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21 June, 2016

A miracle maker bows out

BRP Bhaskar
Gulf Today

With Raghuram Rajan, Governor of the Reserve Bank of India, who provided a calm environment for the economy through skilful management of monetary policy, quitting in September, the path is clear for the Narendra Modi administration to bring another autonomous institution under its heel.

The rupee was falling against the dollar and inflation was ruling high when the Manmohan Singh government picked Rajan to head the RBI in 2013. He steadied the rupee and brought down retail inflation.

The rupee’s movement against the dollar was held in the narrow range of 66.02 to 67.09. The inflation rate was brought down from 10.5% to about 5% in two years. In the past year it has moved up but still remains below 6%.

Rajan worked the miracle mainly by using the RBI’s right to fix interest rates. Initially he raised the repo rate (rate at which the central bank lends money to commercial banks) and reverse repo rate (rate at which the central bank borrows from commercial banks), against the wishes of the government. After stabilising the monetary system, he reduced the interest rates, but not to the extent the government desired.

In the favourable atmosphere he created the GDP grew from 5.6% in 2012-13 to 7.6% in 2015-16, foreign exchange reserves rose from $275 billion to 363 billion and the current account deficit fell from 4.8% in 2013 to 1.1% last year.

Rajan is credited with having forecast the ongoing global financial crisis three years in advance. Speaking at a function to honour outgoing US Federal Reserve Chairman Alan Greenspan he had said a disaster was ahead. Recalling his words, IMF chief Christine Lagarde said last year, “The world should have listened to him.”

Economists and financial analysts say the effect of Rajan’s departure will be felt in the years ahead. However, he disapproves of personalisation of the office and says the RBI will survive any governor.

A product of the Indian Institute of Technology, Delhi, the Indian Institute of Management, Ahmedabad, and the Massachusetts Institute of Technology, USA, Rajan served as Professor at MIT’s Sloan School of Management and Chief Economist at the International Monetary Fund before returning to India in 2007 to head a committee on financial sector reforms. He later became Chief Economic Advisor to the Government.

At the RBI, he was often at loggerheads with the government as it kept pressing him to lower interest rates to raise the growth rate. He resisted, pointing to the high fiscal deficit and possible price rise. After the change of government, the pressure on him increased as Modi was in a hurry to push up the growth rate and usher in the good days he had promised in his campaign speeches. Rajan started relenting but the quantum of rate cut always remained below the government’s expectations.

The government responded by attempting to tamper with the RBI’s autonomy. It proposed the creation of an independent debt management office. As Rajan objected, the move was dropped.

The government then planned to transfer part of the power to regulate the bond market from the RBI to the Securities and Exchange Board of India. The SEBI’s opposition forced the government to drop that too.

Thereafter the government sought to reduce the RBI to the level of certain other financial sector regulators. The RBI’s protests resulted in stalling of the proposed changes.

The Establishment’s unhappiness with Rajan came into the open when Bharatiya Janata Party leader Subramanian Swamy called for his removal a few months ago. He was believed to be acting at the instance of the Rashtriya Swayamsevak Sangh, the power behind the Modi government.

The RSS, which is quite innocent of monetary policy, was apparently incensed by his remarks on the growing intolerance after the lynching of a Muslim at Dadri in Uttar Pradesh for allegedly eating beef. “Tolerance and mutual respect are necessary to improve the environment for ideas, and physical harm or verbal contempt for any group should not be allowed,” he had said in a convocation address at IIT Delhi.

The government, which habitually hypes its record, was peeved with his comparison of the Indian economy to the fabled one-eyed king of the land of the blind.

When the government constituted a search committee to find a candidate to fill the vacancy that will arise when Rajan’s tenure ends it became a clear indication that he would not get an extension. In a note to RBI staff last week he announced his decision to return to academia when his current term ends.

“My ultimate home is in the realm of ideas,” Rajan said in that note. Such a man is, no doubt, a misfit in an administration which delights in surrounding itself with mediocrities.

As Rajan takes the bow some of the tasks he began remain unfinished. One of them is cleaning up of the balance sheets of public sector banks that are weighed down by bad debts, a process he had described as a deep surgery. Another is the formulation of a monetary policy framework. -- Gulf Today, Sharjah, June 21, 2016.

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