Indian Economy:  A brief history

After India’s independence, a broad public debate revolved around the type of economic system that should be adopted and followed.  The Nehruvian Model was finally approved.  A socialistic pattern society was adopted which ultimately shunned every possible option for private enterprises.

Financial Crisis – A boon in disguise!

India tried to develop as a mixed economy during the first 40 years post-independence, unaware of future consequences. Instead of helping the economy grow, the government virtually franked out choices and competition in the name of licenses, restricted exports, forbid commodities, quantitative limits for bulk exports rather than qualitative and reservations for small-scale industries.  This controlled authority of 40 years caused a cumulative systemic crises, which forced the country to open up the economy and integrate with the global market.

1991 crisis helped us to change the Nehruvian model to a free market economy partially. This change in economic model led to economic improvement, but the government had to face criticism by many, as they mortgaged Indian sovereignty to IMF [International Monetary Fund].  A new era of economic revolution started due to this financial crisis and India evolved as a free market Nation. The Indian economy saw many highs and lows till 2013.

Then comes the youngest RBI Governor and rock star of Indian growth story “Raghuram Rajan”. From Alan Greenspan’s Farwell speech to Fault lines to the honourable RBI governor, it’s an incredible journey of Raghuram Rajan.

Raghuram Rajan: The Rock star of Indian Economy

Rajan first came into lime light when he successfully predicted the recession beforehand in 2005 through his book ‘Fault lines’ which explained how a recession would affect the economies worldwide. The same situation unfolded later and Rajan existence felt known. Fault lines explains every hidden fractures that’s still threatening the world economy.

Rajan choose Alan Greenspan’s (A Federal Reserve chairman retiring after presiding over historic period of economic growth) farewell day as a moment to deliver a paper called “Has Financial Development made the world riskier?”

Mr. Rajan argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: “The interbank market could freeze up and one could well have a full-blown financial crisis.”

Securitization

Rajan as RBI Governor:

  1. Inflation and rupee value

When Rajan took office, India was in serious economic crisis, with the rupee depreciating sharply and inflation (Free flow of money circulation) pressures very high. Rajan had a remarkable success in bringing down the inflation and managing the Indian Monetary policy (Managing money supply and interest rates). He achieved a decisive victory over inflation by keeping interest rates firm despite pressure to lower rates, until the inflation was brought back. Falling crude prices also helped him to reduce inflation.

  1. Revolution in banking systems.

Under him, the RBI kicked off the new banking control by giving entry to payment banks and small finance banks, paving way to a banking revolution.

While the first set of payment banks have already been announced, the RBI will soon announce the names of the small finance banks. Besides, Rajan also reworked the priority sector lending norms to ensure that bank credit reaches the needy segments of the country.

RBI realised the threat posed by hidden bad loans in the banking system. Rajan withdrew the tolerance on restructured loans, requiring banks to make provisions on restructured loans at par with bad loans.

Rajan made it clear that even wily promoters who wouldn’t put in money if the asset becomes stressed would be charged. Rajan asked banks to deal with wilful promoters with an iron hand.

  1. RBI’s central role in policy formulation and financial markets

Rajan ensured that the RBI’s voice is heard when it comes to critical issues related to monetary policy formulation and financial markets. How many times have you heard the name ‘Subbarao’ (our previous RBI Governor), when the monetary policy or anything related to financial aspect were changing?

  1. Indian currency stability

After Rajan took over, the central bank has managed to bring in stability in the currency and money markets. The Indian rupee, which fell to its lifetime low of 68.85 against dollar in August 2013, recovered sharply following a slew of measures taken by the central banks in phases to arrest foreign fund outflows and attract fund inflows to the country. The rupee has been trading largely stable since then except in the recent past, when the currency lost the momentum again tracking the weakness in global markets.

 

Challenges ahead… 

The World economy is now in serious turmoil, following the Chinese stock market crash and Greek crisis.  Rajan can’t rest on his glory.  There are tremendous challenges ahead of him as the rupee is depreciating again, because of Yuan devaluation and expectation of US Fed hike interest rates, which leads to a huge FII [Foreign Institutional Investor] outflows.

 

References:
Fault Lines: How Hidden Fractures Still Threaten the World Economy
Raghuram G. Rajan

http://www.thehindu.com/opinion/op-ed/raghuram-rajan-the-man-who-turned-the-economic-tide/article6380438.ece

http://www.economist.com/news/finance-and-economics/21660168-proposal-new-rate-setting-committee-sparks-row-rajan-chains

http://www.livemint.com/Opinion/TGvgjbQwhM51WykAPPBkdP/Raghuram-Rajan–Did-bankers-create-the-crisis.html

http://www.internationalpolicydigest.org/2013/04/24/history-of-economic-growth-in-india/

 

Subprime user – People who have below average credit history (Number of debt repayments)

 

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