Rajan's exit no surprise in Modi milieu

The Modi Government would have been relieved with the decision of Dr Raghuram Rajan, Governor of RBI, to return to academia, at the end of his three-year term on September 3, saving them the embarrassment. His brief statement on his decision, "after consultation with the Government" gives the case away, namely, that Modi Government was not inclined in his favour. Whatever be the "good work" done by him, as Jaitley puts in obligingly while also trying to make it appear that it is Dr Rajan's decision which Government "respects". The Finance Minister added that decision on Dr Rajan's successor would be announced shortly.

Dr Rajan's announcement late on Saturday afternoon came as no surprise to astute observers of the goings-on in the Modi Government, in the context of the unrestrained personal attacks on his three-year stewardship of India's Central bank by the BJP protege, Dr Subramanian Swamy, and the calculated silence on the part of the Prime Minister or his colleagues to repudiate even baseless charges hurled by Swamy.

Also, apparently, Dr Rajan sensed the Government's mind in the manner of its setting up a panel headed by the Cabinet Secretary to select Governor or Deputy Governors of RBI, a new mechanism though Dr Rajan was also to be associated with it.  And there seemed to have been no attempt to persuade Dr Rajan to reconsider his position.

In the three years of his Governorship, Dr Rajan earned the reputation of controlling inflation, bringing it down from double-digit to single-digit levels on a trajectory of the disinflationary process. 

Undoubtedly, a steady fall in world oil prices facilitated the monetary policy management and holding down current account deficits on a sustainable basis, along with measures he had announced on the first day of taking over on September 4, 2013, for mobilising NRI deposits on the foreign exchange account.

Even more, the fall in oil prices came as a windfall for the Modi Government to cut down fuel subsidies and beef up its finances enabling Finance Minister Jaitley to adhere to his fiscal consolidation targets in fiscal 15 and fiscal 16 and establish his credibility and contribute to macroeconomic stabilisation in the aftermath of low growth of economy.

Dr Rajan would have liked to "see through" some of the developments in the financial sector he had involved himself in, such as clean-up of the stressed banking sector and other reforms, but the Government was not ready to retain Dr Rajan even for a limited period as he wished, though some reports appear to suggest it was Dr Rajan who was not willing for a longer term extension.

Though Dr Rajan will still be at the helm over the next two and a half months and it should help him steer over the spillovers from volatile global financial markets, especially if the UK referendum vote on Brexit on June 23 went in favour of exit from the EU, which is most unlikely, his decision to return to the academia as early as September, when his three-year-term expires, has had an unsettling effect both at home and abroad.

Dr Rajan's global reputation as an economist with an innovative mind and the admiration he has earned for the RBI through his monetary management over the last three years contributed a great deal to the current macroeconomic stability that India has achieved in the aftermath of the 2013 exchange rate crisis, along with growth recovery.

One of the major gains from Dr Rajan's intuitive approaches such as attracting NRI foreign exchange deposits helped to build-up a strong cushion in India's foreign exchange reserves, whose level had gone up to a level as high as 360 billion dollars in recent weeks.  Dr Rajan has also put in place an arrangement for the smooth redemption of some of these deposits totalling around 25 to 30 billion dollars in the latter half of 2016.

The government is expected to name a successor to Dr Rajan in August and there is general hope that there would be broad continuity in the prudent monetary policy that has evolved under him. At the same time, the Modi Government would expect a new head to recalibrate monetary policy toward greater emphasis on growth. 

But there would be both economic and political challenges for the Modi Government from now on, even if India remains a vibrant economy with the highest rate of growth, given the rising inflationary expectations and lack of private investments, which could even trigger a spurt in public investment, to revive all round confidence.

Already, Prime Minister Narendra Modi has begun focussing on winning the UP election in 2017, which could largely determine the outcome of the next Lok Sabha election in 2019 as well. Thus, fiscal and monetary policies would be in-tune to the political objectives of the BJP leadership.