Month: June 2016 | Page 2

23 June, 2016

It’s Not the Interest Rate, Stupid

This week there has been an overdose on Raghuram Rajan, the governor of the Reserve Bank of India(RBI) and his decision to not take on a second term. I guess some readers haven’t liked that. Nonetheless, it is important to discuss his ideas and thoughts, given that this is an opportunity to explain some basic economics, which many people don’t seem to understand.

I don’t blame them given the surfeit of reading material that is generated these days. I get many WhatsApp forwards with spectacularly illogical conclusions and many people seem to believe in them. One of the theories going around these days is that Rajan did not cut interest rates fast enough, and this impacted both businesses as well as consumers.

I have tried to counter this argument over the last one week in different ways. But given that I have limited access to data, some questions still remained unanswered. Governor Rajan though does not have these limitations. In his latest speech, made in Bangalore, yesterday, he explained in his usual simple style, as to why interest rates weren’t slowing down bank lending.

But before we get down to that, I would like to discuss something else.

In one of the many columns written to justify Rajan’s decision of not taking on a second term, BJP member and newspaper editor Chandan Mitra, wrote: “Rajan’s emphasis on increasing savings fell on deaf ears because the middle class was by now impatient to spend, not save.”

The insinuation here is that if Rajan had cut interest rates fast enough, the middle class would have borrowed and spent. This would have reinvigorated the Indian economy. But then the Indian economy grew by 7.6% in 2015-2016. It is fastest growing major economy in the world. So, I really don’t what Mitra was cribbing about. Also, Rajan has cut the repo rate by 150 basis points since January 2015.

Rajan in his speech made it clear through data that interest rates hadn’t held back bank lending. As he said:“The slowdown in credit growth has been largely because of stress in the public sector banking and not because of high interest rate.” Take a look at the following chart.

Chart 1 : Non food credit growth Chart1 Non Food credit growth

The yellow line shows the overall lending growth of the new generation private sector banks (Axis, HDFC, ICICI, and IndusInd) over the last two years. What this shows very clearly is that the lending growth of new generationprivate sectors banks has had an upward trend with a few small blips in between.

In contrast the lending growth of public sector banks (the blue line) has slowed down considerably over the last two years. Let’s look at the bank lending growth in a little more detail. The following chart shows the bank lending growth to industry over the last two years.

Chart 2 : Credit to industry Chart 2 Credit to Industry

As can be seen from the above chart, the lending to industry, carried out by the new generation private sector banks has been robust. In fact, in the last one year, it has grown by close to 20%. Hence, the new generation private sector banks have been lending to industry at a very steady pace.

When it comes to public sector banks, the same cannot be said. The lending growth has been falling over the last two years. Now it is in negative territory. In fact, due to this, the overall lending by banks to industry in the last one year was at just 0.1%. The figure was at 5.9% between April 2014 and April 2015. A similar trend can be seen from the following chart when it comes to lending to micro and small enterprises.

Chart 3 : Credit to Micro and Small Enterprise Chart 3 Credit to Micro & Small Enterprices

This has led many people to believe that high interest rates have slowed down bank lending. As Rajan put it:“The immediate conclusion one should draw is that this is something affecting credit supply from the public sector banks specifically, perhaps it is the lack of bank capital.”

But as I have mentioned in the past, both public sector banks as well as private banks, have been happy to lend to the retail sector or what RBI calls personal loans.

These include home loans, vehicle loans, credit card outstanding, consumer durable loans, loans against shares, bonds and fixed deposits, and what we call personal loans. As I have mentioned in the past, retail loans have grown at a pretty good rate in the last one year.

The retail loans of banks have grown by 19.7% in the last one year. Between April 2014 and April 2015(between April 18, 2014 and April 17, 2015), these loans had grown by 15.7%. Hence, the retail loan growth has clearly picked up over the last one year. 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.

This is precisely the point that Rajan made in his speech. Take a look at the following chart:

Chart 5 : Personal Loans Chart 5 Personal Loans

In this graph, the retail ending growth of public sector banks and new generation private sector banks has been plotted. As can be seen, the two curves are almost about to meet. What this tells us is that when it comes to lending to the retail sector, the public sector lending growth is almost as fast as the new generation private sector bank. And given that the public sector banks are lending on a bigger base, they are carrying out a greater amount of absolute lending.

As Rajan put it in his speech: “If we look at personal loan growth (Chart 5), and specifically housing loans (Chart 6), public sector bank loan growth approaches private sector bank growth. The lack of capital therefore cannot be the culprit. Rather than an across-the-board shrinkage of public sector lending, there seems to be a shrinkage in certain areas of high credit exposure, specifically in loans to industry and to small enterprises. The more appropriate conclusion then is that public sector banks were shrinking exposure to infrastructure and industry risk right from early 2014 because of mounting distress on their past loan.”

This isn’t surprising given that banks are carrying a huge amount of bad loans on lending to industry. As the old Hindi proverb goes: “Doodh ka jala chaach bhi phook-phook kar peeta hai – Once bitten twice shy.”

As I have mentioned in the past, in case of the State Bank of India, the gross non-performing ratio (or the bad loans ratio) of retail loans for 2015-2016 was at 0.75% of the total loans given to the retail sector. This came down from 0.93% in 2014-2015.

The bad loans ratio of large corporates has jumped from 0.54% to 6.27%. The bad loans ratio of mid-level corporates has jumped from 9.76% to 17.12%. And the bad loan ratio of small and medium enterprises has remained more or less stable and increased marginally from 7.78% to 7.82%. This is a trend seen across public sector banks. Hence, it isn’t surprising that public sector banks do not want to lend to the industry, at this point of time.

Take a look at the following chart, which plots the home loan lending growth of public sector banks and new generation private sector banks.

Chart 6 : Housing Loans Chart 6 Housing Loans

In this case, the lending growth of public sector banks is as fast as the lending growth of new generation private sector banks.

What all this tells us very clearly is that when it comes to the retail segment, public sector banks are lending as much as they can. This refutes Mitra’s point where he said that the middle class isn’t borrowing and spending because of high interest rates. If middle class wasn’t borrowing and spending, retail lending wouldn’t have grown by close to 20%, in the last one year.

In fact, credit card outstanding of banks has grown by 31.2% in the last one year, after growing by 22.9% between April 2014 and April 2015. So, I have really no clue as to what is Mitra talking about. Vehicle loans have grown by 19.7% against 15.4% earlier. Guess, it’s time he opened a few excel sheets before just mindlessly commenting on things.

Rajan summarised it the best when he said: “These charts refute another argument made by those who do not look at the evidence – that stress in the corporate world is because of high interest rates. Interest rates set by private banks are usually equal or higher than rates set by public sector banks. Yet their credit growth does not seem to have suffered. The logical conclusion therefore must be that it is not the level of interest rates that is the problem. Instead, stress is because of the loans already on public sector banks balance sheets, and their unwillingness to lend more to those sectors to which they have high exposure.”

To conclude, and with due apologies to Bill Clinton, “It’s not the interest rate, stupid!”

The column originally appeared on the Vivek Kaul’s Diary on June 23, 2016

22 June, 2016

An Open Letter from an Indian Crony Capitalist

(This is a spoof)

Dear Indian Citizen,

Kem cho?

Kaamon Achish? Maja ma?

Hope all is well with you.

I am very happy these days. You know with that Rajan guy deciding to go back to Chicago. Good he is going back there.

I to wanted to open a champagne bottle to celebrate. But these children of mine always want this red wine shine.

And I to am still wondering, why would anyone in their right mind, comeback to India from the United States? Okay, maybe Chicago is very cold. My deekro tells me, they call it the windy city. It’s very cold up there it seems.

But then why stay on the East Coast? He could easily move to the West Coast. California. This Rajan guy. Very sunny, I am told. Just like Mumbai it is.

You know, when he was appointed as the RBI Governor, I got my kudi to buy all his books from this Amazon. Or was it Flipkart? I don’t remember. Been a long time since I went to the Strand Book Stall, you see.

So, this Rajan guy has written just two books, it seems. What men, been in the United States for nearly three decades and written just two books? Look at our very own Chetan. He has written so many more books than Rajan while holding a proper banking job at the same time, for a very long time.

And Rajan could write only two, with a teaching job?

So, one book of his is called, Saving Capitalism from the Capitalists. I started the book with great interest, after all I am also capitalist. But all the economic theory-weory got to me finally. And he just kept talking about Mexico. Our Chetan is so much better. North-South love story he wrote. What fun it was.

Didn’t Rajan also marry a North Indian? Why didn’t he write about that then and call it I too Had a Love Story? There is enough trouble in life anyway. Why write about such heavy stuff? And that is why I like watching this Tarak Mehta ka Oolta Chashma.

Oh talking of Mexico. Have you seen this latest Hindi film called Udta Punjab? In that, they compare Mexico to Punjab. Guess the director must have got the idea after reading Rajan’s book.

Anyway. I am meandering and meandering. Let me get to the point. In this Saving Capitalism from the Capitalists book Rajan writes: “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”

First time I read this, I didn’t understand only what Rajan was saying. I read this paragraph over and over again and got worried. Then my son-in-law told me, Rajan is only economist. Economists talk only theory. They don’t do it in practical.

But I had this feeling that this guy meant business. He will practice his theory and try and clean up India’s banking system, I had a feeling. Why? I don’t know. I think Kejriwal came in my dream and told me this. And I was right about it.

You see, I had taken this huge loan from a public sector bank in 2008. Those were good days. Everything was looking good.

Indian economy was growing at a fast pace. And like any good capitalist I assumed that the economy will continue to do well and interest rates will continue to remain low.

But all that changed. Over the last four years I have been having difficulty in repaying the loan. No money only.

You see my problem. I have so much loan to repay. Rs 50,000 crore. On that I am paying interest of 12% i.e. Rs 6,000 crore a year. I am having difficulty in repaying interest. How will I ever repay the principal?

And interest is so high. If it was 8%, I would be paying only Rs 4,000 crore a year. Now I am paying Rs 6,000 crore. Rs 2,000 crore more. “Profit main ghato ho gayo!”

Shouldn’t the government help me also? Shouldn’t the interest rates come down? But this Rajan guy did not want to help me only. Kept interest rates high. On top of that he encouraged banks to come after our assets. And that too public sector banks? Imagine!

You know, this is not the first time I have over-borrowed. I did that in the late 1990s also. But somehow I managed to come out unscathed…he he…The taxpayers had to pick up the tab.

And that is only fair no. There are so many taxpayers and so few capitalists who have over-borrowed. No individual taxpayer will feel the pain of having bailed out the capitalists.

But this Rajan guy said no. He insisted on capitalists like me repaying. Selling our assets and repaying.

Imagine? In India? What is the world coming to?

So good only he is not taking a second-term. Going back to the United States.

And it’s time to celebrate. “Kuch murga shurga khaate hain. Peg-sheg lagate hain!”

Oh and you Dear Citizen. Thank you in advance. If you do pick the tab. Ghabrao nahi, there will be no pain. It will be like a painless injection on your bum.

And imagine I have borrowed Rs 50,000 crore. If you don’t rescue me, the bank I have borrowed from will go bust. And you will lose your money!

Remember what did that John Maynard Keynes say? “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.”

Do you know the modern version of that? As The Economist magazine put it: “If you owe your bank a billion pounds everybody has a problem.”

Dear Citizen, I am your problem!

Yours truly,
An Indian Crony Capitalist

Postscript: Rajan has written Saving Capitalism from the Capitalists with Luigi Zingales. His other book is Fault Lines.

The column originally appeared in Vivek Kaul’s Diary on June 22, 2016

22 June, 2016

Of Bhakts, Udta Punjab and Raghuram Rajan

The two news grabbing events last week were the release of the dark drugs drama Udta Punjab and the exit of Reserve Bank of India(RBI) governor Raghuram Rajan.

Udta Punjab finally made it to the theatres thanks to the Bombay High Court. And Rajan decided to go back to academics in the United States, perhaps because he wasn’t offered a second term by the Narendra Modi government.

It was interesting to see how the Bhakts (for the lack of a better term) reacted to both these issues. In case of Udta Punjab they were convinced that the movie was funded by the Aam Aadmi Party(AAP) and hence, showed Punjab in a bad light. And given that, the cuts that the censor board wanted the producers of the movie to carry out, were justified. Of course, none of the Bhakts had seen the movie.

Even some basic reasoning can tell us how stupid this sounds. The script for the movie would have been written in late 2013, early 2014. So, the Bhakts want us to believe that two writers of the movie, wrote the movie back then, planning three to four years ahead, to show Punjab in bad light, before the elections. In late 2013, and early 2014, nobody knew that AAP would be a force to reckon with in Punjab.

In case of Rajan, the Bhakts have been convinced that the man did not deserve a second term, because he was not mentally Indian and had a green card. Some Bhakts even thought he is not an Indian citizen, which is basically rubbish because you cannot be an RBI governor without being an Indian citizen. Still others totally believed in the accusations that maverick BJP leader Subramanian Swamy had labelled at Rajan.

The point being that the Bhakts were totally sure in both the cases and defended their positions vehemently. As Duncan J. Watts writes in Everything is Obvious—Once You Know the Answer: “Common sense is extremely good at making all sorts of potential causes seem plausible. The result is that we are tempted to infer a cause and effect relationship when all we have witnessed is a sequence of events. This is post-hoc fallacy.”

The point is that human beings like explanations and if none exist, they are likely to create them. Then there is also the issue of confirmation bias, which basically means that our initial position on any issue, decides what we think about it or other related issues. As Gary Belsky and Thomas Gilovich define confirmation bias in Why Smart People Make Big Money Mistakes as a “tendency to search for, treat kindly, and be over impressed by information that confirms your initial impressions or preferences.”

This bias plays out in many walks of life. As Leonard Mlodinow writes in The Drunkard’s Life: “When a teacher initially believes that one student is smarter than another, he selectively focusses on evidence that tends to confirm the hypothesis. When an employer interviews a prospective candidate, the employer typically forms a quick first impression and spends the rest of the interview seeking information that supports it.”

How does confirmation bias fit into the case of Udta Punjab and Raghuram Rajan? In case of Udta Punjab, sometime before the film’s release AAP started running an anti-drugs campaign in Punjab. Needless to say, it latched on to the movie. And AAP of course is against the Bhartiya Janata Party, the home ground of Bhakts. Hence, Udta Punjab was bad, and reasons to opposite it had to be found and were found.

As far as Rajan goes he is a man of ideas and an intellectual who is not afraid of speaking out his mind against whatever the government’s stated position on an issue is. This, of course, doesn’t go down well with Bhakts. In Bhakt land, you cannot question the Narendra Modi government. And hence, reasons justifying Rajan’s exit have quickly been found.

The most stupid reason being that India has enough good economists to replace Rajan. Yes, it surely does. But why fix what is already working?

The column originally appeared in the Bangalore Mirror on June 22, 2016

21 June, 2016

Bhaktonomics 101: All You Wanted to Know but Were Afraid to Ask

There is economics and then there is Bhaktonomics–or so called economics which is used regularly these days, to justify the actions of the Narendra Modi government.

This new faction of economics has never been explored before—at least not until today. In this column I will look at Bhaktonomics that is being used to justify why Raghuram Rajan should not have been offered a second term, as the governor of the Reserve Bank of India.

Here are a few arguments being made:

a) Rajan wasn’t cutting interest rates fast enough: This is an old argument that keeps getting made whenever a central bank does not cut interest rates as the government of the day would like it to. So the followers of Bhaktonomics say that Rajan should not have got a second term because he was not cutting interest rates fast enough.

The irony is that Rajan did cut the repo rate. The repo rate has been cut by 150 basis points since January 2015. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

But let’s leave that aside for a moment. Hence, the argument is Rajan wasn’t cutting interest rates fast enough. And because he wasn’t cutting interest rates fast enough, the bank lending had been growing at a slow rate. Since bank lending has been growing at a slow rate, individuals haven’t been borrowing to spend and companies to expand. Hence, economic growth hasn’t been robust enough. Given this, Rajan had to go.

But didn’t India grow at 7.6% in 2015-2016? Isn’t India the fastest growing major economy in the world? I personally don’t believe that India is growing at 7.6%. There are many other sceptics as well. But try telling that to the practitioners of Bhaktonomics and see how they react.

So, if India is indeed growing at 7.6%, and is the fastest growing major economy in the world, then Rajan has cut interest rates fast enough. And if he has cut interest rates fast enough, why is he being fired? Okay, okay. He has not been fired. He has chosen to go on his own.

If India is growing at 7.6%, then Rajan has cut interest rates fast enough. Or to put it as the conventional economists do, he hasn’t been behind the curve. On the flip side, if he hasn’t cut interest rates fast enough, then India isn’t growing at 7.6%. The broader point being that you can’t have it both ways like the Bhaktonomists are currently.

There are other points on the interest rate front that need to be made here. Rajan ensured that the real rate of interest on deposits was in positive territory, after a long time. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

This worked well for savers who had seen inflation eat away their hard earning during the Manmohan Singh years. It has also helped household financial savings grow, as less money went into gold and real estate, in comparison to the past. It is ultimately these financial savings which will finance the Make in India programme. So Rajan essentially was batting for the government and not against it, as Bhaktonomists have been pointing out.

But a real rate of interest for depositors means that the government had to bear a high rate of interest on its borrowings, something it is clearly not comfortable doing. This is after many years of paying a lower rate of interest on its borrowings than the prevailing rate of inflation.

Take a look at the following chart:

The green line is the rate of inflation. And the red line is the interest that the government pays on what it borrows. Between 2007 and 20013, the government paid a lower rate of interest than the prevailing rate of inflation.

The real rate of interest available to the depositors these days, does not allow the government to do that. Hence, as the biggest borrower going around, it wants lower interest rates. QED.

The saver be dammed. Bhaktonomics has no place for the savers. They are only bothered about the borrowers, which includes the government and the crony capitalists.

b) Individuals are not important/Nobody is indispensable: This is another point that is being vociferously made to justify the exit of Rajan. This is absolute rubbish. If that was the case then Manmohan Singh, would have still been prime minister.

Individuals make institutions and governments. They make institutions and they destroy them as well. Hence, individuals are important. What India lacks are institutions. One man cannot take this country out of the rut that it is in. Good institutions can. And institutions are ultimately built as well as nurtured by individuals. So saying that individuals are not important is not even an argument.

Also, India’s government these days gets as much attention as it does, globally, primarily because Narendra Modi heads it. Modi is an individual. His being the head of the Indian government gives it more credibility than the last one and given that he matters. And like he matters, so does Rajan, when it comes to the RBI.

Further, you don’t hound out an employee who is doing well, especially when you have a serious talent crunch anyway, when the best brains do not want to work for the government (and I mean any Indian government here not just this government) and stay far away from it. If something is working why try and destroy, in order to fix it again? Beats me. Perhaps, Bhaktonomics has an explanation for this as well.

Also, the next RBI governor, whoever he or she is, will take time to settle into the job. And precious time will be lost. This is when inflation has started to go up again. So have oil prices. The cleaning up of bad loans of banks has reached a very important stage. Continuity would have been good here.

In fact, The Indian Express reports that earlier this year the government scrapped the search for a new chief of the Securities and Exchange Board of India(Sebi) and extended the term of UK Sinha on the pretext that ““continuity may be desirable” at times of “excessive volatility — mainly due to external factors””.

If this was true for Sebi earlier this year, it is more than true for the RBI at this point of time. So, why the double standards? Also, UK Sinha, the Sebi chief, like Rajan, is a UPA appointee.

c) It’s the government’s prerogative to decide who works for it: This is the third argument being made justifying Rajan’s exit and is by far the most sensible of the lot. Also, it is better than saying nobody is indispensable.

But is this the way you hound out an RBI governor, when RBI remains one of the few government institutions which hasn’t degraded over the years? You don’t let an unelected member of Parliament run a malicious campaign against the RBI governor and then come out and say this is not the party’s stated position on the issue.

If you didn’t want him, the same could have been communicated to him, in a good way. Tata, bye bye.

The way Rajan’s exit has been handled, it is clear that the message that the government wants to send out is, that if you want to work for us, then you need to be a cheerleader (or team player as the euphemism goes), and if you have an opinion your own, then it’s better to keep your mouth shut.

As Chandan Mitra of the BJP put it in a column on NDTV.com: “He also demonstrated a less-than-patriotic enthusiasm to play cheerleader, expected to tom-tom his government’s achievements.”

The column originally appeared in Vivek Kaul’s Diary on June 21, 2016

20 June, 2016

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