India may grow even less than 5% next year: Ex-RBI Governor Raghuram Rajan  

As the global economy slows down, going forward India may grow even less than 5 per cent, said Raghuram Rajan, former Governor of the Reserve Bank of India (RBI) in conversation with Rahul Kanwal, News Director - Aajtak & India Today, at the World Economic Forum (WEF) in Davos.

“Certainly growth this fiscal year is spectacular at 7 per cent. But you'll have to look at the details of that growth to feel comfortable. What's happening there is that we grew fairly fast in the early part of the year rebounding from the slow growth as a result of the pandemic. And if you look at the later part of the year, we've slowed down to about a 5 per cent rate. And that is a worrying issue. Because going forward 5 per cent, maybe even less, because of the effects of the slowing global economy. We are already seeing our goods exports slowing down substantially. So I think we can't be complacent. Good year but looking forward, we need to do more, to get growth up to the place where we as a country can provide all the jobs we need,” said Rajan.

He also pointed out the importance of a baseline while comparing data with other countries. “From 2019 to 2022 how fast have we grown? 2.5 per cent a year. What you have to look at is how are we doing relative to our baseline? If you look at the US back to its baseline growth. Look at India at 7 per cent below the baseline according to JP Morgan…so we have some catching up to do," said Rajan.  

In the data that is coming out of India, he said the lower middle class is his greatest concern. “I talk to business people they say it is K-shape recovery. Of course, there are people who say that there's no K-shape recovery. Big businesses doing really well. They paid down debt during the pandemic. Banks have written off the bad loans. So banks and businesses are ready to go. The problem is the lower middle class. They have had a bad pandemic. Some of them have lost their jobs, and small and medium enterprises didn't do so well. They are coming back. So there is some recovery needed. My worry is lower middle class, that's where the anxiety is, for lack of jobs,” said Rajan.

On the government spending during the COVID-19 period, Rajan said more could have been done by the government. “The point is there was a lot of suffering. There still is some suffering now. You can debate whether you could have ameliorated that. My sense is if you look at government expenditure, some more could have been spent in that direction without necessarily breaking the budget. It was a transfer of some payments from one side of the budget to another.  Take for example how much we're spending on subsidising the big industry. We have Rs 2.5 lakh crore already budgeted for the PLI scheme."

“We don't have a good sense. We are an attractive country. We are a country with 1.4 billion people. We have a GDP of $3 trillion. So you will see people coming here. Is it more incremental and therefore is the spending that we are doing necessary to get them in? I would like to see a calculation, which tells me how many jobs are we getting for the subsidies we are putting in. And that means an incremental calculation. Do we really need the subsidy to Adani, to Ambani, to the Tatas to get them to get into that industry? They have plenty of money if that industry is attractive. Are two or three years of subsidy going to make a difference?"

On the inflation rates, Rajan said that globally he expects it to stay on the higher side. "Rates are going to be higher for longer than markets expect. It is going to be very hard for an emerging market to be out of sync with that."  

On the need of revising the inflation band, Rajan said, "If inflation is at 4 per cent, people don't bother about it too much, right now it's at the top end of the range. The RBI recognises it's time to bring it well within the range then leave it at the top end…Moving away from the inflation target, you have to accept that your nominal currency versus the US dollar or other currencies, will continue depreciating."