Weak demand is the biggest problem before the world: Raghuram Rajan

Newsroom24x7 Desk

Dr Raghuram Rajan London School o EconomicsLondon: Reserve Bank of India Governor Raghuram Rajan has pointed to aggregate weak demand as the biggest problem before the world today.

Dr. Rajan was addressing the inaugural event for the ‘100 Foot Journey Club’, a collaboration between the High Commission of India and the London School of Economics, South Asia Centre here on May 10.

Speaking on the theme “Rethinking the Global Monetary System”, Rajan began by drawing attention to relatively slow growth and said that one of the reasons is a number of industrialised countries are experiencing population ageing. In this regard, he cited the case of Japan and Europe. The second largest economy in the world – China is also ageing before touching the levels of income in industrialised countries, he added

While observing that we do not understand the impact of population ageing on savings and investiment, Rajan asked: “Do savings increase when population is nearing retirement age and when savings run down.” as a direct corollary to this, he went on to ask: should I cut down investment when population is ageing as there is reduced demand?

The second factor for slowing down productivity growth, according to Rajan is that goods we are seeing today are better than what we bought 10 or 15 years ago. Essentially it is hard to measure quality. Hence we are undermeasuring productive growth and overmeasuring inflation. he gave the example of cars produced today and their quality which is far better than the cars we purchased a few years ago. To drive home his point, he said in fact when we buy an additional car today, we are actually buying two-and-half cars if we compare today’s cars with what we were purchaseing a few years ago.

There is also the monetization problem, Rajan said adding since GDP means only what is monetized and what we do not pay for does not get monetized. To illustrate this point, the RBI Governor said “if a rich lady marries her chauffeur, the GDP will come down.” We still have to figure out how to monetize GDP, he emphasised.

After a welcome from LSE Director and President Professor Craig Calhoun (@craigjcalhoun) , the introductory remarks came from Navtej Sarna (@NavtejSarna), High Commissioner of India.

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Dr Rajan’s research interests are in banking, corporate finance, and economic development, especially the role finance plays in it. He co-authored Saving Capitalism from the Capitalists with Luigi Zingales in 2003. He then wrote Fault Lines: How Hidden Fractures Still Threaten the World Economy, for which he was awarded the Financial Times-Goldman Sachs prize for best business book in 2010.

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