Raising concern over central banks globally being pushed into “competitive monetary easing”, RBI Governor Raghuram Rajan today said lower interest rates and tax incentives can boost investments, but it is consumer demand that holds the key for pushing economic growth.
He also advocated stronger and well-capitalised multilateral institutions, as also better international safety nets.
Speaking on the issue of ‘Going Bust for Growth’ at the Economic Club of New York, Rajan said: “The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector.
“It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises,” he said.
Speaking about the reasons for why it is so hard for the world to restore pre-Great Recession growth rates, Rajan said, “How does one offset weak household and government demand if debt write-downs are off the table?
“Ideally, the response would be to incentives investment and job creation through low interest rates and tax incentives. But if final demand from consumers is likely to be very weak for a considerable period of time because of debt overhang, the real return on new investment may collapse.”
Noting that policy rates cannot be reduced significantly below zero, though a number of European countries are testing these limits, Rajan said equilibrium long term interest rates may stay higher than levels necessary to incentivise investments.
“Hence, central banks have embarked on unconventional monetary policy (UMP), which would directly lower long rates.
“Another way to stimulate demand is for governments that still have the ability to borrow to increase spending. Since this will increase already-high levels of government debt, proponents suggest investing in infrastructure, which may have high returns today when construction costs and interest rates are low.
“However, high-return infrastructure investment is harder to identify and implement in developed countries where most obvious investments have already been made -- political influence is as likely to create bridges to nowhere or unviable high speed train networks as needed infrastructure.
“Also, while everyone can see the need for repair and renovation of existing infrastructure, this requires far more decentralised spending than mega projects, and may be harder to initiate and finance from the centre.”