Raghuram Rajan: Working on thin files


Chris Wright
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As part of Euromoney's 50th anniversary coverage, we profile some of the biggest names that we interviewed for our May Asia focus.

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There was a time, not so long ago, when Raghuram Rajan was branded a Luddite by Lawrence Summers. He laughs about it now.

“As an academic or a thinker, if you’re not criticized, then you’re not really doing your job,” he says. “You’re providing anodyne commentary, which everyone can go along with and which upsets no one.”


Raghuram Rajan

Rajan was chief economist for the IMF at the time and had said that there were serious problems within the banking industry; by 2008 he was proved right.

He had been employed by the IMF in the lingering aftermath of the Asian financial crisis amid a sense that the multilateral had played the whole thing wrong.

“My appointment was in many ways because various committees had suggested to the IMF it needed to boost its understanding of the financial sector.”

Later he would use this expertise in an advisory role in India’s ministry of finance during the Singh government and then in a busy spell as governor of the Reserve Bank of India, where he was noted for his intelligence and drive. Among the initiatives that got underway was the Aadhaar identity scheme.

He has mixed opinions of what has followed his tenure, which ended in 2016. Demonetization came months after his departure; he had been consulted about the concept but not its implementation.

“I did not think it was a good idea,” he says.

And now? “The economic cost of demonetization, we are learning, was quite high and some of the benefits we have yet to see,” he says.

It is commonly argued that demonetization formalized savings and enhanced alternative payments systems, including technology.

“But the real question has to be: were there alternatives to enhancing payments other than this costly, self-inflicted wound? History will judge how much of a blunder it was.”

He is more positive about other things, particularly the Insolvency and Bankruptcy Code (IBC) and related efforts to fix public-sector banks.

“It is a work in progress,” he says. “I hope as we are going through this, we are doing two very important things.”

One is to stop the downside risk of projects falling only on the public-sector banking system, with entrepreneurs taking little risk.

“That mentality is changing. There is a palpable sense that if you need to borrow, you need to repay.”


The other is to develop enforcement that is not only faster but fairer, particularly for small entities.

Rajan recalls, in his time at the ministry, the vast paper files that would cross his desk requiring comment. That comment, once added, would only add to the length of the files, achieving little. A diplomat told him to focus on the thin files, where something might actually be effected by a fresh view.

What’s a thin file India should work on now?

“To improve the process of land acquisition,” he says.

Although he doesn’t want public-sector banks on the hook for private-sector errors of judgement, he also doesn’t want them cosseted and thinks banks should face open competition from fintechs, telcos and the like.

“What we did was to move away from the view that the banking sector had to be protected in order to survive,” he says. “If you went down that route, you would never subject it to competition. It is always convenient to say: ‘We will get blown away by the first whiff of competition.’”

Opening the banking sector to competition, he says, has worked for banks too: “It worked out well. Many of them have understood the need to develop their own apps. It suggests the benefits of broad-based competition.

“My guess is that down the line we will see entities that are part fintech, part bank, so the banks bring their experience of how to do financial transactions and the needs of the customer and fintechs bring new methods. Some combination of the two will prove quite strong.”

Now in academia in Chicago, his new book ‘The Third Pillar’ argues for a return to the strength of individual communities: “Not the old entrenched hierarchical communities of the past, or the anonymous society people are happy with in our cities, but something in between.”

And the question that is still asked across India: why was he not offered a second term by the Modi administration?

“It’s a matter of demand and supply,” he says. “Eventually it has to meet at a point, and we couldn’t find a point to meet. That’s where it ended.”