Rajan prefers steady reforms, ‘mini bangs’ to ‘big bang’ changes

Rajan prefers steady reforms, ‘mini bangs’ to ‘big bang’ changes: Says pace of reforms can pick up as global conditions become less uncertain...


Mini bang reforms

This refers to “Rajan prefers steadyreforms, ‘mini bangs’ to ‘big bang’ changes” (The Hindu Business Line, August 27). Despite Subramanian Swamy’s repeated reminders that Dr Rajan had his earlier education in IIT and not in an Arts & Commerce College (where Economics was an optional subject for Bachelor’s degree), one feels sad that India will miss the sane and forthright advice loaded with common sense and backed by learning and research, which the country has been listening to almost on a day-to-day basis for the last three years.
Minus Swamy, rest of India and the world will still look forward to Dr Rajan’s views on economic development and financial sector reforms issues, as we are sure that he will put to effective use his three years learning of these subjects at Mint Road, while sharing his views at international fora at appropriate times. Who else will dare to come out with a justification for transparent subsidy as Dr Rajan has argued for, on Friday? He said:
“…While the RBI is a liberalizer, we have to be careful not to relax prudential regulations simply because an entity or activity is deemed of national importance. Dispensation on prudential regulation is the wrong instrument to favour such activities. A nationally important activity such as infrastructure may be very risky. To require lower provisions, or to allow higher leverage or ECBs against such activities, may increase systemic risk. In the long run, the activity may be damaged by the regulatory dispensation (too many infrastructure projects that do not have dollar earnings will be financed with dollar or yen loans and cannot repay) and stability may also be compromised. It is far better for the Government to directly subsidize such activities if it deems them important than for RBI to sacrifice systemic stability on the altar of national importance.”
This observation points to the need for GOI and state governments to revisit subsidies and taxes from a hitherto forgotten angle. As a country, we have succumbed to external pressures not to rationalise subsidies and taxes. In an ideal situation where real costs are recovered in full from consumers of products and services, prices and wages are paid by users of services including government/s on a real time basis, need to pay subsidy and collect taxes will come down drastically.
The deep understanding of the Indian context of the possible economic and financial sector reforms helped Rajan to convince Team RBI and GOI the need to parcel the reform package into doable pieces and time their launch/implementation, to suit the country’s needs.

M G Warrier, Mumbai

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