India's new central banker can only do so much

India has been hit the hard by the financial crisis, but responsibility lies squarely with its policymakers - not its new "rock star" central banker, Raghuram Rajan

Share

The new Governor of the Reserve Bank of India has stellar credentials. Raghuram Rajan is a distinguished academic, a former chief economist at the International Monetary Fund, and one of the few who had either the wit or the gumption to call the global financial crisis. He is also – along with Mark Carney at the Bank of England – a member of the new breed of high-profile, “rock star” central bankers from whom great things are expected.

Even Mr Rajan’s manifold talents may not be sufficient for the formidable task ahead, however. His arrival at the RBI yesterday may have been accompanied by a sharp rise in the embattled rupee; but dealers pointed out the central bank’s own aggressive dollar-selling and suspected a plot to avoid the new Governor’s first day co-inciding with an all-time low. The latest economic statistics were less obliging: GDP is growing at its slowest rate for four years thanks to contractions in services, mining and manufacturing.

Ostensibly, India’s problem is that signs of recovery in the US – and with them the Federal Reserve’s decision to “taper” its bond-buying programme – have prompted investors to pull out of emerging markets. Hence the rupee’s plummeting value. But responsibility does not lie with intractable global forces alone. Of the developing economies, India has been hit the hardest. Why? Because it has some of the trickiest fundamentals – and for that, responsibility lies squarely with its policymakers. Not so long ago, India was at full-throttle. After years of double-digit expansion, there was even talk of overtaking China as the world’s fastest-growing economy. But rather than using the good times to push through much-needed but unpopular reforms – liberalising labour and energy markets, boosting investment and tackling graft – the government papered over the cracks with cheap credit, much of it courtesy of US quantitative easing.

Now, with the wave of money receding, and China also slowing, India’s ballooning deficits can no longer be ignored. Nor are problems of grinding poverty, appalling health and widening inequality any closer to being solved. Inflation at 10 per cent, and rising, only adds to the woe.

No wonder more febrile commentators are talking of India’s worst economic crisis for two decades. There is much that Mr Rajan can do. He can restore credibility to monetary policy by keeping interest rates high, despite slowing growth. He can also press for India’s ailing banks to be recapitalised and its financial sector reformed.

Most of what India needs must come from Delhi, though; and attentions there are concentrated on next year’s elections (as the latest costly food subsidies make abundantly clear). Yet until politicians do their bit to control government debts, free up sclerotic markets and drag India’s wretched hinterland into the 21st century, their hopes of Mr Rajan will be sadly disappointed.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

English Teacher- Manchester

£19200 - £33600 per annum: Randstad Education Manchester Secondary: Are you a ...

Trainee Recruitment Consultant - SThree Group - Bristol

£18000 - £23000 per annum + Uncapped Commission: SThree: SThree Group has been...

Secondary Japanese Teacher, January 2015 - China

Negotiable: Randstad Education Group: Position: Secondary Japanese TeacherRequ...

Trainee Recruitment Consultant - Manchester - Huxley Associates

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

Read Next
A study has revealed that 80 per cent of us underestimate the calorie content of a glass of white wine  

Aside from the crushing boredom, giving up alcohol feels pretty great...

Siobhan Norton
Jules and Delaney  

Disney needs a princess with Down's syndrome

Keston Ott Dahl
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes