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Dr. C. Rangarajan, Chairman, Madras School of Economics Addressing the Springboards Council on Jan 12, 2018.

Jan 12, 2018



Springboards Council had the honour of welcoming the eminent economist, former Chairman of the Prime Minister's Economic Advisory Council, distinguished former Member of Parliament and former Governor of the Reserve Bank of India and Chairman, Madras School of Economics, Dr. C. Rangarajan on 12th January 2018 at Madras School of Economics. Dr.Rangarajan delivered the Special Address in an interactive session titled, ‘Current Economic Scenario' coinciding with the Springboards Council Meeting.

Dr. C Rangarajan shared and enlightened the audience with his perspectives on the past and current economic scenarios of India. Dr. C Rangarajan gave a brief introduction to the process of economic reforms in the country, the circumstances under which a need arose to introduce them, and the growth of the Indian Economy post economic reforms. The 1980s saw some important changes in economic policy. A number of committees were set up which recommended changes for improving the functioning of the economy. But most of these recommendations were still within the framework of an overall system of controls. What was attempted was only a relaxation of controls such as raising the threshold for licensing. They were largely incremental in nature. On the other hand, the reforms of 1991 moved away from the control regime and offered a consistent set of measures covering various segments of the economy in line with the new approach.

Cornerstones for Competition

Addressing the gathering, Dr C Rangarajan stated reforms were a response to the acute economic crisis that India faced in 1991. There was a common thread running through the various measures introduced since July 1991, and that was to improve the productivity and efficiency of the system by injecting a greater element of competition.

What changed the mindset of the people who initiated the reforms was the enormity of the crisis of 1991. Mid 1991 saw a new dawn on the economic history of India. The country then faced a severe economic crisis, triggered largely by an acute balance of payments problem. The response to the crisis was to put in a place a set of policies aimed at stabilisation and structural reform. While the stabilization policies were aimed at correcting weaknesses that had developed on the fiscal and balance of payment fronts, the structural reforms were meant to remove rigidities that had entered various segments of the Indian economy and to make the system more competitive and efficient. Thus the crisis was turned into an opportunity to effect some fundamental changes in the content and approach to economic policy.

There has, thus, been a paradigm shift in India’s approach to economic policy. Even as reforms were introduced in the real sector, it became obvious that without corresponding reforms in the financial sector, the expected results would not be achieved. In the first three years after reforms were launched, there was a flurry of activity. Reforms covered all key sectors such as industries, external trade, foreign investment, exchange rate system, banking, capital market and fiscal and monetary policies. The impact was quick. Growth started picking up. The balance of payments situation improved and confidence in the economy was restored. The pace of reform has, however, varied over time.

As reforms progressed, more and more sectors of the economy were brought within the ambit of liberalisation. Agriculture too as a sector needs special attention. Reforms of the agricultural marketing system are overdue. The country is yet to emerge as a single market. Administrative reforms need to be pursued with urgency. Thus the scope for future reforms is still wide. Growth does help in reducing poverty because of both the percolation effect and the ability to raise more resources on the part of the government to provide for increased social sector expenditures, such as health and education. A strategy directed towards - letting the economy grow fast, and focussing on targeted programmes to help the poor and disadvantaged, is required.

Needless to mention, the growth rate is determined by two factors – the investment rate and the efficiency in the use of capital. As the Harod-Domar equation puts it, the growth rate is equal to the investment rate divided by the incremental capital – output ratio. The incremental capital output ratio (ICOR) is the amount of capital required to produce one unit of output. The higher the ICOR, the less efficient we are in the use of capital. As we look at the Indian performance in the last five years, two facts stand out. One is a decline in the investment rate and the second is a rise in ICOR; both of which can only lead to a lower growth rate.

India’s Gross Fixed Capital Formation rate reached a peak in 2007-08 at 33.0 per cent of GDP. With an ICOR of less than 4, it was not surprising that the growth rate was close to 9.4 percent. One sees a steady decline in the investment rate since then. The decline in the rate was small initially but has been more pronounced in the last two years. According to the latest estimates the Gross Fixed Capital formation rate fell to as low as 27.1 per cent in 2016-17 and it stood at 27.5 per cent in the first Quarter of 2017-18. With this investment rate, it would be difficult to achieve a growth rate in the range of 8 to 9 per cent.

Reviving Growth

The solutions, given the current situation is the standard prescription, whenever private investment is weak, is to raise public investment which can take a longer term view. “Though, this standard suggestion is very much appropriate in the present context as well,this can play only a limited role. This can only act as a catalyst. We must not also forget that fiscal prudence is critically important for sustaining high growth” Dr C Rangarajan emphasised.

Thus the emphasis on efficiency does not mean ignoring concerns relating to equity. As the role of government as a producer of marketable goods and services goes down, its role as a regulator and provider of public goods and services increases. In fact, even in the provision of public goods, different combinations are possible. Public-private participation can combine the efficiency of the private sector with larger public policy concerns. Combination of corporate bond models & long term finance are expected to trigger the investment rate.Reforms have come to stay. Reforms are the first important step towards raising the growth rate. But as our experience over the last few years shows, reforms alone are not enough. Focus on development is essential, Dr C Rangarajan opined.

The Special Address was followed by a Q/A session with the audience asking questions on a wide range of topics encompassing his experience as a policy maker. He also shared his thoughts on roll out of the goods and services tax (GST) and demonetisation and its effects on the Indian Economy. Further, Dr. C Rangarajan put forth his views on the various reforms that he recommends to be initiated in the country. Stating that slowing investment rate was the reason behind a dip in the country’s growth rate, Dr C Rangarajan said he expects that the economy would grow at 6.5 per cent for the year 2017-18. Speedy implementation of stalled projects such as Metro, Visag Power Plant, smoothening credit flow and discussions with people would help boost the growth rate, he noted,.He also said the job opportunities and economic growth of the country are inter-related. “Jobs (jobs creation) are not independent. They are related to growth when the economy grows jobs also grow. So you cannot talk off jobs separately from growth,” the former chairman of the Prime Minister’s Economic Advisory Council added. In his concluding remarks, Dr C Rangarajan underscored that growth rate of the economy depends on investment, technology and capability of using the technology.

While, Ms Valli Arun, President, Springboards honoured Dr C Rangarajan, Mr P Murari, IAS(Retd), Former Secretary to President of India & Chairman, Springboards Council delivered the Welcome Remarks and Mr R Ramamurthy, Vice Chairman, Springboards Council proposed the formal Vote of Thanks in the Special Session organised by Springboards Council.

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