India's growth rate will be too slow without reforms, according to Raghuram Rajan

Former Reserve Bank of India governor Raghuram Rajan cautioned that if the urgently required changes are not carried out, the rate of economic development will sharply drop down.

"I believe that India can accelerate growth with the appropriate set of reforms. It will expand too slowly for its own good without that and more of the political unrest and faction fighting that always occur in India. We will have to see how you get to that higher pace of reforms," Rajan said on July 4 at a Standard Chartered event in Singapore.

"There is a government in existence that is attempting these reforms. However, there is a lot of pushback and those changes haven't worked, for example, on agriculture where they were essentially pushed back, partly because a consensus for those reforms hasn't been created generally," Rajan added.

Prime Minister Narendra Modi stated on November 19 that the government would abolish the three new farm rules in response to months of ferocious farmer protests.

India's GDP is predicted to have increased by 8.7% in FY22, however this growth came from a low base because the country's economy shrank by 6.6 percent in FY21. In FY23, growth is predicted to decrease to 7.2%, and in the medium term, it will be closer to 6%.

However, Rajan drew attention to recent accounts of bank privatisation and suggested that the administration may not be finished with reforms.

Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business. "If that can be done reasonably, that offers an opportunity because the banking sector at this point, on net, is holding back the economy rather than propelling it. Credit growth has to be much stronger," Rajan said.

Regarding India as a potential investment, Rajan stated that the nation was young and had a critical need for infrastructure. He did, however, issue a warning, pointing out that despite India's $3 trillion economy, it is a long way from being able to replace China, which is five times bigger.

Rajan mentioned the drag consumption was proving to be as another issue with growth. "People with higher incomes are doing okay in India... The formal sector has significant profitability. Of fact, no nation can truly prosper at the expense of a declining sector. The lack of equal job growth has been an obvious source of worry for lower middle class households in India. There are many unemployed people. They can't all return to farming, he said.

"There is a lot of anxiety there, then. And that's holding back spending, which was previously driving India's economy ahead and growing strongly. That's currently slowing things down, according to Rajan.