The monetary policy committee meets this week to take its next decision on interest rates. The meeting comes against the backdrop of a sharp disagreement between the Union finance ministry and the Reserve Bank of India (RBI) on monetary policy. 

The economists in the ministry believe the central bank has been too cautious in bringing down interest rates despite the fall in headline inflation. The central bank has perhaps been conservative because India has had high inflation over the past decade amid a deflationary global economy.

This is not a new script. There has been a similar divide between New Delhi and Mumbai on interest rate policy for many years now—even during the months preceding the run on the rupee in 2013, when real interest rates were actually negative.

The smooth working relationship between the two masters of our financial universe—first when Manmohan Singh was finance minister while C. Rangarajan was RBI governor, and then when Yashwant Sinha was in charge in New Delhi and Bimal Jalan in Mumbai—is now a distant memory. 

The debate has quite naturally spilled over into the outside world as well. This column had earlier citied the work by economists such as Kenneth Rogoff to argue that a country such as India, with an inflation bias hardwired into policy, needs a cautious central bank to protect monetary stability ( Rogoff had argued that countries with an inflation bias need credible central bankers who are more averse to inflation than the government is.

There is perhaps a more profound difference of opinion that is implicit in the raging debates we have seen over the past decade. 

It is this: Does India resemble East Asia or Latin America?

These two regions have had completely different economic trajectories since 1950—of stability versus volatility. Latin America has had volatile economic growth, a low savings rate, bouts of uncontrolled inflation, periodic balance of payments crises, overvalued currencies, and growing inequality. 

East Asia has had a dramatically different experience—rapid economic growth, a high savings rate, reasonable levels of inflation, stable balance of payments, competitive currencies, and relatively low levels of inequality.

Needless to say, this is a simplified comparison. For example, it is not that there has been no turbulence in East Asia. The entire region was in turmoil thanks to the 1997 financial crisis.

But it is significant that the affected countries quickly bounced back. Compare that with the lost decade that came in the wake of the Latin American debt crisis in the early 1980s. The hysteresis was acute.

Why have these two regions diverged? 

Economists have offered two sets of explanations. The mainstream view is that East Asia got its policy mix right. The developing states in the region made economic growth their primary strategic goal, pushed labour-intensive manufacturing for exports, tried to follow prudent macroeconomic policies, and invested heavily in education and healthcare.

The radical view, from the group of dependency theorists, is that the nation states of East Asia had more autonomy from the neo-imperial influence of the US. Latin America was not that lucky, being in the backyard of the US. 

So, to repeat the question, does India resemble East Asia or Latin America? Is it a paragon of sensible policy or is it prone to macroeconomic adventures?

The latest Economic Survey written by the economists in the finance ministry has said that India now resembles East Asia in terms of high savings rate, growing integration with the global economy and macroeconomic stability. 

Raghuram Rajan used to talk about the risks of India going the Latin American way—not just in terms of periodic macroeconomic instability but also the power of oligarchies over policy. It is not an easy puzzle to solve within the confines of a newspaper column. India currently has similarities with East Asia as well as with Latin America.

However, I would like to focus on one issue that perhaps holds the key to whether India goes down the East Asian or Latin American path in the future. And that is job creation. There is a common misconception, thanks partly to a faulty sample survey conducted by the government in 2009, that India has had jobless growth. Yet, there is no doubt that the Indian economy has failed to create high-quality jobs for new entrants into the labour market.

East Asia pursued a growth strategy that helped millions move from farm to factory over three decades of stunning economic advancement. The ability to create jobs was one key reason why the countries in that region could grow rapidly without generating high inequality. India has had a tougher time because of its failure on the job creation front. 

The inability to do what East Asia did so well over three decades in effect means that a democratic government will need to use fiscal resources to buy social peace in an unequal land. In other words, it will need to spend far more than should be considered prudent.

And these fiscal pressures could lead to a swing from the East Asian to the Latin American model—a danger that is always lurking below the surface.

Niranjan Rajadhyaksha is executive editor of Mint.

Comments are welcome at Read Niranjan’s previous Mint columns at

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