Steep learning curve ahead for next RBI Governor Raghuram Rajan
If the India story needed a fresh salesman in the international markets whom investors would trust, it has that in Rajan.
In an era when the credibility of almost every institution here has been eroded, Rajan has the unenviable task of leaning against the government to protect India’s central bank. Despite its flaws, the RBI is still seen as an institution that is uncompromising — be it with interest rates, banking regulation, currency or even bank licences. Rajan, who will be India’s youngest central bank governor, will take over at a time when the communication between the government and Mint Street’s top man has almost broken down. Only a rupee collapse helped a patch up.
Finance minister Chidambaram and Governor Subbarao have had public spats in the past few months, which has not helped anyone’s cause. The foremost task is to be on the same page, but that will be inviting trouble for Rajan’s credibility if the government continues with its imprudent policies.
“Rajan has strong and uncompromising intellectual standards, but is pragmatic in his approach to the practical challenges of policymaking,’’ says Eswar Prasad, Tolani Senior Professor of Trade Policy at Cornell University and Senior Fellow at the Brookings Institution, who has co-authored research papers with Rajan. “His understanding of financial markets and macroeconomics, along with their international dimensions, make him an ideal choice to head the RBI.’’
What’s on the table? Bank licences and the government’s perceived effort to usurp RBI’s authority by providing executive powers to the Financial Stability and Development Council.
Subbarao and his predecessor YV Reddy — the master bureaucrats that they were — pushed back in their own way. Purists may expect the same from Raja. There is near unanimity (a rarity among economists) when it comes to Rajan’s ability and knowledge of economic difficulties of the country and what needs to be done to fix them. But where he will be tested is in navigating the RBI bureaucracy and also in maintaining the fine balance with the government.
Indeed, Rajan has been warning Indian policy makers well before the Indian crisis began. Though he was abroad for the best part of his professional life, he was no less informed on what’s plaguing India. On the disproportionate number of billionaires in India, Rajan in a 2008 speech at the Bombay Chamber of Commerce said, “I do want to argue that the numbers are alarming — too many people have gotten too rich based on their proximity to the government.
If Russia is an oligarchy, how long can we resist calling India one?’’ Rajan is too aware of the attitude of civil servants, investors and politicians in taking for granted the great India growth story. “I see signs of complacency, whether it be a lazy acceptance of straight line extrapolations by Goldman Sachs indicating that India is destined to become a great economic power, or the willingness of some Indian corporations to pay unconscionable prices in making trophy foreign acquisitions,’’ Rajan told an audience at the Forum of Free Enterprise in January 2006.
“With the right policies and some luck, we will become a middle-income constitutional democracy in my lifetime. But inaction coupled with bad luck could make us an unequal oligarchy or worse, far sooner than we think.’’
Prime Minister Manmohan Singh did not face any battle with the finance ministry this time as Chidambaram, too, backed Rajan. But the new governor should be mindful of the fact that expectations were high from the government when Subbarao was appointed. A year later, the script went awry and hopes were belied. With a poll-bound government, Rajan’s learning curve will be relatively short.
If the India story needed a fresh salesman in the international markets whom investors would trust, it has that in Rajan. But the flip side of that is if he does not enjoy reasonable autonomy, he could choose an assignment anywhere, a choice his predecessors did not have. Be it the credit crisis, or India’s economic woes, Rajan has seen them years ahead. Rajan may do well to remember his predecessor’s golden words that being the head of a central bank “is a lonely job”.
The man & his mind: RBI Governor designate’s views on various issues
Central bank intervention (April ’08)
We are suggesting that the RBI stop intervening heavily in currency markets, something we believe has limited effects on the exchange rate in the medium run, and risks sparking inflation. Many who advocate continued heavy intervention are living in the past, when it may have worked.
Foreign investment in bond market (April ’08)
One should take a holistic view. If the government borrowed much more in foreign currency, there would be causes to be worried. By contrast, if we allow foreigners into the long-term domestic currency markets, there is far less concern — the government will never be forced to default on domestic currency debt. Also, we free financial institutions to make loans instead of holding government paper.
Foreign banks (April ’08)
India stands to gain from the services provided by foreign banks, especially as it becomes integrated with the world economy. Much as the Indian public has benefited from our unilateral reduction in trade barriers, it will benefit from the services provided by foreign banks.
Branch licensing (April ’08)
We do recommend freeing up branch licensing for domestic banks. Following the principle of domestic treatment, that privilege should also be extended to foreign banks after a short period (to allow domestic banks to gear up).
Labour laws (September ’08)
We need more flexibility in the labour market, especially in low-skilled industries like textiles, else our factories will either become fully automated, or full of temporary workers. In protecting some workers, we condemn the majority to a totally unprotected existence, an example of the law of unintended consequences.
Predicting the global financial crisis (February 2013)
At any point in time there are a whole bunch of crazy people saying the world is coming to an end. That is the problem regulators [like Greenspan] face. I would say from the perspective of the regulator, I was one of the crazies
On Bhagwati-Sen Rivalry(February 2013)
There is an old saying: when two elephants are fighting, get out of the way