Raghuram Rajan likens Indians' view of their economy to their view of the nation's cricket team. When the team's doing well, he says, fans essentially worship the players and ignore any flaws. But during a losing streak, the collective focus of the citizenry shifts to the cricketers' weaknesses.
"The fans don't realize the weaknesses existed even during the good times," he told an audience of Harvard Business School students and faculty members on Tuesday. "The team was never as good as it was made out to be in an up phase and never as bad as it was made out to be during a down phase."
A month after becoming the governor of the Reserve Bank of India, Rajan came to HBS to deliver the 2013 Leatherbee Lecture, "India: The Opportunities and Challenges Ahead." In addition to running India's central bank, Rajan is a prolific author, having published articles in several major financial journals as well as two books, Saving Capitalism from the Capitalists and Fault Lines: How Hidden Cracks Still Threaten the World Economy.
Indeed, India is in the midst of a financial losing streak, and industry observers are waiting for Rajan's next move. "The correct question is: are you going to raise rates or cut them?" Rajan said at the beginning of his lecture. "The answer is: I'm not going to tell you. But what I will talk about is the state of the Indian economy."
Rajan said that many are quick to blame India's economic woes on infrastructure issues, human capital, and regulatory issues. He acknowledged that all three affect economic health.
Regarding infrastructure, the national power grid is on track to be connected to the central power grid within a matter of months, he said, which will link southern India to the rest of the country. And new road construction is promising. "Increasingly, rural areas are becoming more and more central to growth," he said. "Build a road into a village and increasingly that road becomes connected to the Indian economy."
Business regulation needs to be "right sized," he said. As for the issue of human capital, Rajan noted that the majority of the populous is undereducated. "We need more education," he said. "Harvard is of course unique, but we need more institutions that emulate you."
Even so, "I would argue that these three big issues are not central to the big problem we're facing now," he said.
Instead, he placed much of the blame on global investment cycles created by the Federal Reserve Board's stimulus policies in the wake of the global financial crisis. "The stimulus we injected was substantial because we didn't estimate how fast we were growing," he said.
When an audience member asked about the future of the nation's banking system, Rajan listed five potential areas for improvement: the banking structure ("We're creating more opportunities for banks and creating more entrants," he said); markets (many are underdeveloped); financial inclusion ("We want to reach every Indian"; restructuring of corporations ("We need to know who's not paying back and why, and we need to give them incentives to pay us back"); and monetary policy.
The Complication Of Interest Rates
Circling back to interest rates, Rajan said that the issue is more complicated in India than it is in the United States.
In India, "you have to explain why raising the interest rate actually combats inflation," he said. "In most countries, that's understood to be so. In India it's a question. The challenges of monetary policy are not understood or documented…Even amongst economists you have debates about what makes sense. Here, if Ben Bernanke raised interest rates, nobody would argue about what he was trying to achieve."
Asked about the highs and lows of his new job, Rajan acknowledged both. While stabilizing the economy is a satisfying challenge, "the kind of public attention you get can be negative," he said. "I don't like my kids reading some of the stuff that's written about me…But policy makers have to accept that we're in the limelight. And we can't expect just bouquets."
The Leatherbee Lecture Series was bequeathed in 1913 by George Leatherbee to support talks by distinguished finance scholars.