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28 August 2012, Gateway House

In 400 words: Raghuram Rajan

A short analysis by Gateway House on what you can expect from Raghuram Rajan, the new Chief Economic Advisor to the Government of India.

Former Director of Research

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On August 29th, Raghuram Rajan, a noted economist and professor at University of Chicago will join the Ministry of Finance as its Chief Economic Advisor – a position with considerable influence over fiscal policy-making.

He comes to India at a time when the country is feeling the pains of a slowing economy and a dysfunctional legislature.

In such a moment of flux, he has several things going for him. First, that he is no stranger to India. He chaired the Committee on Financial Sector Reforms that published the report, “A Hundred Small Steps” in 2008. It remains the seminal guide to introducing step-by-step reforms. Second, that he accurately predicted the global economic crisis. His 2005 paper, “Has Financial Development Made The World Riskier?” warned of the excessive risks financial intermediaries were taking to offer cheap finance to firms and households. His predictions, of course, came true as the crisis unfolded in 2008. And, third, that his beliefs resonate with India’s core concerns today. In his book, Fault Lines, published in 2010, he put rising inequality as the main cause of economic instability in the world; a phenomenon that is evident by the numbers who cannot afford to live at the poverty line defined by the government.

Given these experiences and his leaning towards fiscal discipline and supply-side solutions, the nation can expect some neoliberal policy advice. This bodes well for other targets related to divestment and growth that the country missed in 2011.

At the same time, his suggestions may run up against the way poverty alleviation schemes that guarantee employment and food have been conceived or implemented. Similarly, his experience with the IMF will only be an advantage if he can build creatively on the experience without offering cookie-cutter structural adjustment programmes.

Policy decisions aside, his appointment raises a separate question of why the Indian government cannot find an Indian educated, India-based economist. Dr. Kaushik Basu was also brought in from the United States. Is there no one worthy from the Delhi School of Economics, which has boasted of faculty like K N Raj, Amartya Sen, Sukhumoy Chakravarty and many others? What about the Indian Economic Service that provides research based economic advice to all the departments of the government?

Perhaps, it says something about how our own institutions have lost their shine, or worse, about how we continue to believe that a western education and experience is better.

Akshay Mathur is Head of Research at Gateway House.

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