Rajan warns World Economy of “Great Depression”

RSTV Bureau

Indian currencyReserve Bank of India Governor Raghuram Rajan has expressed serious concerns that the global economy may be slipping into problems similar to the Great Depression of 1930s. Speaking at the London Business School (LBS), Rajan opined that an international consensus was needed to be built to tackle this problem.

“I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth. And, I think it’s a problem for the world. It’s not just a problem for the industrial countries or emerging markets, now it’s a broader game,” he said.

However, he stressed that the situation is different in India where RBI still needs to bring down lending rates to spur investments.

Mr Rajan was speaking at the conference organised by the London Business School (LBS) on Thursday evening (early Friday morning IST). Discussing his views over global economy and challenges before it with the gathering of students and academics, he asked the central banks from across the world to define “new rules of the game”.

“We need rules of the game in order to effect a better solution. I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action,” Raghuram Rajan said.

“I am not going to venture a guess as to how we establish new rules of the game. It has to be international discussion, international consensus built over time after much research and action,” he further added urging a debate at an international level.

Asked specifically about interest rate cuts from an Indian perspective, he said, “I try to shut out market reactions as far as I can. We (India) are still in a situation where we have to spur investment and I am worried more about that.”

During the discussion, Rajan also expressed his views on the pressure over central banks especially when there is a tremendous pressure for growth. He also lauded the central banks for their performance and achievements in the period post the 1930-crisis.

“The question is are we now moving into the territory in trying to produce growth out of nowhere we are in fact shifting growth from each other, rather than creating growth. Of course, there is past history of this during the Great Depression when we got into competitive devaluation,” he warned.

The noted economist also pointed out the need for countries to work together on capital flows, “We have to become more aware of the spill-over effects of our actions and the rules of the game that we have, of what is allowed and what is not allowed, needs to be revisited,” he further added.

(With inputs from the PTI)