Reserve Bank of India Governor Raghuram Rajan has a certain stature in the global financial world. He had predicted the 2008 global financial meltdown much in advance: in 2005, during his tenure at the International Monetary Fund he wrote a research paper in which he warned of financial sector-induced turmoil. Since then, Dr. Rajan’s words and actions in his line of work are watched and read with more than a cursory interest. Not surprisingly, his purported remark made at a London Business School programme last week on intimations of the Great Depression elicited wide reactions. The RBI had to intervene with a clarification to put the Governor’s articulation in perspective and context. “What Governor Rajan did say, in his remarks, was that the policies followed by major central banks around the world were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s,” it clarified. For quite some time now, Dr. Rajan has been voicing his concerns over the ‘competitive monetary policy easing’ by central banks across the globe. According to him, the current non-system in international monetary policy is a ‘substantial source of risk’ to sustainable growth as well as the financial sector. Unconventional policies have the potential to trigger huge risks when they are terminated. He reckons that such policies will push the world economy towards ‘musical crises’. In an inter-connected world, actions in one place trigger consequences elsewhere. In such a situation, domestic policy-planners have to factor in this ‘outside influence’ in their strategies.
Indeed, Indian policy-planners find themselves in a predicament thanks to the continued monetary easing by some nations and the shrinkage in world trade. Given this ‘new normal’ kind of an environment, they will have to look at ways to protect the Indian economy from external vicissitudes. In this context, a fund-starved country like India will do well to focus on foreign direct investment rather than get unduly worried about foreign institutional investment, which will have its ebb and flow depending on the environment outside. A 75 basis-point reduction in the key repo rate made in three equal instalments this year by the RBI has not really helped spur investments. A combination of capacity overhang, slack demand and banks’ mounting non-performing assets has only compounded the problems. With everyone waiting for the other to act first, the onus is definitely on the political bosses to devise quick solutions to accelerate the economy. Perhaps, the prescription of the Depression-era economist John Maynard Keynes is relevant now. Indeed, a bit of a socialistic approach to spur demand is unavoidable.
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