Economic policies are rarely what the textbooks say. The world for one is more complicated in terms of analysing what is going on. But even if the solutions are clear, it is not clear that there is often political will to do what is necessary, to undertake those solutions. And sometimes we end up doing what is easy and what is convenient, rather than what is necessary and what is hard. That's why the field of economics used to be known as political economy and I think it's high time we went back to call it political economy, he said during the 55th foundation day celebrations of Somaiya Vidyavihar.
Rajan, who said that there is no point in reducing interest rates during a banking event Monday, told the media on Tuesday that he sees this as an 'interaction' with students and faculty and it is not a place where I want to say anything about inflation and interest rates.
Stating that it was great to be back at an institute to see wonderful innovations that are being done and what students are capable of, he said it reiterates the fact that the role of universities is not to teach students what to think, but how to think. And sometimes not even how to think, but just the willingness to ask the right questions. I think if you go out of the university with curiosity, that sustains you for life and keeps you continuously learning and making contributions to society. So, I am glad from what I have seen, students are full of that kind of ambition, he said.
Rajan said what one sees in the West is a very slow recovery from the financial crisis and there are several explanations for it. The alternative view is the real problem was that the underlying difficulties in growth were there even before the great recession. And that was masked by a binge of borrowing. So debt fuelled an additional amount of demand in these countries, especially because globally savings were high and there was relatively low interest rates, allowing countries to borrow until they could borrow no more, he said.
Stressing that the underlining problems are difficult to fix, Rajan said they used to be the problems of emerging markets, including problems of how to generate growth, how to educate the population and how to create the right institutions to deal with change. They are problems the West thought it was done with and now they have to confront them again and it takes many years to deal with them. When you want growth today, and you can't borrow anymore because debt is already too high, it goes back to the central bank, which then pumps up money supply and runs very accomodative policies.
Monetary stimulus seems to be the answer of the day. My fear is that it's not a lasting answer, said Rajan. He said countries in the industrial West need to undertake structural reforms. Unfortunately stimulus is easier and consequences of that kind of stimulus come into our countries, he said.
Rajan, however, cautioned that while India has benefited from having a lot of money flow in due to easy monetary policies globally, one must be careful about this money. Foreign borrowing cannot be taken for granted. At some point, these investors will find better uses of their money back home, and that's when you have financial difficulty when the money flows out. So we have to be careful about spending because financial conditions will change. This is why numbers like current account deficit are worth watching closely. We have managed to bring down current account deficit substantially, we are limiting our reliance of foreign debt. It's important we keep it this way, we manage the economy in a way that it is careful and circumspect because that is the only way that we ourselves can continue doing what we need to do, he said.