Senior fellow Arvind Subramanian pens an op-ed about the challenges facing India's new central bank governor.
As the next governor of the Reserve Bank of India, Raghuram Rajan, the professor turned policy purveyor, will be stepping unto the breach of India’s besieged economy. Economic growth has decelerated sharply, the fiscal deficit is about 10 per cent of gross domestic product, inflation has remained elevated at close to double-digits for over three years, and the current account deficit has widened sharply to unsustainable levels.
Short-term investors have fled. Perceiving an uncertain, unfriendly regulatory regime, long-term investors are wary of stepping in. As a result, the rupee keeps plummeting, imparting a distinctly pre-crisis reek to the Indian economy. As if this were not enough, the country is also gearing up for two bouts of elections within the next nine months. The likely strategy for the ruling Congress party is to blanket rural India with money to counteract a possible swing toward the opposition leader Narendra Modi in urban India. Fiscal prudence could be a casualty, further burdening the RBI and endangering the macroeconomic situation.
So what should Mr Rajan – an academic co-author of mine – aim to do? His immediate objective will be damage control. First, he will need to restore calm to the currency market, which will allow investors to return in sufficient strength to finance India’s external borrowing needs of about $25bn in the next six months. That will head off a crisis that the country can ill-afford.