Raghuram Rajan, currently professor of finance at the University of Chicago’s Graduate School of Business, has successfully combined an academic life with stints in policy and research. An astute observer of global macro economy, Rajan had flagged the skewed incentive structure in financial markets—a factor that triggered the subprime crisis. In a recent interview to Mint, Rajan spelt out some thoughts on the macro-economic backdrop preceding the presentation of the Union Budget 2008-09. Edited excerpts:
The macro imperatives for this budget are very interesting. Strong growth momentum, but at the same time there is the subprime crisis where you don’t know where the rot will stop. Heading into the Budget, is this kind of macro inheritance an opportunity or a liability?
Raghuram Rajan, professor of finance at the University of Chicago’s Graduate School of Business
I think $260-270 billion (Rs10.4-10.8 trillion) cushion (foreign exchange reserves) is pretty good. If the world goes to hell, we can still survive for two years. I would say this is still a time of opportunity. I would worry more about frittering away this opportunity. The usual grasshopper story, we fiddle in summer and suffer in winter.
What would be the five things you would do?
Higher education is certainly a burning issue. Unfortunately, even if we do something now, it is going to take a little bit of time. Higher education institutions cannot be built overnight. But our primary education is also in a pretty serious state.
I am glad the plan has put more emphasis (on education), but emphasis also has to be on fixing the system. Sometimes it needs more fixing than money.
I would say on power we are still not out of the woods.
Land is the medium-term reform. Increasingly, we see the consequences of not having good title to land. This whole problem with the SEZ (special economic zone) land acquisition. Especially if we get the rural-urban migration, setting up new cities, everything will need land, and if we don’t have good land title we will have huge problems. We really need to take land titling up on a national scale.
Notice I haven’t said infrastructure. But clearly, setting the ground rules for infrastructure and making them transparent is probably a wise thing. Transparency, objectivity in the regulations would be very important.
I didn’t expound on health care. But you know, the consequences of having an underserved population which is also malnourished is going to hit us very big time 10 years from now. We are suffering the consequences of the past, but when you have the capacity to become at least a second world economy, we may not be able to because of the legacy of the past, because half our population has not had good nutrition when they were young and it is going to condemn them to a second-class existence.
If you look at all of these, underlying it all is ultimately government delivery. The private sector is doing a fair amount, but the government, in a sense, is holding us back.
You can’t wish away the government, you can’t privatize the government because that can create an even bigger set of problems. What you need to do is get the government to step up. It’s just amazing to me that...our Left parties, for example, should be taking up the cause of many of these things which hurt our poor. I hope they do.