Opinion: Bravo Rajan!

Two recent news reports from Raghuram Rajan, Governor of RBI offer wisdom and shows what he stands for. Here they are:

One: RBI Governor Raghuram Rajan's word of caution on 'Make in India' campaign (Link: http://zeenews.india.com/business/news/economy/rbi-governor-raghuram-rajans-word-of-caution-on-make-in-india-campaign_114054.html )

Two: Raghuram Rajan Says It's Not The Regulator's Job to Boost Sensex (Link: http://profit.ndtv.com/news/economy/article-raghuram-rajan-says-its-not-the-regulators-job-to-boost-sensex-712041 )

In the first news item, what Rajan says is ABC of economics. Do what you are good at and outsource the rest to flourish. Instead if every country follows the approach of make it all themselves, there would not be much international trade. And the prices of goods won’t be any less leading to opportunity loss. Manufacturing has worked for China but it does not mean our primary focus should also be the same. Manufacturing creates more jobs and has a lot deeper trickle-down effect than service industry. But what the Prime Minister’s office fails to see is manufacturing is not just labor, it is skilled labor and it also demands uninterrupted power, huge water supply and a robust transportation network to enable moving around things quickly and at low cost. Without the supporting infrastructure, it is not possible to produce at low cost. It takes lot more time to build infra than building factories. When we have so many power plants producing a lot lower power than name plate capacity due to coal & gas shortage, who will power the new factories coming online? And what about the water, chemical supplies? Hopefully you now see, why many goods from plastic goods to solar cells would be lot more cheaper to import than make them here in India. Until we fix infra woes, which may take a couple of years to a decade, focusing on manufacturing may not yield the desired results. So Rajan’s caution is all about economical wisdom but who knows whether the powerful person of India is willing to lend an ear or will he ask Rajan to leave at some time? It would be unfortunate if Rajan’s caution is not taken in right sense.

The second news item is about the priorities of a central banker. Inflation and Rupee valuation come first for RBI before the wish list of finance minister and businessmen. The former Governors of RBI too had this as priority but they were pressured successfully by politicians and businessmen. But Rajan is giving them a miss. He raised rates during UPA-2 governance and now he is able to withstand pressure from NDA Government by not reducing it. It may cost his job, but the rock star Governor made it clear what are his priorities. So I say, “Bravo, Rajan!”

Both inflation and Rupee valuation were hit hard in the past few years. Inflation was stubborn above 8% for many years and Rupee had a good fall from 45 to 60 against dollar. But now, in the last few months, inflation is reversing and Rupee did not give up much when rest of the emerging market currencies were sliding quickly. While RBI can be credited for arresting the Rupee fall but not for bringing down the inflation which is due to softening of crude oil and other commodities.

Since the liquidity is high, bringing down rates by a 100 bps may not increase the inflation, but could help in bringing down the interest costs and help boost economy like it is happening in US. Rajan said he is noticing this, but he will act only on confirmation and that may come very soon. What he says is best is best for us, the common men. Of course his priorities are priorities for the common man too.