Without reforms, India will grow too slowly for its own good, says Raghuram Rajan

Former RBI governor Raghuram Rajan

The pace of economic growth will slow down steeply if the much-needed reforms are not implemented, warned former Reserve Bank of India governor Raghuram Rajan.

"I think (that) with the right set of reforms, India can up the pace of growth. Without that and more of the political turmoil and infighting that always happen in India, it will grow too slowly for its own good. How you get to that higher pace of reforms, we will have to see," Rajan said at a Standard Chartered event in Singapore on July 4.

"We have in place a government that's attempting those reforms. But unfortunately, perhaps because a consensus for those reforms hasn't been built widely, there is a lot of opposition and those reforms haven't played out – for example, on agriculture that were effectively rolled back," Rajan said.

On November 19, following months of massive protests by farmers to the three new farm laws, Prime Minister Narendra Modi announced that the government would repeal them.

While India's GDP is estimated to have grown by 8.7 percent in FY22, it was on the back of a low base, with the economy having contracted 6.6 percent in FY21. Growth is seen slowing down to 7.2 percent in FY23 and closer to 6 percent in the medium term.

Rajan, however, pointed out the recent reports of bank privatisation and said the government may not be done with reforms.

"If that can be done reasonably, that offers an opportunity because the banking sector at this point, on net, is holding back the economy rather than propelling it. Credit growth has to be much stronger," Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance at University of Chicago's Booth School of Business, said.

Commenting on India as an investment opportunity, Rajan said the country was young with a great need for infrastructure. He, however, cautioned that while India may be a $3-trillion economy, it is a long way from being a substitute for China, which is five times larger.

Another concern on the growth front cited by Rajan was the drag consumption was proving to be. "Higher income people are doing fairly well in India… Profitability in the formal sector is quite strong. Of course, no country can really do well at the expense of one sector falling off. And this is the clear concern in India – lower middle class households have seen jobs not grow at the same rate. There is a lot of unemployment. They can't all go back to agriculture," he said.

"So, there is a lot of angst there. And that's dragging consumption; India's consumption growth was always a strong part of the economy and propelling things forward. That's slowing things down (now)," Rajan said.