Why 2013 will be a crucial year for chief economic advisor Raghuram Rajan

Sometime in the second half of 2009, when Rakesh Mohan quit as deputy governor of RBI, the government sounded out Raghuram Rajan who was teaching at Chicago University’s Booth School of Business for the job.

Those familiar with the chain of events say that Rajan declined the offer as he was not in a position to relocate to India. A year later, he was appointed honorary adviser to the PM Manmohan Singh. When Singh was in charge of the ministry of finance for a brief while this year, the government managed to persuade him to join as chief economic advisor (CEA) in the finance ministry — an assignment which may be a stepping stone to more influential positions later.

For Rajan, known for his famous contrarian view in 2005 on a financial disaster in the making, way before the global meltdown, 2013 is when he will be watched to see how he manages to shape fiscal and financial policies — this time as an insider in the government. Rajan has been an enthusiastic supporter of compensatory cash transfers. He comes with strong views on what he terms as an unproductive public sector and delivery of public goods and services. Besides, Rajan is also not without an opinion on land reforms, reducing of inequalities as well as the steps needed to make India’s financial sector more vibrant.

Now that he is part of the government, the former chief economist with the IMF who has been into the CEA’s job for a little over three months will have to demonstrate in the year ahead that he is in a position to influence finance minister P Chidambaram and other stakeholders on the rationale for reforms on the fiscal, financial and monetary policy fronts.

In contrast to his predecessor Kaushik Basu, Raghuram Rajan is far better equipped to deal with these challenges given his skills and work relating to the financial sector but the ability to wield influence and deliver on the policy front is where he will be tested.

Navigating the Indian bureaucracy may not be easy but there are people who reckon that to succeed, it would call for a level of unpleasantness and an ability to ruffle feathers while advocating change. Om Prakash Bhatt, the former chairman of State Bank of India, who worked with him in 2007-08 on a committee which recommended reforms in the financial sector, says that Rajan knows what is doable and what is not in the Indian context. “He is balanced and practical and if he has a strong point of view, he articulates it well.”

That may be fine but as Ajay Shah, professor, National Institute of Public Finance and Policy, says the task of the ministry of finance lies in fiscal, financial and monetary institution-building.