Modi govt's centralised nature doesn't work well for economic reforms, says Raghuram Rajan

Former RBI Governor Raghuram Rajan has said the centralised nature of current Modi government doesn't work well in carrying out of economic reforms. In his article 'How to fix the economy' for India Today magazine, the noted economist pointed that this form of governance might work well for the political and social agenda of the party, but does not do well with economic reforms.

"Not just decision-making but also ideas and plans emanate from a small set of personalities around the Prime Minister and in the Prime Minister's Office (PMO). That works well for the party's political and social agenda, which is well laid out, and where all these individuals have domain expertise. It works less well for economic reforms, where there is less of a coherent articulated agenda at the top and less domain knowledge of how the economy works at the national rather than state level," Rajan wrote.

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Rajan said that Modi government's promise of 'minimum government, maximum governance' is often misunderstood. "What was meant was that government would do things more efficiently, not that people and the private sector would be freed to do more. While the government continues the creditable drive to automation-direct benefits transfer to recipients is an important achievement-the role of the government in many spheres has expanded, not shrunk," he added.

Rajan pointed out that extreme centralisation, coupled with lack of empowered ministers and a coherent guiding vision meant reforms picked up steam only when PMO focused on them and lost pace when its attention switched to other pressing issues.

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"Often, these efforts take the form of grand gestures because the problems are large and require significant response-so we get demonetisation, bank mergers, corporate tax cuts... However, such episodic moves are not necessarily well-timed or synchronised towards a larger vision, so any associated economic benefits are diluted. Moreover, the follow-up to deal with the unintended consequences is inadequate since the line ministries are disempowered," he added.

Among remedies for the economic slowdown, Rajan suggested that decentralisation is critical for economic growth. He said that while the Centre has to give direction and political impetus to reforms, it cannot hold on to every rein.

"It has to start by empowering its own ministers, and also engage the states since many of the actions need state support," Rajan said.

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