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Rip Van Winkle, Rajan & the Indian economy

K. T. Jagannathan
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t’s never easy to satiate the appetite of the stock markets. If their expectations aren’t fulfilled, they turn vengeful. When Raghuram Rajan served a ‘wrong one’ (by raising the repo rate) in his maiden policy review as the Governor of the Reserve Bank of India, the markets tanked.

Tongues have already started wagging, and a section has started painting Rajan as the new villan in the uncertain story of Indian economy. One can view Rajan the individual through the prism of politics. Rajan the Governor, however, has no luxury to look at the economy from the narrow angle of politics.

Delivering the R. Venkataraman Endowment Lecture at the Madras School of Economics in Chennai recently, former Governor D. Subbarao asserted that inflation hurt poor the most. “Concerns of the voiceless poor are not heard by the media. It is RBI’s responsibility to address them,” he went on to reiterate. With the headline inflation rising to a six-month high of 6.1 per cent in August, Rajan, nay the RBI, cannot afford to give in to popular demand.

A whipping boy

Is interest rate the lone factor coming in the way of growth? Is it the only contributor to spiralling cost?

The ‘interest element’ is over-stressed in all the discussions, since it appeals to popular sentiment. The Finance Minister , in the past, had referred to ‘walking alone” if required, suggesting that the RBI should heed to rate cut demand by focusing on growth (rather than adopting a blinkered-horse like approach to price stability).

The fact of the matter is that the present ecosystem isn’t conducive enough for enterprises — both from within the country and across the border.

A host of factors — ranging from policy paralysis to uncertain rules and new-found activism of all sorts — have effectively ensured that business sentiment remained at the bottom. Examples are dime a dozen. The retrospective tax notice on Vodafone, the Tata Nano fiasco in West Bengal, the coal impasse, the telecom tangle, the mining controversy, and the list goes on and on.

Whose business is it to create the right ecosystem? Somewhere along the way, our political managers appear to have let things to drift far too long. Like the proverbial Rip Van Winkle, they have woken and now discover the environment to be topsy-turvy.

All of a sudden, one finds a rash of actions in the form of reform initiatives. As it nears its second innings, the UPA-II at the Centre is in a tearing hurry to sign off as many reform measures as it can . With the general elections just around the corner , it is somewhat difficult to place faith on the ability of the political bosses to have a tight leash on fiscal discipline.

What has accentuated the situation is the inability of the political class as a whole, cutting across regions, to engage in constructive dialogue over matters of the economy.

Though global headwinds have subsided somewhat in the last few days, turbulent times could return if the Fed (Federal Reserve of the U.S.) decides to commence tapering off its stimulus package. Rajan the Governor has indeed a tough tight-rope walk ahead. He has dropped more than enough hints to suggest he may not be averse to walk alone if warranted!

jagannathan.kt

@thehindu.co.in


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