Millennium Post

Poorly handled

 In an email message to his colleagues, Rajan said that he will return to academia once his term at the Central bank ends. Whether the Central banker’s decision was the outcome of a sustained political campaign against him or purely on account of personal reasons remains shrouded in mystery. In his letter, however, Rajan implicitly asserts that the government did not wish to extend his tenure. “While I was open to seeing these developments (formation of the monetary policy committee and the bank clean up initiated under the Asset Quality Review) through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016,” he wrote. 

Rajan has been under a sustained attack from sections of the ruling Bharatiya Janata Party, led by its Rajya Sabha lawmaker Subramanian Swamy, for what they term as his failure to lower interest rates and boost economic growth. Swamy also alleged that the UPA-appointee was "not fully Indian”.  A government has every right to pick and choose its own Central banker.

 But the manner and circumstances of his proposed departure will leave a bad taste in everybody’s mouth, including the Centre. No RBI Governor in recent memory has been subject to such personal attacks by a member of parliament.

 The Centre’s feeble reaction to the tirade against Rajan leaves the impression that it used Swamy to create the necessary political climate for his exit. It seems that the NDA government would rather have a banker who will run monetary policy at its bidding and will also not express public disagreement with the government.

 When he took office in September 2013, Rajan had his task cut out: inflation was rising untamed at 9.52 percent and the rupee was in freefall. Under his tenure, the rupee has stabilised and inflation has halved, although the latter is not entirely down to higher lending rates. In response to a recent spike in retail inflation from 4.83 percent in March to 5.76 percent in May, Rajan left the short-term lending rates unchanged, despite pressure from certain quarters of the industry and the ruling party to reduce them.

 Global demand is still sluggish, crude oil prices are rising once again, food prices are rising and the seventh pay commission is going to put more money in the hands of consumers. Thus, the chances of rising inflation are indeed high. Rajan's decision to keep the rates unchanged reflected caution in the face of misguided optimism, which has always irked the government. The RBI is aiming to contain retail inflation to around 5 percent for the current fiscal.

 “Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading. Instead, what is important is sustained low inflation,” Rajan once said. Retail inflation, especially, food inflation, has a debilitating effect on the purchasing power of both the poor and middle class. The numbers suggest that Rajan has overseen a relatively successful attempt by the RBI to tame it. Moreover, the notion raised by the likes of Swamy that small businesses have been uniquely hurt by the Central bank’s interest rate regime is not substantiated by the evidence available.

 Recent data from the Ministry of Corporate Affairs indicate that small enterprises are in fact doing better than their larger counterparts. Speculation is rife that many in the establishment and the corporate sector did not want Rajan to continue because of his insistence on controlling inflation than cutting interest rates to make credit cheaper for industry. 

One must also note that this month also witnessed Rajan’s last solo monetary policy statement before the government sets up a monetary policy committee (MPC). The MPC’s sole task will be to target inflation, taking away the RBI governor’s veto powers. One hopes that the MPC can stand strong in the face of government and corporate pressure.

 One of the major tasks that Rajan has undertaken is the proposed clean up of the public banking sector. Swamy’s claim that bad loans have doubled over the past two years under Rajan is laughable. It’s clear that bad loans have doubled only because the RBI Governor has forced the banks to recognise them. 

 For years, Indian banks, especially those in the public sector, have lent rather recklessly to big business without due diligence. Bad loans of public sector banks touched an all-time high of Rs 5.4 lakh crore in FY16. The lack of accountability shown by large corporate borrowers has compromised India’s financial system and raised the cost of acquiring credit. 

By using their political connections and working the overburdened judicial system, these massive corporate entities continue to default on their loans, without paying the price for it. Rajan sensed the deep rot in India’s banking system early on in his tenure. In 2014, he began working on NPAs. One criticism of the Rajan-led RBI is that its call for "deep surgery" came late. 

It’s hard to gauge the reasons why it took Rajan two years to recognise the rot and take harsh corrective measures. But a CEO is only as good as his accounts department. This is probably why he has not lost any real credibility in the public eye. Nonetheless, Rajan decision to clean up the balance sheets of Indian banks has stirred a hornet's nest.

 Banks have started cracking the whip on Indian companies for repayment of loans. The most affected industrial behemoths, which include the Anil Ambani-led Reliance Group, Essar, Adani Group and Jaypee, could be forced to sell prized assets to repay their burgeoning debts. Rajan’s exit will definitely bring cheer to many of these corporate chieftains who are in the Prime Minister's Councils of Advisors. Relief will also spread to officials in the upper echelons of our state-owned banks, where many actively took part in the malfeasances that left the banks mired in bad debt.

 One hopes that Rajan’s successor will continue with the reform impetus he has offered to the banking sector. If his successor fails, it could take the sector and the Indian economy a few steps back. Yes, the RBI is not a one-man show and his exit may not necessarily be the precursor to doomsday for the Indian economy. But why rock the boat, when you have a Rajan, who has brought credibility to the job? 

In a recent editorial, Mint argues: “The Reserve Bank of India will survive the departure of its governor in these unfortunate circumstances. But one of the few surviving quality institutions left in the country has been rattled badly. One of the main achievements in recent years has been rebuilding the credibility the central bank lost during the inflation crisis, thanks to fiscal profligacy in New Delhi combined with the delay in rate hikes in Mumbai.

 Rajan played a big part in that process of rebuilding credibility — through a new monetary policy framework, higher interest rates and, yes, his personal qualities.” However, Rajan’s importance to the Modi government is more than just restoring the credibility of the Central bank. In a recent column, noted policy guru Pratap Bhanu Mehta writes: “RBI governors have constraints on what they can say, and what is appropriate for them to signal. 

But still they can provide some reassurance of a counterweight to government spin. What the government needs to understand is that even in an age of spin, acknowledging bad news might actually enhance your credibility. The premium on the RBI governor is that he is the font of reassurance that someone might actually be willing to state the bad news.”

 His recent comment on the Indian economy, where he equated all the talk of India as a “bright spot” in the global economy as akin to a one-eyed person in the land of the blind, was a testament to that quality of truth-telling that any government needs.
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