Answers
The reason why we have two different roles - RBI governor and Finance Minister - to manage the economy is essentially along the lines. Like yin and yang, tester and developer, they complement each other.
RBI governors like all bankers and lawyers are selected to be very conservative. They have to look for the worst case. When the bankers party, things collapse like it happened in 2008.
On the other hand, an executive cannot be that sullen and pessimistic. That would break the system as the gloominess would catch on. He/she has to be the chief cheerleader to get the system going. They have to find a smile even when the situation is deadly. Because, they are the morale boosters. We have already seen the effects of having a sullen economist as a Prime Minister for 10 years. While he was smart about economics, he was not able to cheer or guide the economy.
You don't want an economist to lead the country nor a politician to govern the RBI. When Raghuram Rajan is pessimistic and Narendra Modi is optimistic, it means both of them are doing their jobs. They differ because one is looking at the worst case and the other at the best case.
Q. As someone who has watched India for a long time, where do you see the country headed? What are the challenges for India—is it job creation for the youth that meets their aspirations.
Ans. India has very high debt-to-GDP (gross domestic product) ratio—it is higher than many countries. Studies have shown that when countries have a high debt-to-GDP ratio, it is difficult to grow at a reasonable rate. I don’t really see much going for India right now except Modi, who is not doing anything, when he should be or could be doing a lot. Your central bank governor is probably the best in the world.
The basic reason you mentioned, about India having to create so many jobs, is one of the reasons why I am not investing in India. India historically, or at certain times, has been one of the most successful countries in the world. You could have ruled the world if you were aggressive, but those days are not coming back—India is held back by too many restrictions and regulations. Go around the world, and you see smart successful Indians everywhere—this means you don’t have enough opportunities for these people back in India. You have saved your farmers by making it illegal for foreigners to own more than five hectares—how on earth can an Indian farmer compete with an Australian farmer with 50,000 hectares? In history, India has been one of the great agricultural nations of the world—you have the land, the people, weather—God gave you everything. And then, he also gave you Delhi to mess it all up.
"God gave you everything. And then, he also gave you Delhi to mess it all up"- Jim Rogers
I, as well as others, thought that Modi was going to change all this. With all these crazy laws and regulations, you make it difficult for foreigners to invest in India. With investments comes jobs. Not just foreigners, your bureaucracy makes it difficult for even Indians to invest in India. It is difficult to take money in and out of India—even as an investor, if you bring money into India, there are all kinds of regulations. Indians would rather like jobs and a better economy rather than all these laws, regulations and bureaucracy.
Q. Governor Raghuram Rajan has been criticized for being stubborn on interest rates.
Ans: Central bankers are supposed to be criticized for things like that. Central bankers are supposed to maintain currencies and low inflation. If you want to do something about the economy, you should call out Modi or Parliament and not the central bank. Central banks that cut interest rates because of politicians—such countries usually have economic problems, currency problems, and all sorts of other problems. In my view your central banker is doing the right thing—he understands what banking is all about, he understands what currencies are all about and he understands the economy. The more criticism he gets, the better—that means he is doing what the central bank is supposed to do.
Truth - Let's call a spade a spade. The demagoguery spewed by politicians is directed towards a class of people who lack critical thinking skills, and believe whatever they hear. This class is in majority in India[citation required]. Modi-bhakts and Gandhi-bhakts are impervious to rhyme and reason, so they don't tolerate any rational criticism of their idols. This leaves very little room for honest discourse, and instead you get served with sophist propaganda. Irrational exuberism is always misplaced, and can even lead to complacency (which eventually leads to doom). I'm not trying to belittle the current government's achievements, but all I am saying is that statements of Statesmen should be measured, and devoid of any lofty and ostentatious talk, so that people are not misled by them. Motivation and fabrication are completely different things. People tend to get complacent after listening to such statements. India's conformist culture makes things worse; people are forced to jettison logic and adopt the view of the hoi polloi, lest they be ostracized for having fringe views. In fact, when Mr Modi became the PM, even my ("educated") kin thought that India will become a developed nation in his term. On the other hand, the erudite Mr Rajan expressed his belief that with right policies and some luck, India might become a middle-income country in his lifetime : Steep learning curve ahead for next RBI Governor Raghuram Rajan. I'll also recommend you to read some of his research, such as Is there a threat of oligarchy in India?(Page on chicagobooth.edu) that portray his view of India's prospects.
There is a vast ignorance among the general public about where we currently stand, and how much ground needs to be covered. People should see the statistics. Numbers don't lie, people do.
Believing anything without critically analyzing it might befit the citizens of a communist nation, but not a democracy. I'll recommend you to read George Orwell's 1984.
India is a low-income country and is not even in the top 100 in the world in the United Nations Human Development Index.
Have a look at various Indicators generated by the World Bank to see where we stand : Indicators | Data.
Another excellent tool for visual analysis, if you're so inclined, is GapMinder : Gapminder World.
Also, India was ranked 140 out of 180 in the 2014 World Press Freedom Index, so you have a good reason for not believing what the mainstream media trumpets.
I know that my answer would have frayed the nerves of Modi-bhakts, so I'll opine a positive view of the current government to cool them down.
In my humble opinion, this government is a lot better than the previous government. If INC were in power, the following could have happened :
P.S. - I do hope that the part about not making lofty and ostentatious speeches is taken as positive criticism. Also, the IMF I work for is Impossible Mission Force, where I work with Ethan Hunt. Otherwise, I'm a benighted prole.
Longer Answer: If Narendra Modi says that India will become a superpower he attracts more followers, and possibly wins more elections. He can not be held accountable for what he says in his public meetings. There is no legal binding. (Yes he has a moral obligation to talk only what he is seriously intends to achieve. But then political morality is a thing of past.)
On the contrary, Raghuram Rajan has a respect which he needs to protect. Or else he won't be left employable in future. Imagine him saying similar things, like these politicians speak - The whole world would come back and scrutinize his past statements, and if those statements don't make much sense, his future employment will be at stake.
Keep in mind, professionals earn their future employment by their correctness/performance in the past. Which is not the case with politicians, they remain in office because of their populist statements which may or may not make any sense.
Lets get some things in perspective. It was not Modi but Arun Jaitely who made the claim again. India can replace China as driver of global growth: FM Arun Jaitley.
And the best part is in every interview of his, he does not attach his claim to a specific timeline.
And, Raghuram Rajan is right when he says it is a long way ahead.
I think RR's reply to the question he was asked was much more level-headed and realistic as compared to how Jaitely explained it.
Here is what the defensive Jaitely said to BBC,
"The government has absolute clarity about the direction it has to pursue,"
"Prime Minister Modi's government almost by the day is continuing to move and reform in the right direction and slowly but surely the results are showing."
"I see this as a great opportunity. The Chinese 'normal' has now changed. It is no longer the 9%, 10%, 11% growth rate.
"So the world needs other engines to carry the growth process. And in a slow down environment in the world, an economy which can grow at 8-9% like India certainly has viable shoulders to provide the support to the global economy."
And here is what Rajan said in another interview to BBC when asked about it,
“India is one-fourth to one-fifth of China’s size. Even if we can overtake China in terms of growth rates, the magnitude of the effect will be far smaller for a long time to come.”
Now, there is nothing factually incorrect about what either of the men are saying. But as usual, Jaitely ignores a few ground realities focusing too much on sounding positive and 'hopeful'.
Some of his statements may be misinterpreted by the speculators who run the media business. What he said is,
"For us, lower commodity prices and lower oil prices are a boom,''
"It is an opportunity and a challenge to Indian politics - if we can continue to reform at a faster pace and really attract global investment, then our ability to provide that shoulder which the world economy needs will be much greater."
Mr Jaitley was right when he said that the Indian government had already gained a windfall from lower oil prices. He also said that it was partly because the government had reduced the need for public subsidies to consumers (that is surely debatable but I'm not going to go Jaitely bashing in this answer). That money, he further said, was now going to be invested in infrastructure development.
Note: this money is not going into the hands of the Indian consumer as it did during the year 2010-11 that helped bring about a temporary boom and a damaging inflation scenario. So there is less reason to expect any immediate results (five or ten years or whatever is only a media speculation if u read it somewhere).
So, while Jaitely's statement is still 'politically' correct, the optimism surrounding it is a little misguided which the level headed Rajan just set straight without exaggerating.
Face it - India is not going to replace China by simply building infrastructure, China has much bigger fish to fry and its growth is much more inclusive and stable in the long run. (Read: answer to Why doesn't the world trust China?)
The desperate media (hell bent on projecting China as a loser) will glorify any upcoming buffoon who is willing to challenge China - India - we can take the economic lead as China stumbles.
The media would probably gain by making this a Modi vs. Rajan debate but it is really a futile one with little substance. The country is going to benefit more when they work together and the Indian political leaders hopefully realize this despite themselves. We don't need to see China as a competitor that needs to be taken over. No wonder China Still Doesn’t Take India Seriously.
Let us move on people.
People in power speak of “possibilities”, while intellectuals speak “truth to power”
In this sense, both Modi and Rajan are doing exactly what they are supposed to do. There is a lot of difference between what political leaders promise and ground reality and this has nothing to do with the current PM.
If anyone is under the impression that India bypassing China is a given, then they are morons of the first order. The only path to such a scenario is premised on a Chinese economic hard landing. And no one has any idea of Chinese ground reality, lest of all people who are outside the higher echelons of the CCP (Chinese Communist Party).
Prediction of PricewaterhouseCoopers (PwC) for world economy in 2050. Caveats →
- Such linear projections rarely hold for they cannot factor in black swan events like Global Meltdown of 2008, wars, economic and political instability et al
- Also Satyam's auditing firm was PricewaterhouseCoopers, so make your own inferences.
Positives for China → India needs to learn
- Economy → China has an economy of roughly five times India’s. China has a severe problem of infrastructure and real estate over-heating. Western media keeps highlighting the ghost cities in China and cities bursting at the seams in India. As a result, China is building infrastructure across Asia, Africa et al. Contrast that with India where basic infrastructure is in severe short supply. If only we could allow China to built infrastructure in India (without Chinese labor), instead of rejigging newer versions of PPP (EPC to Hybrid models)
- Business →
- China has progressed on the back of labor slavery aka sweatshops (not very different from British industrial revolution). India also has progressed by exploitation of the vulnerable section, though democracy and independent institutions ensure that exploitation cannot be carried out at the same level as China. Even Bangladesh does a better job than India at this exploitation game. Bangladesh produces no cotton and has worse infrastructure than India and yet has a thriving textile industry that rivals India’s.
- The Ease of doing Business rankings are bad due to a jammed judiciary (in World Bank lingo → Enforcing contracts) and remnants of license, quota & permit Raj along-with government corruption (in World Bank lingo → Construction Permits). Judiciary is a much larger issue than merely a business problem and policy makers are not serious towards a faster and cheaper judiciary (partly because a jammed judiciary helps political and business elite to remain outside jail as cases chug along the very slow judicial pipeline. Even Saharashri is in jail due to the efforts of two institutions [SEBI & Supreme Court] as no political party could try their own financers). Construction permits is resolvable via IT, empowered citizens via RTI and good governance norms.
- Crony Capitalism → Despite the hard times that Saharashri and Mallya have fallen on, they are but reflective of the larger malaise that afflicts Indian business viz. crony capitalism. The meteoric rise of certain industrial houses on the back of government largesse has been a facet of Indian system since forever. (In short, India always had a version of Adani)
- Lack of strategic foresight → Chinese strategic designs like String of Pearl are facilitated by Indian ineptitude. Sri Lanka had given the Hambantota port to India for development but India could not be up for the challenge. Can India cry foul after China was given the project later? Will similar projects not flow directly to China today?
India does better in the following spheres →
- Leadership → despite the criticism that Indian political elite is usually subjected to, I believe they are a not really a bad reflection of the moral quagmire, that represents the larger society. And the fact that they can be thrown out (and are in fact thrown out) repeatedly ensures that a certain feedback mechanism exists...
Of all the major economies, India has the highest growth. So, India is already a global growth engine. So, both are wrong!
Now, if the question is really about when India will become a global economic powerhouse, that’s a very different question: Growth Engine status is based on % increase in GDP over previous year whereas Powerhouse status comes from ranking on GDP in absolute terms, no matter whether it has gone up or down from the previous year. IMHO, metrics like per capita income, blah blah blah do not determine powerhouse status. Only nominal GDP rank matters. There’s no hard and fast rule but I guess only the Top 3 or max Top 5 nations on the league table of GDP will qualify to be called a global powerhouse.
According to List of countries by GDP (nominal), India ranks #7 on this table, with France and UK immediately ahead of it. I’m no economist or geopolitical expert but I’ve witnessed the state of economic activity in both those countries - not to mention India - personally. Based on that, I believe that India will overtake France in 5 years and UK in 10 years. That will put India at #5 position in 10 years from now. If Top 5 confers powerhouse status, then India will become a powerhouse in 10 years, so NaMo’s prediction will be right. However, if only Top 3 confers powerhouse status, India might achieve it in 5 or 50 or 500 years or never - it’s extremely hard to say. Even the biggest wellwishers of India would have to consider the possibility that the incumbent powerhouses won’t exactly be sleeping and paving the way for India to overtake them.
UPDATED ON 20-AUG-2016: I just stumbled upon GDP projections for the next 5 years at GDP (nominal) Ranking 2016. According to the following table extracted from there, India will overtake France by 2018 to take the 6th spot and UK by 2020 to take the 5th spot, where it remains until the projection ends.
Q:Raghuram Rajan says India has a long way to go to become a global growth engine. But Narendra Modi says it will be done in 5-10 years. Who is right about his prediction?
Narendra Modi is politician and PM.
Raghuram Rajan is Governor of RBI.
Raghuram Rajan is Governor of RBI.
So what is the estimated time to surpass China ?
News from August 26, 2015.
News from August 26, 2015.
A: First of all let us compare the 2 countries based on GDP (purchasing power parity) instead of in pure $ terms (as the exchange rates are highly speculative and even manipulative).
List of countries by GDP (PPP)
List of countries by GDP (PPP)
China is approx. $20 Trillion, which means it is approx. 2.5X bigger in size as an economy than India which is approx. $8.5 Trillion.
Now, this is the idea-
IF and BIG IF, India manages to grow at the rate of 9% p.a for the next 20 years, then at constant PPP rates, our GDP will become something like- $50 Trillion in PPP terms (a huge amount) certainly, but inflation will take off much of the sheen from that.
If China continues to grow even at 6% p.a. (the lowest growth of Chinese economy for the past 25 years as per official data) then China within 20 years i.e. in 2035–36 will be approx. $65 Trillion in GDP based on PPP (at 2016 prices).
This means, even in the best case scenario for India, we cannot overtake China for at-least 20 years on GDP based on PPP.
However, if we manage to actually do it, our economy will be quite huge and our per capita income (based on PPP) will be close to $50000 per annum which is a considerable amount and will be close to the “Developed world” standards (as of 2016).
All this assumes, we grow at 9% p.a., our inflation rates are relatively benign (approx. 5% or less), We do not suffer any major population explosion (i.e. we maintain current population growth) and we are all not dead in a Nuclear Winter.
So, even after 20 years of high growth we cannot beat China but we will be close to Developed Economy standards. This is the minimum time period required.
If the Rate of Growth decreases to 7.2% then, this time period will increase to 25 years and if it drops more, the time period also correspondingly increases.
In short- We pay for our follies by not earning compound interest or reap the benefits by earning compound interest.
Summary- Rajan is right that it is a long road ahead, but Modi (or rather Jaitley who made the claim) cannot be philosophical and say 25 years to the public but has to say 10 years, this is the bane of democratic politics that people are worried about the “next quarter” or the next year than the next century and politicians have to “speak” what their voters want.
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