India is suffering a host of economic problems: poor infrastructure and stubborn inflation that keeps interest rates high, dependence on imported fuel, a current account deficit due to low exports and high imports, and fragile confidence that has deterred business investment. Plus, the government’s budget is in deficit due to costly fuel subsidies and the fiscal position is likely to deteriorate because of the looming cost of a new law guaranteeing food for the poor. To make matters worse, many foreign investors had been pulling out of India and other emerging markets because of expectations that the US Federal Reserve would scale back its easy credit policy that had sent “hot money” into riskier developing markets in search of higher returns. The Federal Reserve surprised many on Wednesday by keeping the easy money going for now. Stocks in India and other emerging markets rebounded but the withdrawal of stimulus is only a matter of time and is likely to churn world markets again.
Raghuram Rajan himself wrote in a recent article that the true solutions for the Indian economy are – making it easier to do business in India – by improving infrastructure, easing regulations that slow down investment, reducing subsidies for fuel and controlling double deficits in the national budget and current account. These are all tasks that are the responsibility not of the Reserve Bank, but of the central government.
Rajan also warned that the US Federal Reserve’s surprise decision this week to refrain from scaling back its monetary stimulus, which had the side effect of reducing pressure on the rupee, is only a temporary reprieve and should be used as a window of opportunity. “We must use this time to create a bullet-proof national balance sheet and growth agenda which creates confidence in citizens and investors alike,” Rajan said.
(Source: Hindustan Times Dt Sept 21, 2013)