Raghuram Rajan has signalled in his first steps

Ranabir Ray Choudhury

The new RBI Governor’s move to increase the repo rate from 7.25 per cent to 7.5 per cent caused surprise because the expectation was that any rate change would go the other way. Raghuram Rajan has signalled to the country that his main job at the present time is to tackle inflation, which is currently under severe upward pressure owing to the sharp deterioration in the value of the rupee which, among other things, will sharply increase the price of imported inputs in the domestic economy.

It remains to be seen whether the RBI chief will succeed in achieving his immediate goal of cooling things down and increasing the value of the rupee. However, irrespective of the result, Rajan needs to be lauded for having taken a step in direct opposition to what the Government of the day would have preferred.

Lower interest rates would hopefully, have increased economic activity and driven the growth rate upwards.

In other words, the current political imperative for the UPA-2 Government is to drive the growth rate up so that when election time comes around next year it can show the people how “successful” it has been in managing the economy. But the economic compulsion, as far as Rajan is concerned, has been to act differently.

Systemic ill

The bane of the Indian political system has been the growing emphasis on politics at the cost of economics, which has invariably forced the Government to take economic decisions with a short-term, populist impact.

Admittedly, if one looks at the domestic fuel economy, the point will be made that the right “economic” decision has been taken to raise prices in recent times, reducing the subsidy burden on the exchequer.

The present hardship could, however, have been greatly mitigated if the subsidy element in fuel prices had been reduced over time; that would also have made the oil marketing companies healthier.

Big mistake

There no doubt that the national economy today would have been much stronger if politics had not been given primacy over economic compulsions. Take civil aviation, for instance.

It is only now that truly “economic” decisions are being taken to open up the domestic skies.. In view of the stakes involved, it is galling to have Union Ministers admit today that the skies could not be opened up earlier because of the pressure of private interests.

The future, however, does not appear to be bright. It depends totally on the ability and willingness of politicians to put the national interest over and above their own sectarian requirements.