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Raghuram Rajan alone cannot revive India's economy

Last updated on: September 05, 2013 20:38 IST

Raghuram Rajan alone cannot revive India's economy

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Ritu Jha in California

It is the government and its policies and attitude toward FDI that is at the root of the problem.


Even when the future of India's economy is at stake, Silicon Valley venture capitalists see a ray of hope and welcomed the policies announced by the new Reserve Bank of India Governor Raghuram Rajan, though they feel it's going to be challenging for him because India's problems are too deep-rooted and systemic.

"We applaud the appointment of Raghunath Rajan as the new governor of the Reserve Bank of India," said Venktesh Shukla, TiE (The Indus Entrepreneurs) Silicon Valley president. His expertise, intellect and awareness of global economic forces will be great assets to the economic policy planning brain trust of India. The government deserves applause for this inspired judgment.

As Governor, his direct sphere is limited to monetary policy while the fate of economy depends on a multitude of factors. Those decisions are taken by the government in power which the Governor has no direct control over. In addition to monetary policy what is critical is the fiscal policy as well as key government decisions regarding subsidies, trade liberalisation, foreign investments and all these in the context of global trends.

"We should not have much expectation from Mr Rajan to make a fundamental change to the Indian economy given that the levers that he can operate are only a few while the government has a lot more of the levers to pull," Shukla told rediff.com. Ultimately, these decisions are political in nature and the quality of decision making flows directly from the wisdom of politicians in power and their political will to make tough decisions.

"We should be rooting for a government that has the wisdom to take the right decisions and the political wherewithal to implement those decisions. It is good to have good coaches, good ground staff and good equipment but ultimately a cricket team needs good batsmen, bowlers and fielders to win the game," said Shukla.

Long time investor in India Shailesh J Mehta, managing general partner at Granite Hill Capital Partners, LLC said he was very optimistic on Rajan joining as RBI governor.

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Photographs: Danish Siddiqui/Reuters

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Mehta said Rajan is a smart man, a very qualified man and is likely to bring fresh thinking to RBI. Welcoming some of the new policies that Rajan announced on Tuesday Mehta said they could benefit foreign investors –– like RBI's swap window would attract dollar funds.

However, on a cautious note he added, "The policy level changes in itself may not be sufficient unless the implementation  of complexities are eliminated," and added that he has been investing since 2001, though for the past 18 months has curtailed his investments.

To manage interest rates Rajan will be facing challenges because Brazil and Indonesia both have increased the interest rate to combat the deprecation of their currency. India is caught between a rock and a hard place because he has to strike the balance between inflation, and also has to deal with the currency depreciation.

"He is bright and capable enough to address the monetary policy challenges. I am lot more optimistic about his appointment and hope he is more aggressive," said Mehta. Still the questions remains whether he will make a bold move or continue RBI's past small steps approach.

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Photographs: Hitesh Harisinghani/Rediff

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Entrepreneur and venture investor Kanwal Rekhi, founder Inventus Capital and one of the pioneer investor in India, who have felt the sting of depreciating rupee told rediff.con, "It's great to see Raghuram Rajan becoming the chief of Reserve Bank. But I do not feel the problem lies with the bank and its moves. It is the government and its policies and attitude toward FDI that is at the root of the problem."

India is running a big current account deficit that needs to be bridged. India is consuming too much because of subsidies, especially the subsidised petroleum products. Government needs to let the products rise to world level.

"We as investors are still keeping faith but barely," said Rekhi.  Rupee is headed towards 100 versus dollar if the policies don't change soon, he added.

He believes that 9 to 10 per cent growth is a distant dream and is unlikely to happen under Congress Party regime. To reach this kind of growth, the government will need to roll out the red carpet rather than red tape for foreign direct investment, clearer and stable tax policy, rule of law (meaning no retroactive changes of the rules and overriding supreme court decisions), aggressive privatisation of state assets, cut back in subsidies and much more.

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Photographs: Danish Siddiqui/Reuters

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Vish Mishra, TiE past president and a venture capitalist with Clearstone Venture Partners since 2002, too welcomed Rajan, and said he is a very capable man and he is the youngest governor.

"We certainly hope that he brings some fresh ideas to his job and gets to implement them. However, India's economic problem are beyond his control.The problems are too deep-rooted and systemic," Mishra told rediff.com.

He said, "We need bold moves by the political leaders to pursue more economic reforms on the labour front and the entrenched beauracracy to make aggressive investments in infrastructure and to  get rid of crippling regulations."

"Make India a better country to do business in and with. Declare and deliver on the promise  that India is open for business. Without taking these actions which the current government has been less successful at, I do not see how a new RBI governor can restore the economic health of the country," said Mishra and added, "It's not that India does not have the talent, skill and resources. It's the simple lack of political will which does not give confidence to it's own citizens and outsiders alike."


Photographs: Hitesh Harisinghani/Rediff

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