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Raghuram Rajan: meet India's chief economic advisor

IBNLive.com
Aug 30, 2012 at 10:00am IST

Raghuram Govind Rajan is the chief economic advisor to the Government of India. Born in Bhopal on February 3, 1963, he graduated from the Indian Institute of Technology, Delhi in electrical engineering. He went on to secure the Master of Business Administration degree from the Indian Institute of Management, Ahmedabad in 1987. He moved to the US and got his doctorate in economics from the Massachusetts Institute of Technology (MIT), Boston, in 1991.

Rajan joined the Booth School of Business at the University of Chicago and was the youngest-ever Economic Counsellor and Director of Research (chief economist) to have been appointed by the International Monetary Fund (IMF), a position he held from October 2003 to December 2006. In 2003, he became the inaugural recipient of the Fischer Black Prize awarded by the American Finance Association for contributions to the theory and practice of finance by an under-40-years individual.

Rajan's crowning glory was to come in 2005 when he presented a paper at then US Treasury Secretary Alan Greenspan's retirement celebrations. It was called 'Has Financial Development Made the World Riskier'?

Raghuram Rajan: meet India's chief economic advisor

Rajan favours supply-side reforms like raising taxes and reducing costs to prop up growth.

The abstract read: "Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite for risk may expand over the cycle. Not only can these intermediaries accentuate real fluctuations, they can also leave themselves exposed to certain small probability risks that their own collective behavior makes more likely. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. The paper discusses the implications for monetary policy and prudential supervision. In particular, it suggests market-friendly policies that would reduce the incentive of intermediary managers to take excessive risk."

Rajan's contention that a global financial disaster was looming large was torn apart by leading US scholars. Some labelled him 'misguided', others called him a 'luddite.' However, Rajan's study became prophetic in 2008 when the global meltdown hit the world's financial markets and banks collapsed and industries shut shop. Suddenly, no one thought Rajan was a lightweight.

Prime Minister Manmohan Singh, himself a student of economics, has a lot of hopes on Rajan who is known to favour supply-side reforms like raising taxes and reducing costs to prop up growth rather than opting for fiscal stimulus.

Rajan's ideas can surely come to India's aid, specially when one thinks about the country's spiralling fiscal deficit.

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