The arrival of a high-profile, reforms-oriented economist has created a stir in India’s finance ministry, which presides over an economy that has dramatically deteriorated over the past 12 months.
But Raghuram Rajan’s enthusiasm for reforms may not be enough to precipitate change in the government’s policies.
Dr. Rajan, the former International Monetary Fund chief economist who took charge as chief economic adviser to India’s finance ministry on Wednesday, didn’t have much to say on the first day of his job.
“I have no immediate comments to make on the Indian economy. As soon as we know more of the ground realities, I will speak,” he told reporters who had besieged his new office in New Delhi.
This reticence is not typical of Dr. Rajan, who is famous for warning of impending financial collapse at a 2005 gathering to honor former U.S. Fed Chairman Alan Greenspan.
Dr. Rajan has firm views on what ails India’s economy, which can be gleaned from a speech he made in April.
He is a strong believer in liberalization and privatization and says that the economic reforms of 1991 that set India on a high-growth path need to be carried forward.
“We need to become paranoid again [about growth], as we were in the early 1990s,” he said in the speech. To start with, he wants the government to raise fuel prices in quick steps and eventually deregulate them.
India subsidizes the prices of certain fuels such as diesel, cooking gas and kerosene to make them affordable to more people. These sops are blamed for swelling India’s fiscal deficit and fuelling inflation by keeping the consumption of fuel artificially high.
But Dr. Rajan is not alone in calling for the end to fuel subsidies. Apart from private-sector economists, the Reserve Bank of India and the Prime Minister’s Economic Advisory Council are strong advocates of subsidy reform.
What makes this reform difficult is a) the move is politically unpalatable and b) the ruling Congress party has to bring on board coalition partners before it can take such a step, a tough task for a politically contentious move.
“Deficit-cutting is a good thing, but the finance ministry has political compulsions,” says Ashima Goyal, who advises the Indian central bank on monetary policy.
Dr. Rajan’s predecessor, Kaushik Basu, had also arrived with strong credentials as an economist. He was a professor of economics and the C. Marks Professor of International Studies at Cornell University. Still, there’s not much he managed to push through in terms of reforms in the time he was India’s chief economic adviser.
Dr. Rajan has other challenges besides the government’s ambivalence toward reforms.
The biggest one is his lack of experience in India, says Ajay Shah, an economist at a Delhi-based think-tank who has known Mr. Rajan for more than 10 years.
After studying at the Indian Institute of Technology in New Delhi, Dr. Rajan has spent most of his career abroad. He was most recently professor of economics at the University of Chicago’s Booth School of Business.
Dr. Rajan, himself, is confident that he will be able to navigate through India’s notorious bureaucracy. “I have been an international bureaucrat, so bureaucracy in India is not foreign to me,” he said Wednesday, referring to his tenure at the IMF.
Friends describe him as a “people person” who is comfortable working in big organizations.
“He is not your typical socially-autistic academic,” says Mr. Shah.
Academics see him as a middle-of-the-road economist despite his background at the University of Chicago, which is known for strong free-market proponents such as Milton Friedman and Friedrich Hayek.
“Among rightists, he has a more balanced view,” says Ms. Goyal.
He may not believe that the government should stimulate demand through spending but he would favor action to augment supply, such as improving infrastructure, she says.
No comments:
Post a Comment