Grand, big picture reforms in India will take some time

Raghuram RajanNEW YORK: India’s new government may take some time to unveil “grand, big picture reforms” as it is currently focusing on implementation of stalled projects worth USD 50-70 billion that will pay dividends in the short run by helping on the inflation and income fronts, RBI Governor Raghuram Rajan has said.

“In India, if you are looking for grand, big picture reforms it may take some time coming…but in terms of decentralizing, in terms of doing the small stuff which adds up to the big stuff I think that is already happening,” Rajan said in a speech on India and the global economy at an event organized in Chicago by the Chicago Council on Global Affairs.

He said people have been expecting “major changes very quickly” from the new government and harbored the belief that it would be moving fast on a “number of dimensions that the people want them to move on.”

Rajan pointed out that the new Modi government has “stuck to the path the old government laid out” to show that there was continuity and this has benefited India in the eyes of the international investors.

“I think the government has essentially focused on implementation because that is really the need of the hour. Lot of projects are being stuck because of environmental permissions, forest clearances,” he said.

Rajan said it is important to get the stalled projects “back on the road” because there are USD 50-70 billion stuck in those projects, which once start functioning, would produce output that will help on the inflation and income front.

“Let’s get the projects back on track. The government is focused on that, it is not headline news… but it is something that will pay dividends in the short run and I think that is what they are doing,” he said adding that when the number of stalled projects start to come down sharply, “you will see something good is happening.”

In the longer run, once the economy comes on back on track there are “some major reforms” that probably need to be done. He, however, noted that in the short run, a number of states in India are moving ahead with labor and land acquisition reforms.

“We are still focused on macro stabilization. Current Account Deficit, fiscal deficit, inflation all those numbers hopefully will be better going forward and if the world started growing faster it will help countries like us tremendously,” he said.

Monetary framework
Rajan said the government and the Reserve Bank of India will this year negotiate to formulate a monetary framework for the central bank that lays more emphasis on inflation.

“This year the government and the RBI will negotiate together to formulate a monetary framework for the RBI…the idea is to move towards an objective which has much more emphasis on inflation,” Rajan said.

He said the focus for the RBI has been on controlling inflation and on creating a sound monetary framework. The RBI Act of 1934 does not say anything about the framework that the RBI operates under, he added.

“Since 1934 we have not figured out a framework for the RBI. (It is) time we do it. The government and the RBI will do that,” he said. Rajan reiterated that RBI is aiming to bring down the headline number to 8 per cent by end of this year and to six per cent by the end of next year.

“After that the framework will start kicking in and the government will determine what level it wants inflation at, through some kind of act,” he said.

Rajan also noted that India is finally seeing growth improve, with the country’s GDP growing to 5.7 per cent in the last quarter up from about 4.6 per cent a year ago. He, however, cautioned that while this growth is “reassuring” there is still tremendous room for further improvement.

“I do not want to jump up and down about this number. It is reassuring but we need more of it. My hope is that this year we do a (GDP growth) of 5.5 per cent, may be a little better” and target a growth figure in the 6s next year and around 7 per cent by 2016.

The fiscal deficit too had blown out from 2.5 per cent to 6.5 per cent and the government worked “very hard” to bring it down. He said the fiscal deficit is projected to come down to 4.1 per cent this year and by 0.5 per cent every year after 2014.

He, however, said that everything is not “hunky dory” and there is still lots that need to be done.
“After you cut the deficit the second step is fix the quality of the fiscal deficit,” he said. -PTI

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