Raghuram Rajan's curious case is not of intent but of bad timing and as a central banker, poor timing can be the most expensive mistake. Hopefully, his successor will be armed with an impeccable sense of timing that sometimes, matters more than anything else
The outrage over Reserve Bank of India (RBI) Governor Raghuram Rajan’s exit, once he completes his term in September, will make one wonder if there is any truth to a famous adage which goes like this: “The cemeteries are full of people who thought they were indispensable”. What makes many of us squirm even more is the fact that this outrage comes from those who did not bat an eye-lid when leela Samson held six key positions at one time, including that of chief of the Central Board of Film Certification during the erstwhile UPA regime’s 10-year-long reign and yes, barring her credentials as being a dance teacher of Priyanka Vadra, what got her a Padma Shri or those key positions, is a matter of serious debate.
Coming back to Rajan, let it be told that modern day central bankers are not like their counterparts of yore who were driven by just one agenda — controlling inflation by influencing aggregate demand, via the lever of interest rates. From a Ben Bernanke to a Janet Yellen or from a Mervyn King, to a Mark Carney or a Mario Draghi, central bankers have evolved in the last decade. They understand that while inflation target is relevant, growth cannot be sacrificed at the altar of inflation management and this is where Rajan fumbled, faltered and tripped. If India achieved a 7.6 per cent growth in 2015-2016, it was not because of, but despite Rajan. A large part of the growth is due to public spending by the Government on rail, roads, infra and social services.
Gross domestic product (GDP) is equal to Government expenditure plus private consumption plus investment plus inventories plus (exports and imports). Needless to add, private expenditure, which accounts for more than 50 per cent of India’s GDP, has been growing abysmally, burdened in large part by high interest costs, leading to idle capacities, falling capex and the like. Who is to be blamed for the elevated interest ratesIJ Will the RBI Governor own up since interest rate-setting is the preserve of the RBIIJ
It is true that interest rates alone cannot power an economy to growth. Equally, role of interest rates cannot be undermined, more so when the global economy is going through severe slack and pump priming by central bankers worldwide is the norm, not the exception. Rajan needs to take onus of the fact that his single-minded pursuit of inflation did more harm than good. A study of results of BSE-500 companies for 2015 shows that operating profit margins fell to 18 per cent vs a 10-year average of 22 per cent, again, thanks to high interest costs which eroded profitability.
It must be brought to public notice how Rajan’s policy of elevated interest rates played a spoilsport. High interest costs is equal to lower operating margins, lower operating profit, lower future capex, lower jobs, lower purchasing power in hands of consumer, lower household spending and lower private investments and lower GDP.
There is no doubt about Rajan’s bona-fide intentions but he made unforgivable errors of judgement as a central banker and repeatedly so. What explains the fact that repo rate stood at 7.5 per cent after Rajan took over in September 2013, with oil prices at $112 per barrel and three years hence, with oil at sub 50, repo is still at 6.5 per cent, down by just 100bpsIJ Wholesale Price Index (WPI) was 7.5 per cent, retail inflation at 11 per cent, food inflation at 14 per cent and bond yields at 8.5 per cent after Rajan took charge in 2013. Today WPI stands at 0.8 per cent, retail inflation is down to 5.7 per cent, food inflation has fallen to seven per cent but guess whatIJ Bond yields are still high at 7.5 per cent when ideally they should have been far lower. This is the whole point.
The cost of money should have fallen significantly in line with falling inflation but that has simply not happened as Rajan doggedly chose to keep interest rates artificially high and that is unforgivable as elevated interest rates have hurt the micro, small and medium enterprises. The corporates have not been affected much as they have other avenues to raise funds via external commercial borrowings, foreign currency convertible bonds, etc. And its not just the industry, elevated interest rates are debilitating for the average salaried middle class tax payer too. Once headline inflation ebbed, Rajan should have abdicated his hawkish approach so that personal loans, housing loans, auto-loans et al, could have fallen sharply.
Rajan is a textbook economist who despite best intent, forgot that monetary policy that is divorced from public policy and global environment is meaningless. Rajan lowered the repo rate by 150bps over an agonizingly long period of 17 months between January 2015 to April this year, complaining that he was going slow because of lack of monetary transmission by banks, forgetting that rate cuts work with a lag of six months to nine months. Rule of thumb suggests, when a rate cut cycle starts, the cuts should be swift and chunky, to have the desired impact but alas, Rajan chose a lethargic approach.
Rajan may not have openly admitted but our concern is, Rajan was always second guessing Yellen and the reason he went slow is because he expected Yellen to raise rates far faster and much earlier than she chose to! Yellen chose growth and global stability over all else. Rajan chose hubris and inflation targeting over all else, even as core inflation ebbed. Again, monetary policy is supposed to tackle demand side issues and with wholesale non-food credit growth down to single digit last year, will Rajan explain, why did he blame the banks for lack of monetary transmission, when banks were already reeling under non-performing assets (NPA) and poor credit off take.
Of course, we are not condoning banks that made willful mistakes but there are those that suffered, thanks to a cyclical downturn that was in many ways Rajan’s doing to start with in the first place! While we do give marks to Rajan for tackling the NPA mess by changing NPA recognition norms, again, it was too little, too late. Also, do not forget that while Rajan became RBI Governor only in 2013, he had enough clout as the economic advisor to the UPA Government between 2007-2008 and 2013. The crux of the NPA problem actually started in 2007-2008 wherein NPAs burgeoned from 53,000 crore in 2008 to 2.4 lakh crore in 2013, a massive jump of 352 per cent! Will Rajan as the economic advisor to then UPA Government, not take any blame for the genesis of the NPA mess, which unfolded right in front of himIJ Stressed assets were a huge problem in 2008 itself. We fail to fathom why Rajan waited till 2012-2013 before he decided to tackle the problem head-onIJ By 2013, stressed assets were already 9.2 per cent of the total outstanding loans in the banking system. These are questions that merit a response.
As mentioned earlier, Rajan’s curious case is not of intent but that of bad timing and as a central banker, poor timing can be a very expensive mistake that India managed to weather, thanks to a vibrant public policy driven no less, by Prime Minister Narendra Modi himself, despite India being a “one-eyed king, in the land of blind”. Well, the one-eyed bit is Rajan’s ‘gem’, not anyone else’s!
Hopefully, his successor will be armed with an impeccable sense of timing that sometimes, matters more than anything else, especially when you are the RBI Governor of an economy that is on the cusp of a 10 per cent growth that was held back by an incompetent dispensation for 10 long years. Not any more..
(The writer is an economist, stock market expert and a spokesperson for the BJP)