New RBI chief must be both firm and flexible
Mr Raghuram Rajan is an eloquent man. He also appears to have some literature in him. On taking charge as the Governor of Reserve Bank of India on Wednesday, he said, “Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets.” Charles Dickens would have been pleased. Besides the deft use of imagery, there is another significant aspect to his statement — his assertion that the mess is due to international disturbances. This is true to an extent because the economies of European countries with exceptions like Germany and now Britain are still in a bad shape. But it's also true that the effects of the global meltdown of 2008 have begun to wane in the US, which is India's significant trading partner. If India sailed through the crisis that broke out five years ago, largely because of the infusion of massive funds which was then readily available as the economy was trotting at eight per cent plus growth, there is no reason why the ‘stormy waves' should be so terribly impacting our economy today. Mr Rajan, therefore, will have to attend to the more compelling domestic causes of the decline. Admittedly, there are some things he can do to address those issues and many that he cannot because they are beyond his purview and in the court of the Congress-led UPA Government. The cause of optimism is that because he has a special rapport with the regime and its financial bosses, we can expect more effective coordinated action. His predecessor, Mr D Subbarao, did not enjoy that privilege, largely because he saw the solutions to the problems differently from that of the Government. He saw inflation and fiscal deficits as demons that the Government had to contain before the RBI injected growth-related stimuli such as the lowering of interest rates. The growth versus inflation/fiscal deficit, therefore, became a bone of contention (and confrontation) between the Government and him. Mr Subbarao did have a streak of obstinacy in him, but it would be wrong to infer, as some experts have been saying, that he aborted the regime's efforts at reviving the economy.
If Mr Rajan even partially succeeds in implementing the bold vision that he has outlined, he will have achieved a lot. He knows that change and continuity need to go hand in hand. He has wisely observed that monetary stability is essential to keep inflation in check — something which his immediate predecessor too had underlined. We can sooner than later see, among other initiatives, a cut in interest rates. Besides, Mr Rajan has to hasten the process of short-listing the new candidates that have applied to be bankers, and award them the licence. The banking sector is desperately in need of reforms. India is heavily under-banked; in the last two decades we have had just 11 new banks, and between 1991 and 2011 a mere 30,000 new branches were added.
Mr Rajan is said to be an avid follower of Indian politics. He must, therefore, have given the subject some attention. He will need to put his knowledge to test while balancing the requirements of the economy with that of the political environment he operates in. After all, he could in the coming months be working with a new political dispensation.