एक थे रघुराम राजन (Once There Was Raghuram Rajan)


If you want to survive in a bureaucracy, any bureaucracy, it is important that you market your bosses well.

It is important that you say things that your bosses like.

It is important that you repeat things that your bosses have been saying and like to believe in.

It is important that you laugh at the jokes that your bosses crack—even the ones you do not understand.

It is important that you do not have an opinion of your own. And if you do, it is better if you keep your mouth shut.

Because if you don’t, chances are that you might be asked to leave very soon.

That is one of the unwritten rules of India’s democracy.

The Congress excelled at it for close to the six decades that it governed the country. And the Bhartiya Janata Party has just continued where the Congress left.

Raghuram Rajan, the twenty-third governor of the Reserve Bank of India(RBI), probably did not understand this.

As a consequence, he won’t be getting a second term. This will be the shortest term any RBI governor has got since 1992.

The loss, of course, is ours.

When Rajan took over as RBI governor in September 2013, he brought a sense of balance to the Indian economy, which was all over the place.

The rupee was crashing against the dollar.

The inflation was in double digits.

And people had just started to realise that public sector banks were sitting on a pile of bad loans.

India wanted to be China. But it was looking more and more like Brazil.

As Ruchir Sharma writes in his new book Rise and Fall of Nations—The Rules of Change in the Post Crisis World: “Though India was hoping to be the next China, its government was building another Brazil, a low-growth, high-inflation economy. Between 2009 and 2013 India’s key economic numbers flipped for the worse: GDP growth fell by nearly half, to 5 percent, and inflation doubled to 10 percent.”

Strong inflationary expectations had set in. As Indian workers started to believe that prices will continue to rise at a fast rate, they demanded higher wages. As Sharma writes: “This is a particularly dangerous cycle. Once the spiral begins, it is likely to spin for a few years before the central bank can contain it…Rajan…immediately made clear he understood that fighting inflation was the bank’s top priority. And then in 2014, [India] got a new prime minister who, despite the populist pressure for the central bank to cut interest rates, seemed to back Rajan’s plan to move cautiously with an eye to anchoring inflationary expectations.”

This, along with a huge fall in oil prices, helped control inflation. In fact, Rajan has been severely criticised for keeping interest rates too high in order to bring down inflation. But the fact of the matter is, that after a very long time, depositors are actually getting a real rate of interest on their deposits. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

As Rajan told NDTV in a recent interview: “When inflation was 9% they [i.e. depositors] were getting 9%. This meant earning nothing in real terms and losing everything in inflation…Today they are getting 7% on their deposits and inflation is 5.5%. They are earning 1.5%. It is a real difference.”

This was a real achievement and people are being encouraged to save. In fact, if real interest rates on deposits continue to be the order of the day, then this will help build India’s household financial savings, which have fallen majorly in the last few years.

Between 2005-2006 and 2007-2008, the average rate of household financial savings stood at 11.6% of the GDP. In 2009-2010, it rose to 12% of GDP. By 2011-2012, it had fallen to 7% of the GDP. The household financial savings in 2014-2015, stood at 7.5% of GDP. The 2015-2016 figure should be better than 7.5%.

Household financial savings is essentially a term used to refer to the money invested by individuals in fixed deposits, small savings schemes of India Post, mutual funds, shares, insurance, provident and pension funds, etc. A major part of household financial savings in India is held in the form of bank fixed deposits and post office small savings schemes.

In fact, because of high inflation, a lot of money went into gold between 2008 and 2013, as people looked at hedging against inflation. With real interest rates in positive territory this has changed. Further, it needs to be said here that if Narendra Modi’s flagship programme Make in India, needs to take off, then India’s household financial savings need to go up as well. It is these savings that will finance the projects under the programme.

For this to happen, real interest rates are important. As Rakesh Mohan and Munish Kapoor of the International Monetary Fund write in a research paper titled Pressing the Indian Growth Accelerator: Policy Imperatives: “In the near future, we expect financial savings to be restored to the earlier 10 per cent level, as inflation subsides, monetary conditions stabilize and households begin to obtain positive real interest rates on their deposits and other financial savings. Financial savings are then projected to increase gradually to around 13 per cent by 2027-32.

And how is this going to happen? As Mohan and Kapoor point out: “A sustained reduction in inflation that leads to the maintenance of low nominal interest rates, but positive real interest rates, will help in restoring corporate profitability, while encouraging household savings towards financial instruments.”

This clearly tells us that Rajan was clearly on the right path and it would have been terrific Modi had offered him a second term.

On the flip side, the critics of Rajan keep saying that bank lending is growing at a very slow pace because of high interest rates. Between April 2015 and April 2016 (actually it’ a little more than a year between April 17, 2015 and April 29, 2016), bank lending(non-food) has just grown at by 8.4%. Indeed, this is slow and not as fast as it was in the past. But that is only if we look at the overall bank lending.

In the last one year, the retail loans of banks have grown by 19.7%. Between April 2014 and April 2015(between April 18, 2014 and April 17, 2015), these loans had grown by 15.7%. In fact, the growth in the lending of non-priority home loans in the last one year had stood at 28.6%.

Hence, the retail loan growth has clearly picked up over the last one year, after Rajan cut the repo rate by 150 basis points, starting in January 2015. What is interesting is that in the last one-year retail loans have formed around 45.6% of the total loans given by banks (i.e. non-food credit).

Interestingly, between April 2014 and April 2015, retail loans had formed 32.4% of the total lending. Taking these points into account along with the fact that lending to industry grew by 0.4%, it is safe to conclude that banks are not in a mood to lend to industry. This is primarily because of the huge amount of bad loans that public sector banks are carrying on the loans previously made to industry.

This slow growth has pulled the overall growth number down. Rajan has encouraged banks to clean up their books and at the same time, go after the assets of crony capitalists who have defaulted on their loans. This is likely to yield results in the days to come, assuming that the next RBI governor and the government continue on this path. Of course, in the short run, it has upset the calculations of many a crony capitalist, who would now be feeling relieved with Rajan’s exit in September. But what is good for the crony capitalist cannot be good for the country. Hence, Rajan’s going is not good for the country.

Further, it is worth pointing out here that the appointment of the next RBI governor is of immense importance. A country is not built by a single individual, but it is built by the institutions that he or she nurtures.

In India, precisely the opposite things have happened. Our politicians, starting with Indira Gandhi, have used the bureaucracy and the institutions to create jobs for their supporters and not to support the country.

As  Gurcharan Das writes in India Grows At Night: “No one anticipated that politicians in India’s democracy might gradually ‘capture’ the bureaucracy and use the system to create jobs and rents for their friends and supporters.” The previous Congress led governments excelled at this.

Narendra Modi has shown a similar tendency. The latest such appointment is that of ex-cricketer Chetan Chauhan as the Chairman of National Institute of Fashion Technology (NIFT is not just about fashion design, if that is what you think). I sincerely hope that Modi does not make the same mistake while appointing the next RBI governor.

If he does appoint one of his friends or supporters as the next governor of RBI, it will not send a good signal, either nationally or internationally. If Modi doesn’t appoint a proper professional to the RBI, it will tell us that even though Congress Mukht Bharat might be possible politically, institutionally that day is never going to come.

Loyalty to the King, will remain the only way of surviving in the Indian bureaucracy. And that can’t be a good signal in any way, especially for a leader who had briefly offered us hope of being different. But by failing to give Rajan a second term he has shown that institutionally India has just one model of governance and that is the Congress model, where blind loyalty to the leader is most important.

Postscript: One argument that is being made is that India has many good economists to replace Rajan. We sure do.

But none of them has the same international stature as Rajan. Not Arvind Panagariya. Not Arvind Srinivasan. Not Rakesh Mohan. Not Urjit Patel. Not Bibek Debroy and all the other names who are supposedly in the race.

And honestly, who fires an employee who is doing well? Only, an insecure boss.

The column originally appeared on the Vivek Kaul Diary on June 20, 2016