beyondbrics

The structure of the Indian economy puzzles many. Asia’s third largest economy has a burgeoning band of billionaires, but also the world’s highest concentration of poor people. High economic growth, enjoyed by the few, is in danger of bypassing the many.

Yet where monetary policy is concerned, little is mysterious, says Alan Greenspan, the former governor of the US Federal Reserve.

Given the choice of taming inflation in India or resuscitating a deflation-struck US, Greenspan would rather be in the Mumbai seat of Duvvuri Subbarao, India’s central bank governor, than that of Ben Bernanke in Washington.

India, he told a local television channel, is a “textbook” case for central bankers. Inflation is driven in “big part” by a sizeable budget deficit and double digit growth in the money supply. The remedies are known, even if they are not always taken.

The US economy, in his opinion, has a more serious ailment.

The Reserve Bank of India, the central bank, is showing some gumption in trying to shed the reputation of having the highest inflation in the Group of 20 nations.

A move on Thursday to raise key interest rates for the fifth time in a year shows it is resolute in prioritising curbing rising prices over spurring economic growth towards 9 per cent a year.

Pushing up the repo rate by 25 basis points to 6 per cent – and the reverse repo rate up by 50 basis points to 5 per cent – took some analysts by surprise. They had been expecting the central bank to take a pause.

But the RBI is confident of a benign global outlook and strong domestic growth. Long criticised by some analysts for being over-accommodative, it says it has moved with its latest action much closer to a neutral stance.

Some will demur and say that it has more to do. Samiran Chakraborty, a Mumbai-based economist at Standard Chartered, the banking group, warns that the central bank will have to become more mindful of asset price inflation.

The inexorable rise of the Sensex, the benchmark index on the Bombay Stock Exchange, is a reminder of the perils of strong capital flows into an economy with much promise.

Brian Jackson, senior emerging markets strategist at Royal Bank of Canada Capital Markets in Hong Kong, is one who predicts a further rate rise before the end of the year in order to quicken a reduction in inflation.

Even if India’s path to fiscal consolidation and monetary management is clear, other policy outcomes in India are plainly not for Mr Greenspan.

When asked to compare the rise of India and China, the world’s two fastest growing large economies, he was critical of India’s failure to address a raft of economic issues such as liberalising its labour markets and paring down agricultural subsidies.

“It’s not what China is doing [that is remarkable], it’s what India is not,” he said.

The RBI has more to do, and shows a taste for doing it. Now it’s the finance ministry’s turn to start reforming.

Related reading:
Future of UK aid to India in question, FT
India growth story poses dilemma for investors, FT