Low Interest Rates Important, But Consumer Demand Key: Raghuram Rajan

"Also, while everyone can see the need for repair and renovation of existing infrastructure, this requires far more decentralised spending than mega projects, and may be harder to initiate and finance from the centre."

Rajan said he fears "that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it.

"We are thereby also creating financial sector risks for when unconventional policies."

He further said that the world needs "stronger well-capitalized multilateral institutions with widespread legitimacy, some of which can provide patient capital and others that can monitor new rules of the game.

"We also need better international safety nets. And each one of us has to work hard in our own countries to develop a consensus for free trade, open markets, and responsible global citizenry.

"If we can achieve all this even as recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need."

The RBI Governor, who has earlier served as Chief Economist at the IMF, said that emerging economies have to work to reduce vulnerabilities in their economies, to get to the point where, like Australia or Canada, they can allow exchange rate flexibility.

"Even while resisting the temptation of absorbing flows, emerging markets will look to safety nets. So another way to prevent a repeat of substantial emerging market reserve accumulation, this time for precautionary rather than competitive purposes, is to build stronger international safety nets."

Rajan said that a big factor persuading authorities in industrial countries to push for higher growth is the fear of deflation. He gave the example of Japan, saying "the key mistake it made was to slip into deflation, which has persisted and held back growth."

He further said that deflation increases the real burden of existing debt, thus exacerbating debt overhang, while admitting that "the spectre of deflation haunts central bankers".

"When coupled with the other political concerns raised by slow and unequal growth... it is no wonder that the authorities in developed countries do not want to settle for low growth, even if that is indeed their economy's potential," he said.

Rajan said that emerging markets have a clear need for infrastructure investment, as well as growing populations that can be a source of final demand.

"Why cannot industrial countries export to emerging markets as a way to bolster growth? After all, they have done so in the past. Emerging markets have no less of an imperative for growth than industrial countries.

"Ideally, emerging markets would invest for the future, funded by the rich world, thus bolstering aggregate world demand," he said.
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