India’s high unemployment is ‘real danger’: Raghuram Rajan

Former Reserve Bank governor Raghuram Rajan, who's now a professor of finance at U.S.-based Chicago Booth School of Business, says the high unemployment rate in India is a real danger, especially for the lower-middle-class, as it creates room for "entrepreneurial politicians who cater to these divisions" rather than focussing on actually enhancing jobs.

Rajan, during an interview with Promarket, a publication funded by the Stigler Center at the University of Chicago Booth, says tensions could grow in India if minorities including Muslims and women are not part of strong, sustainable and equitable growth.

"If we focus on just the Indian growth number right now, we’re not doing too badly apart from the dramatic plunge during the pandemic but if you add in that the women’s labour force participation is worse than in Saudi Arabia — people don’t believe me when I say this — these are pressing issues that need to be solved," he adds.

On the worse economic situation in India's neighbouring countries like Pakistan and Sri Lanka, Rajan thinks it'll not have any ripple effect on India, apart from the possibility of economic refugees. However, he thinks neighbours who are hungry or don't have fuel to heat homes or cook food make for a "volatile neighbourhood".

"We already have enough problems of our own without having a neighbourhood that’s going to become more radicalised," adds Rajan.

Rajan says India is sending fuel, food and other supplies to the bankrupt nation but the real worry is that it'll get only a fraction back of the money being lent on humanitarian grounds. "So there has to be some kind of guarantee provided by international organisations or other creditors that this money will not be treated on par with existing debt."

However, India should continue to supply things like food as part of goodwill and as a "friend in need", he says.

On inflation, Rajan says the inflation situation is different across emerging markets, including India and Brazil. There are some elements of supply chain constraints and commodity price rises but the overall imbalance is caused due to higher spending power of upper-middle-class than the lower-middle class. "So there you might see some elements of inflation skewed towards the things the upper-middle-class spends on."

He says this kind of inflation, even if originates from supply constraints, remains high, and before generalised, and that leads to wage-price spirals. "Already you see high wage growth in certain sectors of the Indian economy, in tech for example, though this is driven more by global demand than local."

Rajan thinks the current inflation scenario in India is not only the demand-push inflation but supply constraints as well. This is why he thinks, demand needs to correspond more to supply.

CPI headline inflation rose from 7% in March 2022 to 7.8% in April 2022, reflecting a broad-based increase in all its major constituents. The Reserve Bank of India in its forecast last week hiked its inflation projection for the financial year 2022-23 to 6.7% from 5.7% earlier on the back of rising crude oil prices. RBI's projections indicate that inflation is likely to remain above the upper tolerance level of 6% through the first three quarters of 2022-23.