Ad Here  
Little surplus after salaries, subsidies and debt servicing Make way for Make in India... Strategic planning the missing link Oh my GOLD Policy Makers An eventful week with VVIPs of Delhi Technology and economic development should be linked Welcome Measures. Work for 10X Change Reform this licence to…kill Focus on agriculture and human resources Wanted: decentralised financial system What the big B should offer? Outward ho Much ado about nothing TN - so much to offer... Rail-road Rajaraman Weaving wealth of western Tamil Nadu Ganesh’s mantras Welcome move to widen the tax net… They add lustre to Padma Awards A tale of two Bihar babus 1800 parties registered with EC – Less than 60 contest elections Why (not) abolish? Skewed Economic Zones? When the examiner cheated... How will it PAN OUT Star of the South Deming awardees galore! Better relations with UK... Well-administered State Sustainably developing manufacturing sector… Trail-blazing Tamil Nadu Sowing seeds of hope Indian GST – Between extremes… A gratifying record Welcome rains for damaged roads... MS Installed The deluge and the several kindly souls Research for survival... PC please be our Santa BJP can now hasten its thrust for reforms Tryst with GST Need for radical RBI reform An eco-friendly commute in Mysuru Public investments and welfare will surge Why throw baby with bath water? Pool energy prices Miles to go... A dual GST that will protect prosperous states A historic indirect tax reform Need plan over the long term planning If not Tamil Nadu, where else? INDIA keeps its date with destiny Chennai Airport-Ready for a rapid take off... Two welcome measures from the chief minister... Land, land everywhere, but... Industry can’t get it from Mars, yet It’s raining funds for states. Really? Economy through the month Low profile moves Truce at Kasturi Buildings Healthy finances of the Chennai Corporation In the horns of a dilemma Jobs - Lost, Changed or Gained A blueprint for the future Babes In the wood-RBI North block has little clue to curb inflation South India’s 100 most valuable companies Kudos to GIM organisers... CSR, tech revolution and bank crisis Sardar Sarovar – the seventy year itch Tax evaders’ get out of Jail-Free Card A Fine division of responsibilities Cleansing Indian retail After all, customer is the king Focus on southern TN... Babes In the wood-RBI North block has little clue to curb inflation You too T M Krishna? No groundnuts in groundnut oil! Breaking news or breaking credibility? Much can be done by us The Great Fall CAD and the emergency thereof
Miles to go...
It is when the going gets tough that the tough have to get going. If the tough ride out a storm, it lays a good foundation for successful, long-term performance.

The technocrat and economist of international repute Raghuram  Rajan, displayed high level intellect and strategy in riding out the storm that hit India’s financial markets last summer, soon after he took over as Governor, RBI.  At the end of a year of his tenure, he has stabilised the situation and laid a good foundation.  But successful long-term performance and the attainment of visionary long-term goals for India’s economy and financial system are contingent on the political economy. The Governor himself seemed to be acutely conscious of this when he said recently that the economic discipline should be re-designated as ‘political-economy.’


Economic storm

It indeed was a perfect economic storm when Rajan took charge as Governor early in September 2013 marked by: (a)  a currency in free fall, falling more than 20 per cent in the space of two months; (b)  stubborn and rising double-digit inflation;  (c) collapsing investments and sliding growth; (d) enormous strains in the balance sheet of the Indian banking sector, as non-performing loans ballooned.

The select macro-economic indicators (Table 1) capture the essence of the overall situation, both when Rajan took over and now. For, he has only stabilised the situation and none of the long-term macro-indicators are structurally any better now.

As can be seen, while growth was sliding, overall inflation rose and corporate capital investments collapsed. Technically, this combination of economic conditions is termed stagflation. All these imbalances got reflected in the country’s external trade deficits through the course of the second half of the 2000s. The external deficit increased more than 100 per cent in 3 years. It then duly got reflected in the rupee coming under intense downward pressure in the foreign exchanges, with the local currency losing a third of its value between 2011 and August 2013.


Monetarily India is unstable

From a central banking perspective, the root cause of all the macro-economic problems is that ‘monetarily’ India has become highly unstable. Monetary instability is implied by the double-digit inflation, which has raged for seven years now.  Therefore, it was no surprise that in his first statement as Governor, Rajan said that the RBI would go back to the basics. It would focus on preserving domestic monetary stability and the purchasing power of the Indian currency. Indeed, Rajan drew attention to the RBI’s founding charter, which says that the role of the central bank is to regulate the issue of bank notes, preserve monetary stability and generally operate the currency and credit system to the country’s advantage.

Barring bank notes management, the RBI has not covered itself with glory on the other responsibilities.  The proximate cause of the serious economic downturn of the past seven years is that inflation has become entrenched. Therefore, zero marks on monetary stability. As for operating the credit system to the country’s advantage, there is not much to be proud here also. How can we be when nearly 10 per cent of the banking sector’s credit assets are of doubtful quality (sharply higher than earlier period averages) and also importantly, nearly 90 per cent of India’s  SME businesses have no credit links at all with the formal banking system?

Will Rajan succeed? Well, his long-term success depends on whether the political establishment fully embraces the basic objectives set by the RBI’s charter.

Author :
Reported On :
Sector :
Shoulder :
IE, the business magazine from south was launched in 1968 and pioneered business journalism in south. Through the 45 years IE has been focusing on well-presented and well-researched articles. When giants in the industry stumbled to keep pace with the digital revolution, IE stayed affixed embracing technology.
Read more
Economist Communications Ltd is committed to ensuring that your privacy is protected.
Read more
You agree that your use of this Website and the purchase of the magazine will be governed by these terms and conditions.
Read more
S-15, Industrial Estate,
Chennai - 600 032.
PHONE: +91 44 22501236