Raghuram Rajan (University of Chicago Professor) – Will sticky inflation continue to worry RBI? (Dec 2022)


Chapters

00:00:00 Central Banks and the Battle Against Inflation
00:07:58 China's Economic Turmoil: Impact on India and Global Business
00:11:05 Economic Challenges Facing India: Current Account Deficit, Inflation, and Growth
00:19:12 Central Bank Policies and Liquidity Management
00:23:22 Navigating Cryptocurrencies: From Speculation to Regulation
00:30:07 Challenges and Considerations in Implementing Central Bank Digital Currencies
00:34:27 Reforming India's Bankruptcy Code
00:37:35 Assessing PLI Scheme and Growth Concerns in India's Economy
00:44:30 ET Now Interview with Raghuram Rajan

Abstract



Global Economic Challenges and Opportunities in 2023: Insights from Raghuram Rajan

In an exclusive interview with ET Now, Raghuram Rajan, the former Governor of the Reserve Bank of India, delved into the complexities of the global economy as 2023 unfolds. Highlighting the major challenges such as the lingering effects of the Ukraine conflict, inflationary pressures, and policy uncertainty in major economies like China, Rajan painted a picture of cautious optimism. His analysis also touched upon India’s economic trajectory, noting the country’s potential as a stable alternative to China for businesses, yet cautioning about its own set of challenges including the current account deficit and the need for reforms. Rajan’s comprehensive assessment calls for a holistic approach to managing liquidity, promoting transparency in monetary policies, and addressing non-performing assets in the banking sector.

Main Ideas and Expansion:

Global Economic Outlook:

Raghuram Rajan recognized the global economy’s slower-than-anticipated recovery, influenced by ongoing geopolitical conflicts, interest rate hikes, and the persistent effects of COVID-19. He raised concerns about the possibility of a recession in 2023, foreseeing more of a slowdown than a deep crisis.

US Economy and Inflation:

Rajan emphasized the Federal Reserve’s commitment to reducing inflation to its 2% target, despite the challenges posed by the labor market and wage-price spirals.

Fed’s Policy and Market Expectations:

The discussion highlighted the Federal Reserve’s significant interest rate hikes and the market’s expectation of rate cuts, with a particular focus on inflation control.

Political Influences and Technical Issues:

Rajan pointed out the political aspects of inflation management, especially in Europe, and discussed the technical difficulties in determining appropriate interest rate levels.

India’s Economic Landscape:

India’s growing current account deficit, the need for economic reforms, and inflation challenges were underlined by Rajan. He stressed the necessity for India to address policy uncertainty and volatility to emerge as a true “China Plus One” alternative.

Monetary Policy and Liquidity Management:

Rajan underscored the importance of a comprehensive monetary policy, encompassing both interest rate adjustments and liquidity management. He called for the Monetary Policy Committee to have a broader mandate in managing liquidity and stressed the Reserve Bank of India’s goal of maintaining inflation around a comfortable 4%, not just within the 2-6% range. He highlighted the need for a balance between tightening liquidity to combat inflation and avoiding financial instability, and advocated for the RBI to publicly disclose letters regarding inflation targeting to enhance transparency.

Cryptocurrencies, Regulation, and CBDCs:

Rajan categorized cryptocurrencies as speculative assets, advocating for minimal regulation and cautious experimentation with Central Bank Digital Currencies (CBDCs). He cautioned against overestimating the benefits of CBDCs, especially considering India’s rapid digitization through UPI, and advised a cautious approach in implementing a CBDC in India.

Banking Sector and Fiscal Prudence:

Rajan emphasized the need for improved lending decisions and recovery mechanisms to tackle non-performing assets in banking. He advocated for fiscal prudence, targeted spending, and growth-oriented policies, suggesting a dual approach for handling non-performing assets, which includes better lending decisions and recovery methods.

Re-examining the Bankruptcy Code:

He pointed out that large entities often circumvent bankruptcy laws,

impeding efficient resolution and lending. Rajan recommended a thorough review of the bankruptcy code’s shortcomings and urged the judiciary to limit excessive intervention and delays, highlighting the judiciary’s role in recognizing the importance of efficient resolution for business growth and credit availability.

Fiscal Prudence in Budget 2023-24:

Rajan underscored the need for caution in budget expenditures due to the rising fiscal deficit and inflation. He recommended prioritizing targeted spending on essential areas like infrastructure, education, and healthcare, and improving the efficiency of existing spending programs. He also stressed the necessity of gradually reducing the fiscal deficit to maintain fiscal sustainability.

Government’s Focus on Growth:

The government’s need to prioritize economic growth, especially in light of the upcoming election year, was emphasized.

Slow Growth and Job Creation:

Rajan highlighted the issue of slow economic growth, stating that the current growth rate is insufficient for the necessary job creation.

Investment and Growth Environment:

Despite government efforts in infrastructure, industrialists are hesitant to invest due to a lack of optimism about the growth scenario.

Tariff Increases and China Plus One Strategy:

Rajan expressed concerns about the impact of tariff increases on India’s ability to become a viable alternative to China.

PLI Scheme and Mobile Phone Production:

He acknowledged the increase in mobile phone production under the PLI scheme but raised concerns about the reliance on imported components.

Value-added Requirement and PLI Benefits:

Rajan emphasized the importance of a value-added requirement in the PLI scheme to ensure genuine production in India and prevent temporary assembly for incentives.

Cost-benefit Analysis of Subsidies:

He questioned the logic behind subsidizing sectors where government support might be unnecessary, calling for a cost-benefit analysis of job creation.

Subsidies for Chip Manufacturing and Transparency:

Rajan expressed skepticism about the efficacy of subsidies for chip manufacturing, questioning the expertise of the chosen players and the transparency of the process.

Bharat Jodo March and Democracy:

Rajan clarified that his participation in the Bharat Jodo March was driven by his concern for democracy, communal harmony, and debate, not political ambition.

Conclusion and Additional Information:

In conclusion, Raghuram Rajan’s insights offer a detailed and nuanced understanding of the global economic landscape in 2023. He highlighted a range of challenges, from inflationary pressures to policy uncertainties in major economies, underscoring the need for cautious but proactive economic strategies. His focus on India’s potential and challenges, along with his emphasis on transparent and effective monetary policies, provides valuable guidance for navigating the complex economic terrain of 2023. His concluding remarks, wishing a great year ahead, blend realism with hope amidst global economic uncertainties.


Notes by: Random Access