RBI governor Raghuram Rajan did well to reiterate at Davos what he has constantly been saying, that it is the irrational stimulus programmes, called quantitative easing, that is the main cause of the global crisis today. He said the current global market turbulence may owe much to Central banks persisting with stimulus programmes for too long.
He has been suggesting that these Central banks discuss matters with other Central banks before taking such decisions as they have serious global ramifications All such banks, from the US’ Fed Reserve to the European Central Bank which has just announced another $1 trillion bond-buying programme till September 2016, and Japan, have been printing notes in the hope of juicing up their economies, as one commentator put it.
However, a significant amount of this easy money went into the creation of asset bubbles in commodities, oil and real estate, all of which have now crashed. All that money did precious little to stimulate the economies in the way that was expected. Growth is slow and, as Dr Rajan and some other sane voices have been saying, these countries, including India, should go in for real structural reforms. But few care to listen.
This easy money has created a ballooning global debt of nearly $200 trillion but the Central banks responsible for this prefer denial. India is in a better position to weather the present global storm primarily because Dr Rajan has kept a tight control on inflation. Recognised as one of the best economists in the world, he has maintained that monetary policy alone cannot revive investment or growth.
His detractors among so-called economists and the media, who have all become monetary policy experts, have been attributing slow growth to high interest rates, glossing over the need for reforms and tackling issues like highly leveraged private sector companies and the current account deficit.
Dr Rajan has already cut policy rates by 125 basis point with no signs of a pickup in investments. In this context Dr Rajan did well to shoot down the suggestion of Niti Aayog chief Arvind Panagariya that the inflation target rate be raised and that the monetary policy framework needed review. It would be in the interest of the country if Mr Panagariya put the Niti Aayog in shape and leave the monetary policy framework to experts.
