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IB Economics: India - Raghuram Rajan, Central Banker: India’s James Bond?
12th January 2014
The recent BBC series on the Fragile Five and Linda Yueh’s blog on what we can expect in 2014 have each brought a sharp focus on how India may fare.
The slowdown in GDP growth since 2010 abated with a good monsoon boosting agricultural output, and helping to dampen inflation in the final quarter of 2014, with a growth rate of 4.8%. Wholesale price inflation is running at 7.52% and interest rates were held this month at 7.75%.
Persistent allegations of government corruption continue, leading to the success of Arvind Kaejriwal’s anti-corruption Aam Aadme Party in the recent Delhi assembly elections; the outcome of this year’s general election is uncertain and foreign capital flows have begun to fall. Regulations faced by foreign companies who locate and invest in the country are still seen as over-zealous- Wal Mart recently pulled the plug on a deal to set up branches in India, Tesco decided to stay and boost its range of stores after rules on local sourcing of products were deferred for 5 years. Infrastructure problems remain. Building of the Mumbai metro took five years longer than scheduling after a legal dispute over the location of a key bridge…
With Central government hampered by a large budget deficit and the cost of the Food Security Bill that guarantees basic foodstuffs at subsidized prices, the Central Bank has been charged with using the marginal gains philosophy to boost growth, keep inflation low and stable, support the banks and to stabilize the value of the Rupee.
Enter Raghuram Rajan- a great article here from Forbes India about the challenges he faces in 2014
Former Chief Economist at the IMF, Mr Rajan is popular with the ladies and may well drink sip dry martinis as he seeks to save India from economic malaise. In India, he is likened to Rajnikanth, a tough guy actor from South Indian movies. He has begun a series of minor tweaks that include measures to support the banking system. Much like China, India’s banks, though not exclusively privately owned, sit on a large debt pile, a result of the property boom in the big cities. In Mumbai even apartments in the northern suburbs can go for US$600, 000. Middle class India is evident in Mumbai- sleek shopping malls, car show rooms, and a growing range of local designers and producers in suburbs such as Bandra, Juhu and Powai illustrate rising wealth and the globalization of tastes.
New licences have been issued for private banks, including one set up to support Indian women; foreign banks have also been encouraged and can now set up wholly owned subsidiaries, no longer required to find a local partner. Commercial banks now need to buy fewer government securities. Steps have also been taken to encourage Non Resident Indians (NRIs) abroad to deposit more money back in India banks. Together it is hoped these changes stabilize the value of the Rupee by balancing any loss in capital flows.
Rajan says India won’t need any money from the IMF. In fact, he told the BBC in this interview that India is now a net contributor.