January 31, 2014

Raghuram Rajan is making things exciting, and it's not necessarily great news for India's crony capitalists!

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 – mainly because of his lack of understanding of the positives of a planned economic system – but his heart is in the right place. Having spent most of his life in USA, 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.

Rajan’s analysis about India very correctly observes that the big Indian billionaires (the guys I call “Blood 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 realizing has done India a great favour.

Before I explain further why Raghuram 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 Raghuram 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. Unlike another economist, Krugman – who happens to be one of my favourites and whose prescription is traditional Keynesian, a combination of fiscal stimulus of spending and investing more along with monetary stimulus – Raghuram 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.

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