The man who may turn things around

Will Professor Raghuram G. Rajan be able to catalyse change in his new role as economic advisor?

The Eric J Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business, Raghuram Rajan has been appointed the country’s Chief Economic Advisor.

The former IMF economist, known for his contributions to theory and practice of finance, has chaired the Indian Government’s committees on financial sector reforms and submitted a report in 2008. He is credited to have predicted the 2008 financial crisis.

With the country passing through an economic crisis, with an added perception of stagnation, he is perhaps the best person for the job.

As someone who can draw upon research interests in banking, corporate finance and economic development, and the role of finance in all these, he could perhaps make a difference, with the country passing through a phase of policy paralysis and decision-making being in a limbo.

Associated as an honorary Economic Advisor to the Prime Minister, Rajan had an exciting interaction with the students of The Indian School of Business last April.

He spoke on ‘Indian Governance and Change’, but with a disclaimer, “These are my opinions and not those of the organisations or institutions I am affiliated with.” According to Rajan, “Markets and competition don’t appear by magic, they have to be nurtured through appropriate regulation and enforcement.”

India has achieved much in two-and-a-half decades and there is much to celebrate.

Millions of Indians have moved out of debilitating poverty into a life of modest comfort and the poverty level has come down.

NEED TO BE REALISTIC

Despite the many achievements that India can be proud of, such as the New Delhi metro rail or success in milk production, we should be realistic about India’s deficiencies, he explained.

As the world becomes competitive, India’s star has dimmed, as governance is besmirched by corruption, scandals and deteriorating macro-economic health.

“Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad,” he says. "Growth is not a birthright. It is only when we are paranoid about sustaining growth that we will continue achieving it.

A key factor is to rebuild confidence and resume growth through regulation and governance,” he told management grads and future managers.

According to the Finance Professor, the Government does too much of what it should not do, too little of what it should do, unaware of its limitations.

Given the growth of the private sector, there is really no reason for continued Government presence in some sectors. Government ownership hurts public firms.

Low salaries and continued interference impedes their ability to attract talent while over-employment at the bottom hurts efficiency.

The natural reaction of Government is to protect its progeny by giving them special privileges. This tilts the playing field against the private sector.

Air India, which is on continuous interminable support from the taxpayers, can charge whatever prices it wants and offer whatever service, as it is not compelled to make a profit.

In a pressing case, namely, coal, the public sector has a monopoly. This needs to change.

“We are the world’s largest arms importer, and one reason is the failure of our public sector defence establishments to deliver,” he said.

Fixing the public sector — that is, making the well-performing do even better, while forcing the poorly performing to shape up, even while levelling the playing field — has to come back on the table as matter of urgency.

There is a need for radical solutions towards ‘publification,’ that is breaking monopolies and ensuring that State-owned enterprises work for the public, rather than for their own narrow interests.

ON VODAFONE

An ideal Government would set the rules of the game and allow an independent judiciary to settle disputes. It would change the rules only when they are clearly broken, and rarely, if ever, with retrospective effect, he felt.

The key concern with the Vodafone controversy is not the Government’s right to change law prospectively, if it believes it was poorly written and allows an unintended loophole.

It is not even the Government’s right to change the law retrospectively if it believes that everyone knew what was intended.

The concern is that it intends to change the law retrospectively after the Supreme Court upheld Vodafone’s interpretation of the law.

What is the point of having an independent judiciary? he wondered.

A self-assured India brimming with ideas and energy can play an enormously positive role. “We could teach both the West and rest, while learning from them,” he said.

Even if some of the views of the Professor get translated into reality in the coalition Government, India and its economy would be better off.