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The RBI governor has said that the world was facing a problem of productivity slowdown due to government inability to put firms "out of their misery" and also due to protection provided to oligopolistic firms.
Speaking at the London School of Economics (LSE) on Tuesday, the governor said that the world was facing twin problems of slowdown in aggregate demand due to ageing population and a slower growth in productivity.
According to Rajan, for most people the slowdown in productivity is difficult to grasp because of all the innovation, but it does not show up in the numbers. He said that there are four explanations for the lack of productivity growth - these included a failure to measure and monetize the gains from productivity.
In the context of industry, he said that the problem was also the government's inability to put troubled firms out of their misery.
"Good crisis tends to clean up industry. Only the more productive firms survive. On the other hand if you intervene a lot in the crisis and flood the system with liquidity, there is less liquidation than in an ordinary crisis.
As a result you may have some inefficient firms producing because cost of capital is low. That's the zombie problem, it was there in Japan in a big way after their financial crisis in the 1990s - firms were neither dead nor alive.
Firms were in their last legs but were not put out of their misery. They continued to produce, effecting the profitability and viability of existing firms," said Rajan.
