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Viewpoint: Why did India’s central bank governor have to go?

  • 20 June 2016
  • From the section India

Raghuram Rajan, the governor of the Reserve Bank of India (RBI), announced on Saturday evening that he would not serve a second term, and instead return to his teaching job at the University of Chicago. Economic analyst Vivek Kaul explains why Mr Rajan may have been under pressure to quit.

In a letter to RBI employees which was released to the media, Mr Rajan said, "I want to share with you that I will be returning to academia when my term as governor ends on September 4, 2016."

Since the release of the letter, a small industry has cropped up, trying to figure out why this happened.

A public intellectual in his own right, Mr Rajan had things to say on a wide variety of issues, and from the looks of it, some of them haven't gone down well with the government.

More than one minister has publicly criticised him.

Take the case of a comment he made to Indian website Marketwatch.com in April: "I think we have still to get to a place where we feel satisfied. We have this saying — 'In the land of the blind, the one-eyed man is king.' We are a little bit that way".

He was referring to India's fast economic growth in a slow growing world.

Damage done

Immediately commerce minister Nirmala Sitharaman told reporters, "I may not be happy with his choice of words. I think whatever action is being taken by this government is showing results."

Mr Rajan perhaps forgot that he was working with a government which is extremely sensitive to criticism.

He later clarified what he really meant in another speech, where he said, "My intent was to signal that our outperformance was accentuated because world growth was weak, but we in India were still hungry for more growth. I then explained that we were not yet at our potential, though we were at a cusp of a substantial pick-up in growth given all the reforms that were underway."

But by then the damage had already been done.

Image copyright AFP Image caption Mr Rajan is working with a government which is extremely sensitive to criticism

This and other similar incidents seem to be the major reason for his early exit.

It needs to be pointed out here that no RBI governor has only been given a three-year term since 1992.

C Rangarajan at four years and 334 days, has had the shortest term after Mr Rajan. Most received terms closer to five years.

So letting the RBI governor go in a period of three years, is clearly unprecedented.

An unprecedented tenure

In the recent past, Subramanian Swamy, largely seen as a "maverick" member of parliament, has run a rather slanderous campaign, calling for Mr Rajan's removal, which seems to have had an impact.

The fact that he was appointed by the previous government has not helped his case either.

Mr Rajan's tenure had many good things about it.

First and foremost, as soon as he took over, he handled India's rupee crisis very well.

Inflation has been brought under control from earlier double digit levels, though that was not only because of the RBI. The bad loans mess in public sector banks has been brought into the open.

And for the first time in India's history, banks have gone aggressively after large businessmen who have defaulted and are still defaulting on bank loans.

This is unprecedented. In the past, the show would have just gone on.

Tycoons would have defaulted only to borrow again a few years later, and the taxpayers would have taken on the tab. This remains Mr Rajan's biggest achievement.

It will be interesting to see if the next RBI governor continues to be aggressive on this front.

Image copyright AFP Image caption For the first time in India's history, banks have gone aggressively after large businessmen who have defaulted and are still defaulting on bank loans

Over and above this, Mr Rajan has international stature. He is the only central banker who has openly spoken out against the massive amount of money printing carried out by western central banks.

In August 2005, at a Federal Reserve of the Kansas annual symposium at Jackson Hole, Wyoming, in the United States, he criticised the policies of Alan Greenspan, then Chairman of the Federal Reserve of the United States.

Mr Greenspan was considered a god in banking circles at that point of time and the Jackson Hole symposium was supposed to be a sort of send-off for him before his retirement.

Mr Rajan spoilt the party saying, "The bottom line is that banks are certainly not any less risky than the past despite their better capitalisation, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis."

Three years later, the financial crisis the world is still dealing with showed his warnings had come true.

Punished for disagreeing?

Of course, when Mr Rajan spoke out against Mr Greenspan, he was severely criticised by other economists attending the symposium. As he would later admit in his bestselling and brilliant book Fault Lines: "I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticised by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what's going on before their eyes."

Something similar seems to have been happening in India as well, where his critics seem to have closed their eyes to the issues that the country is currently facing and want to hear good things about the Indian economy all the time.

Their justification for Mr Rajan's removal is that India has enough good economists to fill his shoes. Of course, it does. But there is no one who has the same respect as he does globally.

Further, is that really the point? When was the last time a board fired a well-performing CEO, because he did not agree with their views all the time?

Vivek Kaul is the author of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com

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