It might take the US economy till the end of next year to reach some sort of stability, said Raghuram Rajan, economic advisor to Prime Minister Manmohan Singh. "Though not the great depression, this could certainly be called the great recession," said Rajan speaking at the PanIIT event in Chennai. Rajan's speech was the mostly keenly awaited, with the 3,000 seat auditorium nearly packed at the time of his speech.
The situation for India remains favourable as compared to rest of the world, but it might not be as good as expected. "Growth is much worse than we expected for India, but better than the world," said Rajan, himself an alumni IIT- Delhi. Indian exports plummeted by 12% in October, with factory output also falling for the first time in 13 years.
Talking about possible recovery and stabilisation in the Indian economy, Rajan said for that India needs to reenergize infrastructure spending. He added that government needs to push the existing projects, such as highways which have not been fully allocated, rather than setting up new ones. Another key issue in recovery will be India Inc's investment plans. "The fall is in corporate investments as they have decided to wait and watch," said Rajan. There will not be a drastic fall in consumption even though some layoffs have started. He said that the companies have to restart their investment plans for which interest rates need to decline so that credit flow begins in the economy again.
Rajan also expressed his worries about the budget deficit, for which he said the estimates are large for next year. Rajan said that government should cut subsidies on items like oil, cooking gas, etc and find more efficient ways to distribute subsidies. "We should look at the possibility of providing money directly to weaker sections," said Rajan.
"World over, middle class has lost huge wealth in the recent global financial crisis. Their attitude is now against free market economy," said Rajan, who still believes in free markets and capitalism. "But economists have pointed out that market economies are prone to crisis, but are the ones that provide most growth," he added. Rajan said the present crisis is fundamentally about governance and regulators are also to blame. He said capitalism is necessary for innovation and encourage people to take risks.
Rajan added that management of the US banks were to be blamed for the excesses committed by these financial institutions. He blamed the payment structure of these banks, which paid according to profits and not the long term impact of the actions.