New Delhi: Raghuram Rajan is not known to mince words.
His candour was on display at a speech he gave in New Delhi on 14 April to an audience comprising some of the most powerful people in the country, including Prime Minister Manmohan Singh.
“India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated,” Rajan said. “Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad.”
Without pulling any punches, Rajan pointed out reforms that would reduce patronage and increase competition have stalled, while “rent, patronage, or entitlement-enhancing measures have sailed through”. He added that the old licence raj has been replaced by a new resource raj.
Rajan was taking a leaf from the book of John Maynard Keynes, one of his role models, who told his fellow economists that they should speak truth to power.
The 49-year old Rajan had spoken his mind earlier, in August 2005, at a symposium in Jackson Hole, Wyoming, to honour US Federal Reserve chairman Alan Greenspan. He had asked there whether financial development had made the world a riskier place, a question he had answered in the affirmative.
Tough task: Raghuram Rajan. Photo: Ramesh Pathania/Mint
His remarks were met with scorn from some of the best economists in the world attending the symposium, held at a time when many believed economists had discovered their version of the perpetual motion machine, free of old frictions such as recessions and high inflation. But Rajan was vindicated when a gale swept through the world economy three years later, aka the global financial crisis.
Rajan is now set to become the new chief economic adviser (CEA) to the finance ministry, replacing Kaushik Basu, who returns to Cornell University. Some of that candour and the ability to speak truth to power will be required, since he takes over at a time when the Indian economy is caught in a pincer of slowing growth and high inflation.
Rajan did not respond to questions emailed by Mint.
Former Reserve Bank of India governor Bimal Jalan thinks Rajan is an “excellent choice” for the post of CEA. “He has a very broad bandwidth,” said Jalan, who was a CEA in the 1980’s. “Not only does he have good knowledge in the financial sector space, he has good ideas for the overall macroeconomic situation, as reflected by the thinking in his books.”
Rajan has a scintillating track record.
He is currently the Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. He has also been an honorary economic adviser to Singh since 2008, and he chaired the committee set up by the Planning Commission on financial sector reforms that submitted its report in 2008.
Rajan was the youngest chief economist at the International Monetary Fund. He won the first Fischer Black prize, a prestigious award on the lines of the biannual Fields medal in mathematics and the Clark medal in economics, given to an under-40 finance theorist. It is given in honour of Fischer Black, co-inventor Black-Scholes options-pricing model.
Rajan was born in Bhopal in 1963, the son of a civil servant. The family also spent time in Sri Lanka, Indonesia and Belgium. After studying electrical engineering at the Indian Institute of Technology, Delhi, and getting his masters in business administration at the Indian Institute of Management, Ahmedabad, he went to the Massachussets Institute of Technology (MIT) to do his doctorate in economics. Rajan once said that reading Keynes as a young man convinced him that economics was “an important subject”.
The MIT economics department had a strong Keynesian flavour, with scepticism about some of the wilder claims about the magic of perfect markets. Rajan moved from MIT to Chicago in 1991, a journey across an epic divide. The economics department of his new university has a strong free market tradition, thanks to giants such as Frank Knight, Milton Friedman, George Stigler and Gary Becker.
Rajan was employed in the business school rather than the economics department. The Booth School of Business was home to Merton Miller and Eugene Fama, both proponents of the efficient market hypothesis that financial markets are good at processing information about the economy. Later, Richard Thaler and Robert Vishny helped temper some of the earlier enthusiasm in the finance department at Booth. So Rajan’s academic journey took him past several eclectic milestones, from Keynesian to free market economics, from efficient markets stuff to behavioural finance.
Krishnamurthy Subramanian, now assistant professor of finance at the Indian School of Business, who did his PhD under Rajan at Booth, remembers his former guide as “an extremely sharp but nice person. Though the University of Chicago is known for its free market principles, Rajan appreciates the role that government can play to ensure competition”, Subramanian said. “He understands the balance between the government and business.”
That kind of understanding will be invaluable as Rajan is taking over as CEA at a difficult juncture.
“The job of the chief economic adviser is to advise the government what kind of macroeconomic policies will work and not work in a given situation. But the implementation will depend on the compulsion of coalition politics. And the current economic policies in India are framed by politics,” Jalan concedes.
Renu Kohli, lead economist at the Indian Council for Research on International Economic Relations (ICRIER) in charge of the department of economic affairs-G-20 research project, who worked with Rajan at the IMF, has no qualms as to Rajan’s ability to leap such political hurdles. Kohli, who first heard of Rajan as rising star in the field of economics back in 1996, while she was doing her PhD in the UK, said that Rajan “has a mind that thinks beyond economics. Since good economics does not always make for good politics, he will approach the problem more realistically”.
The immediate policy challenge before the finance minister and the new CEA, according to Arvind Virmani, India’s executive director at the IMF and former CEA, will be to restore macroeconomic certainty and stability and then to close the gap between “potential and reality”. But while Rajan’s views on removing the bottlenecks and infirmities in the Indian economy may be well-appreciated, his prescriptions for the second-generation reforms such as in higher education, retail and media may not be as palatable for the government or the opposition.
His call for a common minimum programme across all sensible political parties to stabilize the economy and regain the confidence of the foreign investors may fall on deaf ears.
Rajan knows fully well that the policies he suggests to the Indian government will have to pass through the political sieve. In two recent essays, he argued it is unfair to criticize politicians in the US and Europe for inaction when they do not have the public mandate to take radical corrective action. “Don’t blame the leaders for appearing short-sighted and indecisive; the fault may lie with us, the public, for not listening to the worrywarts,” Rajan wrote.
The window of opportunity for any serious economic reforms may not come before the general election in 2014, according to Kunal Kumar Kundu, senior economist and general manager, India, at economic research and analysis firm Roubini Global Economics. “The news about the government planning to dole out mobile phones to below poverty line families clearly shows the government is entering into election mode.”
A government official involved in taking decisions at the highest level, who spoke on condition of anonymity, conjectured that Rajan is being brought in to ultimately head the Reserve Bank of India. The current governor of the central bank, D. Subbarao, who was handed a second term at office, will retire in September next year.
“Some may argue Rajan does not have enough administrative experience to be the governor of RBI,” the official said. “But then Ben Bernanke (chairman of the US Fed) also did not have any.”
That assurance may have convinced Rajan to join the government.