The arrival of a high-profile, reforms-oriented economist has created a stir in India’s finance ministry, which presides over an economy that has dramatically deteriorated over the past 12 months.
But Raghuram Rajan’s enthusiasm for reforms may not be enough to precipitate change in the government’s policies.
Dr. Rajan, the former International Monetary Fund chief economist who took charge as chief economic adviser to India’s finance ministry on Wednesday, didn’t have much to say on the first day of his job.
“I have no immediate comments to make on the Indian economy. As soon as we know more of the ground realities, I will speak,” he told reporters who had besieged his new office in New Delhi.
This reticence is not typical of Dr. Rajan, who is famous for warning of impending financial collapse at a 2005 gathering to honor former U.S. Fed Chairman Alan Greenspan.
Dr. Rajan has firm views on what ails India’s economy, which can be gleaned from a speech he made in April.
“We need to become paranoid again [about growth], as we were in the early 1990s,” he said in the speech. To start with, he wants the government to raise fuel prices in quick steps and eventually deregulate them.
India subsidizes the prices of certain fuels such as diesel, cooking gas and kerosene to make them affordable to more people. These sops are blamed for swelling India’s fiscal deficit and fuelling inflation by keeping the consumption of fuel artificially high.
But Dr. Rajan is not alone in calling for the end to fuel subsidies. Apart from private-sector economists, the Reserve Bank of India and the Prime Minister’s Economic Advisory Council are strong advocates of subsidy reform.
What makes this reform difficult is a) the move is politically unpalatable and b) the ruling Congress party has to bring on board coalition partners before it can take such a step, a tough task for a politically contentious move.
“Deficit-cutting is a good thing, but the finance ministry has political compulsions,” says Ashima Goyal, who advises the Indian central bank on monetary policy.
Dr. Rajan’s predecessor, Kaushik Basu, had also arrived with strong credentials as an economist. He was a professor of economics and the C. Marks Professor of International Studies at Cornell University. Still, there’s not much he managed to push through in terms of reforms in the time he was India’s chief economic adviser.