Case Study On “I Do What I Do”

-A book by Raghuram Rajan

BOOK REVIEW
BOOK NAME: “I DO WHAT I DO”
-BY RAGHURAM RAJAN

NAME OF THE STUDENT: SAURABH PANDIT

ROLL NO: 114
Who is Raghuram Rajan?

Raghuram Rajan was born on 3 February 1963 in Bhopal, India. He started his career
with a bachelors degree in electrical engineering from the Indian Institute of
Technology Delhi. Following the decision to leave the sphere of electromagnetic
fields and waves in favour of the oscillations of the economy and financial markets,
Raghu joined the doctoral programme at the Massachusetts Institute of Technology
(MIT), where he received a PhD for his thesis ʻEssays on Banking’. Four years later, at
the age of just 32, he became a full professor of finance at the University of Chicago

The book has had increased media attention and uptake in part due to Dr. Rajan's
much respected views on the economy and the political climate, but, also because of
Rajan's view on the demonetization exercise undertaken by the Government of India
in October 2016. The demonetization exercise had mixed views from economists,
with a majority (including Rajan) subscribing to the view that the short term pains
inflicted would not justify any purported longer term gains. With that said, Dr Rajan
himself is of the view that the data available currently is not fully substantive to
determine if the program could be deemed a success. He has further gone on to call
that rather than demonetization as an exercise, better end to end income and asset
tracking mechanisms, including the usage of biometric systems such as Aadhaar will
be instrumental in battling 'black money

Brief Introduction About the Book:

“I Do What I Do”, Rajan explains clearly his logic for not lowering the policy interest
rate despite the clamour of the industry. The general belief is that lower interest
rates increase demand since people are tempted to borrow to consume which leads
to higher growth, although if inflation is high the same spending fetches less.
Inflation leads people to buy goods because of the expectation that prices will go
even higher and this leads to an association made between inflation and growth. But
Rajan points out that when people get used to higher inflation rates, trusting in
inflation for growth could lead to an upward spiralling of prices which could be
hazardous. He therefore favours low and steady inflation rates to keep demand
stable instead of focusing overly on growth. The shock treatment to lower inflation
used in the US in 1981 would likely do enormous damage and the process of keeping
inflation in check over the long term is the best.

Rajan states his position clearly and one could presume that although it was not
publicly articulated, the earlier governors used the same logic of not lowering
interest rates; one recollects that in 2012 there was an open rift between P
Chidambaram the UPA finance minister and RBI governor D Subba Rao the finance
minister pressurizing the RBI to reduce rates but the RBI governor refusing to budge.
Raghuram Rajan was chief economic advisor at that time and may have been taken
to be with the government, but he acted differently when he became governor of
the Reserve Bank of India himself.

I Do What I Do is essentially a collection of speeches knit together by a narrative and

it is the sections dealing with political ideas that are most interesting in that we get a
sense of Rajan’s political standpoint and allows us to inquire into what they mean
specifically, i.e: their relevance to the Indian context. As a beginning Rajan cites
Francis Fukuyama on the three pillars needed to foster political freedoms and
economic success: a strong government, rule of law and democratic accountability.
Rajan then goes on to add another pillar to Fukuyama’s above three which is a ‘free
market’.

Beginning with ‘strong government’ I gather that Rajan actually means a ‘strong
state’ from this statement: “a strong government is also one that provides an
effective and fair administration through clean, motivated, and competent
administrators who can deliver good governance.”

To elaborate on the difference, a government is the political administration of a

country or state. A state is the geographically demarcated entity that has a distinct
fiscal system, constitution, and is sovereign and independent from other states, as
recognized by them. It is the space where a government can exercise its powers
through policy changes/formulations. A government composed of a coalition of
parties as in Germany today could be weak since a coalition usually has political
disagreements but that in no way impinges upon the strength of the state. India has
had a succession of strong governments (Indira Gandhi’s, AB Vajpayee’s and UPA No
2) but the state has progressively weakened, as evidenced in the administrative
lacunae and failure to implement the law impartially. People with power have found
it easy to circumvent the law though, nominally, all are equal before it.

Fukuyama’s second pillar, ‘rule of law’ is culturally bound and provides a basic stable
code of conduct that should not be violated by either government or the citizenry.
The state’s actions are constrained by a widely understood code of moral and
righteous behaviour, enforced by religious, cultural, or judicial authority and largely
bound by religious beliefs and social conventions; the notion of dharma, for instance,
could broadly be regarded as the traditional code by with righteous behaviour is
judged in India. The third pillar, ‘democratic accountability’, means that the
government has to be popularly accepted, the people having the right to throw out
unpopular, corrupt or incompetent leaders.
Before going on to look at how Fukuyama’s three pillars translate in the Indian
context it is pertinent to look at the fourth pillar erected by Rajan which pertains to
the free market. In elaborating upon it Rajan asks why, since unlike democracy which
treats individuals equally, each one having a vote, and the free market (contrarily)
empowers consumers based on how much money they have and their wherewithal,
the average voter in a democracy does not  vote to dispossess the rich and powerful.
The answer offered is that the voter sees the rich as having come out of a
transparent market and their wealth as owing to they being better managers; if
(sometimes) the property rights of the rich do not get widespread support in
emerging markets it is because they are seen as having acquired their wealth
dishonestly.

The overall effectiveness of the four pillars in India rests on India being a
democracy Rajan affirms that India took to democracy as a ‘duck takes to water’ and
compares the country to others where democracy has not been as successful. But
here is what he says about the meaning of democracy: “A vibrant, accountable
democracy does not only imply that people cast their vote freely every five years. It
requires the full mix of a raucous investigative press, public debate uninhibited by
political correctness, many political parties representing varied constituencies, and a
variety of non-governmental organisations organising and representing interests.”

Since so much of Rajan’s argument depends on India being a true democracy, the
question to be put here is this: while all people have votes and there is an unfettered
press, is there public debate in India in which representatives of all classes
participate? Where there is lack of a free debate, the tendency is to look at the state
and blame it for inhibiting debate. But India is different; the level playing field
implied by ‘public debate’ is inhibited by the ancient social structures corresponding
to hierarchy. Only a small educated class participates in public debates, even as it
pretends to represent ‘opinion’.

Once doubt is admitted over India being a true democracy in which public debate
happens we find many of Rajan’s other suppositions collapsing as well. Since ‘rule of
law’ is equated with dharma and dharma is itself a relativistic system in which
right/wrong are related in some way to vocation/birth it may not be compatible with
a truly democratic system in which all people are equal before the law. (‘All people
are equal before God’, on the other hand, translates very well into democratic
values.)

Further, Rajan relies on Fukuyama and offers this argument: “The caste system led to
division of labour, which ensured that entire populations could never be devoted
totally to the war effort. So through much of history, war was never as harsh, or
military competition between states as fierce, as in China. As a result, the historical
pressure for Indian states to develop strong governments that intruded into every
facet of society was muted. At the same time, however, the codes of just behaviour
for rulers emanating from ancient Indian scriptures served to constrain any arbitrary
exercise of power by Indian rulers. India, therefore, had weaker government,
constrained further by rule of law.”
This may be true but ‘rule of law’ that functions well in hierarchical society may be
incompatible with democratic values.  If this argument is extended, the growing
weakness of the state in the past few decades could be attributed to the ‘small
pressure upon the Indian state to intrude into every facet of society.’

The more one reads Rajan the more does one feel that his political diagnosis does
not take India’s specificities into account. Even his explanation for why voters do not
dispossess the rich and powerful seems out of place. It could simply be that dharma
or ‘rule of law’ in India promotes a tendency not to intrude. Dharma appeals more to
inner conviction than to external manifestations, which might have led to more
‘intrusions’.

Raghuram Rajan as governor of RBI followed a path not very different from that of
his predecessors but one still wonders if someone with his kind of credentials (and
association with an international agency like the IMF) is the right choice to head
India’s central bank since it is imperative that India’s financial autonomy should not
be compromised. Rajan had earlier authored a paper arguing that failed states
should invite outsiders/foreigners who have been holding positions in multilateral
agencies (UN, IMF, aid agencies etc.) to rule, indicating that the autonomy of a
nation is less central to him than its management.

Whatever the truth in the matter, someone like Rajan with an academic background
in the West but with a small understanding of India would tend to advocate
‘universalist’ economic principles without taking local issues into account. As an
instance, he (like Montek Singh Ahluwalia, also formerly of the IMF) advocates cash
transfers instead of strengthening public services. Rajan dismisses the refrain that
the poor will drink away the money transferred into their accounts and argues that
they could build capabilities through education and healthcare. ‘Drink’ could be an
overestimated bogey but one wonders if a study has been made to ascertain if the
poor are not paying for unnecessary medical treatment or low quality private
education, with no possibility of their exploitation coming to light. The poor are
socially lower placed than doctors and teachers, which means that they may not be
able to make the demands that a middle-class consumer would. These are issues a
local might understand but perhaps not someone from Chicago or Harvard. If public
services are not delivered, the poor could go to a political representative but not if
private enterprise is the culprit.

The Five Pillars of RBI’s Financial Sector Policies

1. Clarifying and strengthening the monetary policy framework

2. Strengthening banking structure through new entry, branch expansion,
encouraging new varieties of banks, and moving foreign banks into better regulated
organizational forms.
3. Broadening and deepening financial markets and increasing their liquidity and
resilience so that they can help allocate and absorb the risks entailed in financing
India’s growth.
 4. Expanding access to finance to small and medium enterprises, the unorganized
sector, the poor, and remote and underserved areas of the country through
technology, new business practices, and new organizational structures; that is,
financial inclusion.
5. Improving the system’s ability to deal with corporate distress and financial
institution distress by strengthening real and financial restructuring as well as debt
recovery.

Achievement and Financial Inflation:

1. Rajan’s most visible achievement during his term as the RBI governor is reigning
in inflation.
2. His term saw two repo rate increases which totaled to 50 basis points. This
helped inflation to drop from 11.5% at its peak to 3.3% in November 2014.
3. Expanding access to finance to small and medium enterprises, the unorganized
sector, the poor, and remote and underserved areas of the country through
technology, new business practices, and new organizational structures; that is,
financial inclusion.

Below are the Review Points on the Book:

 The book carries in lot of support for the Current Government work on financial
inclusion “Make In India” and also emphasizes on importance of “Make In
India”.
 Rajan Sir tries to cover various issues rights from the reforms related to inflation,
banking sector, debt markets, Financial inclusion, Resolution of Distress, Advice
on macro-economy some broad concepts like Democracy & Rule of law
Tolerance and Respect. The book holds some messages on the event of RBI's
80th Anniversary and India 67th Independence day celebration.
 Raghuram Rajan’s book I Do What I Do is a collection of talks, lectures and
papers, some of which have been in the public domain for a while. Between
these articles, the former governor of the Reserve Bank of India covers much
territory.
 He champions the spread of banking emphasising the importance of “innovation
in reaching out to the underserved customer.” We find a clear-sightedness
about dealing with the ‘bad-loans’ problem.
 We are told of the importance of “early recognition of distress and fair
treatment of lenders and borrowers.” As he sees it, the task of policy is to “help
those with difficulty while being firm with those trying to milk the system.”
Finally, he speaks of the “miasma of suspicion” that pervades public action in
India, holding us back as a society, and of attempts by the bureaucracy to tie
down the RBI. Every one of these ideas is worth reflecting upon seriously.
 Rajan’s greater cause, however, is the control of inflation. It is also the topic on
which he is least original. Though he is not beyond taking the occasional swipe at
 the “Keynesian economist” he makes light of his own allegiance to the work of
Milton Friedman, which should leave him a “new classical macroeconomist.” The
issues are somewhat technical here, and the reader must bear with the detail as
there is no shortcut to understanding them.
 In this book it is presented as the standard trops of the inflation-centred
economist.
 First, there is some scare-mongering. We are told that high inflation “feeds on
itself” and transported to the experience of hyperinflation in the Weimar
Republic [the name used for the republic that governed Germany from 1919 to
1933].
 Taking this route, however, is akin to using the experience of the Great
Recession to recommend the permanent nationalisation of banking in market
economies. Then we are treated by the author to Friedman’s interpretation of
the observed positive relation between inflation and unemployment known as
the Phillips Curve.
 The interpretation is that unemployment falls below the ‘natural rate’ only
because workers do not anticipate inflation.
 Now the task of the central bank is to maintain stable inflation so that workers
can go back to the level of employment they desire. This account begs the
question of involuntary unemployment, a situation in which workers are willing
to work at the current money wage but cannot find employment.
 Secondly, it treats the inflation rate allegedly picked by mischievous politicians
as independent of growth rather than being generated along with it.
 Finally, there is the age-old argument of how high inflation is variable and
therefore leaves producers unable to distinguish between changes in the
relative of their product and the general price level. In reality, one would have
thought, there is no reason to fear this possibility as producers need go only so
far as the excellent website of the RBI to discover the current inflation rate!
 Having taken us so far as to recognise a role for relative prices, Rajan Sir fails to
point out their role in making people fear inflation. Actually, when relative prices
change, we fear that others may be gaining at our expense. This makes it a
bombshell in a democracy. But it is also true that when inflation is generated
jointly with rising employment, as we have reason to believe it can be, curbing
aggregate demand makes any involuntarily unemployed workers worse-off while
benefiting the owners of financial wealth. It is the power of the financial sector
in Anglo-American capitalism that has led to inflation control becoming the
centrepiece of public policy in recent times. None of this is to play down the
harmful effects of inflation. It only queries a single-minded focus on the inflation
rate to the exclusion of growth.
 As a professional of the highest class, Rajan, naturally, insists on evidence. The
evidence though is poor for his view of what determines inflation in India.
Rather than too high an output level ‘overheating’ it is often its decline,
especially in the agricultural sector, that drives inflation here.
 He tries to explain the rational, well thought the mechanism behind he's every
decision during his tenure as the RBI Governor.
 The title of the book is derived from one of the sensational answers to the
mediaor in Rajan's Sir's word media made it sensation. Right from the second
 page his use of the word, we clearly states his nature and method of work. One
of the most prominent o his works as RBI Governor is reduction in inflation
 Over the end he does accept that there was no offer from the Government for
extension of tenure, which is a very general and normal thing to happen and had
happened many times in the past. He doesn't rule out the possibility to return
back to Indian Economics in some power in near future.
 The book giver you the gret insight into how the mind of central banker works. A
Collections of speeches essays and random pieces by Rajan sir this collection
gives and excellent perspective into how the RBI plays a pivotal role in managing
the nations economy. Rajan Sir's clevarity stands out when he is commenting on
the global economy.