Both fans and critics are wrong about Raghuram Rajan's exit

Focusing purely on his track record for increasing, holding or reducing interest rates is missing the woods for the trees.

 |  8-minute read |   19-06-2016
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Something obviously happened in the last ten days. On June 7, addressing a press conference held after the Reserve Bank of India's (RBI) bimonthly monetary policy statement, governor Raghuram Rajan quipped that it would be cruel to spoil the fun the media was having speculating whether he was going to stay on in his post after his term ended on September 4. “You will know when there is news,” he laughed.

That news broke on Saturday, June 18. The RBI released Rajan's statement “... on due reflection and after consultation with the government, I will be returning to academia when my terms as governor ends on September 4, 2016”.

Obviously, something happened between these two dates for Rajan to pen his letter to the RBI staff openly stating that he was not going to stay beyond September 4 as governor.

Also read: India is no place for good people like Raghuram Rajan

It may just be that he was told that the government did not plan to renew his term. Or it could have been that the conditions set for his term to be renewed were not something he could accept. Or even that he was simply sick of his critics who made absurd comments about his tenure and rather publicly, while the government did not do much to refute those comments.

Predictably, in this age of social media judgments, Rajan's announcement has led to a Twitter war. His most rabid critics – led by Subramanian Swamy – essentially sum up their relief as “good riddance”. They say that there are many others who can handle the Indian central bank, and handle it more in line with the desires of the finance ministry.

swamy-2_061916023316.jpg Subramanian Swamy has been one of Rajan's biggest critics. 

Meanwhile, Rajan’s admirers think it is catastrophic for the Modi government to lose him at this juncture. Some of them even feel that Rajan's exit will lead to the rise in crony capitalism, which Rajan was fighting, and also an outflow or at least a slowdown of FDI in the country.

Also read: By getting rid of Raghuram Rajan as RBI governor, Modi risks losing face

Of course, both his vociferous critics and his most ardent fans have a tendency to overreact – and use bad examples to make their case. Most of the points that the critics use to say Rajan wrecked the economy ignore all data to the contrary.

But equally, except for the economists and financial luminaries – Kaushik Basu, chief economist of World Bank; Deepak Parekh, chairman of HDFC, or Arundhati Bhattacharya, chairperson of SBI are few of those – most of Rajan’s supporters argue about his importance without having the faintest clue about his actual contribution as RBI governor or even his track record as an economist. Many of them take an emotive view of his departure.

Also read: If Modi means what he says, he needs Raghuram Rajan to stay

Focusing purely on his track record for increasing, holding or reducing interest rates is missing the woods for the trees.

First, the whole contention of Swamy and supporters that Rajan wrecked the economy by keeping interest rates unusually high and starved small and medium enterprises (SMEs) of funds is utter rubbish. It ignores two facts. One, the government has released statistics that the economy grew 7.9 per cent in the last quarter – and on closer scrutiny, the explanation is that a lot of it was a result of the sterling performance of the SME sector as shown by data available with the Registrar of Companies (ROC) in the ministry of finance.

If the government's growth statistics are correct, Rajan’s interest rate record has not done any harm to the SMEs or GDP growth. Or, if his critics feel that he destroyed the economy, they should also say that the GDP growth is being overstated by the government.

Also, Rajan has cut rates as inflation has cooled. The repo rate at 6.5 per cent are the lowest since 2011. So accusing him of not cutting rates is being blind to evidence. Could he cut rates even more? Sure. But as experiences in the US and Japan have shown, low interest rates do not necessarily make the economy grow faster.

On the other hand, they do give rise to asset bubbles. Also, what the critics tend to overlook conveniently is that much of the rate cuts by Rajan has not been passed on by commercial banks to consumers – and one reason for that has been the government’s refusal to cut small interest rates of its savings schemes, for it would make banks uncompetitive if they reduced their deposit rates - which affect their lending rates - below the rates that the government promises for PPF or EPF.

But more than the interest rate evidence, what the critics are actually guilty of is ignoring Rajan’s overall achievements and work in the last three years. During Rajan’s tenure, his initial few months were focused on stabilising the currency, which was in a freefall.

The rupee rose quite sharply after Rajan took over, and then was allowed to drift down slowly keeping export competitiveness in view. Rajan also wisely did not try to shore up the rupee to artificially high values, which is a losing battle as many countries have figured out.

After the war on inflation through interest rates, and focusing on the consumer price index as the true indicator of inflation rather than the wholesale price index, and the moves to stabilise the currency, Rajan initiated two moves which, I think, were the most significant achievements of his tenure.

The first was the war on non-performing assets (NPAs) and forcing banks to recognise and tackle their bad loans. The RBI released the framework for revitalising distressed assets, launched the 5:25 scheme and introduced strategic debt restructurings.

As a result of his efforts, the asset reconstruction business went up sharply. More importantly, the government and the public sector banks (PSBs) became serious about recognising and tackling bad loans. Till Rajan started poking, pushing and prodding, everyone knew that bad loans by PSBs were becoming a huge problem – but no effort was being made to actually tackle them.

More important was Rajan’s reforms on the new bank licences front. He introduced on-tap licensing, introduced small finance banks for financial inclusion, and gave licenses to payments banks, which would help banking outreach and transactions. There were other innovations he introduced as well.

Therefore, focusing on his interest rate track record alone is wrong – especially as there are always multiple views on whether interest rate cuts will do more good or more harm. It is a bit like those endless debates about Union finance minister Arun Jaitley’s insistence on sticking to the fiscal targets. There are plenty of critics who feel that loosening the fiscal targets would help the economy grow faster. Not sticking to the targets would reduce India’s credibility among global investors.

Just as most of Rajan’s critics marshal a few facts to make their assertions, many of his supporters also take an emotive stand rather than a reasoned one. A least one prominent supporter, a celebrated journalist, made the case that Rajan’s exit would show that government cannot tolerate free thinkers.

Why should it matter whether Rajan is a free thinker or not? It is his competence at his job that should determine whether he must be given a second term or not. And his competence has never been in doubt. He was a celebrated economist with notable achievements abroad when he was appointed RBI governor.

But his achievements in the global arena of academics and policy would have been useless had he not managed to carry out the reforms he did as the RBI governor. And that is what should matter most, not his looks or his tendency to speak what is on his mind openly in public fora. (Which incidentally is what his critics think is an American trait and therefore “unIndian”).

The fact that Rajan was seen globally as a highly accomplished central banker can be gauged from the fact that he became the first Indian to be chosen as vice-chairman of the Bureau for International Settlements (BIS), Basel, the institution of central bankers around the globe.

Meanwhile, on the fear of Rajan's ardent supporters that India will not survive the Rajan's exit, let me say that those are overstated of course, for two reasons. The first is that Rajan himself has set up a process that helps to make the Indian central bank less dependent on a single brilliant individual. More importantly, the government may well have found someone who is equally bright to replace Rajan, and no man can ever be called indispensable.

But losing Rajan, while hardly a catastrophe for the Indian economy, does not show the government’s talent management abilities in good light. Whether one agreed with his economic policies or not, there is no doubt that Rajan is a highly talented economist at the peak of his powers – and the government should at least have made an effort to keep him. Given the current state of the Indian and global economy, the country needs as many bright economists helping it as it can get.


Prosenjit Datta Prosenjit Datta @prosaicview

The writer is a business journalist at India Today and bookworm.

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