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India's new central bank chief faces tough road ahead
Publication Date : 12-08-2013
As India's next central bank chief, economist Raghuram Rajan will next month walk into a job that his predecessors have described as "lonely" and "thankless".
Such descriptions may be mild, given the multiple challenges the 50-year-old Ivy League professor faces in trying to turn around Asia's third-largest economy.
The rupee is languishing at its lowest levels ever. Growth is at its slowest in a decade. And as with all emerging economies, foreign money in equities and bond markets is drying up.
Rajan, who made an oracle-like warning before the 2008 financial crash, will take on the role of governor of the Reserve Bank of India (RBI) from Dr Duvvuri Subbarao on September 5, when he begins a three-year term.
The economic vision of this cautious pro-markets liberal was shaped by straddling two worlds - the stifling government controls of his childhood India, and the unfettered exuberance of the economy in the United States, where he spent almost all his professional life.
"He has got the academic background, global macroeconomic perspective and knowledge of the Indian conditions," A. Prasanna, an economist with the private sector ICICI Bank, told The Straits Times.
"Markets welcome him," he added, referring to Rajan's pro-markets economics.
As soon as his appointment was announced on August 6, the rupee recovered slightly from a record low of 61.80 against the US dollar, although some of the upswing was helped by the RBI.
The rupee has fallen some 13 per cent this year, entrenching retail inflation and widening the current-account deficit to a record 4.8 per cent of gross domestic product.
Economic expansion, at just 5 per cent in 2012-13, has slowed to its lowest rate in a decade, and economists are repeatedly cutting their growth forecasts for the national economy.
Rajan's job is to stabilise the rupee and revive growth while controlling inflation. Yet, the real cause of India's poor performance may be a lack of political consensus to push growth, something outside the reach of an RBI governor.
Rajan certainly has the credentials to fight a sharp downturn. He holds engineering and management degrees from India's top schools and earned a doctorate in economics from the Massachusetts Institute of Technology in 1991.
In 2003, the award-winning University of Chicago Booth School of Business professor was picked by the International Monetary Fund (IMF) as its youngest chief economist.
Two years ago, in a poll for The Economist, his peers chose him as the economist with "the most important ideas for a post-crisis world". He was featured on Foreign Policy magazine's Top 100 Global Thinkers list in 2010 and again last year.
Rajan is familiar with Indian policy circles, having advised the government for years, although he has no central banking experience. In India, that means the ability to navigate the tedious RBI bureaucracy and resist political pressure to back growth over fighting inflation.
"One hopes he will be his own man," says public policy columnist Mihir Sarma.
There is little doubt, though, about the man's ability to call a spade a spade.
In 2005, at a conference where people were meant to praise outgoing US Federal Reserve chief Alan Greenspan - who had presided over a boom - Rajan warned that unregulated, debt-fuelled growth could trigger a crisis in the American economy.
The response was a chorus of ridicule, with former US Treasury secretary Larry Summers calling his prescient analysis "slightly Luddite". After Lehman Brothers went bankrupt in 2008, many of those present that day apologised to Rajan.
Last year, he moved to India when Prime Minister Manmohan Singh made him his chief economic adviser. He has since worked with Finance Minister Palaniappan Chidambaram on India's recovery. His appointment to the RBI is a departure from the tradition of hiring bureaucrats with little expertise in modern finance.
The late British economist John Maynard Keynes is a major influence on Dr Rajan, who says he has set aside plans to write his next book - on democracy and capitalism - until he completes his new role.
Clearly, it is going to be a tough job, something that will likely eat into his morning tennis sessions, if not his time with his wife and school-going son. A teenage daughter is in college in the US.
In taking up the new job, the affable, mild-mannered economist could be risking a lifetime's reputation, especially in a country where economic policymaking is often derailed by political squabbles.