|Saturday, 18 June 2016 18:00|
RBI Governors seldom have Rajan’s type of credibility
That RBI Governor Raghuram Rajan should choose to leave after a vicious personal attack by Rajya Sabha MP Subramanian Swamy is not surprising, given the somewhat token nature of the government’s defence. Rajan’s credibility came as much from his questioning of Alan Greenspan at the height of the latter’s popularity to the fact that, unlike many of his predecessors, he came armed with a clear plan, not just in terms of deepening the country’s financial markets but also for tackling the massive beating the rupee was taking in the weeks prior to his appointment. Which is why, even as an officer on special duty prior to taking over as RBI chief, Rajan announced a plan – probably fine-tuned by him in his role as chief economic advisor – to encourage mobilization of forex reserves by agreeing to share part of the currency risk of depositors.
None of Rajan’s work at RBI, it has to be said, would have been possible without either luck or strong support by the government, both the previous and the current one. The taming of inflation has more to do with global deflation than keeping interest rates high and even those in favour of a tight monetary policy will admit this would have fallen flat had it not been supplemented by a tight fiscal regime. What Rajan will be most remembered for is his cleaning up of banks, not only forcing them to recognize dodgy loans, but also giving them the moral authority to question lenders who, for years, had unleashed a reign of terror on banks – if you don’t roll over my loan, I will default. It is odd, even foolhardy, that this enhanced cleaning up of bank balance sheets which resulted in a sharp fall in their market valuations was not matched with an equally dramatic financial recapitalization plan, but there can be no two views that Rajan could not have gone ahead without the explicit backing of the government. Indeed, Rajan’s assault on defaulters played very well into prime minister Modi’s anti-crony-capitalism stance,
What did Rajan in, probably, were intemperate statements which, while in the nature of broad philosophical theorizing, did look unduly critical of government, something few other central bankers of repute have done in countries like the US or the UK. Rajan’s DD Kosambi lecture last year quoted Fukuyama, dwelled on why political freedom and economic prosperity seemed to go together, and even talked of how government actions were constrained by the Indian concept of dharma. It spoke of the role of criticism – a raucous investigative press and political debate uninhibited by political correctness – in a vibrant democracy, but the comment about Hitler being democratically elected perhaps needed a more mature audience.
Rajan is no stranger to controversy and surprised most by talking of the support crony capitalism got under the previous government – at the launch of a book in honour of Dr Manmohan Singh when he was PM! – but given his credentials, the government of the day chose to not only make him chief economic advisor but also RBI Governor later. It was the same thought of looking at the national good that guided prime minister Narendra Modi to back Nandan Nilekani’s Aadhaar even though the BJP had been very opposed to it in the past.
Why Modi chose to withdraw the cover to Rajan is unclear and it is very possible the next RBI Governor – to be announced shortly – will bring equal distinction to the job. The prime minister would, however, be aware that in not ensuring Rajan continued as Governor, he has squandered some of the credibility India had among the global investor community, credibility that is hard to come by in these strained times.