Beyond rate cuts

Spanish philosopher George Santayana famously said that “those who cannot remember the past are condemned to repeat it”. Reserve Bank of India Governor Raghuram Rajan’s reminder of the hidden costs of stimulus-driven growth — higher inflation, higher deficits, and lower growth in following years — needs to be read in the context of the ongoing tussle between the Centre and the monetary authority on the issue of cutting interest rates to boost growth. The Centre’s impatience with the RBI over its failure to effect quicker and deeper lending rate cuts is understandable. At a time when the bulk of the global economy is in turmoil, and China, which has served as the world’s growth engine, is noticeably slowing down, India’s performance offers a welcome contrast. With oil prices once again plunging, the Centre believes the fiscal headroom provided by lower energy import costs and falling inflation offers a window of opportunity to further stimulate growth. With the possibility of achieving a GDP growth of 8 per cent this fiscal, a rate cut could just be the icing on the cake for investors, both domestic and foreign.

While the case for maintaining high interest rates has weakened substantially in an economy that is crying out for a short-term boost, Rajan’s cautionary admonition, that achieving sustainable and inclusive growth is not possible merely through quick fixes like rate cuts and giveaways, takes a longer and more holistic view of the reforms debate. During the course of the CK Prahlad memorial lecture, Rajan counselled patience while cautioning policymakers against overemphasising the importance of rate cuts and other forms of stimuli. Making a veiled reference to Brazil and Russia, where such measures have failed to resuscitate the economy, he stressed the importance of including those who have been excluded in India’s growth story so far. Unless newcomers could function in an environment of “arm’s length auctions and contracts, enforced quickly by an impartial bureaucracy and judiciary”, and unless the current set of reform measures announced are implemented and carried through to a logical conclusion, any uptick in growth will at best prove temporary. Reforms, as Rajan pointed out, “have to be institutionalised, so that they outlive the reformer’s passing”.

In other words, the task before us is to achieve growth that is at once both inclusive and sustainable. Rajan’s argument — that unless reforms end up providing an enabling environment for all, and not just speedier access for a privileged few, and unless we are able to create institutions which enable India’s resources and talents to be tapped in an optimal fashion, we will be condemned to repeat history — should serve as a timely reminder for the Centre as it recalibrates its strategy for the next four years.