Raghuram Rajan supports free markets as beneficial for the masses and is aware of the Government’s role in such markets. He also acknowledges that the state can be influenced by big private players. This holistic understanding is what India needs
Reserve Bank of India Governor Raghuram Rajan is potentially great news for the Indian economy. Anyone who talks about “Saving capitalism from the capitalists” has to be good news, for humanity per se. The IIT, IIM-educated man is an intellectual of a relatively high calibre. Not that all his arguments are correct but his heart is in the right place. Having spent most of his life in the United States, his panacea for all ills, as expected, is capitalism. Where he scores however is his better understanding of capitalism’s ills and where capitalism’s ‘fault lines’ are. He has rightly championed the cause against monopolies and oligarchists — and that’s the key reason why he is the man India needs.
Mr Rajan’s analysis about India very correctly observes that the big Indian billionaires are in those sectors where there is high Government interference, and where licensing and price controls are highly prevalent. This is because this is where businessmen manipulate the Government machinery and make their moneys. Thus, wealth gets concentrated in the hands of a very few and they keep becoming richer with the help of the Government mechanism — the typical case of crony capitalism. Although ex-IMF people aren’t very easy to trust, the fact that from all his writings, one gets absolutely no feelings for crony capitalists, is what makes his presence far more exciting than the presence of most others before him. Perhaps before finishing his completely useless and disastrous tenure, Manmohan Singh without realising has done India a great favour.
Before I explain further why Mr Rajan can do a lot of good, specially with his latest move, let me also comment a little on areas where he hasn’t been flawless. Amongst Mr Rajan’s bigger achievements is not just his ability to forecast the 2008 crisis, but also his competence of being sharper than others in understanding its causes and giving a better prescription to come out of it. Mr Rajan argued that the flaw was on the supply side, that developed economies needed to free themselves from the bottlenecks of protectionism of firms and workers, and that they also needed to focus on retraining these very workers, making them more competitive and at the same time giving a bigger thrust to entrepreneurship at a smaller scale.
He is right to a large extent, and yet, here is where he goes wrong in his analysis of the American and European crises and his suggestions become half baked. The problem is that it is not just an issue of supply side economics; there’s something deeper. It’s a fact that almost every earning citizen in the American and European economies has the next 15 years of income already spent through some or the other installment scheme on homes, cars, education et al. So stimulating the demand in these economies is an impossible task in itself; these countries need to realise this and come to terms with this factuality.
Thus, the real way for American and European companies to grow is to do to the African, Indian and Chinese labour force what Henry Ford once did to Americans. Pay them more so that they can buy American and European products and make these economies grow in turn — in simple words, develop these markets. So the real solution is to almost completely forget looking inwards for growth and instead look at developing the poorer nations instead. This is inclusiveness at a global level, the real globalisation of the world. This apparently can be called capitalism; yet, it is something that can be understood better by students of economic planning (at a global level).
The sooner developed nations, and their more human faces (the likes of Mr Rajans) realise this, the faster these nations will spring back and so will the world. Else, it will continue to be like what’s happening now. An Apple or a louis Vuitton brings out one landmark design to bring the American and European consumers out of their shells once a year; these are consumers who buy the product, and go back to their shells on the trot right after.
Although I think that Mr Rajan’s prescription for Western revival has flaws, I also believe India is a different ball game. It requires economics that is relatively devoid of larger philosophies and complications. We are where the West was decades back and our problems have more tried and tested solutions; and yet, at the helm, we require the key economics of having your heart at the right place. That’s precisely why Mr Rajan excites. His academic understanding of how free markets are beneficial, the important and visible role of Governments in such free markets, at the same time his scathing attitude towards how the same Governments are subject to being influenced by big private players, are what India needs at this point of time.
The need of the hour in India is to protect the free market from powerful and oligarchic private influencers, so that benefits of the market economy reach the masses and don’t remain limited to a few. Mr Rajan believes in Governments providing a social safety net, something that I am sure will certainly reflect in days to come in his decision-making, through RBI policies that help the masses more than the richest few — be it through his measures to control inflation or his measures to control black money flow.
His latest act of doing away with pre-2005 notes proves the point, and to my mind, the move has great potential. Given the fact that he has no sentiments for crony capitalists, this actually is one of his initial big moves to entrap and finish off a large chunk of black money.
(The writer is a management guru and honorary director of IIPM think tank)
