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Raghuram Rajan for calibrated roll-out of economic policies

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Dr Raghuram G. Rajan (right), Chief Economist, IMF, and Mr Arvind Datar, Trustee, Palkhivala Foundation, at a lecture in Chennai on Thursday. Bijoy Ghosh
Dr Raghuram G. Rajan (right), Chief Economist, IMF, and Mr Arvind Datar, Trustee, Palkhivala Foundation, at a lecture in Chennai on Thursday. Bijoy Ghosh

Our Bureau

Chennai, Jan. 13

INDIA is a large and complex country and as such, it would be unwise to roll-out major economic policies nation-wide in one go. Instead, it would be better if policy initiatives are implemented first over a smaller area on experiment basis and taken nation-wide, if successful, Dr Raghuram G. Rajan, Chief Economist, International Monetary Fund, USA, said on Thursday.

Or, economic policies could be implemented countrywide for specified, temporary periods of time before they are "set in stone", he said, delivering a speech on `Mindset to succeed in a globally competitive economy'. The lecture was organised by the Palkhivala Foundation.

Later, to a question on whether India should go carefully while liberalising its economy, Dr Rajan observed that the country's liberalisation was more in "fits and starts" than carefully thought through.

He pointed out that the process of liberalisation itself started in 1991 when India was in a crisis. If indeed liberalisation was carefully thought through, then India ought to be seeing a lot more of experimentation with various economic policies, as China does.

The questioner had spoken laudably of India having been immune to the South-East Asian crisis of 1997 because the country was fortunate not to have capital account convertibility (when the Indian rupee could be bought by or sold for any other currency by anybody).

Dr Rajan replied that the fact that India escaped crisis contagion did not necessarily mean that its policies were right.

The country not being affected was like "dead man feels no pain", he said.

He observed that in 1960, South Korea had the same per capita income as India did.

But today, the per capita income of South Korea was $8,000, compared with India's $500. In the last 40 years, South Korea had to face economic crisis, not just once in 1997, but three times.

India similarly needs to have capital account convertibility, Dr Rajan said.

He noted that although the country had liberalised its economy considerably, there was a long way to go. Indian economy was still closed in many ways, including absence of free capital account convertibility. He further noted that the country had initiated the most number of anti-dumping duties and had restrictions on foreign labour and investment.

Stressing that the country was not by nature xenophobic, Dr Rajan attributed India's slow opening up to what is called `lump of labour fallacy' on the part of the industry and lack of awareness of the benefits of opening up on the part of the people.

`Lump of labour fallacy' theory suggests that when more (foreign) companies get in, existing (India) companies' share of the pie shrinks.

This, Dr Rajan said, is not true, because the pie actually gets bigger and the existing companies prosper more.

He noted that Indian corporates were beginning to realise this.

But to change the mindset of people, he said that pro-growth policies would inevitably lead to short-term problems such as job losses, against which there should be a safety net.

It could be in the form of unemployment insurance, designed in such a way that it did not encourage the jobless to stay at home.

Dr Rajan was against inviting foreign investment by giving sops. He wanted a proper playing field for domestic investments.

(This article was published in the Business Line print edition dated January 14, 2005)
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