Raghuram Rajan heralds the next generation of policy mandarins

Raghuram Rajan is due to announce his first monetary policy on Friday. Most of the public attention will quite naturally focus on what he says about the direction of interest rates as well as the future of financial reform. There will be less attention of another significant fact: this perhaps marks the first stage of the eventual handover of policymaking to a new generation of economists. Rajan, at the age of 50, is in the vanguard of that overdue change.

add_main_imageThe reins of policy design have been held by an outstanding group of policy economists for close to four decades now: Manmohan Singh, Montek Singh Ahluwalia, C. Rangarajan, Vijay Kelkar, Bimal Jalan, Y.V. Reddy, Rakesh Mohan and Shankar Acharya, for example. Many of them came in as lateral entrants into the senior bureaucracy. They made seminal contributions to the radical change in industrial, trade, fiscal and monetary policies since the early 1980s, and even today they are often called in whenever a new problem crops up. Nobody in this group is young; many have stretched their tenures for far too long. They have had an exceptional run, but it is time for new talent.

The current mandarins had themselves replaced another extraordinary group of economists who came into prominence in the first decades after independence: V.K.R.V. Rao, I.G. Patel, K.N. Raj, Pitambar Pant, A.M. Khusro and D.R. Gadgil, for example. Many of them returned to India after studying abroad. They were attracted by the optimism during the first flush of Nehruvian socialism. Their contributions were diverse, from developing the first modern estimates of Indian national income to giving a firm theoretical basis to the Indian development strategy.NextMAds

Rajan is an outsider with little direct experience of the Indian policy establishment. However, he should know that the institution he now heads has also had an interesting history of economic research to provide an intellectual backbone to monetary policy. It was C.D. Deshmukh who first tried to attract quality economists into the central bank, which at one time boasted of such intellectual stars as B.R. Shenoy, Deena Khatkhate, Anand Chandavarkar and V.V. Bhatt. It could be argued that the economic talent in Mumbai at that time was superior to the better known stars in New Delhi, at least if one goes by the number of research papers published in noted international journals.

There was a deep spring of talent within the central bank even after the initial economists left; there were men like M. Narasimham and V.G. Pendharkar. But the next big thrust came after C. Rangarajan left his academic career to become a central banker. Rangarajan was instrumental in encouraging a new generation of economists, so that the rethink of the very basics of monetary policy in the 1980s took place in tandem with the rethink on the other components of economic policy. Some names are worth mentioning: S.S. Tarapore, Anoop Singh, A. Vasudevan, S.L. Shetty and Narendra Jadhav, for instance.

One of the most admirable attributes of these policy economists has been their ability to combine technical proficiency with a fine sense of national interest. One is of no use without the other. It remains to be seen whether the new generation that is waiting in the wings learns to develop such a balance during their careers in government. It is also worth mentioning here that there are knowledgeable critics who complain that a tight cabal based in the finance ministry, Planning Commission and select New Delhi think tanks have got an unfairly large voice in economic policy, shutting out good economists from other centres.

The challenges before the next generation will be quite different from those facing the current generation of mandarins. Much of the basic reforms are done; what remains on the table is politically more complicated. New skills could also be in demand. For example, one of the major tasks ahead will be the redesign of the Indian welfare system to make it more efficient, and skills such as mechanism design—a branch of game theory for which the trio of Leonid Hurwicz, Eric Maskin and Roger Myerson won the 2007 Nobel Prize—will be required.

It is likely that the induction of a game theorist such as Kaushik Basu, rather than the usual macroeconomist, as the chief economic adviser in 2009 was because his particular skills would have been useful in designing the incentive structures in welfare programmes.

There is another risk worth noting. Rajan came in from the US without any direct exposure to Indian institutional realities. The search for the next generation of economic advisers is bound to also move across boundaries since some of the best Indian economic minds are now in foreign universities. That is quite natural. But there is a large gap between the elegant mathematical models and the institutional peculiarities in any economy. The nature of second-generation economic reforms is such that political constraints also need to be understood.sixthMAds

So the transition from this generation to the next may not necessarily be smooth.

Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at cafeeconomics@livemint.com

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