September 8, 2017 / 2:42 AM / 10 months ago

BREAKINGVIEWS-Rajan throws down fiscal gauntlet for New Delhi

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

NEW DELHI, Sept 8 (Reuters Breakingviews) - India’s rock star central banker has found his voice. Former Reserve Bank of India Governor Raghuram Rajan has broken his roughly one-year long silence on the country to impart some timely advice. The ex-International Monetary Fund economist told Reuters Breakingviews that New Delhi should sell stakes in state firms to fund a bank bailout. He’s right: borrowing more would give up the credibility India has won with international markets with its healthy finances. It also throws down the fiscal gauntlet for New Delhi.

New Delhi needs billions of dollars to fund a bank bailout. In his new book, “I do what I do”, Rajan dismisses the idea of setting up a bad bank and advocates a direct recapitalisation. Rajan went further in an interview, saying the strong performance of India’s stock market provided a good opportunity to sell assets to fund such a move. His view runs counter to the current consensus that India can afford to relax fiscal consolidation for such an important reform.

India is already straining to hit the fiscal deficit goal of 3.2 percent in the current financial year for various reasons, including a halving of a payout from the RBI following Prime Minister Narendra Modi’s unorthodox currency experiment. Chief Economic Adviser Arvind Subramanian earlier this year said a bailout could cost as much as 4 percent of GDP. If that was borrowed and added to the existing position, India could end up with a deficit to rival its peak following the global financial crisis. That ultimately fed into the currency turmoil Rajan had to manage in 2013 when he took over the RBI - his success then earning him widespread acclaim.

One reason India has enjoyed record inward investment under Modi is because of strong leadership as well as healthy finances, with twin fiscal and current-account deficits under control and a stable currency. India, though, has been helped by low oil prices and has less power to control the current account than to maintain fiscal credibility. Rajan is right to dampen the unbridled confidence and warn New Delhi to stick to the path of prudence.

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- India could sell stakes in state-owned companies to fund a bank recapitalisation without straying from the path of fiscal consolidation, the former head of the Reserve Bank of India (RBI) said on Sept. 8.

- Stronger, better-managed banks should be given the capital they need to absorb losses as a matter of high priority, Raghuram Rajan, who left the RBI last year, told Reuters Breakingviews in an interview at the Chicago University offices in New Delhi.

- “The whole point about the fiscal consolidation process is saying that you are making hard choices, so if you are staying within that you have to find other places where you either cut spending or raise resources,” Rajan said.

- He said the government might sell some assets to raise funds and that a strong stock market provided a good opportunity for divesting.

- The former International Monetary Fund economist was in India to mark the publication of his book, “I Do What I Do”.

- For previous columns by the author, Reuters customers can click on


Editing by Quentin Webb and Katrina Hamlin

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