Dr. Raghuram Rajan

Raghuram Govindarajan is an Indian economist as well as the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He was born on February 3, 1963. He served as the International Monetary Fund’s Chief Economist and Director of Research between 2003 and 2006. He served as the 23rd Governor of the Reserve Bank of India from September 2013 to September 2016. In 2015, while serving as the RBI’s governor, he was appointed Vice-Chairman of the Bank for International Settlements.

The topic has a chance of being asked as a UPSC Prelims Economics Question or as a Current Affairs Question.

Note: UPSC 2023 is approaching closer, supplement your preparation with the free Daily Video Analysis of The Hindu Newspaper by BYJU’S.

Dr. Raghuram Rajan UPSC Notes PDF –Download PDF Here

About Raghuram Rajan

Rajan issued a warning about the escalating risks to the financial system at the Federal Reserve’s annual Jackson Hole conference in 2005 and put forth policies to address these risks. Lawrence Summers, a former U.S. Treasury Secretary, referred to Rajan as a “Luddite” and the warnings as “misguided.” However, Rajan’s opinions were viewed as foresighted following the financial crisis of 2007–2008, and he was extensively interviewed for the Academy Award-winning documentary Inside Job (2010). Rajan was awarded the first Fischer Black Prize in 2003. This award is given by the American Finance Association every two years to the financial economist under the age of 40 who has made the greatest contribution to the theory and practice of finance. The Financial Times/Goldman Sachs Business Book of the Year award went to his book, Fault Lines: How Hidden Fractures Still Threaten the Global Economy, in 2010. Time included him on its list of the “100 Most Influential People in the World” in 2016.

Education and Early Life of Raghuram Rajan

Raghuram Rajan was born into a Tamil Brahmin family in Bhopal, Madhya Pradesh. His father, R Govindarajan, was assigned to the Intelligence Bureau and posted to Indonesia in 1966. In 1968, he joined the Intelligence Bureau’s newly established Research and Analysis Wing (R&AW), where he worked as a staff officer for R. N. Kao and joined the “Kaoboys.” Rajan missed a year of school in Sri Lanka in 1970 after being posted there due to political unrest. R. Govindarajan was transferred from Sri Lanka to Belgium, where the kids attended a French school. The family went back to India in 1974. Rajan assumed his father was a diplomat throughout his childhood because the family used diplomatic passports to travel. Up until 1974, he attended Campion School in Bhopal on a half-term basis. Rajan attended Delhi Public School in R. K. Puram from 1974 to 1981. He enrolled at the Indian Institute of Technology in Delhi in 1981 to pursue a bachelor’s in electrical engineering. He served as the Student Affairs Council’s chairman during the last year of his four-year degree. As the best all-around student, he received the Director’s Gold Medal upon graduation in 1985.

He graduated with a gold medal for academic achievement from the Indian Institute of Management Ahmedabad with a Master of Business Administration in 1987. He began working for Tata Administrative Services as a management trainee but left after a short time to enroll in the doctoral programme at the Massachusetts Institute of Technology’s Sloan School of Management. Under the direction of Stewart Myers, he earned a PhD in 1991 for his thesis, Essays on Banking, which included three essays on the nature of the connection between a company or a nation and its creditor banks. In the 1980s, the nature of financial systems underwent significant changes as a result of deregulated markets, easier access to and processing of information, and increased competition. According to the accepted wisdom, deregulation inevitably would lead to more competition and, ultimately, higher efficiency. Rajan contended in his thesis that this might not always be the case. The first essay concentrated on the options that companies have when choosing between relationship-based and arm’s-length credit.

The second was primarily concerned with the Glass-Steagall Act and the conflict of interest that results when a commercial lending bank engages in investment banking. The last essay looked at why debt indexation was rarely included in debt reduction plans, despite having potential benefits. He received honorary doctorates from the Université Catholique de Louvain in 2019, the Hong Kong University of Science and Technology in 2015, and the London Business School in the year 2012.

Awards

• Rajan was the first recipient of the Fischer Black Prize, given by the American Finance Association in 2003 for an economist’s contributions to the theory and practice of finance.
• He was given the title of Global Indian by NASSCOM in February 2010 at its 7th annual global leadership awards.
• Fault Lines: How Hidden Fractures Still Threaten the World Economy, which he published in 2010, won the Financial Times and McKinsey Business Book of the Year Award.
• In November 2011 he received the Infosys Prize for Social Sciences – Economics for his work in analysing the contribution of financial development to economic growth, and the potential adverse effects of poorly functioning incentives that lead to excessive risk-taking.
• For his “groundbreaking research work that influenced financial and macroeconomic policy around the world,” he received the sixth Deutsche Bank Prize in Financial Economics in 2013.
• He received the “Governor of the Year Award 2014” from the London-based financial publication Central Banking in 2014.
• He received the “Yashwantrao Chavan National Award 2018” in March 2019 for his contribution to economic growth.

Career of Raghuram Rajan

In Academia

Rajan began working at the Booth School of Business at the University of Chicago in 1991 as an assistant professor of finance. In 1995, he was hired on a full-time basis. At the Indian School of Business, Kellogg School of Management, MIT Sloan School of Management, Stockholm School of Economics, and Kellogg School of Management, he has served as a visiting professor. In 2010, Rajan attended the FT and Goldman Sachs Business Book of the Year Award ceremony with Lionel Barber (left) and Lloyd Blankfein (right). Rajan has published a lot of articles on organisational structures, corporate finance, growth and development, and banking. He frequently posts to Project Syndicate. He and Douglas Diamond have worked together to produce highly cited research on banks and how they relate to macroeconomic phenomena.

He has collaborated with Luigi Zingales on research examining how institutions affect economic growth. Their findings demonstrate the importance of developing free financial markets for the modernization of the economy. In 2003, Rajan and Zingales released Saving Capitalism from the Capitalists as a result of their work. The book made the case that established businesses in closed financial markets thwart competition and reforms, which slows down economic expansion. Fault Lines: How Hidden Fractures Still Threaten the World Economy by Rajan, published in 2010, looked at the fundamental stresses in the American and global economies that contributed to the financial crisis of 2007 – 2008. He claimed that the crisis was caused by escalating income disparity in the US, trade imbalances in the global economy, and competition between financial systems that were not at odds with one another.

He is listed among the top 5% of authors by the Research Papers in Economics project, which ranks him as one of the most significant economists in the world. For his “pathbreaking contributions to our knowledge of financial institutions, the workings of the modern corporation, and the causes and consequences of the development of the financial sector across countries,” he was given the first Fischer Black Prize in 2003, which is given biennially by the American Finance Association to the best finance researcher under the age of 40 years. In 2009, he was admitted into the American Academy of Arts and Sciences, and in 2011, he presided over the American Finance Association. He belongs to the international group of economists known as the Group of Thirty. He was one of the original members of the academic council of the Indian School of Business since the year 1998.

Note: UPSC 2023 is approaching closer, keep yourself updated with the latest UPSC current affairs where we explain the important news in a simplified manner.

Note: You can make your current affairs revision robust using Free Monthly Magazines by BYJU’S.

In Policymaking

International Monetary Fund (IMF)

Following the 1997 Asian financial crisis, the International Monetary Fund came under fire for imposing stricter monetary and fiscal policies on developing countries. Critics, such as Nobel laureate and former World Bank chief economist Joseph Stiglitz, blamed the IMF’s policies for the rise in economic volatility and instability. The chief economist had traditionally been a prominent macroeconomist, but the IMF wanted to increase its financial knowledge. After reading Rajan’s book Saving Capitalism from the Capitalists recently, American economist Anne Krueger, who was then the IMF’s first deputy managing director, contacted him to see if he would be interested. Rajan showed up for an interview despite initially appearing to have reservations. IMF managing director Horst Köhler stated in a statement announcing Rajan’s appointment that his “special experience in financial sector issues will help strengthen the IMF’s role as a centre of excellence in macroeconomic and financial sector stability”.

He was the first person born in an emerging-market country, at the age of 40 years, to be named the IMF’s chief economist. From October 2003 to December 2006, he held the post. Rajan laid the foundation for the IMF’s economic country models to incorporate financial sector analysis. He also oversaw a group that helped some significant economies reduce their balance of payments imbalances. The Research Department, under Rajan’s leadership, made significant contributions to a thorough review of the IMF’s medium-term strategy, worked to incorporate contemporary modelling and exchange rate assessment techniques into the IMF’s consultations with member countries, and examined China and India’s development and integration into the global economy. While he largely maintained fiscal austerity policies, he occasionally published research that deviated from the IMF’s accepted wisdom. In a 2005 paper co-authored with Arvind Subramanian, the effectiveness of foreign aid was questioned on the grounds that aid inflows have a negative impact on economic growth in developing nations. Rajan was asked to serve as the chief economist for a second term; however, the University of Chicago stated that his leave could not be extended, so Rajan left after one term.

Government of India’s Economic Advisor

In 2007, Montek Singh Ahluwalia, who was the Deputy Chairman of the Planning Commission at the time, asked Rajan to prepare a report outlining the upcoming wave of financial sector reforms in India. A twelve-person High-Level Committee on Financial Sector Reforms was established, with Rajan serving as its chairman. In its report, A Hundred Small Steps, the committee recommended comprehensive changes to the financial industry, arguing that rather than concentrating “on a few large, and frequently politically contentious steps,” India should “take a hundred small steps in the same direction.” Rajan was appointed as an honorary economic adviser by Indian Prime Minister Dr. Manmohan Singh in November 2008, a position that required Rajan to draught policy notes at Singh’s request. Rajan succeeded Kaushik Basu in the position of chief economic adviser to the Indian Ministry of Finance on August 10, 2012. He created the 2012 – 2013 Economic Survey of India. He called on the government to cut spending and subsidies in the annual survey and suggested shifting Indians from farming to the service and skilled manufacturing sectors. Additionally, he had doubts about the Food Security Bill in light of the expanding budget deficits.

Governor in Reserve Bank of India

On August 6, 2013, it was confirmed that Rajan would succeed Duvvuri Subbarao as Governor of the Reserve Bank of India for a three-year term. He took over as the 23rd governor on September 5, 2013, at which point he left the University of Chicago Booth School of Business. Rajan pledged banking reforms and loosened restrictions on foreign banking in his first speech as governor of the Reserve Bank of India. As a result, the BSE SENSEX increased by 333 points or 1.83%. The rupee increased 2.1% against the US dollar after his first day in office. In a 2014 interview, Rajan stated that he believed reducing inflation was the most crucial of his three main goals as governor of the Reserve Bank of India: to lower inflation, increase savings, and deepen financial markets. He appointed a panel to recommend a 6% inflation target for India in January 2016 and a 4% (+-2%) inflation target after that.

Despite the government’s advice to the contrary, Rajan’s RBI adopted the consumer price index (CPI), which is the accepted global measure of inflation. In two years, India’s foreign exchange reserves increased by about 30%, totalling $380 billion. Rajan authorised the RBI to licence two universal banks and eleven payments banks to provide banking services to approximately two-thirds of the population who are still not yet connected to the financial system. To protect customers’ security, he mandated two-factor authentication for domestic credit card transactions while he was in office. But at a time when the Indian government was actively working to promote financial inclusion through its Pradhan Mantri Jan Dhan Yojana scheme, he also allowed banks to charge customers for performing ATM transactions more than a certain number of times per month, which prevented people persons from easily accessing their own savings and deterred them from using the form.

Despite Rajan’s denials, media speculation suggested that Rajan would take Christine Lagarde’s place as IMF director when her term ended in 2016. Lagarde was eventually nominated for a second term, so this did not ultimately matter. Rajan was appointed as the Vice-Chairman of the Bank for International Settlements (BIS) on November 9th, 2015. On June 18, 2016, Rajan made the decision to leave his position as RBI Governor and return to academia. Despite being willing to accept an extension and serve a second term as RBI Governor, Rajan revealed in September 2017 that the government had not made him any offers, leaving him with no choice but to step down.

Economic and Political Opinions

Rajan’s observations of the Indian economy during The Emergency had an impact on his economic and political beliefs. He was therefore cautious of the dangers of both unneeded government intervention and of unregulated financial markets as an economist while continuing to be a supporter of capitalism.

Financial Markets

Rajan favours enhancing the role of financial markets in the economy. Together with Luigi Zingales, the authors of Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity make the following case for deregulated financial markets as a means of facilitating access to finance for the underprivileged: “Capitalism, or more precisely, the free market system, is the most effective way to organise production and distribution that human beings have found … healthy and competitive financial markets are an extraordinarily effective tool in spreading opportunity and fighting poverty. …Without vibrant, innovative financial markets, economies would ossify and decline”.

Rajan presented a contentious paper which was critical of the financial sector in 2005 at an event honouring Alan Greenspan, who was about to step down as chairman of the US Federal Reserve. Rajan “argued that disaster might loom” in that publication, “Has Financial Development Made the World Riskier? “. According to Rajan, managers in the financial sector are enticed to “take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the other times. These dangers are referred to as tail risks. The question of whether banks will be able to provide enough liquidity to the financial markets to allow for the unwinding of financial positions and the distribution of losses in the event that the tail risk materialises is perhaps the most crucial.

At the time, Rajan’s paper received no positive feedback. For instance, Lawrence Summers, a former president of Harvard University and former U.S. Treasury Secretary, referred to Rajan as a “Luddite” and the warnings as “misguided.” However, Rajan’s opinions gained traction after the financial crisis of 2007–2008, and by January 2009, The Wall Street Journal reported that “few are dismissing his ideas”.  Rajan actually gave lengthy interviews for the Academy Award-winning documentary Inside Job about the world crisis. The continued economic crisis in the US and Europe from 2008 to 2012, according to Rajan’s May 2012 article, was largely caused by problems with workforce competitiveness during the globalisation era, which politicians tried to “paper over” with easy credit.

He put forth long-term institutional or national competitiveness supply-side solutions: “The industrial countries should treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades… Rather than attempting to return to their artificially inflated GDP numbers from before the crisis, governments need to address the underlying flaws in their economies. In the United States, that means educating or retraining the workers who are falling behind, encouraging entrepreneurship and innovation, and harnessing the power of the financial sector to do good while preventing it from going off track. In southern Europe, by contrast, it means removing the regulations that protect firms and workers from competition and shrinking the government’s presence in a number of areas, in the process eliminating unnecessary, unproductive jobs”.

Stimulus versus Austerity

In a May 2012 opinion editorial, Paul Krugman mentioned Rajan by name as having different ideas about how to revive the economies in the US and Europe. This discussion took place against the backdrop of a significant “austerity vs. stimulus” debate that was going on at the time, with some economists supporting either one strategy over the other or a hybrid approach. Rajan argued for structural or supply-side reforms in a piece for Foreign Affairs magazine. He also supported fiscal austerity measures (such as tax increases and spending cuts), though he acknowledged that these measures might temporarily slow down the economy and cause significant “pain” for some groups of people. Krugman disapproved of the combined focus on structural reforms.

Instead, he promoted classical Keynesian fiscal (government spending and investment) as well as a monetary stimulus, contending that a general shortfall in consumption throughout all sectors of the economy, rather than structural or supply-side factors that affected specific sectors, was the main factor slowing the developed economies at the time. Rajan has tended to sympathise with both sides of the so-called “growth vs. welfare” debate in relation to India, avoiding the Bhagwati vs. Sen controversy. While Rajan generally shares Bhagwati’s views (in that he believes that growth is the primary driver of development), he has also opined for government involvement in health and education, much like Sen, and has highlighted the danger of oligarchy or the alienation of the public as a result. Rajan claimed in 2019 that modern capitalism is “under serious threat” because it has ceased to provide opportunities for the many and is now facing a potential uprising from the masses as a result of the financial crisis of 2007 – 2008 and the implementation of austerity measures.

Demonetisation in India

Rajan claimed in interviews conducted in September 2017 that the Reserve Bank of India had been consulted by the Indian government regarding the issue of demonetization but had never been asked to make a decision. He claimed that the RBI opposed the action and forewarned the government of potential consequences. The currency note ban initiative, according to Rajan, “One cannot in any way say it has been an economic success”. Raghuram is a member of the Berggruen Institute’s 21st Century Council in addition to his work at the University of Chicago and RBI.

Economic Weapons

Raghuram Rajan considers economic sanctions kind of a weapon that is used to make the enemies vulnerable and inflict insufferable pain. “When fully unleashed, sanctions, too, are weapons of mass destruction. They may not topple buildings or collapse bridges, but they destroy firms, financial institutions, livelihoods, and even lives. Like military WMDs, they inflict pain indiscriminately, striking both the culpable and the innocent.”

Raghuram Rajan Committee on Financial Sector Reforms

The Indian government established the Raghuram Rajan group on financial reforms in 2007. In his “The Hundred Steps” report, Raghuram Rajan advocated financial sector changes on the grounds that incremental, steady steps are preferable to a few large, contentious ones. Eleven informal meetings and nine formal meetings were held by the Rajan Committee. In order to put together a report, the committee members also met with other committee members.

The Terms of Reference

The Raghuram Rajan Committee on Financial Reforms was charged with identifying the new issues that would need to be addressed in order for the financial sector to be better able to meet the financing demands of the Indian economy over the next ten years. Additionally, it aimed to evaluate the financial sector’s performance across multiple areas and pinpoint adjustments that would enable it to better serve the demands of the real sector. It was intended to identify modifications in the regulatory and supervisory architecture that can better enable the finance system to perform its duties while making sure that risks were contained and identify the changes in other aspects of the economy, such as the conduct of monetary and fiscal policy, the operation of the legal system, and the operation of the educational system that could help the financial sector function more efficiently.

Rajan Committee Report

As it addressed financial inclusion, as well as domestic financial development, the Raghuram Rajan committee’s proposal, was necessary at the time, but this also meant that the report’s political obstacles were more significant. This report’s overarching topic was the requirement to increase freedom for players while also upgrading the financial and regulatory infrastructure in order to increase inclusion, growth, and stability.

Recommendations of Rajan Committee

• Financial and macroeconomic development.
• Broadening Financial accessibility.
• Creating a level playing field.
• Creating markets that are more effective and liquid.
• A framework for regulation that promotes growth.
• Building a solid credit infrastructure.

The macroeconomic frameworks were the most contentious and were probably the most difficult to put into practice. This strategy was extremely different from inflation targeting and floating exchange rates. The market’s present strategy is considerably different. The report offers a clear and uncomplicated approach in this regard. It promotes the establishment of financial markets and exchanges between investors and products, stops the formation of investor uncertainty in prohibited markets, and promotes the entrance of the missing markets. By reducing the time required for the approval of new financial products, it also contributed to the development of a more welcoming environment. The paper makes numerous suggestions for improving the coordination, coverage, and quality of the current regulatory architecture. The elimination of micromanagement is the main concept. Structure reform undoubtedly has the potential to improve incentives, but there is a risk of becoming mired down in new institutions or legal changes. Small participants in the financial sector will be better informed, educated, and protected by an upgraded credit framework. Even while none of this will immediately lead to greater financial inclusion, it will mark the start of the modern financial industry. The Raghuram Rajan Report can be seen positively in that these adjustments indicate greater room for reform in the future.

Significance of Rajan Committee Report

In the area of finance and economics, Raghuram Rajan made a lot of contributions. The Raghuram Rajan group was given the task of seeking a comprehensive understanding of the financial industry in order to make suggestions and identify connections between essential reforms while providing a unifying conceptual framework. At that time, the real sectors were critical. It concentrated on enhancing the technology sector, consolidating, and placing light constraints on public sector banks in order to increase bank efficiency. I hope that this offers you a general idea of the work and report of the Raghuram Rajan financial committee on the financial reforms.

Financial Stability and Development Council

The Financial Stability and Development Council (FSDC) is a top-level organisation established by the Indian government. The Raghuram Rajan Committee first proposed the notion of establishing such a super regulatory organisation in 2008. Finally, in 2010, India’s then-finance minister, Pranab Mukherjee, agreed to establish such an independent organisation to handle macroprudential and financial regularities throughout the whole Indian financial sector. Apex-level FSDCs are not statutory organisations. Governments and institutions all around the world are under pressure to regulate their economic assets as a result of the recent global economic crisis. This council is considered as India’s effort to improve its readiness to stop similar occurrences in the future. The new organisation plans to institutionalise and reinforce the mechanisms for maintaining financial stability, the growth of the financial sector, inter-regulatory coordination, and monitoring macro-prudential control of the economy. The council receives no special funding for carrying out its activities. On September 3, 2021, Smt. Nirmala Sitharaman, Union Minister for Finance and Corporate Affairs, presided over the 24th meeting of the Financial Stability and Development Council (FSDC).

Responsibilities

• Macroprudential oversight over the economy, particularly how well the major financial corporations operate.
• Coordinating India’s international engagement with organisations working in the finance sector, such as the Financial Action Task Force (FATF), the Financial Stability Board (FSB), and such organisations as may occasionally be determined by the Finance Minister.
• Financial Inclusion.
• Financial Literacy.
• Inter-Regulatory Coordination.
• Financial Sector Development.
• Financial Stability.

The Financial Stability and Development Council (FSDC), which is led by the Finance Minister of the Government of India, is the program’s apex body, and it is mandated, among other things, to concentrate on achieving financial inclusion/literacy goals. This makes the institutional structure of India’s financial inclusion/literacy programme unique.

Note: You may get all the Economics Questions for the UPSC Mains exam by visiting the linked article.

Start your IAS Exam preparation by understanding the UPSC Syllabus in-depth and planning your approach accordingly.

Related Links: