Economic commentators are disappointingly short on metaphors. New economic figures released last week prompted a slew of articles asking whether or not India’s economy had “turned a corner,” “cleared the woods” or begun sprouting “green shoots.” After a turbulent summer – and against the backdrop of a lingering global downturn, looming general election and a booming China – it’s no surprise that Indians, and investors, are desperate for signs that the country’s economy is “back on track.”
The fact that the BSE index, or Sensex, often ignores global equity trends is not the point. In fact the last time the Fed looked as though it was going to “taper” off its $82bn quantitative easing programme Indian stocks were knocked sideways along with every other emerging market and the rupee collapsed.
By September it had fallen 20% since the beginning of the year to an all-time low against the dollar. The reasons were threefold – an escalating current account deficit, a too-big budget deficit and the prospect of foreign money being sucked back to the US as interest rates there started to move back up.
It’s not often in economics that being handsome plays much of a part, but Raghuram Rajan was given a rousing welcome in the Indian press for his laid back “rock star” good looks, suave self-confident style, and almost as an afterthought his economic credentials:
chief economist at the IMF
Professor of finance at the Graduate Business School at the University of Chicago
economic adviser to the Indian Finance Ministry
What’s more he made the most of it. Where his predecessor, Duvvuri Subbarao, had been vilified for attempting to put up interest rates, Mr Rajan’s two interest rate hikes have been greeted with giddy enthusiasm by almost everyone. He coupled it with steps to liberalise the banking sector and expand financial services to the hundreds of millions of Indians who remain unbanked.
And more reforms are in train – he’s quoted as saying: “There are so many low-hanging fruit in the economy that if we only pluck them we can accelerate growth substantially.”
Mr Rajan’s greatest achievement then has been to restore a measure of confidence, and with it has come a measure of stabilisation for the rupee and a 20% rise in the Sensex as investors came back to the market.
He’s remarkably sanguine about India’s public finances too, where he says the deficit is shrinking – down from 73.2% of GDP in 2006-07 to 66% in 2012-13.
Just before he became governor he pointed out in a paper that most of the debt was held domestically.
The final link in the chain is politics. The Sensex has been given a lift by what is being seen as a suggestion that come the May elections, the government may be stable enough to push through more reforms.
Exit polls at the state elections this week indicated Narendra Modi and the opposition, the Hindu Nationalist BJP, may be making significant gains.