Raghuram Rajan can lift India's corporate torpor

There is an Indian proverb about finding fault with others: "Those who can't dance say the yard is tilted." It is a saying that could easily be applied to the country's corporate sector, as it seeks to assign blame for faltering growth.

Also read: Raghuram Rajan says economy can overcome challenges

True enough, India's situation looks increasingly dire: the rupee keeps tumbling, growth is stagnant, private investment has collapsed, and corporate earnings show no sign of revival.

As a result there is much quiet muttering from business types about their feckless political counterparts, alongside occasional respectful public requests for policy "reforms". It is often noted that Indian business is unwilling to criticise its government openly. But it is just as true to say the recent slowdown has brought little in the way of self-examination from the corporate sector, parts of which are also badly in need of a shake-up.

The upper echelons of Indian business can speak from a position of authority, given that the cream of India's well-run large companies is among the few bright spots in a now-tarnished growth story.

Equity markets have fallen only slightly over the past month, despite rising alarm over the country's trajectory. This is because foreign investors, owning roughly half of freely-traded shares, continue to have confidence in a few dozen leading businesses in sectors like pharmaceuticals, consumer goods and IT outsourcing.

Indeed, it is only continued good performance from the likes of Tata Consultancy Services and Hindustan Unilever that now seems to stand between Asia's third-largest economy and a much sharper market correction.

Yet India's business chieftains could still be much more vocal about the need to improve performance in many of the sectors and companies below this top rank, where performance is often much less impressive. And here they might take inspiration from an unlikely source: Raghuram Rajan, the economist appointed last week as the next governor of the Reserve Bank of India.

Indian central bankers are typically a cautious lot. But Mr Rajan, a former academic at the University of Chicago, has an admirable knack of floating radical ideas, several of which are focused on overhauling the less productive areas of Indian business.

Take banking. In 2009 Mr Rajan authored a government report outlining numerous far-sighted financial sector reforms, many of which he can now happily introduce. One proposal involves the creation of new private sector banks. Here the RBI has already invited applications for the first time in a decade, and numerous suitably qualified companies have shown interest. There is little reason now not to move forward quickly, potentially by announcing the creation of half a dozen new institutions before the end of this year.

The RBI is also set to unveil new rules affecting foreign banks, which will cajole the likes of HSBC and Standard Chartered to set up local subsidiaries. Many international bankers are privately sceptical of this approach. But they would be much more enthusiastic if the chance to acquire some of India's smaller and weaker banks came with it - a move the regulator presently forbids, but which Mr Rajan's report backed.

Separately, Mr Rajan has suggested a range of worthy measures, including opening up India's corporate and government bond markets to foreign investors. More broadly, he also gave a speech last year advocating a new wave of privatisation to regenerate lumbering state-owned enterprises, which control about three-quarters of the banking sector, but also substantial parts of other sectors crucial to restoring Indian growth, including natural resources and energy.

"State ownership in many areas no longer serves the public interest, and the only reason it continues is because it serves the many vested interests that benefit from the status quo," he said, noting the many problems that come with "public sector workers who have cushy undemanding safe jobs . . . the occasional corrupt executive who rakes in bribes, and the minister who enjoys the patronage."

Instead he suggested a series of bold steps to improve corporate governance, break up state-run monopolies and eventually turn them over to private ownership. Constrained by his new position, Mr Rajan is now unlikely to push publicly for such sweeping measures.

But ideas of this type are precisely what India must now consider, if is to rekindle investor confidence and return to 8 per cent annual growth. And for the country's cautious corporate leaders, this means one thing above all: grumbling quietly about the government is no longer enough.

James Crabtree is the Financial Times' Mumbai correspondent

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