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RBI Governor Raghuram Rajan's Exit Makes Modi Government Look Petty

18/06/2016 9:57 PM IST | Updated 18/07/2016 8:52 PM IST
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Reserve Bank of India (RBI) Governor Raghuram Rajan listens to a question from a journalist during a news conference at the RBI headquarters in Mumbai, India, Wednesday, Dec. 18, 2013. India's central bank surprised many Wednesday by keeping its key interest rate unchanged despite the worrying rise in inflation. (AP Photo/Rafiq Maqbool)

In two sentences announcing he will be stepping down as the governor of the Reserve Bank of India, Raghuram Rajan has made it clear he's being booted out.

"While I was open to seeing these developments 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. I will, of course, always be available to serve my country when needed," Rajan has said in a message to the staff of the central bank.

The phraseology makes it clear that the government has indicated to him his second term is not coming. The choice of words also makes it clear he was open to a second term.

A government has every right to choose its own central banker under the Indian system, but the way this government has handled the whole controversy leaves an entirely avoidable bad taste in the mouth. It gives a wrong signal to the markets and to investors, gives rise to all kinds of speculation, and shows the Modi government as petty and unappreciative of good talent.

The government can't pretend Subramaniam Swamy's activism against Rajan was his private business. Swamy started calling Rajan unpatriotic and other names after he was given a Rajya Sabha seat by the Modi government. The government now appears to have used Subramanian Swamy to do a hit-job against a celebrated central banker, politically de-legitimising him to create the climate for his exit.

It didn't have to be this way. The government could have done it quietly, with dignity, without controversy. At best, the government could have indicated a difference in economic vision.

No matter how great a central banker Rajan is, no individual is indispensable. Yet the politicisation of Raghuram Rajan's extension issue sends out the signal that this government brooks no dissent, it wants the heads of even autonomous institutions like the RBI to toe the government line and pay obeisance to the prime minister on a daily basis.

As Pratap Bhanu Mehta wrote, "When government creates a credibility crisis for itself, premium on anyone who looks half-credible goes up." Rajan will go back to his academic career as a man who did well at the Reserve Bank of India, he will continue to win laurels, but it is the Modi government's own credibility that is at stake here.

It seems like prime minister Modi can't tolerate an outspoken man with a mind of his own, so what if he's said to be the best man for the job. The government puts a cricketer to run a fashion institute, a C-grade filmmaker to head the censor board, an actor to head the country's premier film institute, and so on.

Analysts have gone to the extent of saying that billions of dollars in foreign investment may be gone with Rahuram Rajan's exit. It's being called "Rexit", similar to "Brexit," the proposed exit of UK from the European Union that is likely to have an adverse and unpredictable fallout on Britain and the global economy.

No one can doubt Rajan's achievements during his three-year tenure. He actively took on inflation, and went to war with the non-performing assets that public sector banks were saddled with, partly due to loans to crony capitalists on the direction of political masters. In his note today to the RBI staff, he has said his work on both fronts, inflation and bad loans, are both unfinished. There's thus bound to be speculation that Rexit is the victory of crony capitalism.

The world at large celebrates Raghuram Rajan, but the Modi government, it seems, would rather have a banker who will run monetary policy at its bidding and will also not express public disagreement with the government, however mild it might be.

That is not how a mature democracy ought to treat the central bank and its governor.

Booting out a man instrumental in bringing about hope in the Indian economy could cause at least short-term tremors in the stock, currency and bond markets.

In the opening lines of his note, Rajan has replied all his critics: "I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the "Fragile Five"."

Success is the best revenge, and Raghuram Rajan's success will be remembered over the Modi government's pettiness.

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