Raghuram Rajan is a man known for questioning orthodoxies, notably in a 2005 speech as Chief Economist of the International Monetary Fund, in which he was credited with foreseeing important elements of the global financial crisis. After being appointed as Governor of India’s central bank in 2013, however, Rajan has been more circumspect, pushing a quietly radical agenda of financial openness, but not allowing himself to be painted as a proselytising liberal, out of step with his cautious paymasters in New Delhi. Yet Rajan’s intellectual curiosity—which won him a place in the top 10 of Prospect’s 2014 list of leading world thinkers—still shows through in occasional, thoughtful speeches that stray far outside his remit as central bank head. A few days before Modi’s Independence Day remarks in August, Rajan made just one such intervention, laying out “a hypothesis on the persistence of crony capitalism” in India. His remarks made no mention of Modi. But his intent was clear enough: to explain the structural problems any government wanting to rid India of corruption needs to tackle, especially those rooted in its local democracy.
India’s public services are threadbare, Rajan argued. Citizens cannot rely on the state. Welfare entitlements supposedly provided for the poor mysteriously never appear. State schools and hospitals are dismal. Public goods like water and road repairs are absent too. “This is where the crooked but savvy politician fits in,” Rajan said. “While the poor do not have the money to ‘purchase’ public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents—a government job here, a [police report] registered there, a land right honored somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.”
Rajan explained his thesis to me not long afterwards, sitting in his favoured meeting room on the 18th floor of the Reserve Bank of India, where the large windows provide sweeping views over the hubbub of downtown Mumbai below. His inspiration had come during his time in academia, he explained , and in particular from reading Richard Hofstadter, the US liberal historian. Hofstadter’s book The Age of Reform examined the path taken by America, as it first endured and eventually overcame its own era of “robber barons” in the late 19th century. This was a period in which the US looked oddly like contemporary India—a “gilded age” marked by rapid industrial growth, helter-skelter urbanisation, wealthy tycoons and rampant municipal corruption.
Hofstadter, Rajan said, had shown that, in the US, a combination of corruption crack-downs and basic improvements in public services eventually reasserted good governance, culminating in the New Deal of the 1930s. But in contemporary India, at the local level at least, there are few mechanisms of accountability to stop political leaders extorting cash to fund services that should be provided by the state. “Obviously, to do some of this, some of these guys need resources,” Rajan told me. “And where do you get resources from? You get resources from business. So it’s sort of an unholy nexus, so to speak. Poor public services, politician fills the gap; politician gets the resources from the businessman, politician gets re-elected by the electorate for whom he’s filling the gap; and electorate turns a blind eye to the deals done with the businessman.”
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India’s public services are threadbare, Rajan argued. Citizens cannot rely on the state. Welfare entitlements supposedly provided for the poor mysteriously never appear. State schools and hospitals are dismal. Public goods like water and road repairs are absent too. “This is where the crooked but savvy politician fits in,” Rajan said. “While the poor do not have the money to ‘purchase’ public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents—a government job here, a [police report] registered there, a land right honored somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.”
Rajan explained his thesis to me not long afterwards, sitting in his favoured meeting room on the 18th floor of the Reserve Bank of India, where the large windows provide sweeping views over the hubbub of downtown Mumbai below. His inspiration had come during his time in academia, he explained , and in particular from reading Richard Hofstadter, the US liberal historian. Hofstadter’s book The Age of Reform examined the path taken by America, as it first endured and eventually overcame its own era of “robber barons” in the late 19th century. This was a period in which the US looked oddly like contemporary India—a “gilded age” marked by rapid industrial growth, helter-skelter urbanisation, wealthy tycoons and rampant municipal corruption.
Hofstadter, Rajan said, had shown that, in the US, a combination of corruption crack-downs and basic improvements in public services eventually reasserted good governance, culminating in the New Deal of the 1930s. But in contemporary India, at the local level at least, there are few mechanisms of accountability to stop political leaders extorting cash to fund services that should be provided by the state. “Obviously, to do some of this, some of these guys need resources,” Rajan told me. “And where do you get resources from? You get resources from business. So it’s sort of an unholy nexus, so to speak. Poor public services, politician fills the gap; politician gets the resources from the businessman, politician gets re-elected by the electorate for whom he’s filling the gap; and electorate turns a blind eye to the deals done with the businessman.”
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