The following article is shared from the Sydney Morning Herald:
October 13, 2012 by William Pesek
A surprise Finance Ministry appointment suggests India is serious about reform and investment.
THE first time I met Raghuram Rajan, the Indian economist couldn't sit still.
It was over coffee in Bangkok in November 2008, less than two months after Lehman Brothers imploded and almost took the global financial system down with it. Rajan had become a big draw by then, having warned as early as 2005 that a crash was coming. On that day in Thailand, he had a crisis on his hands: The hotel's WiFi was out.
"I'll be back - I need to make a call and make sure the world economy is still there before I begin my speech," he deadpanned. "You never know."
That last sentiment could also apply to an extraordinary bit of recruitment on the part of Indian Prime Minister Manmohan Singh. Rajan, 49, is one of his most pointed critics, never one to shy away from slamming India for trying the same failed policies over and again. Rather than castigate Rajan, Singh offered him a job: top adviser to the Finance Ministry.
Rajan's arrival might shake up India at just the right moment and accelerate moves to open retailing, aviation and insurance to foreign investment. Palaniappan Chidambaram's return as finance minister in July might have seemed enough of a jolt. He wasted no time in announcing policies that amounted to shock therapy for an economy that has lost its way. If those were a sign India is again open to business, hiring Rajan suggests it won't stop there. There are three things about Rajan that are noteworthy:
One, his focus. He's looking in the right places - modernising the financial sector, making it easier for companies and entrepreneurs to do business and tackling the labyrinthine distribution system in areas such as agriculture;
Two, Rajan is a University of Chicago guy. To some extent he's about increasing economic efficiency as a means of raising living standards. Supply-side solutions can go too far, as we saw when the US went off the rails due to lax regulations and oversight. Yet if there is anything India needs, it is a burst of deregulation fever.
Among the most common phrases you hear in India is "licence raj," shorthand for the baffling and elaborate system of issuing permits to do anything. This snarl of red tape throttles business and breeds corruption. It is the single biggest barrier standing between India's 5.5 per cent growth and shantytown dwellers in Mumbai or Kolkata. New strategies are desperately needed to remove it;
Three, Rajan is an intellectual re-import. It is often said that India's best export is its chief executives - Indra Nooyi, of PepsiCo, Lakshmi Mittal, of ArcelorMittal, Anshu Jain, of Deutsche Bank, to name a few. Its academics, too, remind us that developed nations don't have a monopoly on economic wisdom.
Rajan is part of a growing pattern of talent returning home. Take Rana Kapoor, who left Wall Street to start Mumbai-based Yes Bank. Or former Citigroup executive Jaithirth Rao who founded software maker MphasiS in the US before moving the group's headquarters to India, where he started an affordable-housing finance company. Rajan's experience as chief economist of the International Monetary Fund from 2003 to 2006 and as a celebrity academic is now to India's benefit.
There's still plenty of flow in the opposite direction, including Kaushik Basu. He recently left India's Finance Ministry to become chief economist of the World Bank, which along with the International Monetary Fund is holding its annual meeting this week in Tokyo.
Basu is the rare iconoclast in a position to make a difference. An adherent of his own brand of Freakonomics, his interest lies not with the politically correct or expedient but common-sense solutions to the biggest quandaries of our day. One is what to do about corruption. He argues that it be legalised, thereby adding transparency and having the effect of naming and shaming graft seekers.
Like Basu, Rajan is an example of an Indian in the right job at the right time in ways that could benefit humanity. Jump-starting India's economy would offer the world another engine at the perfect moment. It would also arrest the policy decay in Asia's third-biggest economy.
A day after Chidambaram met the US Treasury Secretary, Timothy Geithner, in New Delhi this week, Standard & Poor's reminded India it may become the first BRIC economy - Brazil, Russia, India and China - to lose its investment-grade rating. Junk status would be a terrible blow to a nation S&P predicts will see its budget shortfall widen to about 6 per cent of GDP in the year to March 2013. Borrowing costs would surge, investors would flee and reducing poverty would become harder.
The good news is that Rajan is on the case to help Singh's team get back in touch with its reformist roots. You can bet he won't be sitting still on the job.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.