Reserve Bank Governor Discusses India’s Financial Opportunities

A month after becoming the new governor of the Reserve Bank of India, Raghuram Rajan came to HBS to deliver the 2013 Leatherbee Lecture, "India: The Opportunities and Challenges Ahead."
by Carmen Nobel

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.

About the Author

Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.

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In order to be published, comments must be on-topic and civil in tone, with no name calling or personal attacks. Your comment may be edited for clarity and length.
    • Sid Mehta
    • CEO, Foremost Systems
    India's inflation is due to a lack of supply and not due to an overheated economy. Raising interest rates can't increase supply of goods. And it won't decrease the demand for basics like food shelter and clothing etc.

    Supply issues can only be fixed by putting in infrastructure.
    • Anonymous
    I agree with well studied comments of Sid Mehta. Furthe our law makers are not allowing reforms . But have come up with populist yet destructive new laws: 1) food bill 2) land reforms and 3) ban on mining ...,, without having thought for adverse effect on economy and overall development. .....
    • Vaibhav Deshpande
    • Student, Student- Uni Pune India
    It feels that the Indian Economy is under change, which are major but something unusual. May be due to the World Economic Condition and Time in which Sir Raghu. has been appointed. Its also Elections out to be in India. Definitely, we Indians like to criticize every move of Policy.. (News Channels and Middle Level Living Persons are faa..r ahead than Businessmens !!) , but also its because it leads these peoples to have better strategy for Future- Regarding Planning, Expending & Saving as well..
    No Question RBI has always Positioned itself to Strict Economic Strategist for Betterment of Indian Economy (we Indians believes more RBI than Indian Govt. .), and Much pressure is on Mr. Raghu. to succeed his move.
    In other words, Feeling secured but still Fingers Crossed....
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    The new Governor of Reserve Bank of India is working well for a turnaround. He has been able to halt the fast decline of rupee during the earlier few months. He is also going forward to expedite entry of new banks. However, as he has rightly brought about a comparison with the game of cricket where people change their impressions even after a single failure notwithstanding earlier successes, the problems faced by the economy are multifaceted and lot still needs to be done.
    We wish him godspeed in his endeavours.
    • Dr. Prasanna Kumar Mozumdar
    • Management Consultant, P.M. Consultant and Associates
    I do not agree with Raghuram Rajan about his cricket analogy. Because, when we appoint a team for performance they are suppose to perform. Generally speaking the whether it is national cricket team or management of economy, these are specialist's job. People in large do not interfere, while they are performing or performing well. Yet, quite often people with their respective knowledge in the subject of their interest come up with certain suggestions or criticism about the selection of the team (management of economy or, cricket), or way they perform. What is most unfortunate in such cases that we have observed, instead of appreciating such people for putting forward their valuable opinions (in fact such opinions can provide for some solution to existing problems, or they could be considered as an alternative solution), generally our executives and political leaders call such people and termed as anarchist. Therefore, at many occasi
    ons people with knowledge would like to remain silent, or indifferent.

    Secondly, I do agree with RBI Governor Mr. Raghuram Rajan that problems of Indian Economy are structural. We have huge gap in infrastructure and human capital, but more than that we shall have to overcome the problems of leadership through the process of reforms. Because, once way we can overcome the lacunae of political and bureaucratic leadership in this country; then much of the other structural flaws could be solved. Because, leadership will take right decisions to initiate and bring about changes that are needed at right time.
    • Assist.General Manager, KSIIDC, Bangalore
    Raghuram Rajan has understood very of our rural system. His statement on rural roads if connected, it will connect to Indian economy. its true, I too implemented several rural roads into villages nearly in 800 villages in a year. it was great feedback from the villagers in the Karnataka.
    • tanvi midha
    • assisstant professor, RBIM CHANDIGARH
    The cricket analogy is the best way to explain the state of any arena in india, the country where cricket binds people more than religion. but, interest rates fluctuation and subsequently its stability in india seems to be going parallel to "rocket sciences". A balanced , holistic approach towards the ultimate goal achievement with all the circumstances being favourable to progress in india is what is the requirement today.This all in all requires time to bridge the gap between where we are and where we want to be in future .
    • Vineet Agarwal
    • Student, IMT Hyderabad
    Mr. Rajan highlighted the core problem of Indian Economy when he pointed out the little understanding of economics in India. Policy framers, esp. those who are in for the short term goals, are willing to go down the popular road, often damning the consequences. The economy will function much better when the human capital becomes a function of it and understands the very natural tangents of the economic circle.