Difficult changes for global economny: Raghuram Rajan, Abhijit Banerjee

Two renowned economists taking a bird's eye view of the recent crisis reached chilling conclusions of what might happen to the global economy. If events unfold in the manner they foresee, the global economy is in for gut-wrenching changes and no country will be in a position to take anything for granted.

Speaking on the first day of the India Today Conclave in New Delhi, Raghuram G. Rajan, Chief Economic Adviser in the finance ministry, and Abhijit Banerjee, Economics Professor at Massachusetts Institute of Technology, felt the global economic crisis, which has played out largely in U.S and Europe over the last few years, marks the end of a whole way of economic growth. The only solution is for the affected countries to create new ways to make their economies grow. This, in turn, will impact India and require urgent measures to prepare for what could come.

Rajan described the financial crisis that showed up in the US and Europe in 2008 as the straw that broke the camel's back. It marked the end of almost three decades of debt-fuelled growth. "It's hard to recreate debt-led demand," he said, explaining why it can no longer be business as usual. "In general, industrialised countries have to find new sources of growth," he added.

The way Rajan envisaged the future is industrialised countries emerging as far more competitive economies after a few years marked by internal political conflict. "(A) leaner, much more hungry West," is what he forecast. This West would not be just a consumer of exports from countries such as India, but would also compete in different export markets.

For India, this development would mean that its exporters and its economy are in for more competitive times . "India needs tremendous structural reform in order to be prepared," said Rajan.

"(A) Tsunami of competition is coming," Rajan concluded ominously.

Banerjee largely agreed with Rajan's view on the way the global economy would evolve though he was more pessimistic about the pace of recovery in industrialised countries. Given the sense of urgency about reforms India needs , Banerjee's assessment of the manner in which the Indian government functions was grim. One of the basic flaws of the government's functioning is that it keeps trying to do more without fixing mistakes already discovered, he said. In short, the government keeps repeating mistakes when the need is urgent reform.

Banerjee drove home his point forcefully by comparing India's current state with that of Brazil around 1980. At that time, Brazil had witnessed two decades of robust growth. Subsequently, the country experienced two decades of stagnation as wrong policies derailed the economy.

By placing India in the context of their view of how the global economy would evolve, Rajan and Banerjee got people thinking. They showed that the government's inclination to keep harping that the country remains one of the fastest growing in the world may only serve to lull people into a sense of complacency.