Sunday, June 19, 2016

Rockstar Rajan of Mint St

That Reserve Bank Governor Raghuram Rajan would not last much longer as the Rock Star of Mint Street was foretold. However, what Ministers and Mandarins running India from the heights of Raisina Hill had not anticipated was his sudden resignation one June evening, creating shock waves in the bond and money markets as well as on news and social media. Not to speak of the considerable embarrassment for their ilk.

Finance Ministry officials have for long been haranguing the Reserve Bank of India Governor Raghuram Rajan on what they considered to be his obstinate stand on controlling inflation ahead of cutting interest rates.
North Bloc top brass as well as the ruling BJP were impatient to post a rosy picture of the economy, especially of industry given the fact that the Prime Minister had launched a `Make in India’ programme with much fanfare. Despite their reasoning with numbers that industry was not growing and in some months was actually shrinking, Rajan very rightly pointed out that a half percent or a percent cut in lending rates would not really see a rush of investors. Instead he pitched for controlling a runaway inflation which was severely shrinking the Common Man’s ability to buy goods and services needed to have a decent life and to create a demand pull for the economy.
The other issue on which the Government did not see eye to eye with Rajan though they did not have the gumption or courage to talk to him on, was his extremely strict norms for recognizing bad loans and his policy that business houses which had run up large bad loan portfolios would not get any new hand-outs.
The power, finance and transport ministries on the contrary were asking the RBI and banks to consider a regime which would let defaulters access fresh debt to finish what they called pending projects – power plants, highways and ports - stuck in limbo as the economy faltered post the 2008 Wall Street crash which saw  investors dithering on taking fresh risks.  The Reserve Bank’s point was that India's stretched banking sector alone could not be exposed to risks. If projects were to be completed by the promoters who had not paid back loans, then they had to bring some money and guarantees on the table or the Government had to give subsidies. Not a very comfortable situation for an industry and government machinery used to treating banks as their personal piggy bank.
Even after multiple investigations had found several private sector investors guilty of padding costs and siphoning off loans to fund other business or private expenses, precious little had been done to bring them to book. Instead in many cases in the past they had been rewarded with fresh cheap loans, something which Rajan wanted stopped.
In private, top bureaucrats are believed to have warned Rajan that his stand could cost him a second term in office. Rajan however publicly made it clear that the culture of impunity for big business would have to end, stating very aptly in one conference “No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more.”
Rajan is considered one of the brightest young economists, globally, having earlier forecast the coming global financial crisis in a lecture made to the world's central bankers at their annual retreat in Jackson Hole, Wyoming, USA in August 2005. Not something which the central bankers exactly appreciated at that time.
Writing later in his bestseller `Fault Lines: How Hidden Fractures Still Threaten the World Economy’, Rajan described the situation as :  "I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions." Possibly that is exactly how his relationship was with the powers that be in New Delhi.
The academic-turned central banker, who enjoyed almost rock star like status with the media, had not either endeared himself to the Government by his plain speaking on various issues including the hype around `Make in India’, where he had pointed out that the global economic situation was not conducive to an export-led growth strategy and that India would have to carry out hard nosed reforms to pep up its own home markets. Nor was his use of the adage "in the land of the blind, the one-eyed man is king” in the context of much tom-tomming about India’s economy growing at a fast clip, taken kindly. Especially when both the prime minister and finance minster were repeatedly stressing in global forums that India was “the bright spot” in a faltering global economy.
Despite finance minister Arun Jaitley debunking sharp and acerbic criticism of him by BJP MP Subramaniam Swamy, the fact remained that he had angered the powers that be and they wished to see the back of Raghuram Rajan as RBI Governor. Tellingly, a month back Prime Minister Narendra Modi told a Washington Post interviewer that  he did not “think this administrative subject can be an issue for the media. And that issue is only in September, not now,” when questioned on whether Rajan would get a second term.
That the Government had no intentions of giving the RBI Governor a second term was  also made clear in its reaction to his resignation. No calls were made by the finance minister asking him to reconsider his decision. Instead Jaitley chose to put out on his facebook a bland statement : “Dr. Raghuram Rajan has announced his intention to go back to academics at the end of his current assignment.The Government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly.”
Former finance minister P.Chidambaram who had helped appoint Rajan to the hot seat, like his successor possibly did not always see eye with him on India’s interest rate regime while still at North block. However, with Rajan delivering a resignation ahead of the BJP saying no to a second term, Chidmbaram came out in his defence. "I am disappointed and profoundly saddened by the decision of Dr Raghuram Rajan to leave the RBI on completion of his term on September 4, 2016, but I hasten to add that I am not surprised at all," he said in his reaction.
"As I had said sometime ago, this government did not deserve Dr Rajan. Nevertheless, India is the loser.”