1. RNG Lecture: Every default is not malfeasance, says Raghuram Rajan

RNG Lecture: Every default is not malfeasance, says Raghuram Rajan

Reserve Bank of India governor Raghuram Rajan on Saturday said that while it was important to punish malfeasance, all defaults were not evidence of wrongdoing.

By: | New Delhi | Updated: March 13, 2016 10:55 AM
Ramnath Goenka Lecture

Ramnath Goenka Lecture: Wholetime Director and Head of New Media, Indian Express, Anant Goenka with RBI Governor Raghuram Rajan in New Delhi. (Express photo by Praveen Khanna )

Reserve Bank of India governor Raghuram Rajan on Saturday said that while it was important to punish malfeasance, all defaults were not evidence of wrongdoing.

Delivering the first Ramnath Goenka Lecture on the topic ‘India in the global economy’, held in the national capital, Rajan said it was dangerous to use the benefit of hindsight to decide on malfeasance. Asked about how promoters who had allegedly bought assets overseas using the loan money, Rajan said: “There must be evidence money changed hands.”

The governor cautioned that all promoters should not be painted with the same brush. “Let me assure you, this will kill entrepreneurship in the country. This country needs bankers to lend,” he said.

Rajan observed it was important for India to liaise with emerging economies or even developed nations to become more influential in the global arena.

“A mere increase in the quota may not get us there. What is required is to ideate and analyse on a policy-by-policy basis.” He observed that merely a more comparative exchange rate would not help drive exports at a time when the global economy is barely growing. What was needed was an increase in productivity, which India is more capable of as compared to most of the world. He said the rupee has remained relatively flat since early 2015. ”What we have given up against the dollar, we have gained against the Euro or the Real, so overall, in trade-weighted terms, the rupee has been flat. But wait a minute, our economist friends will say. Inflation in India is higher than inflation in most other countries. This affects competitiveness,” he said.

“But there is another reason to absolve the exchange rate of accusations of overvaluation. The real exchange rate is only one measure of competitiveness. Productivity also matters. In a rich country, firms are already at the  productivity frontier, so they typically can improve productivity only through innovation. In a poor country, productivity can be improved simply by reducing existing bottlenecks or by moving a little closer to the productivity frontier through the adoption of already-known best practices. Productivity in India, for example, can improve simply if a better road is built from a factory to the rail head, or if the firm manages its inventories better,” Rajan said.

He said India is in a sweet spot and if it does the right thing, the country can well achieve the higher growth.

“Given the inhospitable world economy and two successive droughts in India, either of which would have thrown the economy into a tailspin in the past, our focus on macroeconomic stabilisation must be part of the explanation why we have over 7% growth, low inflation, and a low current account deficit unlike some of our emerging market counterparts. Now, we have to build on this sound base,” he said. He said that today India has a seat at most international tables and many countries want to draw us into bilateral and multilateral treaties.

“When we were unimportant, we used to rail against the proposals that were inimical to us, knowing it would not make an iota of difference. As we get more power, we need to develop the capability of using it effectively,” he said.

However, he added that today, it is an unfortunate reality that international meets are still dominated by the old powers. “But it is less through brute power politics and more through the power of ideas, agenda setting, and organisation that they dominate. Agendas in the G-20 are still largely set by elements of the old G-7, and often we find that they have already agreed on their preferred approach. It is only when the big powers disagree that the rest of us have some hope of influencing outcomes.” He further said, “The fault is not in the power structure, it is in us.

Unless we amongst the emerging world put forward our agenda, build the intellectual and analytical basis for pushing it, and create coalitions to support it, we will have no chance of moving forward. Encouragingly, the BRICS do discuss policy issues and try and develop common approaches, but we need to do more. We also need to build coalitions with sympathetic industrial countries. In India, we need to build capacity in our think tanks and universities to inform our policy makers on how to approach and shape the international policy agenda. We need to be well prepared when we negotiate bilateral and multilateral treaties, so that we do not wake up too late to the fact that we have given away the house with little in return. With careful analysis, engagement, and coalition building, we will be able to influence the global agenda, and will stop being seen as an obstructionist but ultimately powerless country that we may have been in the past.”

He concluded by saying that Ramnath Goenka focused on unearthing facts that would help move the public debate forward. “All too often, our public debates generate more noise than illumination, and we should learn from the example he set. As we cope with the global slowdown, and as we frame our policies going forward, we need to debate what our policy path will be, based on facts, empirical analysis, and sound arguments. I have laid out a view. I look forward to alternative viewpoints.”

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