In the second part of his interview, economist Raghuram Rajan tells TOI Crest that India needs to become proactive on the global stage.

In India, there's been a lot of talk about how the G-20 is a sign of India having arrived at the high table. Does the G-20 have little more than symbolic value?

You saw what happened. When it was time to spend, the G-20 told them all to spend. They all spent. A year later, some of them got into trouble spending, so the G-20 said 'ok, some of you spend, some don't spend' ...

So it basically told them to do what they were already doing?

Exactly. You didn't need encouragement to spend, as politicians, in a downturn. They all went out and spent. They just got political cover in some sense - you were doing what the G-20 said. But now it comes to hard policy change that each country has to do and now you're seeing the differences. So I don't really think the G-20 has that much capacity to do the change. The second thing I would say is that even whatever little the G-20 can achieve has to be through the power of ideas. This is where we also need to say, now that we've arrived at the high table, what is it that we want the high table to do. It's not clear to me that we have a strong sense of where we want the high table to go. Our position in the past has been largely reactive - we don't like this, we don't like that, you've got to change this, you've got to change that. But it has rarely been proactive in the sense of 'here's what we think is for the global good'. I think we need more of that. We did play a little bit of that role in the Non-Aligned Movement, but we need to play that role again. China has tried to take up some of that role, acting as the voice of the developing countries. Brazil has. We need to do that in a way that enhances the debate.

Joseph Stiglitz in his book on the crisis argues that economics as a discipline needs to be reformed too because it has become "the biggest cheerleader" for freemarket capitalism. Your comments...

The cause of this crisis was not free enterprise, it was the interaction between the government and the private sector. If it had been just free enterprise, we'd have seen the problems in the corporate sector. The corporate sector was untouched. We saw the probem in low-income housing. Why? The banks in this country have to be prodded to lend to the poor because there is no money to be made there, right? The same is true of the US. Why are the banks going and lending to people who are less well off? The hand of the government is obvious. Now, who is to blame? The government was well-intentioned, the private sector tried to take advantage of the government. You can't blame the private sector either, it's their job to try and make money and if the government is willing to step in and provide cheap money, they will take advantage of that. The key is to make each play its role in an appropriate way and that is where economies failed. There are weaknesses in free enterprise capitalism. The question is: what do we replace it with? We've already seen socialism doesn't work, so what's the alternative? Winston Churchill's comment that democracy is the worst system except all the other ones that have been tried applies here too. It's a pretty bad system, but given human incentives it is something that works much better than anything else, so we just have to make this work much better.

As you point out in your book, the government's urge to boost low income housing was because it was seen as the simplest way of addressing resentment about widening inequalities. Isn't that inherent in free market capitalism?

Well, there are different kinds of inequality. There's inequality that comes because somebody is much more talented and therefore capable of producing something much better. I don't grudge Steve Jobs his billions, because he's a really smart guy who manages to produce products that the world wants to buy. In a system where everybody thinks they have the opportunity to become Steve Jobs, people don't grudge Steve Jobs. That's the way the US used to be. Where people believe that they are shut out from ever becoming a Steve Jobs, inequality breeds resentment, especially when you think, 'Steve Jobs didn't get there because he was Steve Jobs, he got there because he knew the minister for computers'. So, inequality that comes from privilege is very different from inequality that comes from talent and I think increasingly the US is becoming a society where inequality comes from privilege. The biggest difference in the US is between kids who go back to a home in the summers where they read books and work on summer projects - typically white kids -- and kids who go back home and watch TV. Those three months make an enormous difference in their educational attainments. There have been studies showing that the gap increases over time between white kids and minority kids simply because of the way they use their summer. This indicates you are a product of your family. As more of these differences make their effect felt, you get a growing gap between the haves and have-nots with the have-nots knowing they can never become the haves. This wasn't the case in the US in the past.