What is the difference between a doer and an advisor? Take a look at Raghuram Rajan and you will know what precisely differentiates the two. In about a year that Rajan functioned as chief economic advisor or CEA in the finance ministry, he looked a man with good intentions, but showed little firepower to make a difference. However, Rajan looks a different man now after taking charge as Reserve Bank of India (RBI) governor last Wednesday, taking actions where necessary without mincing words.
Apart from his impressive speech on taking charge of the central bank, outlining both his short-term and long-term goals, Rajan has been instrumental in a series of decisions that the RBI took to bolster capital flows into the economy. So far, he has succeeded in halting the steady decline in the value of the rupee and restoring foreign investors' confidence in the country's ability to address its macroeconomic imbalances. Indeed, the rupee has appreciated since he joined the RBI.
Note that the difference between Rajan the CEA and Rajan the RBI governor is not a comment on his ability to make a difference. More appropriately, it is a comment on the roles that the government assigns to its CEA and to the RBI governor.
The CEA is an advisor and more like a backroom boy, who does an important job for the finance ministry or the minister, but is usually not seen as taking decisions. In the past, there have been exceptions, where CEAs have played a more active and well-publicised role in policy-making. But in the last few years, CEAs have usually taken the backseat. In sharp contrast, the RBI governor is the head of an autonomous organisation that has to take decisions to impart stability to the economy and markets. By the very nature of the job, the RBI governor has to take charge of the situation and has to be seen to be doing things.
This perspective is important for those who may be in the running for the CEA's post that has fallen vacant since Rajan's shift to Mumbai's Mint Road, where the RBI headquarters are located. The government is reported to have shortlisted a few names with strong academic credentials and international reputation. But to expect that the appointment of one of them as the next CEA would make an immediate difference to policy-making in the finance ministry would be unrealistic.
That's because the role of the CEA has become fairly restricted as a result of the way the finance ministry has been run in the last few years. Indeed, finance ministers these days often prefer to have their advisors in place, who make a critical part of a CEA's job almost redundant. This is an unfortunate decline of an institution that once provided a decisive edge to economic policy-making in the government. Two factors could be cited for the decline.
One, the number of trained and qualified economists in the government has seen a steady decline. This is true not just of the finance ministry, but of other economic ministries as well. Some of India's well-known economic administrators were earlier trained as economic advisors in many of these economic ministries and rose to occupy important positions in the government and other institutions like the RBI. Economic liberalisation resulting in the opening up of several more lucrative opportunities for young economists has also played a role in the steady disappearance of economists in these ministries. Recent initiatives to induct young economists to work as interns have made some headway, but the challenge would be to retain them in the system and facilitate their growth and development, so that at some point the government has a wider range of choices for selecting economic advisors in different ministries. That goal remains elusive.
Two, the tribes of economists in the government can survive only if sufficient care is taken within the government to rebuild a cadre of economists that can serve different ministries. The Indian Economic Service has been languishing for several years since it has been strangled from all quarters including the strong and all-powerful lobby spearheaded by the Indian Administrative Services or IAS. It is perhaps better to let that service die a natural death since reviving an economists' cadre within a structure where IAS would always retain its suzerainty would make little difference to the quality of economists or economic administration in the government.
A more sensible strategy would be to create a pool of established economists, selected from the private sector, who then could be placed as economic advisors in different ministries. The process of selection of such economists should be a continuous affair so that there is a steady flow of such talents. The idea of a top economist heading a team of junior economic advisors in a department is flawed from an institutional point of view. It is important to build a pool of young economists in a system that allows upward mobility on the basis of a transparent and merit-based system. That pool could also provide the government with options while selecting top secretaries in key economic ministries and departments. The IAS stranglehold on all posts even in economic ministries needs to be countered for ensuring better economic administration.
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