The Booth Professor And India's Path to Growth

On leave from his position at Chicago Booth, Raghuran G. Rajan discusses his role as Governor of the Reserve Bank of India.

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Taking leave from his position as Distinguished Service Professor of Finance at Chicago Booth in 2013 to become Governor of the Reserve Bank of India, Raghuran G. Rajan gained global recognition as “one of the best central bank governors worldwide.” In June 2016, Rajan announced that he will leave that position when his term expires in September to rejoin the University of Chicago Booth School of Business faculty.

In May 2016, Rajan returned to the London campus to give a packed audience of business leaders and Chicago Booth students past and present an insight to his role at the heart of the Indian banking sector and share his views on the global economy.

As Stephen Barter, Co-chair of the EMEA Cabinet on the Global Advisory Board for Chicago Booth, noted when introducing Mr Rajan: what better way to understand India’s view of itself and the world than through the eyes of a man credited with establishing it as the planet’s fastest growing economy?  

“In an emerging market like India, the real challenge is not maintaining the monetary framework, but creating it,” Mr Rajan explained to event moderator Chris Giles, Economics Editor for the Financial Times. “I’ve spent lots of time making the case for reforms, such as introducing a tighter focus on inflation control. It’s all a work in progress, though. This job never finishes.”

What he feels is finished, however, is the time for slow productivity growth to be attributed solely to the global financial crisis. Instead, he sees a variety of other macroeconomic factors affecting countries’ ability to increase real GDP. 

“For a long time, slow global growth has been put down to the financial crisis but that was eight years ago, so can’t still be entirely to blame,” he continued. “We have to resolve other issues, like an ageing population and rising inequality, which are impacting demand and slowing GDP growth.”

Pushed on his proposed solutions to these issues, Mr Rajan admitted there is still work to be done in understanding the true extent of their effect. However, a good place to start is with how productivity growth is measured in the first place.

 “Today’s products are far better than yesterday’s, but we don’t adjust GDP numbers to reflect this improved quality and value. We also undercount GDP by only recognising what’s monetized. A lot of unmonetized qualitative improvements – like the fact we can now watch films on the Internet for a few dollars rather than visit a cinema – go unaccounted for.”

Nor does the solution to slow or flat productivity growth lie in what he calls "short term solutions" like stimulus packages or quantitative easing. Instead, the plan for sustained prosperity in India is to make the country a better place to do business. 

“We need to anchor expectations but the signs of faster growth are there,” Mr Rajan insisted. “Now we have to focus on three things: implementation, implementation, implementation.”

“Our credit clean-up program is freeing up the banks to start lending and funding infrastructure projects again. And there has been a rise in the number of heavily indebted companies selling assets to domestic firms as well as foreign funds picking up stressed assets to enter the Indian market.” 

“"Make in India" is also an important part of our future and we already have rising cement production, strong automotive sales and double the rate of railway construction. Plus, we’re close to power self-sufficiency and in a much better place on corruption.”

In other words, the country appears well set on its path to growth.

—By Jane Delbene
May 25, 2016