It is rather ironic that for a highly rated engineer-turned-economist, the twilight of his career should have been triggered not by technical disagreements with his employer, but by a breakdown of cultural communion.
Dr Subramanian Swamy may or may not have been right in suggesting that the outgoing Reserve Bank of India's (RBI) Governor did not have a "sufficiently Indian" mindset. But there is no doubt that Raghuram Rajan approached his job in India technically, without taking into account the country's cultural underpinnings and aspirational urges.
Even if Rajan did not end up as the proverbial fall guy, he lent himself to becoming a stick to beat economic woes with; "he damaged the economy" it was bluntly said in government circles. The perception was that despite Prime Minister Modi's untiring efforts and India's economic parameters being very sound, India was not moving fast enough.
People have been asking with increasing frequency as to why, despite highly favourable oil prices, rising FDI and political stability, the economy is merely jogging along instead of racing ahead. A growth rate of 7.6 per cent in current global conditions, particularly China's slowdown, is obviously impressive. But by describing India as "Andhon mein kana Raja" (the one-eyed is deemed king in a gathering of the blind), Rajan may have run down his own achievements. He also demonstrated a less-than-patriotic enthusiasm to play cheerleader, expected to tom-tom his government's achievements, rather than be economical with his praise.
As a UPA appointee who took office in September 2013, Rajan's instincts were decidedly conservative. He was inducted into a key policy-making position by Manmohan Singh at a time when the then government was battling corruption charges on several fronts. Consequently, those were the heydays of "policy paralysis". The UPA government in its last years was content with conducting a holding operation rather than experimenting with new schemes or economic boosters. In the aftermath of the 2008 global depression, Rajan may have rightly pitched for a slow and steady approach, although that was not the best prescription to go into election mode.
From all accounts, public mood in India in 2013-14 was one of anger and disgust. Corruption scandals, especially the humungous spectrum scandal followed by the even more gigantic Coalgate scam, accompanied by prolonged economic stagnation, was testing popular patience. At that point, Modi's robust campaign playing to aspirational chords of the youth and the promise of "acchhe din" aroused astronomical hopes of an economic turnaround. Modi wove magic assuring the launch of an Indian Century.
Thus when the NDA Government came into power in May 2014, it was riding the crest of a wave of optimism and faith in the instant transformation of the economy. Perhaps Modi made the mistake of retaining Rajan at the helm of economic policy-making, assuming he would read the political signals and change appropriately. With a trusted confidant, Arun Jaitley, as Finance Minister, Modi may not have been wrong in his assumption.
The economy, in any case, was beginning to look up, although inflation was still not under control. Rajan decided to prioritise pulling the leash on inflation over rapid growth, as skyrocketing prices of essential commodities was a key factor in the UPA's dramatic downfall. His tight money policy indeed helped to keep inflation in check.
A basic economic law is that tight money policy curbs price rise but simultaneously restricts growth. Investors are loath to put their money where their mouth is, expecting the government to shell out funds for public projects. On its part, the government was unwilling to go beyond budgeted sums as Jaitley's priority was to stay within the fiscal deficit target, something he commendably achieved.
Was Rajan too dogged in refusing to cut interest rates? Arguably, a significant cut would have spurred more withdrawals from banks and FIs, thus investment in industry could have seen a steady rise. The economic stagnation encountered during 2012-14 was in no small measure caused by two successive monsoon failures. All these factors appear to have made Rajan even more conservative than his own natural instincts. Although he never spelt this out categorically, it seemed he was unwilling to touch interest rates till the onset of the monsoon, hoping like everyone else that the rains in 2016 would be bountiful and therefore give a spurt to rural demand which had been sluggish for long.
In theory, the RBI chief was not wrong. He had often emphasised that an increase in inflation could wipe out all the gains made by the economy in a tizzy. But this is where his conservatism clashed with the political and cultural demands for rapid growth. Rajan failed to internalise that the middle class was straining at the leash and wanted to see India gallop into double digit growth. But the visible indices of galloping growth, such as a spurt in sectors like real estate, simply refused to materialise. Overawed by massive amounts of bad debt and mounting NPAs, public sector banks were unwilling to open their vaults to fund dicey projects, especially real estate, where oversupply had taken a toll of viability. Rajan's emphasis on increasing savings fell on deaf ears because the middle class was by now impatient to spend, not save.
But the bigger cultural problem Rajan faced was his natural temptation to talk policy issues openly. Although not necessarily a bad thing, the RBI chief got embroiled in unnecessary controversy by his remarks on policy issues like interest rate cuts. He got riled by comments against him made by persons like Dr Swamy who took a high nationalist ground and made Rajan look like a person not fully wedded to the country's interests.
Never before has India had an RBI chief who has been in the limelight in this manner. Over the last few weeks l, speculation over his continuation has been similar to that of, say, MS Dhoni continuing as India's cricket captain. Evidently, Rajan failed to make friends in important places; his critics ran away scoring goals from afar which he failed to deflect.
Understandably, it is difficult for a professional to work effectively in this environment. Although the RBI Governor is not required to bow to populist pressure, it is necessary for him to understand that pressure and why it is surging. India's urge for quick and sustainable economic growth and people's expectations of the Modi government are factors any policy maker had to take into account.
Rajan appeared too distant and uncaring about India's aspirations. That was his unmaking.
(Dr. Chandan Mitra is a journalist, currently Editor of The Pioneer Group of Publications. He is also BJP MP of the Rajya Sabha.)
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