Raghuram Rajan in Project Syndicate:
In their efforts to stimulate demand by pursuing increasingly aggressive monetary policies, advanced economies have been imposing risks on emerging-market countries such as India. Indeed, one day we face surging capital inflows, as investors go into “risk-on” mode, and outflows the next as they switch risk off.
India has responded to this external volatility by trying to create a domestic platform of macroeconomic stability on which to build growth. India’s latest central budget emphasizes fiscal prudence, adheres to past commitments, and aims at structural reforms, especially in agriculture. Fiscal consolidation has also helped to keep the current-account deficit under 1% of GDP. Moreover, inflation has been brought within the official target range. And parliament has created a monetary-policy committee for the Reserve Bank of India (RBI), which should ensure that multiple views are embedded in policy and improve continuity.
We must also address banks’ non-performing loans so that their balance sheets have room for new lending. Unlike more developed countries, India does not have an effective bankruptcy system (though a bill to create one has just cleared the lower house of Parliament). But, using some “out-of-court resolution” mechanisms devised by the RBI, and with capital support from the government, banks should have well-provisioned balance sheets by March 2017.
Perhaps the hardest challenge has been to persuade the public, impatient for rapid growth, of the need to ensure stability first. Growth, it is argued, is always more important, regardless of the looming economic risks. Yet, despite the focus on stability, inhospitable global growth conditions, and two successive droughts (any of which would have thrown the economy into a tailspin in the past), growth is above 7%.
The task is to build on this base. For the first time in decades, global trade has grown more slowly than global output.