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

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The Independent Online

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.