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Chief economic advisor Raghuram Rajan's first economic survey strikingly frames the complexity of India's current economic challenge. Macroeconomic mismanagement in the period after the financial crisis figures prominently in his analysis of what went wrong with the India growth story. According to the survey, 2012-13, a post-crisis fiscal and monetary stimulus resulted in demand expansion, pushing up GDP growth and inflation in the two years following the crisis. The monetary tightening that followed in response to the subsequent inflation then pushed investment down. This further caused supply-side constraints, which pushed inflation up. To get out of this very difficult macroeconomic environment, the CEA recommends fiscal tightening, monetary easing and a host of reforms. He emphasises India would have to improve infrastructure, governance and the regulatory environment, streamline permissions for investment projects, undertake financial reform, change labour laws and education policy and improve agricultural productivity, among other measures, for growth to get back on track and for inflation to go down again.
Achieving this long list of objectives is going to be an enormous challenge. Even the seemingly simple ones, which involve macro-stabilisation policies, pose huge difficulties. For instance, higher interest rates have led to lower investment; on the other hand, as the survey shows, financial savings have fallen sharply and gold imports have risen due to lower interest rates earned on financial savings. This has pushed up the current account deficit. But to reduce interest rates to increase investment, and to raise rates to increase financial savings, would require financial intermediation costs to be brought down sharply. For this, the financial sector has to become much more efficient and competitive. While this is feasible in the long run, as India privatises public sector banks, improves financial regulation and increases competition in the banking sector, in the short run it seems a nearly impossible task. Considering the list of policy changes required to achieve higher growth, the CEA's projection of 6.1 to 6.7 per cent GDP growth in 2013-14 appears somewhat optimistic.