Fixing monetary policy

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SummaryIndia needs out-of-the-box solutions

The recent speech by RBI Governor Raghuram Rajan at Bancon 2013 is an important literary piece of art, which weaves economic thinking with sociology and presents in a lucid style the state of the Indian economy. The author of the landmark report on India, A Hundred Small Steps, Rajan delineates the challenges—sluggish growth in manufacturing and industry, poor infrastructure, lack of adequate education and training for youth, and weak regulatory mechanism and financial system. Finally, the five development pillars for RBI are discussed—strengthening monetary policy framework and banking structure, developing financial markets, higher financial inclusion and improving stress management in the economy. The issues raised are pertinent and deserve attention of academicians, policymakers and government.

It is interesting to note that in a developing country like India educational infrastructure has not been keeping pace with time. In India, the share of industry has declined to about 20% of GDP while that of services has increased to nearly 66%. Our population is young and ready but adequate educational opportunities are lacking. Even today, after more than six decades of planning, there are just a handful of non-engineering colleges of repute—the likes of St Stephen’s and Shri Ram College of Commerce. In the meantime, catering to Indian mindset, engineering colleges, including IITs, have multiplied manifold and churn out engineers in multitudes. In advanced countries like the US it is the law and commerce degree that is most sought after. Ironically, in a country with more than a billion people, the best economists are generally engineers, some from IITs, including the present Governor, Rajan.

The levels of income are rising in India and so are expectations, but absent are sufficient number of colleges and acceptable quality of educational infrastructure even for the probable problems to surface soon: illustratively, ageing. The aged population given the demographic trends is expected to increase from about 8% in 2011 to 20% by 2050. India does not have enough doctors, gerontologists and medical personnel to address the looming problem.

The issue of inflation is unique. India, which is still a developing country, with relatively under-developed financial markets and weak transmission mechanism, should not be aiming at low, even though implicit, inflation targets. There are a number of countries that already have high inflation targets, and even MIT Professor Blanchard, chief economist, IMF, has been advocating for a higher inflation target for a few years now. More importantly, psychologically, it is more

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