Stability that breeds complacence. Photographer: Dhiraj Singh/Bloomberg
Stability that breeds complacence. Photographer: Dhiraj Singh/Bloomberg

Raghuram Rajan may be too good a central banker for India's own good.

Of course, the stability the Reserve Bank of India governor has bestowed on Asia's third-biggest economy is a good thing. When he started the job 11 months ago, the currency was plunging and markets were betting the country would be the first BRIC -- Brazil, Russia, India and China -- downgraded to junk. Today, those risks seem very distant -- and that may just be the problem.

The calm that greeted Narendra Modi when he assumed power in May seems to have the prime minister thinking he has all the time in the world to retool the economy. Barely three months on, expectations that Modi would act fast to make India an easier place to do business are being replaced by disappointment. Although it's still early days, a question is already coursing through New Delhi: Is Modi's window to end India's dysfunction closing?

Hopes for an Indian "big bang" began receding on July 10 when Finance Minister Arun Jaitley unveiled this government's first budget. For a team that pledged to quickly enact economic reforms, it was vague and unimaginative and shied away from the subsidy cuts needed to fix the national balance sheet. Nowhere to be found were clues of how Modi would translate the economic success of his Gujarat state into national prosperity. Since then, Modi has wavered on allowing foreigners to hold majority stakes in key industries and sidetracked a World Trade Organization deal to cut tariffs.

Thanks to these anti-reformist moves, the rupee is now Asia's worse performing currency these past few months. Modi might be able to set things right if he accomplishes something quickly, such as ushering through legislation in the next few days before Parliament adjourns to let foreigners own as much as 49 percent of domestic insurers. Doing so might show he has the steel needed to drag lawmakers along in an effort to deregulate labor markets, retail, real estate and pensions.

Since September 2013, Rajan has done an impressive job of restoring order. But the upgrades India needs are beyond the brief of a central banker. Along with deregulation, cutting red tape and attacking corruption, Modi must reverse a current-account deficit that leaves India vulnerable to turmoil in global markets. He also must address a budget deficit that keeps 10-year debt yields at 8.6 percent, a drag on growth that saps funds needed to improve infrastructure and reduce poverty.

Here's where Modi's priorities bump up against Rajan's. India's central banker is in the news this week warning about another global crisis amid loose monetary policy experiments. What worries the former International Monetary Fund chief economist is what bankers call "moral hazard," or reckless behavior by traders encouraged by zero interest rates.

“They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time,” Rajan told the Central Banking Journal. “There will be major market volatility if that occurs.” What's more, he added, “we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost.”

That's particularly true of India. Thirteen years ago, Goldman Sachs thrilled New Delhi by including India among the four emerging nations with the brightest prospects. It was far less enamored with Morgan Stanley's "fragile five" grouping last year, which lumped India with Brazil, Indonesia, South Africa and Turkey. And rightfully so, given how quickly speculators turned on India last year amid signs of stress in global markets.

Modi's election mandate was to keep India from sliding back to the dreaded pre-1970s "Hindu rate of growth" days. With India growing the slowest in 10 years, returning to the era of roughly 3.5 percent growth isn't out of the question. Voting for Modi was a bet that he could scale up his celebrated "Gujarat Model" to revive a nation. I'm worried he's missing the moment with his go-slow approach and squandering that mandate.

It's still possible to get it back. But Modi's next few months must be much more productive than the last few. The next six days while Parliament is in session may be a make or break window for reform.

To contact the writer of this article: William Pesek at wpesek@bloomberg.net

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.