Focus on India's Strengths for Faster Growth: Rajan

In 2005, Dr Raghuram Rajan, then with the International Monetary Fund (IMF), drew disapproving looks from an audience of economists and bankers in Jackson Hole, Wyoming, in the US, when he said the roll-out of complicated instruments, such as credit-default swaps and mortgage-backed securities, made the global financial system a riskier place.

In the next three years, his concerns were validated when Lehman Brothers collapsed and contagion spread around the world. He became an instant hit and a celebrated, and celebrity, economist.    

When India was struggling with the US ‘taper tantrums’ — when the Fed Reserve began pulling back on investing in the economy — in 2013, Dr Rajan took over as the RBI Governor and focused his energies on cleaning the balance sheets of Indian banks, which laid the foundation for the future growth.    

Dr Rajan, Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business, is currently on a tour to promote a book that he has written with Rohit Lamba, another economist of global repute, ‘Breaking the Mould: Reimagining India's Economic Future’ that prescribes the measures India needs to take for transforming itself into a global economic superpower.

The ‘rockstar banker’ — as journalists called him 10 years ago — sat down with Deccan Chronicle for an exclusive interview that touched upon artificial intelligence, jobs, equitable growth, per capita income, ageing population, slowdown and the road ahead.

Edited excerpts:

Q. When production is not a function of human resources with the advent of artificial intelligence, what is the utility and relevance of GDP and per capita income?    

Well, firstly, the movement towards artificial intelligence is slow… There are interesting applications which can be very helpful to humanity. So, in the meantime, the world goes... Your employment and my employment still go on.

 Over time, things will change. Three things can happen. One, some people can lose their jobs because AI can substitute them, but that's true of any technology. Two, it will be a help to some people; already, journalists are using ChatGPT to write articles. And number three is that a whole lot of new jobs can be created.

 You saw that with the internet, data analytics became a big issue. And now, many institutions are churning out graduates and big data, data analytics. So, I think all three will happen. How much of each will happen, we will have to see. But so long as AI is not used for bad purposes, it can be a very big contributor to our well-being.

Q. Six years ago, Bill Gates called for taxing robots that take away the jobs of humans. Do you think AI-dependent companies should be taxed to fund social security for the people? How valid is Gates' argument to India?

I think not now. Let us see how it displaces people, but also who gets the profits from AI. If it is very competitive, it may not be necessary because they've brought down the costs of AI to the point where they're not making excessive profit. Taxing them then doesn't make sense.

Q. The global financial architecture is dependent on the US dollar; several countries fund the US deficit by hoarding US dollars. How long will this continue?   

Well, so far, it hasn't happened, right? So far, the US dollar has been a sought-after asset. And if you think about what the alternatives are, it's hard to find something as liquid and as readily transactional, which also holds its value. In the longer run, maybe some other currency will come. But right now, there is no alternative to the US dollar.

Q. So, you don't foresee any kind of global recession happening again?

I don't know. I think there's a lot of uncertainty right now. And it is possible that if inflation doesn't come down fast enough, the Fed will not have room to cut. Interest rates will stay higher for longer, which may mean some more slowing than anticipated at this point. So, I think it's too early to say we know how the next year will play out.

Q. The US Fed hinted at slashing interest rates...

I don't think they said that. I think the markets assumed that. I think the Fed said that chairman Powell said that we probably are near the peak or at the peak. That is all he really said. The interpretation was, and looking at the dot plots, that they would cut interest rates next year, which perhaps is not incorrect, but the word you used was slash. I don't think they ever said that they would slash.

Q. When can the world get out of the stimulus-backed growth zone?

Well, that's what we have talked about in our book, 'Breaking the Mould'. See, China, as an engine for growth, is slowing because it is already very big. So which is the next economy that is capable of being a growth engine? It is India. So what are the things that India can focus on to be that engine of growth for the global economy? I've said in many fora that India needs to grow faster, both to create jobs as well as to become a rich country. And so how do we increase the rate of growth? We have to rethink what our strengths are and focus on them.

Q. Speaking about growth, do you think the $5 trillion figure is too ambitious for India?

Five trillion is just a number. So, I think we should basically focus on doing our homework... Why five trillion, why not 10? Why not 15? We are a large country and we should not rest happy when we have achieved five. We have a long way to go beyond that.

Q. You said if we don't grow faster, we will grow old before we grow rich. Could you elaborate on this?

That's just simple maths. We are a country which is young now. But if you look at the south, it is already growing at a very low rate in terms of population. It's still the north and the northeast, which are growing at a fast rate because, they, in some parts, are poorer than the south. But as they grow richer, they will also start having fewer children. The population growth will slow down. So, there will come a period in which the population will grow, but then it will slow down. As soon as it slows down, the ageing of the population starts… so, the question is how long do we have to get rich. The calculation was simply if we put it as 24 to 30 years, then if we are growing at six per cent a year, we don't get to be what is defined as rich in today's terms, which is much more than the per capita GDP we will reach at that point.

Q. What are the gaps in equitable growth of the economy that are noticeable as India moves up in global rankings?

I think the rankings are about overall GDP. When you look at per capita GDP, we are still a poor country. $2,500 per capita approximately. And we need to make that distinction. When we overtake the UK, we're overtaking them on overall GDP. That's because they are a 67-million-person country. We are a 1.4 billion people country. So, we are about, you know, 20-25 times their size.

When you translate into per capita GDP, we are still far behind the UK. This is a distinction that our people need to understand when I say we have a long way to go before we become rich, I'm talking about per capita GDP. That is how much each person earns or makes. We can do it, but we need to do more homework to do it.

Q. What role does infrastructure play in the development trajectory of a nation?

I think infrastructure, whether physical or virtual, is becoming important. Both those things are quite important in creating opportunities for people. That's one aspect. In the book, we talk about other aspects. We talk about how, in addition to creating that physical infrastructure, perhaps our biggest asset is the human capital of people. So, you need to improve the human capital of people. What does that mean? It means that we need a much better education — right from the school to the college to the university.    

Q. Is the pace of liberalisation in India enough for the economy to take off faster?

I think we can always explore places where we can liberalise a little more. And also, often places where you need to regulate a little more. And so that mix has to be constantly thought of. What do we need to do to help? Tear away the rules which are holding us back, but rules are also sometimes very useful in making sure that we don't go off track completely.

Watch DC Conversations with Dr Raghuram Rajan: