Raghuram Rajan at Harvard: India poised for higher growth, but has to stay away from autocratic path


Cambridge, April 12: Former Reserve Bank of India Governor Raghuram Rajan on Wednesday said India was poised to chart a higher growth path and stay there provided it does not go down the autocratic path along the way.
Once catch-up growth happens, which may be 10 years, and once it is closer to the frontier, it will stay there for long given its liberal market democracy, Rajan said, addressing Harvard Kennedy School students.
In a conversation moderated by HKS Dean Douglas Elmendorf, Rajan, who is the Katherine Dusak Miller Distinguished Service Professor of Finance, The University of Chicago Booth School of Business, said, many compare India with China. “This is unfair to India… the two are very different countries. India pales in comparison with China. Today China is 5 times India’s size, and the per capita income is 5 times more with populations approaching a similar size.”
Rajan noted that enormous part of Chinese manufacturing growth has been much better logistics, which India doesn’t have. “China could do this because of construction and infrastructure in terms of roads and ports. What India has not done is this… And the difference is property rights and democracy. China can go ahead and acquire land despite protests, but in India, you can’t do it. Building infrastructure is not easy because it means running over so many peoples’ land,” he said.
Describing India’s policy, Rajan said, “We have a close to first-world civil society, politicians incentivized to organize people for protest, and an administration, which is third world.” There are solutions that are fair, and at some point India will figure it out, he said.
According to Rajan, India’s advantage is democracy. “It is not a state-run system, or an autocracy… India has all the elements to get there, but it has to make sure doesn’t go autocratic along the way. The next phase of growth, once catch-up growth happens, which may be 10 years, and once it gets closer to the frontiers, India will stay there longer because liberal market democracy is the strongest system for growth,” he said.
To a question on demonetization, Rajan said the central bank under him had advised the Government it was not a good idea and as it turned out later on, it not only cost the economy in terms of growth, but also a lot of jobs in the informal sector.
“We (the RBI) were consulted. We felt it was not a good idea, and told the Government. It seemed to me people will find a way around it,” he said. Demonetization was not a well-planned and a well thought out exercise. “Anybody who knows India knows that we quickly find ways to get around… Many turned to brokers, and converted the black money to white for a price. It did not have the direct effect as was expected,” he said.
He said demonetization had a negative impact on growth. Different estimates put the range at 1.5-2% of GDP. “I don’t think there is a huge amount of dispute around it. I don’t even think the Government challenges it,” Rajan said, adding (“it) was not a policy that was useful.”
The idea that people who had money stored in the basement without having paid taxes will turn religious and tell the Government ‘sorry, we were hiding this money, and let us pay the tax now’ was a naïve view, he said. The other cynical view, which was correct, was that people will find ways to convert their black money into white by paying some percentage to the broker. “The thought that there may be some longer-term impact, that the Government is serious about tax collections, and tax revenues would go up – we still have to see strong evidence that it is true,” Rajan said. (Courtesy: IE)