Behind Rajan’s Exit
The outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan has dominated the news headlines over the last one week. The habitual Modi-bashers say that Rajan has been forced to go back to the Chicago University where he is a “tenured Professor” after the completion of his term in the RBI in September. Interestingly, it is Rajan who broke the news that he would leave, not the Modi government. On the contrary, as I have argued elsewhere, there was every indication that he was about to get an extension. If I am writing on Rajan’s issue again, it is because the controversy refuses to die and there is a new dimension to it that I have come across since I wrote on the subject last.
Let it be remembered that Rajan has been on leave from his University over the last four years. He came to India first as Chief Economic Advisor, Finance Ministry in 2012, and then after a year, he was appointed the RBI Governor for a period of three years. So far, nobody has verified whether the University of Chicago was going to extend his leave beyond September 2016 for him to be able to continue as the RBI Governor on an extended tenure. Since he is a tenured Professor (a permanent position in an American University that enables one generally to continue working as long as he or she wants with no age-limitation) of some gravitas (his expertise being in banking, corporate finance and economic development) at a very important institution, it is quite possible the Chicago University wanted him back.
It is against this backdrop that I find a recent report in the Economic Times interesting. According to this report, the Modi government was prepared to give Rajan proper extension (of two to three years), But the outgoing Governor only wanted a “short extension”. Maybe Rajan would have managed from his University an extended leave of few months, not more. And since, Rajan’s first love has always been “academics”, he could not have risked his job in Chicago University to continue as a short-term administrator of the RBI, howsoever important assignment in his home country that may be (contrary to speculations, Rajan continues to be an Indian citizen).
Be that as it may, if the controversy over Rajan’s exit in September remains live, it is essentially because the whole issue has been highly politicised. And for this, Rajan himself is partly responsible. With the deepening fractures in Indian polity because of the failure on the part of the dominant intellectual and political elites in India to recognise the legitimacy of Narendra Modi as the Prime Minister of the country, Rajan has become a big hero for all the habitual Modi-bashers. As a result, Rajan as an individual has been projected more important than the RBI as an institution. Secondly, attempts have been made to make the RBI under Rajan to be completely autonomous of the Central government, which has never been the case in Independent India’s history. RBI, all told, is a part of the Government of India, for which it is the political executive that is finally accountable.
Historically speaking, the RBI Governor has been a political appointee of the government of the day; his ultimate Boss being the Prime Minister. As noted journalist Sanjaya Baru, Press Advisor to former Prime Minister Manmohan Singh, says, “From Jawaharlal Nehru to Manmohan Singh, every single prime minister has appointed his trusted man (and till now, it has only been a man!) to the job. Morarji Desai appointed the highly-talented IG Patel in 1979 and when his three-year term ended, Indira Gandhi did not give him an extension. She replaced him in 1982 with Manmohan Singh. Rajiv replaced Manmohan Singh at the end of the latter’s three-year term. With the exception of S Venkitaramanan (1990-91), all governors appointed by one prime minister were replaced at the end of their term by the next one. Subba Rao secured a second term from the same prime minister who gave him his first. Modi has merely kept in step with precedent.”
I think Baru, incidentally a former colleague of mine, makes enormous sense. Only I do not agree with him when he says that “Modi has kept the step with precedent”. Because, in the case of Rajan, we cannot be certain that Modi would not have given him an extension. All told, it is Rajan who said that he would be leaving; he was not asked by the government to leave.
There are no doubts, and it is India’s pride, that Rajan happens to be one of the world’s leading economic thinkers. But to infer, as his supporters have, that his exit will also mean the exit of tens of billions of dollars from the Indian banks is totally unwarranted. On the contrary, such an assessment gives Rajan’s critics like Dr. Subramanian Swamy to doubt his integrity.
Let me share one such nasty post against Rajan in the social media that reached me: “How many of you remember when Swamy told everyone that Raghuram Rajan had set a time bomb which will explode in Dec 2016. Many ignorants laughed at him. Let me expose his deeds naked. No Media will expose him. I can challenge Mr Raghuram Rajan knows it …..Just after he became Governor, he devalued Indian currency and Rupee started falling. Then citing reasons of Rupee fall he purchased 28 billion USD bonds which helped USA to recover from disaster. Most surprising fact, he while purchasing 28 billion USD bonds put maturity date as Dec 2016 which is (his) post retirement. Now Indian Banks have to pay this 28 billion USD to USA. Do you know what the amount is? 1.33 lakh crore and this has to be returned till December.”
It is true that there have been occasions when there have been animated discussions between the officials in the Finance Ministry and those of the RBI over the anti-inflationary measures such as cuts in rates of interests, but ultimately the views of Rajan have prevailed, with both Modi and Finance Minister Arun Jaitley standing by him.
It is also true that two important policy objectives of Rajan — his targeting of the retail inflation as the main thrust of monetary policy, and his forcing of the banks to come clean on the stressed assets — have invited adverse reactions in many quarters, particularly from all those “crony capitalists” who want cheaper interests but are reluctant to deposit their money in the banks. The likes of Subramanian Swamy argued that Rajan has “killed” the small and medium enterprises. However, my RBI sources say that in this “battle against the RBI Governor”, he has been fully supported by the Modi government, or at least those who ultimately matter in this government.
In my considered opinion, differences between the RBI under Rajan and the Finance Ministry over the country’s monetary policy have not exactly been a bad development; in fact, healthy differences are fine as long as there is an agreement in the final analysis. And that is how it has been the case between the Modi government and Rajan, even though the latter was appointed by a previous government. The real problem, according to me, has been the fact that on many occasions Rajan failed to appreciate that as long as he was an employee of the Government of India, he should not air his opinions as a public intellectual that he was as a University Professor. And that too his opinions were against the government of the day. And worse, all these were his political or quasi-political opinions.
Rajan talked about, directly or otherwise, the lack of rights to dissent under Modi; the credibility of Modi’s Make-in-India programme, which according to him should have been “Make for India”; the validity of the Modi government’s claim that it has achieved 7.5 per cent rate of growth by saying that “In the land of the blind, the one-eyed man is king. We are a little bit that way”. It is a fact that Rajan’s choice of words, the metaphors that he used, unnecessarily gave a handle to Modi’s critics, particularly the Congress leaders, to give quirky interpretations like ‘who is this one-eyed king that Raghuram Rajan is referring to?’
And yet, I will like to stick to my point after talking to my sources in the government that Modi was very much inclined to give Rajan an extension. On record, Finance Minister Arun Jaitely has described Rajan to be “very bright”. Prime Minister Modi is quoted to have said that Rajan has been his “best teacher” in explaining complex economic issues to him. Not only this, “The Prime Minister backed Rajan in the monetary policy panel’s composition and blocking moves to strip the RBI’s authority to regulate government bonds and manage public debt. Modi’s office also directed the Finance Ministry to pursue only those policies where there was agreement with the central bank”, said an India Today report. Therefore, it does not make any sense when one says that “under fire from BJP, Rajan heads for the door”. Did the BJP president ask him to go? Did any BJP secretary or authorised party spokesmen say so?
That is why I continue to believe that Rajan has been a victim of those who claimed to be his friends. These friends, almost all of them being habitual Modi-bashers, succeeded in creating a climate for Rajan to distrust the government. They are least interested in Rajan, who, in any case, has a secure future in Chicago University. Their main ploy was to score a political goal against Modi. And it has so happened that Rajan allowed himself to be the football in this game.
By Prakash Nanda