Tuesday, February 24, 2015

India’s best bet: MyGov with My Guv

IIFL | Mumbai | February 24, 2015 12:40 IST

Raghuram Rajan has met with stiff opposition from certain quarters for asking the right questions. Hope his detractors realize, if not wholeheartedly acknowledge, that these very questions will ultimately lead the nation towards better answers.
- Courtesy: http://www.indiainfoline.com/article/news-top-story/india%E2%80%99s-best-bet-mygov-with-my-guv-115022400382_1.html#sthash.42azfsJ4.dpuf

Even a cursory glance at Mr. Rajan’s thought process is enough to highlight the irrefutability of his wisdom. Those who find it obvious are oblivious of the multi-hued peculiarities of the Indian story and those who term it detestable are busy protecting vested interests. Before we get to the moot point, let’s summarize some of the perceptive points Rajan has been relentlessly stressing on:

That India needs to strike a fine balance between regulation and impulsion to ensure that the complexity of checks and balances are not reduced to self-defeating mechanisms that unknowingly hamper business and economic growth.

That Black money is as much an internal problem as it is an external one – calling for a disciplined culture of enforcement to demolish the very escape routes that enable people to park funds overseas in the first place, that a policy of moderate taxation coupled with austere enforcement is better than a regime of excessive taxation and its weak enforcement

That Indian government needs more domain specialists of proven credence to provide the right direction and depth to economic decision making.

That ‘Make in India’ campaign needs a complementary ‘Make for India’ mission primarily because an export-led growth model now poses new challenges for emerging economies in the wake of global slowdown and growing re-shoring initiatives of industrial economies.

That Indian must also strive to build a robust, internally-funded domestic market across sectors which merit the support of budget incentives as also a revamped supply-chain of optimal and efficient market intermediaries, not merely improved logistical arrangements.

That our banks need to recover from and guard against past blunders of design and execution for which they deserve enabling support from governmental, judicial and RBI in architecting their turn arounds by enforcing proactive, prudent and pragmatic lending terms to prevent defaults and fund misuse rather than deal with them in hindsight.

That the Urjit Patel disinflationary glide is tailored for India’s economy, and disinflation in our context need not be linked with the US scenario of late 70s and early 80s consequent to the-then Fed Reserve chair Paul Volcker’s preemptive disinflationary restraint that adversely affected construction and farming activity.

Of all his penetrating recommendations, the last two prove particularly unpalatable to some players for obvious reasons. Rajan’s proposed reform directly upsets the umpteen well-nurtured bank-to-business comfort zones replete with dubious debts and doubtful holdings. This menacing lobby has literally redefined the term ‘risk’ as cent per cent return by unabashedly enjoying its rewards and unperturbedly escaping its costs over the years.

On the inflation issue, certain quarters may have a logical point in taking objection to Rajan’s inflation-fixation, especially its impact on small businesses and given Rajan’s recent surprise rate cut (his critics see that as a flip-flop under severe governmental pressure) but they have no business to categorize Rajan as a Western-trained intellectual tailored for Wall Street’s cause. If they apply their minds, they would realize the depth and gravity of Rajan’s argument favoring sustainable growth as against growth alone.

If our expediently jingoistic sons of the soil care to introspect, they will appreciate the logic of Rajan’s argument, in urging India to take the lead in seeding new ideas and challenging the global status quo rather than be content with quota reforms. FDI, Rajan believes, is critical to India’s growth but not at the cost of comprising its own interests. He couldn’t have been more apt in this context when he says that it makes perfect sense to persist with rules for patenting a medicine in India, regardless of the contrary stance of foreign drug makers.

Very few possess his crystal clear clarity in unfolding the essence of financial regulation, as an effective means to ensure sound economic fundamentals and not as a trifling tool to boost the bourses alone. A bustling stock market, he contends, is most welcome but only as a collateral benefit, never as the prime motive of policy making. And his definition of economic inclusion goes beyond monetary confines to encompass quality education, nutrition and healthcare. He is dismissive of bellicose ideas like the inheritance tax which he feels adversely affects wealth creation in the sole focus on penalizing the well off rather than helping the deprived come up in life. How many before him have openly cautioned lenders on the need to evaluate the quality of student loans to avoid the route and fate of farm loans.

Nobody put the 2008 debt crisis in perspective like Rajan did in his incisive account ‘Fault Lines’ wherein he points out that avaricious bankers, dishonest homebuyers and reckless investment managers were only responding to three sets of fault lines: domestic political pressures, trade imbalances and incompatible financial systems. He’s been proactively vocal about the long term perils of inflated assets and misallocated capital in the global economy primarily arising from artificial liquidity injections. He has also highlighted the glaring disconnect between the Federal Reserve and central banks of other nations in that then US Fed decisions focused on domestic economy affect other dollar-governed economies in ways the fed reserve can’t either consider or anticipate.

Most interestingly, there are striking similarities between Fed Reserve chair Janet Yellen and our Raghuram Rajan, both incisive thought leaders and committed practitioners and both among the early predictors of the 2008 debt crisis. While Janet Yellen’s appointment proved to be Obama’s best-known compromise in the wake of Larry Summers’ (almost) willful resignation, Rajan is the PM Modi’s (sole) prized legacy from the earlier government. Both circumstantial choices have proved to be in the best interests of the respective nations.

Rajan’s arguments are critical to India’s growth story because they provide a functional and fruitful framework to rightsize the rhetoric of PM Modi’s Make in India campaign without hurting its wholesome fabric. Beyond doubt, MyGov needs My Guv. And India needs both.