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Name: Vinod Sitaram Pawar

Roll No. 1850024
Subject: Research Methodology
Book Review: I Do What I Do By Raghuram Rajan
Guide: Prof. Bhujang Savaisirke Sir

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.
Controlling inflation
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
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the reader must bear with the detail as there is no shortcut to

understanding them.
We are in this book presented with the standard tropes 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 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
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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. My work with M. Parameswaran shows that the relative
price of agricultural goods and the price of imported oil dominate the
‘output gap’ as drivers of recent inflation in India. This somewhat weakens
the case for the approach to inflation proposed by Rajan, and practised by
the RBI when he was governor, namely ‘inflation targeting’.
Once again, this does not weaken the case for inflation control per se. It
only signals the need for management of agricultural supplies and, as the
Americans have shown, weaning the economy away from imported oil. But
the evidence I have cited should make us doubt the confidence placed on
the power of monetary policy in tackling inflation in India.
Finally, while Rajan is absolutely right to claim that inflation was lower by
the end of his tenure, it had already begun to decline, though mildly yet,
when he took over. Indeed, his effort was aided by a steady decline in the
relative price of agricultural commodities and the price of imported oil,
trends lasting throughout his three years as governor. In general, Rajan
recounts his actions as governor and assesses their impact, mostly
dispassionately except in the case of inflation control where he simply
assumes that the outcome reflects the RBI’s prowess. There is also no
acknowledgement that the growth slowdown that is being talked about
today had commenced in his tenure, even as the inflation rate declined.
Rajan writes with great clarity and has a nice style. My estimation, for
what it’s worth, of this readable book is that it is strong on the finance but
less convincing on the macroeconomics.