Mr Rajan will need firm government action to tackle the ills crippling the economy. Will he get it? That really is the trillion-dollar question, and will set the tone for his equation with the government.
The signs of the times that the Reserve Bank’s governor-designate Raghuram Rajan will face were writ all over the stock markets on Tuesday as his appointment was announced. The rupee sank to 61.80 to the US dollar intra-day, but it did recover 1.03 paise at the day’s close. The Sensex tanked 450 points, with `1.4 lakh crore of market capitalisation wiped off and India lost its place in the trillion-dollar market cap club of 11.
Mr Rajan is an internationally reputed economist and has a remarkable academic and financial pedigree. But he will need much more than that to put the rupee on a strong dose of adrenaline. Monetary policy, however decisive, has its limitations in the Indian scenario where the real sector, where goods and services are produced through the combined utilisation of raw materials and other production factors such as labour, land and capital, is tottering under the weight of misgovernance, delays in infrastructure projects for want of land and environmental clearances, inter-ministerial squabbling over restarting mining operations, lack of focus on manufacturing and, most important of all, corruption and non-transparency in decision-making. India ranks 132nd out of 185 countries in “ease of doing business” and 173rd in “starting a business”. All these issues have been affecting investment, the current account deficit and the rupee that has become a hostage to whims and policy paralysis of the Manmohan Singh government. The trade deficit has been growing since October 2012, when the rupee was around 45 to the dollar, but the government did nothing. India has a trade deficit with 80 countries today, the rupee is at 61 to the dollar, but still there is no accountability for this.
Mr Rajan will need firm government action to tackle the ills crippling the economy as he tries to revive the rupee and tame inflation. Will he get it? That really is the trillion-dollar question, and will set the tone for his equation with the government. Incumbent RBI governor D. Subbarao, who he will replace, tried in vain to get the government to manage supply side constraints, but he only succeeded in inviting the finance ministry’s ire. Mr Rajan may well fare better at managing the government, particularly as he has so much more at stake. He has a considerable reputation in international academic circles, and will hardly want to meet his Waterloo on Mumbai’s Mint Street. With some prescience, he has lowered the bar of expectations people have from him by saying he has “no magic wand” to solve India’s economic problems but will work with the government to address these challenges. Will the rupee and the economy see a new dawn, come September? Wait and watch!
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