India must resolve problem of bad loans for growth, says Raghuram Rajan

New Delhi: In an interview on Thursday, Raghuram Rajan said that India must fix the balance sheets of its banks and issues related to bad loans. It should also work to revive the stalled infrastructure projects, especially in the power sector, and focus on exports.

However, India’s reputation as a reforming economy has been still intact despite the recent slowdown. The quality of education system and skill-building initiatives also need an effort, Rajan told Hindustan Times.

“I think on the positive side, a number of reforms have been undertaken, some of which, like GST, may have a short-term negative effect, but hopefully in the longer run, will have a very positive effect,” he said.

India’s economic growth has sharply fallen over the past year, from 7.6% in July-September 2016 to 5.7% in April-June quarter this year, as a result of the of the cash crunch that followed demonetisation.

Rajan identified areas that he feels would be critical to reviving the Indian economy from its current state. “The twin balance sheet problem, the balance sheets of the (debt-ridden) corporates as well as those of the banks (that have piled up huge amounts of bad loans). We need to tackle that in a very strong way,” he said.

Rajan said he is also worried about the power sector. “There is where there is an incipient weakness, we need to make Uday work, not just on the financial engineering side but also the real side,” he said.

“Bringing down the losses, increasing the tariff so that there are fewer of our power producers going sick,” Rajan said. “Also, we should be careful to avoid renegotiating especially for these renewable producers, renegotiating the power (purchase) agreements,” he added.

The other major concern for Rajan relates to the exports sector, which has badly fallen off the growth trajectory.

“Why are we not doing better when the rest of the world is picking up on its exports?” Rajan asked. “Earlier we could have the argument that the rest of the world is not doing well, but now exports are picking up throughout Asia. And we need to ask why we are not picking up as strongly,” he said.