One cannot understate the importance of the Chief of the Central Bank. Just look at what Alan Greenspan did to USA and consequently the world. Recently, BJP leader Subramanian Swamy, in all his wisdom, suggested that Raghuram Rajan is not the right RBI governor for India, giving the following reasons:
"His move to increase the interest rates, so as to cut down inflation and stabilize the economy, has backfired and has badly affected the nation,...,All the industries have collapsed and as a result unemployment has increased. In my opinion, he should be removed as early as possible."
The economy of a country is a shared responsibility of the government and the Reserve bank of India. So is Mr. Swamy criticizing his own government too?
While Swamy's views do not necessarily represent those of his party, the general mood seems to be that Rajan will not be given an extension due to bad performance.
On the other hand, Raghuram Rajan seems to want another term as RBI chief, as he says there is more to do. We should not just go by Rajan's impressive résumé, for as Swamy rightly points out, his international stature and knowledge does not make him automatically fit for the Indian job. It's like the argument usually thrown against foreign coaches -- they might not understand the Indian team ethos. Just that Rajan is Indian. He studied in IIT and IIM. That is the Indian dream!
Such an important decision for the country deserves more analysis. A good point to start would be the criticism of Rajan offered by Swamy. He claims that unemployment has increased in Rajan's term as RBI chief. This is factually incorrect if you go by what the Bureau of Labour statistics suggests. Moreover, loss of jobs is also a failure of the BJP government. The economy of a country is a shared responsibility of the government and the Reserve bank of India. So is Mr. Swamy criticizing his own government too? The other points made by him are no secret. Indeed one of the main goals of Rajan as RBI chief was to contain inflation, and prevent bubbles like the ones observed regularly in the US. To that effect, even Swamy agrees that Rajan has been successful. Also, Swamy, and indeed many Indians, do not give enough credit to the soundness of Rajan's economic knowledge. To claim that he will not understand the economics of a developing economy is to grossly underestimate Rajan's calibre, his "Indianness", and indeed the entire economics community.
To claim that he will not understand the economics of a developing economy is to grossly underestimate Rajan's calibre, his "Indianness", the entire economics community.
While Rajan admittedly has not done enough to rescue the economy from troubled waters, there are many reasons why he is the most suited for the job. Here a (non-exhaustive) list:
1. Continuity of Reserve Bank policies
An economy is a complex system. The effects of the policies are seldom well understood, and there is never a clear consensus on the correct action. What is, however, agreed upon is that a policy must be given time for the market to adapt to it. Rapidly changing policy directions would obfuscate the sources of change due to the policy. Three years is too small a timescale to judge a policy. What can be objectively evaluated is whether it has caused a massive crash, or brought into motion an unending recession. Neither of those things happened, so the policy has not yet failed. Who better to continue the policies to their fruition than the one who implemented them?
2. Protection of the economy from international forces
Rajan has been going around the world explaining the need for an international financial body to monitor the monetary policies of countries, which at times can be destructive, almost war-like. His stature also helps India push through its views to the international stage, where he also gives his perspective as the Central banker of India. He is thus the best placed economist currently to understand the dynamics of international trade on economies and plan accordingly.
Rajan's strategy... is frustrating for the BJP, which wants to show impressive results after three years -- they fear that Rajan might postpone the party.
3. Success as RBI chief
Rajan has so far succeeded in his modest goals in office. He has successfully curbed inflation. Inflation and growth go together, and this means he has willingly sacrificed some growth, just like China did few years back. By not lowering the interest rates, he has ensured that no major bubbling occurs, and the economy consolidates. By pushing the government, he ensured that the fiscal deficit is kept low, so that we do not entail crippling debts. By pushing the banks, he has ensured that bad loans are brought to book, instead of carrying them over till a crisis happens.
Yes, he may have been a little overcautious, but it's better to err on the side of caution, a dictum that makes all the more sense when you see the American model falling into one crisis after another. To be fair to Rajan, if all goes right, we'll hit the pedal.
4. Long-term thinking
I think the essence of the debate really is whether we should we adopt policies which give us profit in the short term but are riskier in the long run (American model) or instead make policies which provide less profit in short term, but are solid enough to make profits in the long term. Rajan's strategy is clear. It's also natural that this is frustrating for the BJP, which wants to show impressive results after three years -- they fear that Rajan might postpone the party.
In short it would be incredibly foolish of India to let go of Raghuram Rajan when he is willing to ably serve the country. If we do, we will lose parity in the Indian economy, and will give a free rein to the government, which will look to gain short-term profits at the expense of risking the future. India cannot afford a crisis, unlike the USA. Rajan knows all about it.
Above all, if we let go of Rajan now, we can never complain about "brain drain" without a sense of irony.
This post was first published on Idea Bhandaar.
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