India’s former central bank chief, Raghuram Rajan, said that India’s economy can grow 10 percent a year, but with some caveats.
“My sense is that without doing anything extraordinary, India should be growing at 7.5 to 8 percent real GDP growth per year,” Rajan, who was the head of the Reserve Bank of India (RBI) from 2013-2016, said at the Credit Suisse Asian Investment Conference in Hong Kong on Monday.
“It was getting there before demonetization and it flattened off for a year and a half. Now its going back towards the 7.5 and hopefully 8 [percent] after that,” he said.
Getting past demonetization
In November and December of 2016, India’s government declared 500 and 1,000 rupee notes were no longer valid currency, requiring them to be deposited and replaced in a bid to crack down on corruption and tax evasion. That reportedly represented as much as 80 percent of the value of currency in circulation.
Even after demonetization, India’s economy remains heavily dependent on cash transactions and the demonitization program stunted the economy for a time.
But with the disruption now in the rear-view mirror, Rajan said his country’s economy can power ahead, potentially hitting 10 percent GDP growth, if three key reforms are pursued: land acquisition, ease of doing business and bankruptcy system reform.
“If these three big reforms can be done, I think you can get a percentage point more growth. And then you focus on skill building, you get another percentage [point],” he said. “So India could go up to 10 percent, but it needs to do some very core reforms which are not business as usual.”
Rajan said the reforms would require “burning some political capital.”
It’s a subject he’s familiar with. Rajan only served one time as RBI chief after pursuing reforms at the central bank to make its processes more rules-based and less subject to political influence.
Rajan noted, for example, that when it comes to taking land from farmers, it’s a “very political” step.
“You need to find a way to convince them to give it up, and you need to find a way to convince opp pols not to make their careers on the basis of that,” Rajan said.
If these reforms are pursued, not only will India’s economy be able to reach 10 percent growth, but the subcontinent’s appetite for metals and infrastructure could rival China’s path to growth, he said.
To be sure, Rajan did say his bullish scenario wasn’t immediately on the cards, although he highlighted the urgency.
“There’s many a slip between the cup and lip. We need a bunch of reforms to make that possible. Those reforms are not reforms that I believe the current government will spend political capital on,” he said. “It will have to wait for the next government.”
Rajan noted that India will have a “huge” number of people coming to the workforce, as much as 12 million every year.
Good jobs will require tremendous growth, he said.