Why Raghuram Rajan had to go


Raghuram Rajan, the governor of the Reserve Bank of India(RBI), announced on Saturday evening (June 18, 2016) that he won’t be taking a second term, and would return to his teaching job at the University of Chicago.

In a letter to the RBI employees, which was released to the press, Rajan said: “I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.”

Since the letter has been released a small industry has cropped up, trying to figure out, why has this happened. Other than being the RBI governor, Rajan is also a public intellectual in his own right. Given this, he had things to say on a wide variety of issues and from the looks of it, some of these things haven’t gone down well with the government of the day.

More than one minister has publicly criticised Rajan for having an opinion on a wide range of issues. Take the case of a comment he made in April
this year. “I think we have still to get to a place where we feel satisfied. We have this saying — ‘In the land of the blind, the one-eyed man is king.’ We are a little bit that way,” Rajan told Marketwatch.com. Rajan was referring to India’s fast economic growth, in a slow growing world.

This did not go down well with the government and Nirmala Sitharaman, the commerce minister, told the press: “I may not be happy with his choice of words. I think whatever action is being taken by this government is showing results.”

Rajan perhaps forgot that he was working with a government which is extremely sensitive to criticism. He later clarified what he really meant in another speech, where he said: “My intent was to signal that our outperformance was accentuated because world growth was weak, but we in India were still hungry for more growth. I then explained that we were not yet at our potential, though we were at a cusp of a substantial pick-up in growth given all the reforms that were underway.” But by then the damage had already been done.

There were other similar occasions where his comments did not go down well with the government of the day, and that seems like the major reason for his early exit. It needs to be pointed out here that no RBI Governor since 1992 has had just a three-year term. C Rangarajan at four years and 334 days, has had the shortest term after Rajan. Bimal Jalan, YV Reddy and D Subbarao all got terms close to five years. In fact, Jalan’s term was close to six years.

So letting the RBI governor go in a period of three years, is clearly unprecedented. Something of this sort has not happened in close to 25 years. In the recent past, the maverick Member of Parliament, Subramanian Swamy, has run a rather slanderous campaign for his removal. That seems to have had its impact as well. Further, a section of the government has never liked Rajan, given that he was appointed by the previous Congress led United Progressive Alliance government.

Rajan’s tenure had many good things about it. First and foremost, as soon as taking over, he handled the rupee crisis very well. Inflation has been brought under control from the earlier double digit levels, though that was not only because of the RBI. The bad loans mess in the public sector banks has been brought into the open. And for the first time in India’s history, banks have gone aggressively after crony capitalists, who defaulted and are still defaulting on bank loans.

This is unprecedented. In the past, the show would have just gone on. Crony capitalists would have defaulted only to borrow again a few years later, and the taxpayers would have taken on the tab. This remains Rajan’s biggest achievement. It will be interesting to see if the next RBI Governor continues to be aggressive on this front. For now, India’s crony capitalists will be breathing a sigh of relief and opening champagne bottles for sure.

Over and above this, Rajan has an international stature. He is the only central banker who has openly spoken out against the massive amount of money printing that has been carried out by the Western central banks and the ill effects of the same.

Rajan’s outspokenness on issues, as many in India feel, is not a recent phenomenon. In August 2005, at a Federal Reserve of Kansas’s annual symposium at Jackson Hole, Wyoming, in the United States, Rajan had criticised the policies of Alan Greenspan, the then Chairman of the Federal Reserve of United States.

Greenspan was considered as god in banking circles at that point of time and the Jackson Hole symposium was supposed to be a sort of a send-off for him, before he retired in 2006. Rajan spoilt Greenspan’s party by saying: ““The bottom line is that banks are certainly not any less risky than the past despite their better capitalization, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis.”

Three years later, the financial crisis which the world is currently dealing with, started with Lehman Brothers, the fourth largest investment bank on Wall Street, going bust. The US government had to then come to the rescue of the American financial system. Rajan’s warning came to be true.

Of course, when Rajan spoke out against Greenspan, he was severely criticised by other economists attending the symposium. As he would later admit in his bestselling and brilliant book Fault Lines: “I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what’s going on before their eyes.”

Something similar seems to have been happening in India as well, where the critics of Rajan seemed to have closed their eyes to the issues that the country is currently facing and want to hear good things about the Indian economy all the time.

There justification for Rajan’s removal is that India has enough good economists to fill his shoes. Of course, it does. But there is no one who has the same respect as Rajan has globally.

Further, is that really the point? When was the last time a board fired a well-performing CEO, because he did not agree with their views all the time?

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on BBC on June 20, 2016