Thursday, May 2, 2013

India’s existing economic institutions could not cope with strong growth: Raghuram Rajan

Raghuram Rajan, the chief economic adviser to India’s Ministry of Finance, argues that economic growth slowed down in India due to two reasons:
  • As India’s existing economic institutions could not cope with strong growth, its political checks and balances started kicking in to prevent further damage.
  • Investment slowdown began as political opposition to unbridled development emerged. The resulting supply constraints exacerbated inflation.

He prescribes the following solutions:
  1. India must improve supply, which means shifting from consumption to investment.
    • By creating new, transparent institutions and processes, which would limit adverse political reaction.
  2. Over the medium term, axe the thicket of unwieldy regulations.
    • One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects. By bringing together the key ministers, the committee has coordinated and accelerated decision-making, and has already approved tens of billions of dollars in spending in its first few meetings.
  3. India needs less consumption and higher savings.
    • The government has tightened its own budget and spent less, especially on distortionary subsidies.
    • Households also need stronger incentives to increase financial savings.
      • New fixed-income instruments, such as inflation-indexed bonds.
      • Lower inflation.
      • Lower government spending and tight monetary policy are contributing to greater price stability.