He said central banks across the world are worried about deflation and want to promote growth to avert it at any cost.
“The IMF is supposed to look at these in a global sense, but the IMF has been sitting on the sidelines applauding these kinds of policies ever since they were initiated and hasn’t really questioned the value of these kinds of policies,” said Rajan, who was the former chief economist of IMF. “IMF does spillover studies which invariably say that these policies are good for a country and therefore good for the world, he said at an event here. “I think we need to examine these issues,” he added.
RBI Governor said: “Unfortunately if we look at central banking mandates across the world, no central bank has a mandate for the world. “Its mandate is purely domestic...what are you going to do to elevate employment and growth. It has to worry about the world only at second level...if I do something which creates problems for another country and as a result demand from that country falls off from my country’s, I should take that into account.
“I don’t care if I destroy the other country completely, so long as it doesn’t import from me.” Without pointing fingers on any particular country, Rajan said these kind of domestic mandates of central banks are there in every country. “We haven’t got mandates for the world. And I want to argue that we are in a world that nothing prevents these kinds of policies. There is nobody looking at them,” he said.
Talking about deflation, Rajan said there is a very strong fear, especially in the United States given its historical experience in the 1930s, that if deflation takes hold then we will have a Japan-like experience and will have to write-off 15-20 years of growth. “There is a very strong fear amongst the central banking community across the world that deflation has to be averted at any cost, and that is another reason to try and promote growth because when you have reasonable growth, you can avoid deflation,” he added.
Moreover, Raghuram Rajan underlined the need to make taxation more transparent so that the Indian economy is able to attract stable inflow of foreign capital for strong growth. He also called for more coordination between leading central banks, saying there is a need for more optimal use of the monetary policy tools globally as the world is increasingly staring at deflation.
“We need to make our tax regime more investor friendly. Let’s make taxation more transparent, more predictable. Let’s do all the things necessary to allow our businesses to create what is needed,” he said at a seminar organised here by ‘Gateway House’, a private think-tank on foreign policy.
Over the weekend, Finance Minister Arun Jaitley had also stressed on the need for friendly tax regime and promised to bring down corporate tax rate to 25 per cent over the next four years, beginning next fiscal, in a gradual manner from 34 per cent at present.
Rajan linked the easy and predictable taxation to achieving the goal of ‘Make in India’ plan of the government saying, “Let’s make in India, but for that we need to create the framework, let’s make the business easier.”
‘For 9% growth, investments and supplies must improve’
Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday said the country cannot have a GDP growth of 9 per cent until it makes “tremendous investments” and improves supply situation that boosts demand, but warned against populist policies. To a query on whether the country can have much higher levels of growth without inflation, Rajan said, “The answer is no. We have to create underlying supply conditions that would allow us to sort of have a much higher demand.”
To achieve 9 per cent growth, there is a need for large investments which could lead to higher demand, he said. “In some sense, I see 9 per cent growth as a situation where we are investing tremendous amount and thus creating the supply which will then help the demand.
So, what we need to do is not just boost demand but we need to boost supply also, which means a lot of work on a number of fronts which currently the government is engaged in,” Rajan said at an event here on Monday. He added however that reaching 9 per cent growth rate is a steady process and cannot be attained overnight. “That (the 9 per cent growth) is certainly an aspiration we should have but we need to eliminate the supply constraints, including our human capital,” Rajan said.
However, he cautioned against populist policies, saying they are driven by a desperate need for growth while the fact is that the real ways of growth are really hard. He also said that there is a need to improve the quality of human capital in the country.
On the G20 grouping, Rajan said, India does not have many good economists who could represent the country in various international fora and working groups. “The G20 framework working group is suppose to be co-chaired by Canada and India. Canada has seven strong economists working on this group and trying to further the agenda while India brings fewer people to the table because we don’t have that strength in the number of economists that we can actually contribute,” he said.
Rajan said the country does not have many people working in the government who have that kind of training and that kind of capacity. “As a result, what happens is more of the pen and the writing is done by the Canadians and they step up to the play.”