India Slowdown ‘Very Worrisome’, New Set Of Reforms Needed, Says Raghuram Rajan

Former Reserve Bank of India Governor Raghuram Rajan sees the slowdown in Indian economy as worrisome and said the government needs to come out with a new set of reforms to energise private sector investment.

The government also needs to fix the immediate problems in power and NBFC sectors, the former central bank governor said.

Rajan also called for a fresh look at the way India calculates its gross domestic product, referring to former Chief Economic Adviser Arvind Subramanian's research on overestimation of India’s GDP growth rate.

"There are a variety of growth projections from the private sector analysts, many of which are perhaps significantly below government projections, and I think certainly the slowdown in the economy is something that is very worrisome," Rajan told business news channel CNBC-TV18.

India's GDP growth rate slowed to 6.8 percent in 2018-19—the slowest pace since 2014-15. Various projections by private experts and RBI estimate that GDP growth in 2019-20 will be less than government estimate of 7 percent.

The country’s auto sector is facing its worst crisis in two decades with media reports suggesting thousands of job losses in automobile and ancillary industries.

The real estate sector has huge unsold inventory, while consumer goods companies have reported a decline in volume growth.

"You can hear businesses all around, worrying and complaining out loud that they need some kind of stimulus," said Rajan.

"A fresh set of reforms" is now needed to boost the economy and growth rate, he said.

"We need a fresh set of reforms, informed by view on what we want India to be and I would love for that view to be articulated at the very top (that) here is the kind of economy that we want,” said the former RBI governor.

“One-off programs here and there don't amount to a comprehensive reform agenda for the economy," he said, adding that borrowing in overseas markets is not really a reform but a "tactical action".

"What we really need is an understanding of how we are going to propel this country by 2-3 percentage points... that needs fixing the immediate problems such as in the power sector, such as in the non-bank financial sector..."

“Those need to be done yesterday, not in the next six months, it is very important that those be tackled immediately," said Rajan.

Rajan advocated a new set of reforms to spur private sector investment in India.

“Sops, stimulus of one kind or the other, are not going to be that useful in the longer-term, especially given the very tight fiscal situation that we have. Instead, bold reforms—well thought of, not jumping off the cliff, but really seriously thought-out reforms—in a variety of areas which energise the Indian people, energise the Indian markets and energise Indian business.

"This is what we need today, and I really hope we put our best minds to think about this because absent that my sense is that we are in for not so good times," he said.

The former RBI governor also drew attention to former Chief Economic Adviser Arvind Subramanian's research that India’s GDP growth rate was overestimated by 2.5 percent during 2011-12 and 2016-17.

"I also think that we should pay attention to some of the arguments made by former chief economist Arvind Subramanian that, in fact, we may be overestimating growth with some of the new GDP data,” said Rajan. “I would suggest—I have been saying this for some time—we need a fresh look from an independent group of experts at the way we compute GDP and make sure that we are not in a sense having GDP numbers that mislead and cause the wrong kinds of policy actions.”

On the ongoing global economic slowdown, Rajan said that in comparison to the 2008 financial crisis, banks around the world are better off.

"History never repeats. So, I think there is more leverage than there was in 2008 but it is not in the same places. Banks are less levered than they were then. On the other hand, some corporate sectors, certainly in the U.S. are more levered, certainly in China are more levered, and of course governments are more levered,” said Rajan.

“So, leverage was the big factor in 2008, it is different today. Not necessarily better, but different,” he added.

Rajan said he can't predict another big financial crash but if it comes, it will be from different sources. "Do I predict a big crash coming? I don't know, but I do think that it is going to come from different sources and simply fixing the old problems is not going to prevent the new ones.”