Rakesh Mohan

India's Recent Macroeconomic Performance: An Assessment and Way Forward

The sustained high growth in an environment of macroeconomic and financial stability—recorded by the Indian economy prior to the North Atlantic financial crisis (NAFC) has suffered a setback. While the macroeconomic policy response after the NAFC was admirably rapid, there was overshooting of the stimulus, and its withdrawal was gradual. The stimulus measures led to high growth, averaging 9%, during 2009–11, but also sowed the seeds for inflationary and balance of payments pressures, necessitating the subsequent moderation in domestic demand and growth. The domestic slowdown was then further exacerbated by domestic policy bottlenecks. Appropriate policies in regard to domestic oil prices and fiscal consolidation will make more resources available to the private sector and contribute to the recovery of private sector investment. Fiscal consolidation would also facilitate a reduction in inflation, which would then have a moderating impact on gold imports and a favorable impact on the real exchange rate, exports and current account deficit. Given the growth and inflation expectations, interest rates in India can be expected to remain above those in advanced economies, even when we move away from the present aberrations of near zero interest rates in the major advanced economies; therefore, a prudent approach with regard to the opening up of debt flows to foreign investors needs to be pursued

Monetary Policy Coordination and the Role of Central Banks

The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs.

Monetary Policy Transmission in India

Key to the efficient conduct of monetary policy is the condition that it must exert a systematic influence on the economy in a forward-looking sense. A priori economic theory backed by some empirical evidence has identified the main channels through which monetary policy impacts its final targets, viz, output, employment and inflation. Broadly, the vehicles of monetary transmission can be classified into financial market prices (eg, interest rates, exchange rates, yields, asset prices, equity prices) or financial market quantities (money supply, credit aggregates, supply of government bonds and foreign denominated assets). It is recognized that, whereas these channels are not mutually exclusive, the relative importance of each channel may differ from one economy to another depending on a number of factors, including the underlying structural characteristics, the state of development of financial markets, the instruments available to monetary policy, the fiscal stance and the degree of openness.

The International Monetary System; Where Are We and Where Do We Need to Go?

The North Atlantic financial crisis of 2008-2009 has spurred renewed interest in reforming the international monetary system, which has been malfunctioning in many aspects. Large and volatile capital flows have promoted greater volatility in financial markets, leading to recurrent financial crises. The renewed focus on the broader role of the central banks, away from narrow price stability monetary policy frameworks, is necessary to ensure domestic macroeconomic and financial stability. Since international monetary cooperation might be difficult, though desirable, central banks in major advanced economies, going forward, need to internalize the implications of their monetary policies for the rest of the global economy to reduce the incidence of financial crises.

Pressing the Indian Growth Accelerator; Policy Imperatives

India’s real GDP growth slipped substantially after the North Atlantic financial crisis. Return to a sustained high growth trajectory is feasible but it will need much more focused attention to the revival of manufacturing and to the acceleration of investment in transport and infrastructure. The immediate priority is to achieve the kind of fiscal quality and low inflation levels exhibited during 2003-08, with focused attention to increasing efficiency and compliance in tax revenue collection. Higher tax revenues can facilitate increases in public investment, which then crowd in private investment. The task ahead will be more difficult in view of the protracted slowdown in global growth and trade.

Indian Financial Sector: Structure, Trends and Turns

This paper traces the story of Indian financial sector over the period 1950–2015. In identifying the trends and turns of Indian financial sector, the paper adopts a three period classification viz., (a) the 1950s and 1960s, which exhibited some elements of instability associated with laissez faire but underdeveloped banking; (b) the 1970s and 1980s that experienced the process of financial development across the country under government auspices, accompanied by a degree of financial repression; and (c) the period since the 1990s till date, that has been characterized by gradual and calibrated financial deepening and liberalization. Focusing more the third period, the paper argues that as a consequence of successive reforms over the past 25 years, there has been significant progress in making interest and exchange rates largely market determined, though the exchange rate regime remains one of managed float, and some interest rates remain administered. Considerable competition has been introduced in the banking sector through new private sector banks, but public sector banks continue have a dominant share in the market. Contractual savings systems have been improved, but pension funds in India are still in their infancy. Similarly, despite the introduction of new private sector insurance companies coverage of insurance can expand much further, which would also provide greater depth to the financial markets. The extent of development along all the segments of the financial market has not been uniform. While the equity market is quite developed, activities in the private debt market are predominantly confined to private placement form and continue to be limited to the bluechip companies. Going forward, the future areas for development in the Indian financial sector would include further reduction of public ownership in banks and insurance companies, expansion of the contractual savings system through more rapid expansion of the insurance and pension systems, greater spread of mutual funds, and development of institutional investors. It is only then that both the equity and debt markets will display greater breadth as well as depth, along with greater domestic liquidity. At the same time, while reforming the financial sector, the Indian authorities had to constantly keep the issues of equity and efficiency in mind.

Emerging Powers and Global Governance; Whither the IMF?

The governance structure in global bodies like the IMF continues to be disproportionally dominated by advanced economies. Sustained rapid growth in emerging and developing economies (EDEs) in the past 2-3 decades has led to their growing relative weight in the global economy, but with little increase in their voice in the IMF. The emergence of regional financial arrangements reflects the growing dissatisfaction of the EDEs with the current framework. The global economy is on the cusp of an epochal change moving the fulcrum of economic power from the North Atlantic towards Asia after more than 200 years. This must be recognized and responded to adequately.

Getting India Back to the Growth Turnpike: What Will It Take?

India’s real GDP growth has slipped substantially since the onset of the North Atlantic financial crisis (NAFC). There are questions as to whether growth can be revived back to the high growth phase of 2003–2008 in an environment of macroeconomic and financial stability. This article argues that returning India to a high growth turnpike is quite feasible but it will need much more focused attention to the revival of manufacturing and to accelerate investment in transport and infrastructure. The immediate priority is to achieve the kind of fiscal quality and low inflation level that was exhibited during 2003–2008, with focused attention to increasing efficiency and compliance in tax revenue collection Higher tax revenues can facilitate increases in public investment for the delivery of public goods and services, which then crowd in private investment. However, the task ahead will be more difficult now in view of the protracted slow-down in global economic growth and in global trade.