Need to fix NBFCs, power sector immediately to stimulate economy, says Raghuram Rajan

Raghuram Rajan, the former Reserve Bank of India (RBI) governor shared his views and outlook on the ongoing economic slowdown and its impact on India in an interview with CNBC-TV18.

Rajan, who is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth, said that in comparison to the 2008 financial crisis, the banks are better levered across the globe.

“I think there is more leverage than there was in 2008 but it is not in the same places.

"Banks are less levered than they were then. On the other hand, some corporate sectors, certainly in the United States are more levered, certainly in China, are more levered — and of course governments are more levered," he said.

"So leverage was the big factor in 2008, it is different today. Not necessarily better, but different.”

Rajan, who served as the RBI governor from 2013 to 2016 before leaving for Chicago Booth, said that he can't predict another big financial crash but if one come, it will be from different sources.

“The big issue today is not so much the financial sector frenzy... there is some, but really on trade and global investments, and the worries are that if we don’t pay enough attention, the old global order is going out of the window and there is nothing really to replace it to keep countries from doing things that serve their own interest rather than the global interest. So it is a different world.

"Do I predict a big crash coming? I don’t know, but I do think that it is going to come from different sources, and simply fixing the old problems is not going to prevent the new ones,” he said.

About estimates of India’s growth projections this year being downgraded successively, Rajan said: “There are a variety of growth projections from the private sector analysts, many of which are significantly below government projections, and I think certainly the slowdown in the economy is something that is very worrisome.

"You can hear businesses all around worrying and complaining out loud that they need some kind of stimulus. But I also think that we should pay attention to some of the arguments made by the former chief economist Arvind Subramanian that in fact, we may be overestimating growth with some of the new gross domestic product (GDP) data. And I would suggest — I have been saying this for some time — that we need fresh look from an independent group of experts at the way we compute GDP, and make sure that we are not in a sense having GDP numbers that mislead and cause the wrong kinds of policy actions.”

On the nature of the slowdown in the economy, Rajan said: “I have been saying for some time that I really do think we need a fresh set of reforms and we need a fresh set of reforms informed by view on what we want India to be, and I would love for that view to be articulated at the very top... here is the kind of economy that we want. One-off programmes here and there don’t amount to a comprehensive reform agenda for the economy.

"What we call reform, borrowing in international markets, is not really a reform. It is a tactical action. What we really need is an understanding of how we are going to propel this country by the two or three percentage points greater growth that it needs, and that needs fixing. The immediate problems such as in the power sector, such as in the non-bank financial sector and those need to be done yesterday, not in the next six months. It is very important that those be tackled immediately.

"But we also need a new set of reforms which energise private sector to invest. SOPs (standard operating procedures), stimulus of one kind or the other are not going to be that useful in the longer-term, especially given the very tight fiscal situation that we have.

"Instead, bold reforms, well thought out jumping off the cliff but really, seriously thought out reforms in a variety of areas which energise the Indian people, energise the Indian markets and energise Indian business. This is what we need today, and I really hope we put our best minds to think about this, because absent that, my sense is that we are in for not so good times."

Source: CNBC-TV18