Dr. Raghuram Rajan

If we can get some of the growth momentum, partly by completing large projects and partly by creating better sentiment, I think we will see a turnaround   Read More >>

   IBEF: IIP numbers for FY 2012-13 are at a 20-year low. How do you see industrial growth shaping up in the current fiscal? Dr Raghuram Rajan: The slow industrial growth, in part, is due to some of the aspects of industries such as power production and other infrastructure areas. I think that by getting some of the large projects restarted and completed, you will, in a sense, re-energise growth in a number of ways; including the fact that when these projects are completed, their promoters have more cash flow coming in. They can then also sell off some of the debt on these projects to other entities and sometimes even sell off these projects; and thereby liberate or create the financial capacity that they need to undertake new projects. So my sense is that if we can get some of the growth momentum, partly by completing large projects and partly by creating better sentiment, we will see a turnaround from the current pessimism. I think the turnaround is underway. I would hope that we would achieve our predicted growth of 6.4 per cent next year – somewhere in the 6.1-6.7 per cent range. It’s a wide band, but I think we will reach somewhere in that band next year.   Read Less >>

As inflation comes down, people will shift from savings in gold, which acts as a part of the CAD; to making financial savings that will reduce the CAD.   Read More >>

   Dr Raghuram Rajan: The current account deficit is more a residual of policy rather than a target of policy. You do all the things that you can, and if you bring all of them together, you bring down the current account deficit (CAD). CAD essentially reflects the fact that you are spending more than you are saving. That’s technically the definition of the CAD, which means that you need to borrow from abroad to finance your investment. Ideally, the way you would reduce your current account deficit is by saving more, which means consuming less, buying fewer goods from abroad and importing less. Or, the other way is by investing less, because that would allow you to bridge the CAD. Now we don’t want to invest less. We have enormous investment needs. So ideally, what we want to do is save more. The first way is for the government to cut its under-saving or its deficit and that is part of what we are doing. The second way is when the public decides to save more rather than spend. We need to encourage financial saving. I think as inflation comes down, that will happen; and people will shift from savings in gold, which acts as a part of the CAD – to making financial savings that will reduce the CAD. Apart from that, the other way to look at the CAD is your trade deficit. Can we reduce the trade deficit? One aspect is to import less and the other is to export more. Can we create the conditions for India to export more? It means a focus on competitiveness, which is where all the infrastructure spending and investment in human capital will help. My sense is that investment will be the way to create a more competitive India, which will help us bring the CAD under control over time. In the meantime, we should try and encourage savings; try and create a better environment for businesses to set up and enable the efficient and safe financing of the CAD. This includes things like allowing more FDI; because that is a form of investment into India coming from abroad, which allows us to finance the CAD.   Read Less >>

My sense is that in a three-speed world, India is probably in the first ranks even now, but has the potential to move up even within that first rank of countries in the next few years   Read More >>

   Dr Raghuram Rajan: I think that in the short run, India has different issues as compared to some of the industrial countries that are labouring under huge debt loads and very weak growth. In India, some of the problems have to do with stabilising inflation, bringing our large current account deficit under control, bringing our fiscal deficit under control, etc. All these are part of macroeconomic stabilisation, but the growth potential is far greater than industrial countries. And it looks to be something that we can harvest for the next 20 years if we play our cards right. So I don't think that anybody in India is pessimistic about our capacity to grow if we do the right things. On the other hand in some of the industrial countries, there is some pessimism about the capacity to grow even if the right policy initiatives are undertaken. In India, the fruits are low hanging in many ways. Just building out the infrastructure will create an enormous amount of growth. Add to that the manufacturing that sits on top of that infrastructure and benefits from it; you will get additional growth. Add to that our young population, which is entering the labour force; you get yet more growth. And add to that the capacity to do things more cleverly than we have been doing it – to move up the skill chain or the value added chain – I think that all those will add to growth. So I have no doubt that if we do the right things in the next 20 years, we will create growth. And then, remember that India is already a US$ 2 trillion economy. A US$ 2 trillion economy that is growing at 7-8 per cent a year is creating an enormous amount of additional growth, which can be a source of growth for companies across the world. So my sense is that in a three-speed world, India is probably in the first ranks even now, but has the potential to move up even within that first rank of countries in the next few years. Again, it is important that we don't become complacent, it is important that we do the right things to stabilise the problems that we are faced with today. But I have no doubt that the problems are fixable.   Read Less >>

Manufacturing relies on services like advertising and information technology. So to the extent that India already has a fair amount of capabilities there, it can actually make it easier for manufacturing to emerge, than in the past   Read More >>

   Dr Raghuram Rajan: You know services range from activities like banking and financial services, which require higher level of skill to more mundane activities like retail, which require lower level of skills. The services sector in India runs the gamut of these kinds of activities. Experience and capabilities in services can help manufacturing. After all, manufacturing relies on services like advertising and information technology. So to the extent that we already have a fair amount of capabilities there, it can actually make it easier for manufacturing to emerge, than in the past. And it can make it easier for India to have a competitive advantage relative to some other countries at the same level of development.   Read Less >>

In higher education, the expansion has been tremendous in recent years. But we are also improving the quality of vocational education – of skills like plumbers, electricians, technicians, etc   Read More >>

   Dr Raghuram Rajan: India is a services power, but not a manufacturing power as yet. Manufacturing accounts for around 15 per cent of GDP, and many countries at India's level of development have a bigger manufacturing sector. So the question is what is impeding India's manufacturing growth? The problem is not our capability. We have some very good companies. Companies like Bharat Forge are world leaders in what they do. We have a very robust car manufacturing sector. So it's not that we don't have the capabilities, but we still don't have a large manufacturing sector catering to the rest of the world. I would say that the three biggest factors are infrastructure, regulation and skills. All three are going to change dramatically in the next ten years. On infrastructure, there are enormous new plans. Just as an example, we have the Delhi-Mumbai Industrial Corridor that is going to link Delhi and Mumbai with a six-lane highway, high speed freight line, and nine industrial zones; where land will be acquired, infrastructure will be created, power will be assured, and companies can set up operations there. So that's one. We will create the infrastructure and it is being built out. The second is regulation. We need to reduce the regulatory burden on firms. There are a number of initiatives underway to do this. And I think that in these new industrial zones, there will be experiments at reducing the regulatory burden enough so that small and medium enterprises can set up without a huge burden. I think in addition, many government organisations are moving to do more IT (Information Technology), and enabling those processes that will help increase government efficiency and reduce the regulatory burden. The third element is skills. We have a large potential labour force. But they need the right skills. In higher education, the expansion has been tremendous in recent years. But we are also improving the quality of vocational education – of skills like plumbers, electricians, technicians, etc. I think that a combination of engineers, management specialists, etc. with moderate but specialised education in areas like vocations, will help provide the labour force for manufacturing. So in each of these, we need to do more work. But the work is underway and I think that in the next 10 years, you will see the fruits emerge.   Read Less >>