'India's bureaucracy too active': Raghuram Rajan's next-gen reforms for $50 trillion economy by 2047

Former RBI Governor Raghuram Rajan said India needs a whole new generation of reforms to unlock growth, warning that excessive bureaucracy continues to hold back investment. "India's bureaucracy is a little too active. We need to cut the red tape a little more," Rajan told CNBC in an interview. "States are engaged in it, the center has promised a commission which will cut red tape. But we need to do all this yesterday."

Rajan stressed that India's strength lies in its young population. "You start first with India's greatest strength, and that has to be its large number of people and a large number of very young people. And if we can train them up, if we can skill them up to much higher levels, then I think we have the raw material for moving ahead," he said.

"Yes, we have a Satya Nadella or J.V. Rama Krishna or an Abhijit Banerjee, but we need many more Indians to have the kind of education that prepares them for those kinds of careers. That needs a lot more work not just on higher education, but more primary education, more health care, better access to financial services."

On India's growth trajectory, Rajan said: "India at 4 trillion right now and growing at 6.5% is probably going to overtake Japan and Germany — if it hasn’t already done so. There's some talk based on World Bank statistics that it has overtaken Japan. But we're talking maybe a couple of years before India becomes the third-largest economy. But that said, it is way behind China and the United States in terms of size."

He projected India could reach $50 trillion by 2047. "India wants to do that before it starts getting old and its population dividend. The big challenge for India in the next few years is how to employ the young people coming into the labor force." 

On reforms, Rajan said India's current pace was not enough. "India is reforming. It's a continuous process as has been the case since 1991, but it's not enough at this point. And we really need a whole new generation of reforms to light up the Indian engine of growth. Incremental stuff is not going to give us that 2.5% (extra growth) that we need."

He credited infrastructure spending but said private sector investment must pick up. "To the government's credit whether state or national, there's been a lot of infrastructure spending. The quality of India's infrastructure is so much better than it was 10-15 years ago. But that won't cut it. That can’t be the only thing that happens," he said.

"We need India's firms to want to be world beaters again," Rajan added. "Our young entrepreneurs have that. You talk to young Indian entrepreneurs, they want to beat the world, but our older entrepreneurs seem to have lost a little bit of that ambition - and they need to recover."