Millennium Post

Encouraging any industry surest way of killing it: Rajan

He also disagreed with the frequent demand made by industry bodies to the authorities to "do something", such as lowering the value of rupee to boost merchandise exports and said the currency valuation might not be necessarily slowing down India's trade volumes. 

Rajan, known for being vocal on various macroeconomic issues, further said in a Project Syndicate article that advanced economies have been imposing risks on emerging market countries like India by pursuing aggressive monetary policies to stimulate demand. "Indeed, one day we face surging capital inflows, as investors go into 'risk-on' mode, and outflows the next as they switch risk off," he wrote. "I am often asked -- Which industries should we encourage? I would say that 'encouraging' any industry may be the surest way of killing it. Our job as policymakers is to enable business activity, not to dictate its course," he said. 

Rajan, the former Chief Economist at IMF, said India is trying to create a domestic platform of macroeconomic stability on which to build growth, so as to safeguard its markets from the 
external volatility. 

He argued that India has managed a growth rate of over 7 per cent despite "inhospitable global growth conditions" and and two successive droughts, any of which would have thrown the economy into a tailspin in the past. "The task is to build on this base... And, as advanced economies become more competitive, and as China moves up the value chain, more inputs are being sourced within countries. For all these reasons, the heady days of double-digit growth in Indian trade in goods and services will not return soon.

"Many emerging markets have been hit by lower prices for their commodity exports, but India's exports of goods seem to be doing worse recently than those of other emerging markets. "At the same time, India's exports of services are doing somewhat better, perhaps because of demand from the US," he said.

Rajan, who is currently in UK for a series of lectures including at the Cambridge University, said India is not alone in suffering a fall-off in trade, but "that does not stop industry bodies from demanding that the authorities 'do something' especially by lowering the value of the rupee". 

'Policy making is rather easy... the trickier part is political acceptance'
Describing his job of formulating monetary policy in India as a 'joyful' and easy task, Reserve Bank Governor Raghuram Rajan has said complexities arise when ensuring its political acceptance and one needs to be "a little more clever" for that.

"You can't bulldoze your way in some of these situations and therefore you have to be a little more clever... You have to understand where altering a policy from Economics 101 will make very little difference, but be politically more acceptable," he said.

Addressing Cambridge University students last evening as part of his concluding presentation at the two-day Marshall Lecture series 2015-16, Rajan said policy formulation in an emerging market like India is a fairly basic economics task as such. "A lot of policy formulation is Economics 101. Just like in industrial countries, there is a lot of stuff, which does not require deep insights of economics. To my mind, deeper insights come when you are trying to make it politically feasible," the former International Monetary Fund (IMF) Chief Economist said.

Asked how easy he found his job of economic policy formulation in India, he joked: "Formulation is very easy. I think it is harder to implement the policy." 

On a more serious note, he added: "The joy of trying to formulate policy in a developing country is that there are many more places where good policy can have significant effects. In that sense, there are lots of low hanging fruits and often no real impediment to plucking them.

"You have to be a little intelligent about what fruits are easy to pick and what are not so easy to pick. And if they are not so easy, what kind of strategies to pick." 

The on-leave Professor of Finance at the University of Chicago's Booth School was addressing the topic of 'Banks, Central Banks, and Crises' to conclude his two-day lecture series organised by the Faculty of Economics of Cambridge University.

In his first lecture titled "Why Banks?" on Tuesday, he had used what is described as "matchstick theory" to conclude that banks were peculiar yet enduring structures, which offered an efficient form of borrowing.

Picking up on the same theory, he went into greater theoretical depth about the workings of the banking system and the role that central banks play.
Next Story
Share it