If ‘Rajan's exit’, a play on Brexit, happens, it will be because the RBI Governor chose not to carry on, hurt at the slander campaign against him. Still, it’ll be a pity if someone like him has to leave in the circumstances created for his departure
For the understated Raghuram Rajan, his 2005 speech at the Jackson Hole conference, the annual central bankers’ retreat in Wyoming, organised by the Kansas City Fed, celebrating the career of Alan Greenspan, Chair of the Board of Governors of the Federal Reserve System, commonly known as Fed Chair, was not an attempt at self aggrandisement. Rather it was typical of Rajan to use that platform to be honest and prescient.
Straight off the bat, the professor at the University of Chicago’s Booth Graduate School of Business warned that securitisation had made the financial system more vulnerable, not safer. He questioned whether banks had sufficient liquidity to cope “if the tail risk does materialise”. Raining on the parade, Rajan with customary candour, in a paper entitled, “Has Financial Development Made the World RiskierIJ” stated that changes in the financial system had “expose[d] the system to large systemic shocks” from sudden changes in the prices of assets (like, say, mortgage-backed securities), increasing the probability of a “catastrophic meltdown”.
He had actually called the 2008 financial meltdown in the speech three years prior to the event. Contradicting him brusquely, larry Summers, former US Treasury Secretary and later in the hunt to replace Greenspan, described Rajan as a luddite, saying that the US Federal Reserve could do with someone like him.
Neither got the job, for Janet Yellen replaced Greenspan and the luddite Rajan went on to become chief economist at the International Monetary Fund, then chief economic adviser to the Government of India, and finally, Governor of the Reserve Bank of India in September 2013.
Summers, of course, had wrongly prognosticated that Rajan’s 2005 speech was based on a “slightly luddite” premise: New-style finance increased the risk of crisis. In retrospect Rajan was right and Summers wrong. Summers dissing him publicly had become a talking point in the US. Now, as the same Rajan, as India’s central banker, comes to the end of his three year tenure, speculation abounds over his future.
If Rajan does go after the public shellacking from BJP MP Subramanian Swamy, then his replacement may well be the incumbent chief economic adviser to the government Arvind Subramanian. Subramanian, an economist at the Peterson Institute and the Center for Global Development had succeeded Rajan as CEA. Before coming to India, he had argued that a tighter policy is called for, to fight inflation and strengthen the rupee.
“You would expect real interest rates to be two to three percent, if not more,” he had said, noting, “We’ve not been close to that for some time.” Those days India was under the cosh with double digit inflation. And Rajan’s job was to navigate those choppy waters.
Indian central bankers are supposed to be fiercely independent (they would like to believe that the RBI is their domain) and their biggest task is often controlling the inflation genie in the absence of competent supply side interventions. A combination of imported inflation and structurally flawed supply-side bottlenecks unchecked for years, means that crude oil, commodities and food items contribute regularly to spikes in inflation.
It is the RBI which more often than not has to use monetary tools at its disposal to control inflation. Ergo, this means a high interest rate cycle which is a growth damper. It is a tough tightrope walk for the Mint Street Sheriff at most times because he has to balance industry and political aspirations, and keep public outcry at bay by keeping headline inflation numbers down.
So, many of the more famous central bankers —Manmohan Singh, C Rangarajan and YV Reddy — have been monetarists while Rajan himself and his predecessor D Subba Rao have been economists. Keeping India an island of tranquility both during the 1997 East Asian contagion and the 2008 global financial crises, Rangarajan and Reddy as monetarists did an admirable job.
It is ironical that the rump of Swamy’s attack on Rajan is that he is anti-national and “mentally not fully Indian”. Incidentally, Rajan’s father R Govindraj was a key member of the Kaoboys, seconded from the Intelligence Bureau to the then burgeoning Research and Analysis Wing under spymaster Ram Nath Kao.
Hence, it is a travesty that Swamy claims that Rajan’s actions lead him to believe that he is acting more as a disrupter of the Indian economy than the person who wants the Indian economy to improve. Now, these are grave charges completely unsubstantiated. At the very kernel of this antipathy is Rajan’s Green Card.
Successive Governments in India have battled price rise, not necessarily being on the same page as the RBI Governor. In the growth versus controlling prices dilemma, Governments prefer that the RBI Governor is more malleable and ductile, but that doesn’t always work out because of the Governor’s pressing priorities to rein in prices.
Since tightening of the interest regime is one of the principal tools available with the central bank, politicians and industry reckon that there should be an easing which allows growth imperatives to pick pace. But east is east and west is west, and never the twain shall meet. India has been battling high inflation constantly, and Rajan too has done his best to soothe the price genie, a global commodity down cycle helping enormously. Consumer Price Index targeting began under Rajan’s watch, and this has remained high just as the dollar has remained super strong hurting exporters.
In a recent interview, Rajan, whose impending exit has triggered a maelstrom, said, “I welcome genuine criticism of our policy but will not address ad hominem attacks or allegations against me as an individual rather than the policies and position I hold. I won’t comment on a second term. But you’ve seen my speeches. My ultimate home is in the realm of ideas.”
‘Rexit’(Rajan’s exit), a play on Brexit, is playing at a theatre near you. Rajan’s exit, if it does come about, will be primarily because Rajan himself has chosen not to carry on, hurt at the slander campaign against him. In the same interview, he tellingly added, “Indian-ness, love for your country is complicated. For every person there is a different way that you show respect for your country.” It would be a pity if someone like Rajan has to leave in these circumstances created for his departure.