Raj Versus Rajan

Marathon runner Raghuram Rajan is ending his RBI Governor stint with a three-year sprint. Never has the leaving of an Indian central bank governor created a global ripple. To coin Rexit ( Rajan exit from RBI) to match Brexit ( Britain’s possible exit from EU) reflects the importance of the event and the stature of Rajan who finds mention amongst Time magazine’s 100 most influential people .

A great predictor, be it on the 2008 global financial crisis or his own discharge , Rajan stepping down was a graceful step up in protecting the apolitical image of his post.

When Rajan took over – barring inflation everything was defined by the dreaded four letter word – weak. Today from growth to forex reserves to psu bank balance sheets all have considerably strengthened while inflation has halved . India has moved from Fragile Five to Fastest First -To this effect Raghuram was the true King (Rajan) of good times .

Critics though have accused Rajan of tight money policies . Keeping interest rates high and the rupee strong, they say, has caused growth to drop and bad debts to prop. Weak Corporate results have resulted in low business confidence.

True, but is Rajan to blame - Let's examine - Inflation fell by almost 50 per cent during Rajan’s term. Sliding international crude and commodity prices certainly helped. This at the wholesale level. Consumer inflation though remains at a worrisome high – reason why lowering interest rates is not an easy option. Then attractive interest rates generate more foreign interest leading to higher investment into the debt market. Our forex reserves thus look most healthy . Poor corporate results came from falling producer prices and Chinese dumping. Slipping exports accentuated the problem. Weak global demand not just a strong rupee caused this . The rupee in fact has been allowed to depreciate by 15 per cent eroding the current account deficit by two third – 5 per cent to 1.5 per cent . Then a currency war would eventually be a lose lose .

Rajan’s leaving thus needs deep introspection. The manner in which he has had to leave needs deeper inspection. An RBI governor’s compulsion to quit due to personalized public attacks by an MP is a deplorable first. Allegations of not being fully Indian and willfully wrecking the economy are unsavoury. Rajan was India’s best western face andfaulting his foreign background could dissuade the homecoming of other overseas bright minds. India could miss out on best western practices and good liason.

Having said that, the Reserve bank governor’s post is nobody’s reserve. He is appointed not elected. Power to appoint or dismiss lies solely with the Central Government.  It isn’t the first time a governor has been made to go. Governors typically get a five-year term. Rajan exits after a three-year stint. Even former Prime Minister Manmohan Singh had sub three-year tenure as RBI Governor. The precedence of five-year stints for last four governors justify expectations of continuance with Rajan for another two years. So does the fact that his term is the shortest of any G20 country. This gets magnified by his universal popularity .

So why did Rajan go ?

Historically Mint Street and North Block are in a perpetual tussle. At the core of the conflict lies North Block’s short term political considerations which often impose long term economic risk. Maximum interest lies in the rate of interest. Growth versus inflation often becomes a war between government and governor. Like any decision prioritizing either comes with strong merit and risk. Being long term, economic policies are difficult to judge . Exposed to unforeseen external situations complicates. Being ahead or behind the interest rate curve is best answered in hindsight. We only get to know the true impact of policies long after the policy maker.

Was it apt ?

Now, as captain, Prime Minister Narendra Modi wanting his own team is justified as long as there is a democratic winning formula for all. In a team game coordination outshines individual skill. A perpetual state of conflict is counter productive. Delhi under Arvind Kejriwal suffers this new kind of Capital Punishment. To win, members even from different teams need to play together. The IPL is a great sporting example.

Independent thinking has deservedly got Rajan high rating from international agencies. Need for RBI’s independence cannot be challenged. However in case of deadlock the casting vote must favour the elected over the appointed. Rajan was not the sarkaar- in fact the sarkaar is the rajan (ruler).

So what now ?

Let's not belittle the behemoth of the RBI by making it person specific. The Institution frames policies which outlives people , even governments. Rajan himself, with the New Monetary Policy worked towards this and opines that RBI will survive any governor. Rajan’s exit is disappointing not a disaster – which presupposes an unworthy successor. Government needs to address this swiftly and tactfully.

Fears of pullout by overseas investors seems overdone. Investments find comfort in stable governments not just able governors. In PM Modi’s categoric agenda and powerful elected majority lies this comfort. The policy of stabilizing currency and keeping inflation in check is critical and must continue. The reaction of the markets to Rexit happening thus far have been indifferent. Brexit happening though can make matters very different.

Was there a way out with Rajan in the system. Yes. Governments can lower interest rates in multiple ways. Then , government’s fiscal policies are far more powerful than RBI’s monetary ones. But two correct moves by Rajan hurt. Upsetting powerful indebted industrialists by a clean up of the banking system. Questioning GDP data as retail inflation rose while industrial growth froze. The latter may have show Rajan in good independent light to the western world but it threatens to darken India’s credibility .

Speaking out is effective. Speaking out of turn is infective. The public good in Rajan’s necessary reasoning with policy issues was offset by his unnecessary reasoning with political issues. Having a right of say is one thing .Saying it right is another. Advocating Make “for” India to replace Modi’s pet Make “in” India programme meant he was “in for“ trouble. Then Rajan controversially stated - Indian economy is a one eyed king in a blind world . He seemed to have been blind sighted too, by Indian politics. This is where the bureaucrat scores. For the academician Rajan this was indeed a bitter lesson. Amidst all this we lost a great governor.