The Rajan Effect
“To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.” - Raghuram Rajan
Relevance: GS III (Economy)
- Prelims: Monitory instruments; 15th Finance Commission;
- Mains: Economic Policies; International monetary markets and trends;
Why in the News?
Dr Raghuram Rajan, (former Governor of RBI) has challenged the current narrative of India landing in the company of developed countries in the next 25 years.
- This has generated a great deal of controversy.
About:
- Dr. Raghuram Rajan has questioned the economic growth trajectory charted by Government economists leading to subsequent opposition and trolling on social media platforms.
- Rajan revealed that the RBI was against demonetization and that he had warned the Government of its potential negative effects.
- In fact, one cannot in any way say that demonetization has been an economic success completely.
- At the Annual Jackson Hole Conference (2005), Rajan warned of the 2007-2008 economic meltdowns more than 2 years before it actually hit the US.
- Going against extant economic thinking, Rajan warned about the growing risks in the financial system and suggested policies to counter them.
- Rajan was widely criticized for his counterintuitive views, with former U.S. Treasury Secretary Lawrence Summers calling the warnings “misguided” and Rajan himself a “luddite”.
- Probably with an eye on promoting his newest book “Breaking the Mould: Reimagining India’s Economic Future,” Rajan has given a series of interviews to newspapers and periodicals.
- According to Rajan’s narrative, given a growth rate of 6%, India’s per capita GDP will quadruple in the next 24 years to US$10,000, placing it in the lower middle-income category and not in the developed economy bracket.
- Rajan also said that with the demographic dividend running out by that time, India will ‘grow old before it grows rich.’
What needs to be done?
According to Dr. Raghuram Rajan,
- The Indian economy needs a much higher rate of growth, to achieve the status of a developed country in the next 25 years.
- Working on the Unemployment issue: Flagging unemployment as the biggest socio-economic problem, Government should focus on human capital development and eradicate social evils like malnutrition.
- Working on Sectoral Growth: Rather than manufacturing, the services sector can be a much better driver for the growth of the Indian economy.
- Working on Conduct of Election: Rajan also made some controversial statements about election funding.
- Working on Economic Management: Taking Rajan’s criticism constructively, the Government could improve its economic management.
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- For example, Union Budget expenditure doubles every three years but commensurate output is not noticed. Then, though the largest component of the Union Budget, more than 40%, regularly goes to the more than 700 Central Schemes, aimed at promoting social welfare and social security, over the years, little of their purpose seems to have been achieved.
- The 15th Finance Commission, in its report tabled in Parliament (in 2021) had questioned the efficacy of Central Schemes and recommended a third-party review of all such schemes.
- In a significant shortcoming, hardly any novel initiative has been brought in to increase agricultural productivity, which is the key to the country’s economic development.
- Governments should err on the side of caution; 25 years is too long to make an accurate prediction there may be wars, disturbances, technological innovations, and pandemics in the interregnum.
- Need for genuine criticism of our policy: Rajan welcomes genuine criticism of our policy, but will not address ad hominem attacks. The controversy over Rajan gives rise to the question of the Government listening patiently and not stifling contrarian voices and honoring the timeless dictum of the opposition having its say before the Government has its way.
- As such, this quality seems to be lacking in the present dispensation, which would show the suspension of a record 141 opposition MPs.
- According to Dr. Rajan (2016), certain allegations are fundamentally wrong and baseless and addressing them would amount to giving them legitimacy.
Conclusion:
Raising questions and displaying strange behavior leads to suspensions. The value of dissent has been understood since ancient times. One hope is that as democracy takes root in our country, both the Government and the opposition will appreciate the nuances of principled dissent.
Mains PYQs
Q. What policy instruments were deployed to contain the great economic depression? (2013)
Q. (a) “Corruption causes misuse of government treasury, administrative inefficiency and obstruction in the path of national development.” Discuss Kautilya's views. (150 words) (b) How could social influence and persuasion contribute to the success of Swachh Bharat Abhiyan? (150 words) (2016)
