Reserve Bank of India (RBI) governor Raghuram Rajan on Saturday said structural reforms can help achieve potential growth, suggesting that write-downs might be a remedy to growth slowdown. At the same time, he admitted that large-scale write-offs are politically difficult.
The RBI governor also called for a new set of international rules to assess monetary policy that includes using colour codes to rate how beneficial measures are to global welfare.
Speaking at the Advancing Asia Conference, he said the financial boom preceding the Great Recession left industrial countries with an overhang of debt, which was holding back growth. “While the remedy may be to write down debt so as to revive demand from the indebted, it is debatable whether additional debt-fueled demand is sustainable. At any rate, large-scale debt write-offs seem politically difficult even if they are economically warranted,” he said.
Structural reforms that increase competition, foster innovation and drive institutional change are the way to raise potential growth, Rajan said.
While monetary policy cannot substitute structural reforms and elevate growth potential, the central banker said “no central banker can claim they are out of tools”.
Rajan said there are few areas of robust growth around the world, with the International Monetary Fund repeatedly reducing its growth forecasts in recent quarters. “This period of slow growth is particularly dangerous because both industrial countries and a number of emerging markets need high growth to quell rising domestic political tensions,” he said.
Rajan said given the importance of spillovers from monetary policies, especially in the face of globally low inflation, it was important to build a global consensus on how to get better outcomes for the world. He, however, cautioned that there may not be an international agreement on the issue as a number of country authorities like central banks have explicit domestic mandates. He called for a new set of international rules to assess monetary policy that includes using colour codes to rate how beneficial measures are to global welfare. He said policies seen as good for the world should be rated green, while those that should be used temporarily would be classified orange. Policies that should be avoided at all costs would be rated red. Rajan called for a group of “eminent academics with reasonable representation across the globe” to analyse and grade various policies.
“The international community has a choice,” Rajan said, adding, “We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the 21st century.” Direct policy actions such as intervention in the foreign exchange market or indirect policies such as monetary, fiscal and trade policies or regulations of capital movements, regardless of the intent or purpose, can affect the level of the exchange rate, and can be interpreted as ‘manipulation’, he said.
Moreover, although broader surveillance by IMF of its members’ exchange rate policies, and other policies with significant financial sector spillovers, and perhaps public statements about such policies can have signaling effects, countries are not obligated to follow its advice unless in a programme, he said.
“The more pertinent question, therefore, might be what can the Fund really do once its executive board determines that a particular country is in violation of its obligations under the new rules of the game? Hopefully, the clear focus on the downsides of the particular country’s actions for the rest of the world will lead to political and economic pressures from around the world that make the country cease and desist. The clearer the eventual rules of the game, the more likely this outcome,” he said.