Deficit problems not structural, can be fixed: Rajan

Singapore: India’s slowing economy and its massive current account and fiscal deficits are not structural problems and can be fixed with modest reforms, newly appointed central bank Governor Raghuram Rajan said on Wednesday.

Rajan acknowledged the economy will expand at a pace that will be its slowest in a decade, with annual growth this year likely to be between 5 and 5.5 percent.

In a commentary published on the Project Syndicate website, he also drew an analogy between the current bearishness on the country, whose currency has barely recovered from record lows last month, to the fickle loyalties of Indian cricket fans.

[caption id=“attachment_1103177” align=“alignleft” width=“380”]  Rajan acknowledged the economy will expand at a pace that will be its slowest in a decade. PTI[/caption]

“A few years ago, India could do no wrong…. Today, India can do no right,” Rajan wrote in the piece.

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Referring to the record current account deficit and slowing growth, Rajan said those “can all be fixed by means of modest reforms.”

“This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems,” he wrote.

He said the slowdown in the economy was paradoxically the effect of substantial fiscal and monetary stimulus that its policymakers had injected into its economy in the aftermath of the 2008 financial crisis.

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The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared, he said.

“So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.”

Economic growth would slow to a 5 to 5.5 percent pace, he said, adding that was “not great, but certainly not bad for what is likely to be a low point in economic performance”.

Reuters