Raghuram Rajan: The prescient Luddite

In 2011, Raghuram Rajan was hailed by peers in an Economist poll as the financial thinker with "the most important ideas for a post-crisis world". Now he's got the chance to act on them.

The former IMF chief economist and garlanded author a leading light of the free-market "Chicago School" of economics has become the 23rd governor of India's central bank.

The move was so popular, noted Indian Economist, that it briefly lifted the "grim mood" gripping the country (see below). The consensus is that if anyone can get the economy moving, it's the dynamic Rajan.

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Indians love a good story, and there are plenty in Rajan's award-winning book Fault Lines. The most famous relates to the incident that defined his reputation, says the FT, the 2005 paper he read at the annual central bankers' jamboree in Jackson Hole now acknowledged as the first "detailed warning shot" of the financial crisis.

At the time, Rajan's warnings about dangerous financial innovation and skewed incentives went down like a lead balloon. Larry Summers (now a front-runner to become Fed chairman) dismissed them as "Luddite". The groupthink was so pervasive that, as Rajan later wrote, "I felt like an early Christian who had wandered into a convention of half-starved lions".

Pragmatic and outspoken, Rajan may be about to lob a few similar bombs into the polite pools of central banking orthodoxy. In a 2010 interview he described quantitative easing as "a Hail Mary pass". In an FT op-ed shortly after, he pondered the risks of using a quick dose of inflation to tackle high debt levels in the financial system and what this might do for the reputation of central banks.

Although Indian by birth he was born in Bhopal to a Tamil family in 1963 Rajan has spent so much of his life abroad that he finds it hard to see where one identity begins and another ends. As he told Indiaoutlook.com in 2003, soon after being appointed the IMF's youngest-ever chief economist: "It's hard for me to disentangle changes that stem from living in America from those that stem from my own ageing and maturing". He's fond of cricket, and cites Tolstoy and Tolkien as his favourite authors.

The son of a senior police chief, Rajan spent his childhood shuttling around Sri Lanka, Indonesia and Belgium, before graduating in electrical engineering from the Indian Institute of Technology (IIT). He later switched to economics, met his wife (a fellow academic), and wound-up at the Booth School of Business at the University of Chicago, emerging as "a star turn in academia", says The Economist.

However impressive his CV, Rajan is taking a risk signing up for the big job in India. As he himself observed last year: in central banking circles, "the transition from hero to zero can be swift".

'Great jockey. Pity he doesn't have a better horse'

Rajan has "an unenviable task", agrees the Economist. He has spent the past year advising the finance ministry, so he knows the score. His priority is to head off a currency crisis.

Yet measures involve "sucking liquidity out of the banking system", which may cause a "credit crunch" pushing growth below the current 4%-5%. The RBI is being forced to choose "between a currency slump, or strangling the economy". The answer is structural reform but with an election in May, what are the chances of that happening?

Not high, says Gavyn Davies in the FT. With appropriate reforms, Rajan believes "India can one day return to the heady 8%-10% growth rates of the 2000s". But most seem "politically beyond reach".

He insists the "fiscal deficit must be brought down, that cronyism must end and the RBI should not be subjected to fiscal dominance by the government. Unfortunately none of this will he control".

In an article last year, Rajan posed the question: "what should central banks do when politicians seem incapable of acting?" He's about to find out. But international investors hoping he'll prove "a catalyst for recovery" may be in for a long wait.

Meanwhile, Rajan has his own challenges, says Vikas Bajaj in The New York Times. His Tamil is "rusty", while his Hindi needs brushing up. "I want to develop to the point where I can give a working interview in Hindi. I can understand the questions perfectly but not the terminology," he says. An English phrase such as "fiscal deficit" is "pretty unusual in Hindi".