Stephen Barter, co-chair of the Global Advisory Board at the University of Chicago Booth School of Business, welcomes the audience and introduces Governor Raghuram Rajan. He highlights the achievements of Chicago Booth, including its Nobel laureates, global campuses, and distinguished faculty. Barter emphasizes the importance of understanding India’s perspective on itself and the world, given its rich history and cultural significance.

Chris Giles Introduces Raghuram Rajan
Chris Giles, Economics Editor of the Financial Times, takes over as moderator. He acknowledges the unwritten rule among central bankers not to criticize their peers and promises to ask questions that Rajan can answer forthrightly. Giles notes that Rajan is approaching his third year as Governor of the Reserve Bank of India and asks him about his experiences.

Raghuram Rajan Compares Central Banking and Academic Life
Rajan draws parallels between being a central bank governor and working in academia. He emphasizes the importance of teamwork, finding talented individuals to lead teams, and setting direction for the organization. However, he also highlights a key difference for emerging market central bankers: the need to advocate for change and create the necessary frameworks, rather than simply operating within existing ones.

Raghuram Rajan on India’s New Monetary Policy Framework
Rajan discusses his efforts to establish an inflation-focused framework for India’s central bank, which has now been enshrined in legislation and includes a newly formed monetary policy committee. He believes that this framework will lead to greater anchoring of expectations and lower inflation over time. Rajan acknowledges that it will take time to see definitive results but expresses satisfaction with the progress made so far.

Raghuram Rajan on the Global Economy
Giles shifts the discussion to the global economy, noting the International Monetary Fund’s assessment of it as fragile and mediocre, with various risks on the horizon. Rajan shares his views on the global situation but the response is not provided in this document.

Deleveraging and Underlying Forces:
Slow growth post-financial crisis was initially attributed to deleveraging, but after eight years, other factors may be at play. Additional leverage cannot mask these underlying forces, leading to a need to understand them better.

Population Aging:
Population aging in certain countries is a possible reason for slow demand. Effects of population aging on asset prices, interest rates, and exchange rates are complex and not fully understood. David Pilling suggested adjusting the definition of recession in Japan due to its shrinking labor force.

Productivity:
Low productivity growth is a puzzle considering the technological innovations happening in social media, biotechnology, energy, and batteries. It remains unclear why this technological progress is not reflected in economic data.

Wage Inequality and Aggregate Demand:
Stagnant median wages and increasing inequality may affect aggregate demand. Technological progress may be contributing to job and wage disparities, further impacting demand.

Conclusion:
Combinations of these factors may explain slow growth, but strong evidence supporting any one explanation is lacking. Rajan suggests three equally plausible explanations for low productivity growth: Difficulty in measuring quality improvements in products over time. Investment in intangible assets that are not captured in traditional productivity metrics. Misallocation of resources due to market imperfections.

GDP Growth Measurement:
We undercount GDP growth by not adjusting sufficiently for improved quality of goods, such as cars. Nominal GDP is discounted by the inflation rate to obtain real GDP. However, if quality improvements are not accounted for, we may overestimate inflation and underestimate real GDP growth.

Technological Change and GDP:
GDP only includes monetized activities. Unpaid or unpriced activities, such as household chores or self-production, are not counted. Technological progress has led to increased unmonetized activities. For example, streaming movies online may provide better entertainment than traditional movie theaters, but it is not reflected in GDP.

Impact on Consumption and Leisure:
Technological advancements have enabled people to consume more leisure activities, such as streaming videos, without paying as much. This results in improved quality of life and consumption of leisure, but it may not be fully captured in GDP measurements.

Low Productivity Growth Explanations:
Increased female labor force participation may have overstated GDP growth as informal work shifted to monetized work. Low-cost capital benefits incumbents, discouraging new entrants and potentially keeping inefficient firms afloat. Labor hoarding may be a factor, as firms retain workers despite low productivity due to low capital costs.

Effectiveness of Stimulus:
Stimulus can be effective in the short term during periods of risk aversion when the private sector is hesitant to invest. However, prolonged reliance on stimulus raises concerns about its effectiveness and sustainability. Excessive stimulus could lead to future generations bearing the financial burden without sufficient returns.

Challenges Facing Central Banks:
Many central banks have inflation targets with a lower bound, and disinflationary forces risk falling below this bound. Printing money to generate inflation, known as “helicopter drop” or “monetary financing of the fiscal deficit,” is a potential option. This approach involves the government issuing bonds, which are purchased by the central bank, leading to increased money supply and potential spending.

Helicopter Money and Spending Behavior:
Despite past evidence suggesting that individuals may save rather than spend monetary transfers, there is uncertainty about whether helicopter money would result in increased spending. Rajan questions the assumption that flooding the economy with money would lead to immediate and full spending, especially if hyperinflation is not a threat.

Central Bank Ammunition:
Central banks cannot claim to be out of ammunition, as doing so would create negative expectations. While there may be limits to central bank actions, they must maintain the appearance of having additional options available.

Indian Economy and Stagflation Concerns:
Rajan addresses recent criticisms regarding the Indian economy, particularly concerns about rising inflation and weak industrial production. He acknowledges these challenges but emphasizes the need to balance growth and inflation objectives, considering India’s unique circumstances.

Overall:
Rajan expresses skepticism about the effectiveness of helicopter money as a fail-safe option, highlighting the need for responsible monetary policy to avoid hyperinflation. He also emphasizes the importance of central banks maintaining the perception of having available ammunition to manage economic challenges. Additionally, he acknowledges concerns about the Indian economy but stresses the need for balanced policies that consider the country’s specific circumstances.

Economic Recovery in India:
Raghuram G Rajan sees signs of a slow economic recovery in India, supported by auto sales, cement production, and the potential for a strong monsoon. Core inflation has remained stable despite temporary fluctuations, and the Reserve Bank of India is committed to anchoring inflation expectations.

Banking Sector Cleanup:
Non-performing loans and past excess credit extension have been issues in India’s banking sector. Public sector banks experienced a slowdown in lending even before the central bank’s measures to disclose and rectify assets. Rajan believes the cleanup of bad loans will help banks put problem projects back on track and enable them to fund economic growth. The recent passage of a bankruptcy code is expected to strengthen the out-of-court resolution process for distressed assets.

Reforms for India’s Growth:
Rajan emphasizes the need for implementation of planned reforms to secure India’s position as the world’s fastest-growing large economy. Infrastructure investment is showing positive signs, with increased construction of railway lines and near self-sufficiency in power generation. The Reserve Bank of India focuses on providing a six-month plan and monitoring its implementation to ensure timely progress.

Brexit and India’s Trade:
Rajan acknowledges the ongoing debate on Brexit in the UK and the potential for a trade deal with India. He declines to offer an opinion on the economic impact of Brexit, citing the availability of numerous studies and analyses on the subject.

Technology’s Role in India’s Growth:
India has an advantage in distribution due to its entrepreneurial spirit. Technology can lower transaction costs, making essential services more affordable. Medical procedures and logistics can be improved through technological advancements. Virtual shops increase access to goods for urban and rural populations.

Technology and Productivity:
Technological innovation in services and manufacturing affects productivity and growth differently. Manufacturing innovation leads to sustainable growth for a while, but eventually peters off. The current shift from manufacturing to services is a significant trend.

Technological Innovation and Productivity Measurement:
The speaker suggests that technological innovation in manufacturing is more measurable than in services, leading to a potential discrepancy in productivity assessments. Productivity growth in manufacturing may be more visible due to measurable manufacturing numbers and quality. Productivity in services is often lost in the noise, making it challenging to accurately measure.

Challenges in Data Quality and Measurement:
The speaker highlights issues with data quality, GDP deflators, and inflation, particularly in global comparisons. Improvements in data measurement and quality are crucial for macroeconomists and finance professionals.

Combined Fiscal and Monetary Policy:
The speaker expresses concerns about implementing combined fiscal and monetary policies, given the limitations and potential risks associated with high debt-to-GDP ratios. The effectiveness of such policies might vary across countries with different economic circumstances.

Vague Fiscal Stimulus Proposals:
The speaker criticizes vague statements about fiscal stimulus without specifying specific projects and rate of return expectations. He emphasizes the importance of evaluating the actual projects to be funded and their potential impact on the economy.

Keynes’ Statement on Economic Growth:
The speaker cautions against misinterpreting Keynes’ statement about digging up holes and filling them up again as a blanket endorsement for unproductive spending. He stresses the need to carefully assess the positive and negative NPV (Net Present Value) of investments and spending to avoid creating more problems for the economy.

Better Data Measurement through Big Data:
The speaker acknowledges the need for better data measurement and explores the potential of big data to provide a more accurate understanding of prices and economic indicators.

Infrastructure Spending and Project Specificity:
The speaker emphasizes the importance of naming specific infrastructure projects rather than making general statements about investing in infrastructure. He raises concerns about the planning, decision-making, funding, and supervision of infrastructure projects, which require careful consideration and time.

Economic Growth and Infrastructure:
Infrastructure projects, often labeled as “shovel-ready,” are not always truly viable or worthwhile investments. Genuine positive NPV (net present value) shovel-ready projects should be developed during good times to be implemented during economic downturns when costs and real interest rates are more favorable.

Addressing Corruption:
Corruption is a significant issue, particularly in developing countries. Corruption can hinder economic growth and development. Tackling corruption requires strong political will and commitment to transparency and accountability. Cultural factors and the complexity of corruption networks can make it challenging to eradicate. Governments must prioritize anti-corruption measures and promote ethical practices in public and private sectors.

Corruption in India:
Corruption is a significant problem in India, impeding decision-making and economic growth. While certain acts may be considered corruption in one culture but not in others, most societies do not condone corruption. India has experienced a surge in the fight against corruption, with efforts to increase transparency in contracts and allocations. Although grand-level corruption has diminished, it has not been completely eliminated.

Technological Advancements:
Technology has played a crucial role in reducing corruption in certain areas. Examples include the automation of railway ticketing and income tax filing, which has reduced opportunities for corruption.

International Cooperation:
The fight against corruption should not be limited to developing countries; developed countries like the UK and the US also have a responsibility. International cooperation is essential to address the issue of money taken out of developing countries and hidden in places like London. Industrial countries need to support efforts to identify beneficial ownership and bring illegally obtained money to justice.

Sovereign Debt Capital Markets:
The presentation does not address this topic, so no information is provided.

Sovereign Borrowing:
The Indian government prefers to borrow in its own currency, the rupee, rather than issuing dollar bonds globally. This is because the government can borrow freely and long-term in domestic currency, with an average maturity of government debt nearing 10 years. There is no need for India to start a dollar borrowing program.

Make in India:
The Make in India campaign aims to make India a better place to do business and produce goods and services. It involves improving infrastructure, reducing excessive regulation, and promoting competition between states to ease doing business. The campaign also seeks to improve the quality of research and development (R&D) in India. The government is working to create a predictable tax structure and provide advanced tax rulings to make the tax regime more transparent and clear.

Vodafone Tax Case:
The Vodafone tax case is still ongoing, and Vodafone has yet to pay any taxes on the demands levied against it. The government has stated that it cannot subvert the established structure for tax decisions for a specific case. Going forward, the government aims to make the tax regime more transparent and clear.