Raghuram Rajan’s recipe to revive India's economic growth

Globally renowned economist Raghuram Rajan’s latest lecture at the Brown University is being used by the opposition in India to slam the government for its majoritarian approach while the supporters of the Narendra Modi administration are trolling the former governor of the Reserve Bank of India (RBI) for an alleged political attack on the government.

The fact of the matter is Rajan pointed out both the flaws and positives of the Modi regime in India and shared some ideas on how the currently sagging economy can be revived and put back on a high-growth path. “Let us not dismiss some of the good things that the Modi government did…. Consumption growth supported by borrowings and transfers as well as the household measures like the free cooking gas, really gave the people a sense that they were better off; despite the fact, unlike NDA-I, there were few deep reforms that liberalised growth and markets,” Rajan said in his lecture on October 12.

“But what the Modi administration did in economic performance, it is not sustainable. And therefore, unless it changes we’re going to have problems down the line,” he added.

So what is it that the government can do to improve India’s economic growth. Here’s Rajan’s “wishlist”, as he called them, in his own words.

1. We need to further move to de-politicise appointments of leadership at democractic institutions and reduce interference/intervention in their functioning.
   
   There is no more important institution than the Supreme Court but also investigative agencies like the CBI, CAG, CVC, CIC including the vice chancellors of different universities.Universities are an important source of independent ideas and to politicise appointments there is to reduce the flow of ideas to what is more politically convenient.
   
2. There is a need to go back to the path devolving funding from the Centre to the states but also from the states to the local bodies.
   
   The states have also been remiss in pushing funding to the local bodies. It is important that we not only devolve funding but also devolve powers. It will allow the people to hold the government accountable. The more localised it is, the more we can see what the government is doing and can object. Local police paid by local funds will be much more sensitive to local needs than for example the local police that is employed by the state and responds to commands from the state capital rather than the locals.
   
   
3. There is no point in offering more stimulus in the economy if the stressed sectors-- real estate, construction, banking, non-banking financial firms-- hold back any possible economic growth.
   
   There is a need, in such stress situations, for the government to come in through the regulator, look through the balance sheets of these companies, figure out which ones can be saved and which one cannot be, and figure out a way for the ones that cannot be saved to be put them in some form of receivership so that they don’t serve as an overhang in the market. This is the classic game plan for distressed situations even if it involves private sector firms so long as these can be systemic.
   
   Given that non-banking financial firms are 17% of the economy, you can’t avoid doing this. If you keep avoiding it, eventually the problems will spread more widely. Unless the government is completely sure that each one of these stressed companies is isolated from the rest of the system, it is extremely important that you do that ‘search and rescue’. Providing liquidity is not enough.
   
   Release the stressed assets, like unsold apartments for example, into the market at a reasonable pace.
   
   Some of the decisions are going to be arbitrary, some of them are going to be the source for future governments to accuse you of shenanigans and investigate the process and send the CBI etc after you. But this is governance, and it is about taking hard decisions. You can make it as transparent as you can.
   
4. Improve the functioning of the factor markets -- land, labour, finance, regulations.
   
   India has workers who you can hire and fire at any time -- they have no rights whatsoever -- and those permanent labour who have all the rights and you can’t fire them. We have both those and nothing in the middle. India would be better off if it would ‘grandfather’ those guys who have permanent jobs, but find a way to move the guys with temporary jobs, contractual jobs to more security by giving them multi-year contracts and building up their stake in the firm by, for example, increasing severance pay over time.
   
   There are things you can do to improve labour markets even while adding more flexibility-- things that would improve job security. Not everyone will have a permanent job but it would give people much better than what they have today, which is really contractual uncertainty.
   
   One of the biggest stumbling blocks in India is acquiring land. We are a democracy and we need to acquire it in a fair way, which gives the person who sells the land substantial revenues in the future e.g. land sharing agreements. Take 5 acres, develop all 5 and give back 2 acres to the farmer or whoever you have taken it from. Many of these work but we need to find the best practices here and not get stuck in an equilibrium where we can’t buy the land-- the land that the farmer actually wants to sell. But we can’t buy it because we can’t agree on a price that is reasonable and not subject to political intervention later.
   
5. Prune some regulations while improving others.
   
   There are some areas where we are under regulated. If you see the way houses are built in hill stations, we will know that whatever zoning laws we have don’t seem to function there.
   
6. Reduce the public sector presence.
   
   Part of the reason why governments in India have so much power is because they control financing. 70% of the banking system is in the hands of the government, there are also a number of state-owned companies, the Life Insurance Corporation is under the thumb of the government. When you have so many ways to favour some and dis-favouring others, it is a temptation for any government. It is a source which can affect people’s actions.We need to reduce this as it will make India far more democratic and also far more amenable to growth.
   
7. Keep tariffs relatively low, keep them relatively predictable, that will bring more foreign direct investment.
   
   We need to focus on making India more export competitive but we can focus not just on manufacturing but non-traditional exports like education. Improving our educational institutions and getting students from the rest of the world would be a way of exporting. Similarly, healthcare. We can provide doctors to the rest of the world. Why not export Indian services by getting patients to come to India. That means make their experience much easier. Tourism is, of course, a big service factor.
   
   Even for manufacturing exports, we need a more transparent, institutionalised process for changing regulations and tariffs on investors. Today, it’s on a whim and can be changed overnight. This was a complaint that Amazon and Walmart had. They thought they were buying into a particular regime and started investing on that basis and the rules changed on them overnight. We need a more transparent process for this.
   
   If we move towards a government with more checks and balances and a more market-driven economy, not only will the private sector become more efficient and independent, it will become a more of a check on the government, like in this country (US). I am not saying that the private sector in this country (US) is perfect. I am just saying, in industrial countries there is a power that is independent of the government, that is the private sector and that is a good thing.
   
   Without stronger growth, distributive policies, which have been quite effective, will overwhelm revenues, driving the economy into a hard corner.
   
8. Ignore fiscal deficit at your own peril.
   
   There is sometimes a sense in India that fiscal deficit doesn’t matter-- let’s spend more. That would be disastrous.
   
   One of the things that India has done well over the last few decades has been to run a reasonably tight ship. There have been populist pressures but we have reversed them in times of trouble. For example, the efforts taken in 2012 to reduce spending and deficits protected the Indian economy during the ‘taper tantrum’ by the US in 2013.

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