Raghuram Rajan “resigns”

India may well regret seeing off a sober money-man if it now lets slip the dogs of boom

This weekend saw the announcement by Indian central bank chief (and former IMF director) Raghuram Rajan that he would not take up a second period where, appointed by the previous Congress administration, he has been in post since 2013. Instead, Rajan will return to the University of Chicago’s Booth School of Business. There he is Distinguished Service Professor of Finance, and has been on an extended sabbatical that has seen him steady and even turn around India’s economic situation.

At least that is what some say. Others, such as deadly loose cannon Subramanian Swamy, who campaigned for his removal, accuse Rajan of hobbling India and indulging in egotistical grandstanding, to the government’s and the nation’s detriment.

Strictly speaking, Rajan’s announcement that he would return to the USA after 4 September 2016 was not a resignation. As Swamy delighted in pointing out, a second term as Reserve Bank of India boss had not been offered, so it was more akin to quitting before he could be sacked.

There is somehow bad blood here between Swamy, a formidable political operator and assassin, and Rajan. Both men have Olympic-size egos; that goes with the territory. Swamy seems offended that Rajan is not powerhousing the economy. In other words, he disapproves of the RBI governor’s monetary rectitude and his refusal to drop interest rates fast enough, whereas Swamy would like to open up the afterburners for economic growth. But it is not only that. Swamy, an ex-Congress administration minister (though never a Congressman) has swung around from once being an intimate of the Gandhis to being their BJP-hired nemesis: he is even attempting to secure jail time for Sonia Gandhi, and Swami often (some might say always) gets what he wants.

Rajan, of course, was appointed not by Modi and the BJP, whose attack dog Swamy now is, but by the previous Congress-led government. Swamy sees this as prima facie evidence that Rajan, in ‘holding back’ the Indian economy by not allowing easier money and looser investment conditions (for example Rajan’s insistence that public sector banks’ bad loans are admitted and debt whittled down before more expansion is undertaken), is really working against the BJP administration. For Swamy, Rajan is nothing less than a destructive agent of the exiled Congress, and it is true that the RBI chief does tend to shoot his mouth off and criticise the BJP and Modi in public, speaking out on a range of topics that a central bank governor would normally have no business commenting on.

But as I say, Olympic-sized egos go with the territory in these media-soaked days, where to remain visible and influential one must constantly generate headlines, as Swamy himself well knows.

A few words need to be said in Rajan’s defence. First, he has certainly steadied the ship, so to speak, and I believe has acted in a responsible way by not opening the credit spigots when he could easily have done so – and this was especially virtuous while under pressure from politicians, who would have benefited directly and publically from a faster rate of growth. India’s GDP is rising at 7% or more now, the highest in the world, but it could perhaps have been even a couple of percentage points higher if Swamy would have had his way.

That would be good, no? Actually, no. India entered the new BJP era with terrible non-performing debts and a cratered economy from a decade of Congress malfeasance. Simply using improved conditions and the fresh reputation of a dynamic new PM to supercharge the Indian economy would certainly have stimulated growth, but only by front-running real productivity. In other words, it would have been a credit-led boom, leading eventually to an outsized debt hangover. To his credit, Rajan was dead set against that.

Remember, when he was at the IMF Rajan was one of the very few economists warning against the oncoming financial crash in 2007. He was shouting himself hoarse about it and his only reward was to be ridiculed as a Luddite who did not understand the new financial realities of an endlessly prosperous planet. The Great Crash proved that Rajan know exactly what he was talking about, and he wrote a very good book, Fault Lines, in the aftermath, in which he warned that the problems leading to the credit crunch and depression have not gone away.

Thus, when he was given India to look after, Rajan decided to put into practice the fiscal conservatism that the greedy financial wreckers of the world economy had ignored in their giant bankruptcy party. Interest rates are still rather high in India; there is not the level of investment there might have been by now – although that is by no means all down to RBI policies. The economy is developing slowly but nicely, and in accord with Modi’s structural programmes and reforms, not least the upcoming implementation of the revolutionary Goods and Services Tax (GST) which will rationalise and make efficient vast swathes of the Indian economy, making it more modern and finally supplying the government proper tax revenues to improve society.

The GST, incidentally, is something that Swamy, despite it being Modi’s baby, wants to derail. Of course Rajan’s rule has not been perfect and there were mistakes made and things that could have been done better (see here for a list, not all of which I would agree with, but a good list nonetheless). Indeed, compared to Yellen or Carney or any other of the worst-ever generation of central bankers currently ruining the world economy, Rajan stands out as an Einstein. If you want to invest, India is the one country left where you will see a return on your money, the one place left that does not look as if it will be swallowed up in the tar-pits of ZIRP deflation and eternal debt.

That was not a foregone conclusion, and Rajan should be thanked for the opportunities he has offered to India. Modi knows this very well, which is why he abided Rajan’s big mouth without complaint. Swami’s mouth is equally as big, and although I have affection and great admiration for that political cobra, I would not relish being the snake-charmer as he looked me in the eye.

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