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How Raghuram Rajan’s rate cuts impacted India in 2015

The debate over the state and future of the Indian economy has been rife over the last couple of years, but increasingly, there is a sense that the time to determine the course of its future is now or never. The current government was arguably elected on the mandate of economic reforms and development, but the two most decisive steps have been taken by the Reserve Bank of India (RBI), led by governor Raghuram Rajan.

Earlier this year, a new monetary policy framework, which for the first time sets the agenda of the central bank as inflation targeting (consumer price inflation of 4% with a band of +/-2% from financial year ending in March 2017), came into place. And in September, a surprise rate cut of 50 basis points (bps) was announced, which added considerably to the 75 bps cut made gradually over the course of 2015.

Rajan will announce the fifth bi-monthly monetary policy review on Dec. 1—the last policy of the calendar year—and is expected to keep key interest rates unchanged. In 2015, he cut rates four times.

In this context, Pragya Tiwari spoke to Jayati Ghosh, professor of economics at the Centre for Economic Studies and Planning, School of Social Sciences, at Jawaharlal Nehru University, about the potential of these rate cuts and about the role of monetary policy in the current state of the Indian economy.

I believe an independent central bank is an oxymoron.

Q: What would you say should be the priority for the government in order to step up and be able to help the economy make use of the rate cut?

Ghosh: I think the real drag on the economy today is the pattern of fiscal policy—of public spending. If they want the economy to revive, there needs to be a big push in certain critical areas, which is the opposite of what they are doing. (There needs to be a) big push in rural employment guarantee, creation of an urban employment guarantee, increase of social sector spending for health, education and nutrition, actual implementation of the Food Security Act, and so on. All of this can easily be financed by making the tax administration more efficient. I’m not asking for an increase in taxes. I’m just saying implement your tax laws, properly and seriously.

Q: So what do you make of this push to cut the fiscal deficit?

Ghosh: I think it’s obscene. You don’t do that in the middle of a deceleration. What’s the point, except for some kudos from some international bankers, who are not actually going to come up and help you to increase investment?


First published on Quartz

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