raghuram rajan : tolerance and respect for economic progress convocation address by dr raghuram rajan, governor of the reserve bank of india, at the iit delhi convocation, delhi, 31 october 2015. * * * thank you very much for inviting me back to the institute to deliver the convocation address. i graduated with a degree in electrical engineering 30 years ago. i was overly anxious then about what the future held for me, because i did not realize that the institute had prepared me so well for what lay ahead. our professors – and i will not single out any to avoid a disservice to those i do not name – were dedicated professionals. they asked a lot of us, knowing that in challenging us they allowed us to learn what we were capable of. equally important, our electrical engineering class – in those days, computer science was part of electrical engineering in iit delhi – had some of the smartest people it has been my privilege to know. after working with them as colleagues, and competing with them for grades, i learned what it took to succeed in the fiercest environments ; very hard work, friendship, and boatloads of luck. those lessons have stayed with me since. iit delhi then, as i am sure it is now, was not only about studies – it was about growing up. we were, with a few notable exceptions, the proverbial school nerds who had been excluded from all school sports by the macho sports cases. with almost everyone in the same boat at iit, for the first time in our lives we got a chance to bat and bowl at the nets, instead of being posted at deep long on to retrieve the odd six by the stars. everyone did something, ranging from photography to publishing. of course, we all aspired to join dramatics, where you got to spend long hours with members of the opposite sex. unfortunately, i was no good at acting, so i had to look for self - actualization elsewhere. but there were enough places to look. student politics was vibrant, with plenty of scheming, strategizing, and back - stabbing. it was an intellectual pastime, however, without the violence and corruption that plagues student politics elsewhere in our country. you had to convince the small intelligent electorate to vote for you, and in figuring out how to get that vote, we all learnt the art of persuasion. so we grew up in the classrooms, in

to distinguish the healthy from the sick ex ante, the former purchasing more annuities than the latter, leading insurance companies to offer annuities on less attractive terms thus discouraging their purchase. 20 this “ adverse selection ” is important - it is approximately 20 % more expensive to buy annuities as an individual than in a group scheme. 21 collective risks raise additional problems. longevity risk to a particular cohort can be shared only across generations. those generations who are alive today can pool risks through financial markets. but sharing across all generations, including the unborn, requires collective or public insurance through variations in the national debt. 22 consider an annuity provider who faces the risk that an increase in the average longevity of its pool of annuitants will lead to a shortfall in its funds. the annuity provider would clearly like to hedge this risk in some way. one way of doing that would be for it to have assets on its balance sheet that pay out more if the average longevity of its annuitants increases. financial markets are currently developing ‘ longevity bonds ’ along these lines. 23 the interest rate on longevity bonds is linked to some measure of unexpected changes in average life expectancy. in the case of the recently announced european investment bank - bnp paribas bond, the payout each year for the next 25 years will be a fixed sum multiplied by the proportion of people in england and wales who were 65 in 2003 that are still living in that particular year. so if five years from now 90 % of the cohort are still alive, the payment in that year will be 90 % of the fixed sum. the cash flows to a buyer of this bond will decline over time, but decline less rapidly if people live longer. the demand for such a hedge against longevity risk we might expect to come from pension funds and other providers of annuities. the supply might come from lifeinsurance companies, who benefit from increased longevity to the extent that fewer early deaths mean lower claims, and financial intermediaries collecting the savings of those younger investors prepared to bear some of the longevity risk of the old. 24 how close private markets can get to providing the optimal amount of risk sharing is hard to say. private annuity markets which could pool individual longevity risk are small. for collective longevity risks, the burden of unexpectedly high longevity for a particular cohort should be spread over as many generations as possible. in theory, this provides a potential role for government to share risks across