ONE of India’s favourite parlour games came to an end on June 18th wrote The Economist and predicted that a period of uncertainty beckons amid suspicions of political interference in India. The reputed British magazine was on the dot because Raghuram Rajan, the 23rd Governor of Reserve Bank of India (RBI), during his three year-stint gave unprecedented stature to the job by cleaning up the banking system, bringing inflation under control (10.5% to 5.67%), stemming a sustained fall in the rupee and strengthening foreign exchange reserves (from $275bn to $363 bn) to help India deal with global shocks. If compared with what is happening in economies like Brazil, will make one understand the importance of what he has done in the past three years.
The big question is why Mr Narendra Modi decided to oust his well-regarded central banker?
Only a year back, on 80th Foundation Day celebrations of RBI, he had praised him saying that both Rajan and his government thought along similar lines. He acknowledged his dependence on Rajan to understand complex economic issues. Then why this sudden change?
The disillusionment with Rajan began soon after the BJP gained absolute power. Rajan, being a much sought-after person, was fearless and began to express opinions without caring for those in power. He commented on big political economy issues without consulting anyone. The political leadership was riled when in a 2014 speech at Mumbai, Rajan said: Of course, there are many politicians who are honest and genuinely want to improve the lot of their voters. But perhaps the system tolerates corruption because the street smart politician is better at making the wheels of the bureaucracy creak, however slowly, in favour of his constituents. Later his views on intolerance and PM’s Make in India mission further intensified political bitterness against him. The support from P. Chidambaram and Yashwant Sinha further intensified BJP opinion against him. Almost during the same period there were whispers that three to four Cabinet Ministers were quite critical about his piloting the RBI and not agreeing to reduce interest rates. The BJP had promised to reduce interest rates to improve growth. This was the first lobby that began to gather against him.
The second lobby against him was in the Finance Ministry because of a feeling that the position has been snatched from them. Since RBI was established, its Governor, invariably, has been a top bureaucrat from the Finance Ministry. Of the 23 Governors, 12 were from ICS, IAS, LIC and IAAS and six were Finance Secretaries. Only five, including Rajan, were professional bankers or economists. Of the five, two were only for one month, to keep the seat warm for the waiting bureaucrat to finish his assignment.
Sharp disagreements began to develop more than a year back on implementing the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC). Rajan, believing in the popular American belief don’t repair till broke, termed some of the suggestions as faddish and impressionistic. Relations further deteriorated early last year when the Government decided to transfer the management of public debt to another agency without consulting Rajan. However, some measures were withdrawn when Rajan protested. Differences intensified when the government decided to appoint Deputy Governors by a new committee headed by the Cabinet Secretary.
Another cause of edgy relations was on the monetary policy framework agreement. The RBI, was given the responsibility of keeping inflation at four per cent (within a +/- two per cent band). It wanted a bigger role for the Governor and a larger representation for its representatives in the Monetary Policy Committee (MPC) that would decide on crucial issues including policy rates. While the discussions were going on, some papers claimed that Rajan sought a Cabinet Minister rank for the RBI Governor and that of Minister of State for RBI’s Deputy Governors. The Government was against it and had declined ministerial status even to the top advisors in PMO like the National Security Advisor and the Principal Secretary.
The third lobby to become interested in the ouster of Rajan was that of industrialists. A nexus had developed over the past several decades between a syndicate of politicians-industrialists-bankers to siphon off depositors money. Huge loans were given to industrialists who never repaid it and were written off. Rajan initiated a process of cleaning up the bad loans of Rs 3,41,641 crore that upset India’s powerful and indebted industrialists.
The guv as he is popularly known in RBI is leaving and the Government’s credibility of retaining talented persons is falling. Nobel laureate Amartya Sen rightly told a TV channel that India is losing one of the most skilful financial economic thinkers in the world. It is sad for the country and it is sad for the government of the country too.Though India will move on, as it has during the worst of crises, Rajan will be remembered for a long time to come because he took charge of RBI when the economy was battling a currency crisis. He dextrously stabilised the economy, restored the RBI’s credibility and carried out a structural revolution in monetary policy in just three years.
What was to happen had happened and cannot be undone. But the government should handle the exit of global icons like Rajan in a more courteous way. Persons not acceptable to the Government have been asked to go in the past but with a certain amount of grace. Here the foul-mouth-method has been used. More worrying would be if a newcomer were appointed to reduce interest rates at the cost of higher inflation or becomes soft on banking reforms. Most dangerous thing is that hounding wolves have tested blood and more may be targeted in the coming months. Nominated-MP, Subramanian Swamy, has declared that his next project is to expose 27 bureaucrats who are in various Ministries and loyal to Sonia Gandhi.
(Author Dr. Halan, a commentator on politico-economic affairs, is the former Resident Editor of Financial Express and past Member of Press Council of India)