Raghuram Rajan as PM's adviser will not help UPA in any way

There's a new broom out in North Block. Prime Minister Manmohan Singh, who has taken additional charge of the finance portfolio from putative President Pranab Mukherjee, is evidently implementing sweeping changes in the bureaucratic set-up there to cast it in his own image.

Officers who were closely identified with some of the more discredited economic and taxation policies of Mukherjee's term in office are being bundled off on other assignments. Just as significantly, Manmohan Singh is looking to infuse the economic policymaking and implementation teams with some fresh blood.

Indicatively, Manmohan Singh is reportedly looking to persuade Raghuram Rajan, former chief economist at the IMF and a professor of finance at the University of Chicago, to take up an influential position in economic policymaking, according to a report in Economic Times.

"Dr Rajan's name is being considered actively," The Hindu Business Line reported, quoting highly placed government sources.

Rajan already serves as an honorary economic adviser to the Prime Minister. AFP

Rajan already serves as an honorary economic adviser to the Prime Minister, but given that Kaushik Basu's term as Chief Economic Adviser to the Prime Minister expires on 31 July, Manmohan Singh is keen to secure Rajan's services in that capacity.

The wisdom of appointing a man of Rajan's stature to enhance and influence the government's economic policymaking is, however, open to question. Not because he doesn't have ideas to contribute - he does - but because the government is not exactly lacking in ideas to fix the economy.

The government's all-star economic team - from Manmohan Singh himself to Montek Singh Ahluwalia to C Rangarajan to Kaushik Basu to RBI Governor Duvvuri Subbarao - have between themselves analysed the economy threadbare, and can comfortably agree on the broad contours of policy action needed.

Everyone from the Prime Minister downwards has in recent days been giving voice to the failings in the economy that have contributed to the slowdown in growth, and the way to go about fixing them. For instance, returning from his overseas visits, Manmohan Singh said all the right things that needed to be done to revive economic growth and address macroeconomic deficiencies.

The problems of fiscal management and of the balance of payment and of the current account deficit would all need to be tackled "effectively and credibly," he acknowledged. More critically, he noted that obstacles or policy impediments that came in the way of foreign investment - both portfolio and FDI - would need to be removed.

And Rural Development Minister Jairam Ramesh, who appears to be angling for the post of Finance Minister, has written a letter to Congress president Sonia Gandhi and the future Prime Minister-in-hiding Rahul Gandhi identifying the problem areas in the economy and the specific recommendations for fixing them.

According to The Indian Express, Ramesh airily dismissed the government's recent announcement of austerity measures as "meaningless" - and instead suggested specific ways to lower the fiscal deficit and the subsidy burden: raise diesel and LPG prices; introduce a tax on diesel passenger cars, particularly SUVs; and cut the budgets of key ministries by 5 percent. And although Ramesh's recommendations to Sonia Gandhi are politically opportunistic - he does not, for instance, mention the fiscal burden of the NREGA or the Food Security Bill - he makes some broad-sweep recommendations that are not so wide of the mark.

And economic commentators, including we at Firstpost, have ensured through our contributions (see, for instance,here and here) that the government is never short of ideas on precisely what needs to be done to get the Indian economy back on its feet.

So, to reiterate, the problem isn't with generating ideas that make for sound economic policy. The problem has always been in summoning up the political will to implement what everyone knows needs to be done.

And there's reason to believe that some of Raghuram Rajan's policy critiques may be politically unpalatable to the UPA - and particularly to Sonia Gandhi.For instance, writing recently, Rajan had this to say about what's wrong with the Indian economy today.

"For a country as poor as India, growth should be... a "no-brainer." It is largely a matter of providing public goods: basic infrastructure like roads, bridges, ports, and power, as well as access to education and basic health care."

But instead of going through the hard grind of increasing income-generating capabilities in rural areas and among the poor by improving access to education, healthcare, finance, water and power, successive UPA governments had resorted to the easy expedient of increasing voters' spending power through populist subsidies and transfers, notes Rajan.

"The lurch toward populism was strengthened when the Congress-led United Progressive Alliance concluded that a rural employment-guarantee scheme and a populist farm-loan waiver aided its victory in the 2009 election," he adds.

There are none so deaf as those that do not want to hear. What earthly purpose would be served by inducting Rajan into the economic policymaking team if the powerful political managers of the UPA government have shut their ears to his diagnosis of what's centrally wrong with policy?

The irony is that for all the doom and despair about the Indian economy, the core of the Indian economy retains enough robustness to get growth firing on all six cylinders - if only the government would fix some obvious failings, such as those that Rajan and others have pointed to.

And even one of the negative consequences of the government's many recent failings - the sharp slide in the rupee's value - can be one of the levers that helps revive the economy, by making investments in India just that much more attractive. Indicatively, the rupee's slide from Rs 45 to the dollar to Rs 57 today gives foreign investors' dollar investments an additional leverage of about 25 percent in rupee terms.

On his last day as Finance Minister, Pranab Mukherjee cleared FDI proposals of the order of about Rs 2,000 crore. In recent days, Ikea and Coca-Cola announced billions of dollars in fresh investment proposals in India. Coca-Cola's global chairman and CEO Muhtar Kent even put a positive spin on the India growth story, noting that it was wrong to suggest that India was slowing down. "As you go up, the oxygen gets thinner," he said."What's being created today at 6-7% GDP is incrementally much higher than it was some years back."

Columbia University Profesor Arvind Panagariya too says that to claim that India's growth has collapsed is a myth: although the current 6.5 percent GDP growth is below the average of the previous eight years, it is still above what we have achieved during any other period on a sustained basis - and is among the highest growth rates in the world right now. Nor, he suggests, have investment rates collapsed.

All this suggests that what Manmohan Singh needs right now is not one more cook in his kitchen cabinet in the form of Raghuram Rajan. What his government needs to do is to implement the ideas that it already has, by leveraging the economic wisdom of its all-star policymaking team. If the reformist economic philosophy of the UPA's current "reformist team" cannot be reflected in policymaking, no purpose will be served by bringing in one more heavy hitter into the team.

Far better to let Rajan be where he is if his recommendations will not be implemented in earnestness because the government lacks the spine to challenge the prevailing populist discourse within the UPA.

Updated Date: Dec 20, 2014 11:05 AM

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