Home >Politics >Policy >Central banks playing with fire: RBI’s Raghuram Rajan

Mumbai: The present period of slow economic growth is dangerous for the world and central banks are engaged in a risky competition to divert growth from other nations through monetary easing, rather than acting in unison to create new growth opportunities, Reserve Bank of India (RBI) governor Raghuram Rajan said on Tuesday.

Multilateral agencies such as International Monetary Fund, Rajan suggested, should develop a consensus on new rules for policy making and should be able to hold the rules inviolable.

“This period of slow growth is particularly dangerous because both industrial countries and emerging markets need high growth to quell rising domestic political tensions," Rajan said in a speech at the Economic Club of New York.

“Policies that attempt to divert growth from others rather than create new growth are more likely under these circumstances. Even as we create conditions for sustainable growth, we need new rules of the game, enforced impartially by multilateral organizations, to ensure countries adhere to international responsibilities," Rajan said.

The prevalent international monetary policy practice is a source of substantial risk, both to sustainable growth as well as to the financial sector, Rajan said. He emphasised that growth is not a problem for industrial or emerging markets, but it is a problem of collective action.

Countries should not compete with each other to corner whatever global growth and demand they can manage, but should create new growth, he said. The ideal solution is to fund emerging markets so that a new segment of global growth is created.

“We are being pushed towards competitive monetary easing," Rajan said in his speech, titled Going Bust for Growth.

“I use Depression-era terminology because I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it. We are thereby also creating financial sector risks for when unconventional policies end," he said.

Stronger, well-capitalised multilateral institutions with widespread legitimacy, are needed now. While some of these institutions can provide patient capital, others can monitor new rules of the game.

The world also needs better international safety nets and every country has to work hard to develop a consensus for free trade, open markets, and responsible global citizenry.

“If we can achieve all this even as recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need."

It is difficult to achieve the growth rate achieved before the recent crisis as the financial boom period left the developed countries with an overhang of debt, Rajan said in his speech, adding that writing off such debt to revive demand is perhaps not sustainable in the long run.

In this environment, incentivising investment and job creation through low interest rates and tax incentives also become difficult because the final demand from consumers is likely to be very weak for a considerable period of time and the real return on new investment may collapse.

While government spending on infrastructure projects could be a good way to lift growth, it is not always a viable alternative.

Emerging countries are in desperate need of growth, as much as industrial countries are hankering for it.

Even as many emerging markets do not have past entitlement promises to deliver on, some have ageing populations that have to be provided for, “and many have young, poor, populations with sky-high expectations of growth".

“Ideally, emerging markets would invest for the future, funded by the rich world, thus bolstering aggregate world demand," Rajan said.

“Clearly, the long run response to weak global growth should be policies that promote innovation as well as structural reforms that enhance efficiency," he said, adding even as most emerging markets have large infrastructure investment needs, they still need to understand how to improve project selection and finance.

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