business, University of Chicago.

Talking about the global economy, he said the probability of a repeat of the 2008 global economic meltdown was below 20 per cent, but even then it should not be ignored. In his view, the US is recovering and will probably grow a bit, but needs to rethink for the long term as it is saddled with serious political divisions and its education system is not keeping pace with its labour market needs.

Rangarajan said India’s current policy regime was adequate to support eight-nine per cent economic growth, though bottlenecks like land acquisition and environment issues had to be dealt with.