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Banking on India's economic renewal
Publication Date : 16-09-2013
Hopes are riding so high in India for new Reserve Bank Governor Dr Raghuram Rajan, ahead of his first full policy address on Friday, that a popular commentator feted him as the one capable of putting "sex back into the limp Sensex" (a key benchmark index).
Rajan, one of the few economists who predicted the 2008 financial crisis, will certainly need to draw on all his prescient ways to steer the drooping economy and falling rupee to safety.
But are Indians' expectations overdone?
"Swings between over-exuberance and self-flagellation", as Rajan noted, have characterised assessments of the economy's trajectory. A clear-eyed appraisal by the University of Chicago professor will be helpful to order priorities, build a consensus on action lines and restore confidence.
Stabilising the rupee (Asia's worst performing currency) requires attention as persistent weakness unnerves investors and makes them dwell excessively on the economy's other weak points.
It also raises the cost of imported oil that India relies on almost entirely and accentuates high consumer price inflation. The next order of business would be to spell out credible growth measures, rather than to just implore Indians to stop buying gold to help ease the current account balance - an act that bears a whiff of desperation.
The course of sound policy implementation, however, never did run smooth in India and politics has been culpable for much unfulfilled potential. First prime minister Jawaharlal Nehru's "socialist rate of growth" saw the economy stagnating for decades while East Asian nations powered ahead with double-digit growth.
Much-needed reforms came with the economic liberalisation of 1991, heralding a period of gains in diverse socio-economic areas. The period from 2003 to 2007 was one of high growth rates.
During those heady years, some analysts proclaimed that India would become the third-largest economy in the world, behind the US and China. When the economy turned anaemic from last year, sentiment swung the other way and India was said to be facing its worst financial crisis in decades.
There has been much criticism of lingering issues like misgovernance, political gridlock, endemic corruption and stifling red tape. These need to be tackled vigorously, notwithstanding the political uncertainty generated by a general election expected to be held next May.
India needs collective resolve to rebuild confidence by pressing on with its liberalisation programme and other reforms. Fortunately for India, its new central bank chief is a dyed-in-the-wool pragmatist who sees even small steps towards much-needed change adding up to "large strides" if these can be sustained.