It is official. Raghuram Govind Rajan, currently the Chief
Economic Advisor in the Finance Ministry, is appointed the Goevrnor of Reserve
Bank of India (RBI) and will take over from D. Subbarao who demits office on
September 4, 2013.
Raghura Rajan, an alumnus of IIT (Delhi) and IIM
(Ahemdabad), completed his doctorate in Massachusetts Institute of Technology.
He was also Economic Advisor to the PM of India in an honorary position, and is
one of the few young Indian Economists to have correctly predicted the 2008
recession as early as in 2005. He is by far one of the youngest governors
appointed. That said, let’s stand on our toes and see what challenges lie ahead
for this predictor.
1.High Consumer Price Inflation (CPI):
A measure that examines the weighted average of prices of a
basket of consumer goods and services, such as transportation, food and medical
care; consumer price inflation is also termed as ‘headline inflation’.
Basically; high prices of CPI index indicates periods of inflation and
vice-versa. The CPI index in 2008 was
8.32% and the same in 2012 was 9.30%. In 2013, CPI index is growing at a
projected 11.21%.
2.Free-fall of Indian Rupee:
On August 6, 2013, the Indian Rupee nosedived and fell to a
record low of 61.80/USD. The value of rupee has fallen by over approx.
202.43 per cent since 1990. Constant depreciation of Indian Rupee against US
Dollar has and will impact the prices of imported goods, the fuel prices (there
goes the petrol price up again!), tourism industry among others. Also, in a bid
to control rupee’s depreciation, RBI intervenes through public sector banks via
its monetory policies. If the depreciation in rupee continues, it will further
increase inflation. In such a situation RBI will have very less room to cut
policy rates. No cut in policy rate will add to the borrower’s woes who are
eagerly waiting to get rid of the high loan regime.
3.Widening Current account Deficit (CAD):
A CAD occurs when a country's total imports of goods,
services and transfers is greater than the country's total export of goods,
services and transfers. This situation makes a country a net debtor to the rest
of the world. The major contributor of CAD is the high imports of crude oils
and gold (understand why GoI is restricting gold imports?).The high current
account deficits stemming from imports which do not contribute to economic
growth but only are necessary to meet the demands of domestic consumption
coupled with a GDP which is not growing fast enough, has put the economy on a spot.
Some of the effects of sustained CAD are currency depreciation, inflation, reduction
of credit rating of the country affecting foreign investment (which again will
reduce the foreign investment in India).
Above were a few challenges mentioned. We can realize that
these challenges are inter-related and controlling one would not do. It will be
interesting to look how Raghuram Rajan is able to tackle these issues with
serendipity.
-V.k. Dadhich
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