What lies ahead

“Raghuram Rajan is joining the Reserve Bank of India (RBI) to be the next Governor”, I told my friend, as I casually pointed to Rajan’s book, Fault Lines. Furrowing his eyebrows, looking quite puzzled, he asked me why that MTV Roadies guy is joining the RBI! Humorous? This is because each day as we get our morning newspaper, we shove away the main sheets and read up all the gossip on Page 3, to see where last night’s biggest party has been at, and which celebrity recently got a manicure. If he would have simply glanced at the inner pages, which have been littered with news about the change of guard at the RBI, he would know that the Chicago economist does not share that much in common, except his first name, with the immensely talented MTV host.

To say that the Indian economy is not in a crisis situation is excessively optimistic. We are exactly at that stage wherein most economists like to use the catch phrase ‘at the brink of a crisis’. I am actually beginning to think that if there ever was a blame-game competition, we Indians would emerge the undisputed winners. Ask anyone – ranging from an auto-rickshaw driver to an educated working professional – to state a reason for the current situation and you’ll get an answer, and a pretty convincing one as well. The common man and the media would blame the government, the government would blame the opposition and the external situation, the external sector blames the Indian political setup and the ruling party, and the patriotic Indian would say the Rupee was falling so drastically because we’re drinking more Coca-Cola and lesser Nimbu Paani! Um… No.

True. As patriotic Indians we have a responsibility towards political and economic outcomes, both of which we can affect, maybe not individually, but through aggregated action. One of the most challenging duties of an economist is to smile during the recession, confidently and shamelessly, and this is where Keynes wins the beauty contest. An economic crisis is not the time for us to begin the blame-game that we are so good at and weep our way into poverty. Instead it is that time to remain confident and upbeat, and take affirmative action. It is that time when it is apropos to quote P.B. Shelley’s Ode to the West Wind: “If Winter comes, can Spring be far behind?”.

The first step towards affecting the economy positively is to understand it, and this blogpost is dedicated to exactly that. Indians are unusually aware of terms like inflation, deficit and foreign exchange. The first two are popular thanks to political parties and their campaigns, and the latter, due to our huge foreign diaspora. This is good, but not good enough. Knowing terminology definitely makes you sound smart at the mundane coffee table conversation. Understanding it can do wonders for you.

Jokes apart, the intention of this blogpost is to educate and not mock. So what’s all the noise about this new Governor? I explain what lies ahead on the RBI’s road to reform, and the Indian economy at large. Yesterday evening, Rajan gave his first statement as Governor, explaining the economic backdrop and the short term time table of reforms. Most of the intended reforms that he stated are structural in nature, which could affect the average Indian quite profoundly. I briefly explain a few of them below.

1. Inflation Indexed Savings Certificates:

Much of the returns that we earn on our investments in savings schemes loses value due to the high levels of inflation that we deal with. If you earn a return of 7% annually on a scheme and inflation has been averaging at 5%, your real return is only 2%, since the prices of goods that you wish to buy with that money have increased now. This is simple logic you might say, my dear educated friend. Many of the people to whom I say this applaud in awe when I make this point.

2. New Banking licenses:

It is true that we have a lot of banks in India. But it is also true that we do not have enough to deal with our 1.2 billion strong population. Allowing new entities to apply for bank licenses, the RBI has emphasized on its mandate of inclusive development. Financial inclusion in India is still in doldrums. The Rangarajan Committee on Financial Inclusion (2008) stated that 45.9 million (51.4%) of farmer households do not have access to credit. Of course, there are enough supply side problems as there are demand side ones. Poor households do not demand financial services, and hence, poorer the group, greater is the exclusion. The most hilarious of things is that the words ‘financial inclusion’ have figured in our government’s five-year plan documents right from 1950 – the year of the first five-year plan. With these new banking licenses, the RBI has the potential to push the frontier of financial inclusion in India.

3. Unique ID – Aadhar:

If you have not gotten yourself registered, do it right away. The RBI aims to implement a pan-India bill payment system such that you will be able to pay all your monthly bills (against utilities, schooling, medical services etc.) and make transfers electronically. Once your expenditure is streamlined through the UID system, private companies will follow suit – think about how simple life becomes. Think about how much corruption we could reduce. Think about how much poverty we could potentially eliminate.

4. Mobile Payment Systems:

The RBI is considering to mimic the technology of developing a SMS-based payment system, which has become a huge success in Kenya. A lot of people whom I have met know of this technology, known popularly as M-Pesa, translating to Mobile Money. (You must have read it at some point in the news.) People in Kenya now carry money on their phones! This money is transferrable through an encrypted SMS-based funds transfer system, and works very conveniently on any type of handset. It serves as an alternative currency, a simple money transmission mechanism, and a savings vehicle. Money in the form of mobile minutes can be transferred, used to buy goods, and saved if desired. Kenya has actually taken the first step towards a cashless economy.

In India, being the country that holds the second largest number of cellphones in the world and where almost half the population is financially excluded, introducing this kind of technology could be beneficial to both the consumer and the retail trader. Note that this technology does not make use of the internet, and hence could penetrate to the poorest sections of the population. Rajan said, “Mobile payments can be a game changer both in the financial sector as well as to mobile companies”.

I wrote my Master’s thesis on this. I am indeed very excited.

Rajan’s first statement outlining the path to future reforms boasts of confidence. If you’re an economist interested in Indian affairs, you must read it. It screams the words ‘reform’ in almost every paragraph. Having said that, what lies ahead is implementation – which is also the more challenging and demanding of concerns. We would need to wait in order to see these reforms pan out. The statement has a precise perspective and clear cut vision. Come 20th September and Rajan’s first monetary policy statement will hopefully brim with lucid forward guidance and a clear cut description of the path the RBI intends to take.

Thank you for reading.

Unconventionally Yours.