Tag: Inflation | Page 5

26 July, 2016

Does the Food Security Act Really Offer Food Security?

In late June 2016, the food minister Ram Vilas Paswan, said that by July 2016, the entire country would come under the ambit of the National Food Security Act. As he said: “National Food Security Act is in force in 33 States/UTs, and in states of Tamil Nadu and Nagaland it will be implemented in next month.”

The National Food Security Ordinance (NFSO),8 2013 was promulgated on July 5, 2013. A little over two months later, the National Food Security Act (NFSA) was enacted on September 10, 2013. Given this, it has taken the states nearly three years to implement the Act.

The Food Security Act offered food security by freezing the price of rice, wheat and coarse cereals at the central issue prices of Rs 3, Rs 2 and Re 1, respectively, for a period of three years, up to July 2016. The targeted public distribution system forms the largest component of the Food Security Act.

In fact, there are two types beneficiaries under the targeted public distribution system. There are those who come under the Antyodaya Anna Yojana (AAY) and then there is something termed as priority households. The AAY was launched in December 2000 and it aims to reduce hunger among the poorest of the poor. Priority households on the other hand includes all families which come under the below poverty line. The broader definition of the priority households has been left to the state governments.

As far as entitlements go, every AAY household is entitled to 35 kg of food grains every month. Those coming under priority households are entitled to 5 kg per person of food grains every month. Close to 12.2 crore individuals come under AAY whereas 69.3 crore individuals come under priority households.

Nearly three years after the Food Security Act was passed, a question worth asking is, does it really offer food security to the citizens of this country?

The Food Security Act largely focusses on making food grains available to the citizens of this country at a rock bottom price. In order to support the ambitious coverage of the Act (nearly 81.5 crore individuals or two-thirds of the country’s population as per 2011 Census), the government has to acquire a large amount of rice and wheat through the Food Corporation of India as well as other state procurement agencies.

This has led to the defacto nationalisation of the grain trade. As Shweta Saini and Ashok Gulati write in a working paper titled The National Food Security Act 2013—Challenges, Buffer Stocking and the Way Forward: “Such large-scale public procurement also has the impact of strangling private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh and Chhattisgarh) (CACP, 2014). Of the total market arrivals of wheat and rice in these states, 70-90 per cent is bought by the government, indicating a de‐facto state take‐over of grain trade.”

This has an unintended consequence. Simply stated, the law of unintended consequences refers to a situation where economic decisions have unexpected effects.

In this context Saini and Gulati point out that “the monopolisation of the grain market by the government, where increasingly lower quantities of grains are available in the open market, also leads to the problem of support reversal.”

And what is support reversal? “The average cereal consumption in India is 10.6 kgs per person per month (NSSO, 2011), and NFSA supplies nearly half of it (5 kgs per month per person, except for those under the AAY who have a family entitlement of 35 kgs per month). People go to the open market to buy their remaining cereal requirements. However, with the government mopping up the supply of cereals, the open market is left with less causing an upward stickiness in prices,” write Saini and Gulati.

Even for those coming under AAY, the NFSA doesn’t supply enough food grains. Assuming five people per household, the average individual entitlement comes to 7 kgs per month, which is lower than the average cereal consumption of 10.6 kgs per month.

The point being that even though the idea behind the Food Security Act is to provide food security by selling food grains at a very low price, it makes things a little difficult by pushing up prices of food grains. Further, one needs to take into account the fact that food grains are not the only thing that people are eating in order to survive.

The government offers a minimum support price at which it buys rice and wheat from farmers. This helps on two counts. One is that it encourages farmers to grow rice and wheat, knowing well in advance what price they can sell it at. Further, the government buys rice and wheat to create a buffer stock in order to support the food security programmes, as well as maintain food security of the nation.

But this leads to other issues. As Shweta Saini and Marta Kozicka write in a research paper titled Evolution and Critique of Buffer Stocking Policy of India: “The buffer stocking policy of food grains has become the one tool with the government to fulfil the interlinked objectives of supporting food producers and food consumers, and of ensuring food availability at the national level. Buffer stocking is used to simultaneously tackle the problem of volatility in the price of food grains, provide food security and incentivise high production. Using the same instrument to achieve the objectives of ensuring remunerative price to farmers and providing the food grains so procured to the poor at highly subsidised prices creates conflicts.”

One clear problem is the fact that farmers end overproducing rice and wheat, given that the government buys all the rice and wheat that is brought to it. This discourages farmers from growing fruits, vegetables and dal. As the Economic Survey of 2014-2015 points out: “High MSPs result in farmers over-cultivating rice and wheat, which the Food Corporation of India then purchases and houses at great cost. High MSPs also encourage under-cultivation of non-MSP supported crops. The resultant supply-demand mismatch raises prices of non-MSP supported crops and makes them more volatile. This contributes to food price inflation that disproportionately hurts poor households.”

This essentially means that even though the Food Security Act wants to help people by selling rice and wheat at a low price, it ends up creating a difficult situation because prices of other crops tend to go up, as farmers tend to concentrate on buying rice and wheat. Food inflation in June 2016 was at 7.79 per cent. Within food, vegetables, pulses and sugar, saw an increase in price of 12.72 per cent, 28.28 per cent and 12.98 per cent, respectively. Spices went up by 8.13 per cent.

Hence, the unintended consequence of the Food Security Act is to make things more expensive on the whole. What is the way around this? I shall discuss some solutions in the weeks to come.

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

20 July, 2016

Why Governments Love Inflation

rupee

The Reserve Bank of India(RBI) governor Raghuram Rajan has often been accused of not cutting the repo rate fast enough and in the process hurting economic growth.

Repo rate is the interest rate at which RBI lends to banks. The hope is that once the RBI cuts the repo rate, banks will cut their lending rates as well. In the process people will borrow and spend and economic growth will return.

The Rajan led RBI started cutting the repo rate from January 2015 onwards. Between then and now it has cut the repo rate by 150 basis points, from 8 per cent to 6.5 per cent. One basis point is one hundredth of a percentage.

In June 2016, the rate of inflation as measured by consumer price index was at 5.77 per cent. The repo rate at 6.5 per cent is hardly high enough. The gap between the repo rate and the rate of inflation is not even 100 basis points. As Rajan said recently: “This discussion keeps going on without any economic basis. You saw the CPI numbers just last week. 5.8 per cent is the CPI inflation, our policy rate is 6.5 per cent. So I am not sure where people say we
are behind the curve. You have to tell me that somehow inflation is very low for us to be seen as behind the curve. So, I don’t really pay attention to this kind of dialogue.”

Also, the rate of inflation in January 2015 was at 5.19%. Since then it has risen by 58 basis points to 5.77% in June 2016. During the same period, the repo rate has been cut by 150 basis points. So the RBI has cut the repo rate despite, the rate of inflation going up. Hence, the question is, how has it been slow in cutting the repo rate? People who make such arguments, typically do not look at numbers and say things for the sake of saying them.

The fact of the matter is that all governments love lower interest rates and inflation. One reason for this is that low interest rates and inflation can create some growth in the short-term. As I had explained in yesterday’s column quoting a February 2014 speech of Raghuram Rajan: “if lower rates generate higher demand and higher inflation, people may produce more believing that they are getting more revenues, not realizing that high inflation reduces what they can buy out of the revenues. Following the saying, “You can fool all the people some of the time”, bursts of inflation can generate growth for some time. Thus in the short run, the argument goes, higher inflation leads to higher growth.”

The trouble is that this inflation eventually catches up with growth. As Rajan said: “As the public gets used to the higher level of inflation, the only way to fool the public again is to generate yet higher inflation. The result is an inflationary spiral which creates tremendous costs for the public.”

Take a look at the following table.

Year	Inflation (in %)	Economic Growth (in %)	Fiscal Deficit as a % of GDP
2007-2008	6.2	9.32	2.54
2008-2009	9.1	6.72	5.99
2009-2010	12.37	8.59	6.46
2010-2011	10.45	8.91	4.8
2011-2012	8.39	6.69	5.73
2012-2013	10.44	4.47	4.85
2013-2014	9.68	4.74	4.43

In 2007-2008, things were going well for India. The gross domestic product(GDP) grew by 9.2 per cent. The fiscal deficit was at 2.54 per cent of GDP. The inflation was at 6.2 per cent. Then the financial crisis struck in 2008-2009. The government decided to tackle the slowdown in growth by increasing its expenditure. In the process the fiscal deficit went up as well. Fiscal deficit is the difference between what a government earns and what it spends.

The fiscal deficit reached 5.99 per cent of the GDP. Next two financial years the economic growth crossed 8.5 per cent. The rate of inflation also entered double digits. The extra expenditure did manage to create growth, but it also created inflation.

This ultimately caught up with economic growth. The economic growth fell to below 5% levels in 2012-2013 and 2013-2014.

Hence, high inflation ultimately caught up with growth. But it did create growth for two years and during that period the Manmohan Singh government looked good. In fact, if the Lok Sabha elections were around that period, the Congress led United Progressive Alliance would have done much better than it eventually did.

The larger point is that any government has only got a period of five years to show its performance and in that period it has to do whatever it takes. If that means turning on inflation to create growth, then so be it. The trouble is that once you get inflation going, it is very difficult to control, as we clearly saw between 2007-2008 and 2013-2014. But the lessons of that are still not appreciated.

In fact, there is another lesson to learn here. As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “The Indian state has systematically underestimated the prevalence and the cost of ‘government failure’. It often intervenes, arbitrarily or to correct supposed market failures, without any clear evidence that the market is failing, and so ends up damaging resource allocation and stifling business drive.”

While, inflation ultimately catches up with economic growth, it ends up helping the government in another way. The government finances its fiscal deficit by borrowing. When it borrows the absolute level of government debt goes up. Despite this, government debt expressed as a proportion of the gross domestic product, might come down, because the GDP in nominal terms is growing at a faster pace than the debt, due to high inflation.

As Joshi writes: “From 2008 onwards, fiscal consolidation [in fact, the government was spending more] was meagre but this did not stop the debt ratio falling from 80 per cent of GDP in 2008-2009 to 68 per cent in 2014-2015. This is because high inflation eroded the value of debt.”

Due to inflation, the nominal GDP (which is not adjusted for inflation like real GDP, and against which total debt is expressed) went up at a much faster pace than the total debt of the government. This led to government debt expressed as a proportion of GDP falling.

Given this, there is more than one reason for the government to love inflation.

The column originally appeared on July 20, 2016, in Vivek Kaul’s Diary on Equitymaster

19 July, 2016

Why Inflation Cannot Be a Growth Strategy

In the recent past it has been suggested that some amount of inflation cannot be bad in order to get economic growth going again. Hence, the Reserve Bank of India(RBI), should cut the repo rate in order to get the economic growth going.

Repo rate is the rate at which RBI lends to banks. The hope is that when the RBI cuts the repo rate, banks will also cut their lending rates. At lower rates both individual consumers as well as firms will borrow and spend more. And this will get economic growth going again. (As I have said in the past individual consumers are already borrowing at a record pace even at the so called high interest rates).

How does this work? As RBI governor Raghuram Rajan had explained in a February 2014 speech: “By raising interest rates, the RBI causes banks to raise rates and thus lowers demand; firms do not borrow as much to invest when rates are higher and individuals stop buying durable goods against credit and, instead, turn to save. Lower demand growth leads to a better match between demand and supply, and thus lower inflation for the goods being produced, but also lower growth.”

When RBI cuts the repo rate this trend reverses. As Rajan explained: “Relatedly, if lower rates generate higher demand and higher inflation, people may produce more believing that they are getting more revenues, not realizing that high inflation reduces what they can buy out of the revenues. Following the saying, “You can fool all the people some of the time”, bursts of inflation can generate growth for some time. Thus in the short run, the argument goes, higher inflation leads to higher growth.”

Hence, it is important that inflation stays in control, if a country is looking for strong growth over a long period of time. (As I had explained in a column last week).

Inflation as per the consumer price index has started to go up again. For June 2016, the inflation was at 5.77 per cent. In comparison, the inflation in June 2015 was at 5.40 per cent. One reason for this jump has been food inflation. Food inflation in June 2016 was at 7.79 per cent. Within food, vegetables, pulses and sugar, saw an increase in price of 12.72 per cent, 28.28 per cent and 12.98 per cent, respectively. Spices went up by 8.13 per cent. Food items constitute 54.18 per cent of the consumer price index. Food inflation impacts poor the most given that a bulk of their income goes towards paying for food.

As is obvious, the jump in inflation as per consumer price index has been due to a rise in food inflation. The RBI cannot do anything about food prices through the repo rate, and hence, the RBI should cut the repo rate, or so goes the argument.

In the 2014 speech Rajan had explained this by saying: “I want to present one more issue that has many commentators exercised – they say the real problem is food inflation, how do you expect to bring it down through the policy rate? The simple answer to such critics is that core CPI inflation, which excludes food and energy, has also been very high, reflecting the high inflation in services. Bringing that down is centrally within the RBI’s ambit.”

So RBI cannot control food inflation but it can control the prices of other items that make up the consumer price index, through its monetary policy. In fact, the RBI can control, what economists call the “second round effects”.

Economist Vijay Joshi explains this in his new book India’s Long Road—The Search for Prosperity: “What sparks inflation is quite different from what keeps it on the boil. Though a supply shock raises the price of, say, food or oil products, this leads to a persistent rise in the overall price level only if it spreads and gathers strength due to the pressure of aggregate demand. If the economy is ‘overheated’, the inflation impulse becomes too generalized. A wage-price spiral can then develop that is hard to break, especially if people begin to expect higher inflation and increase their wage and salary claims in order to protect their real incomes.”

And this is where monetary policy and the central bank come in. As Joshi writes: “To prevent these ‘second-round effects’, monetary policy has to keep excess demand and inflationary expectations under check.”

Hence, while the RBI cannot control food prices, its monetary policy can have an impact on other elements that constitute the consumer price index. And this explains why the core-inflation (prices of products other than food and fuel) in June 2016 cooled to down 4.5 per cent. It was at 4.7 per cent in May 2016. This, despite the fact that food inflation is close to 8 per cent.

In fact, Rajan explained this beautifully in a June 2016 speech where he said: “The reality is that while it is hard for us to control food demand, especially of essential foods, and only the government can influence food supply through effective management, we can control demand for other, more discretionary, items in the consumption basket through tighter monetary policy. To prevent sustained food inflation from becoming generalized inflation through higher wage increases, we have to reduce inflation in other items. Indeed, overall headline inflation may have stayed below 6 percent recently even in periods of high food inflation, precisely because other components of the CPI basket such as “clothing and footwear” are inflating more slowly.”

Given that this is not such a straightforward point to understand, many people fall for the inflation is good for growth and that RBI cannot control inflation, arguments.

The column originally appeared in Vivek Kaul’s Diary on July 19, 2016

12 July, 2016

Mr Stiglitz, India’s Obsession with Inflation is Correct

Joseph Stiglitz, a Nobel prize winning economist, had some advice for Indian policymakers last week. Speaking in Bangalore, Stiglitz said: “Excessive focus on inflation almost inevitability leads to higher unemployment levels and lower growth and therefore more inequality.”

The point that Stiglitz was making is that the government of India should spend more than it currently plans to. Further, the Reserve Bank of India(RBI) should cut interest rates further and encourage people to borrow and spend more. Of course, all this extra spending will lead to some inflation, with more money chasing the same quantity of goods and services. But that will be a small price to pay for economic growth. This economic growth will lead to lower unemployment and in the process lower inequality.

This is precisely the kind of argument that was made during the Congress led United Progressive Alliance(UPA) regime, to justify the high rate of inflation that prevailed between 2008-2009 and 2013-2014.

The trouble is that there is enough evidence that suggests otherwise. Over the last five to six decades, countries which have grown at a very fast pace, have had very low rates of inflation.

As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The miracle economies like South Korea, Taiwan, Singapore, and China, which saw booms, lasting three decades or more, rarely saw inflation accelerate to a pace faster than the emerging market average. Singapore’s boom lasted from 1961 to 2002, and during that period inflation averaged less than 3 percent.”

The same is the case with China. As Sharma puts it: “In China, the double digit GDP growth of the last thirty years was accompanied by an average inflation of around 5 percent, including an average rate of around 2 percent over the decade ending in 2010. China saw a brief surge in inflation in 2011, and economic growth in the People’s Republic has been slumping steadily since then.”

The point is very clear, inflation is not good for economic growth. There is enough evidence going around to show that. The same can be said in the Indian case as well, when the inflation surged between 2008-2009 and 2013-2014. It ultimately led to economic growth collapsing.

Year	Inflation (in %)	Economic Growth (in %)
2007-2008	6.2	9.32
2008-2009	9.1	6.72
2009-2010	12.37	8.59
2010-2011	10.45	8.91
2011-2012	8.39	6.69
2012-2013	10.44	4.47
2013-2014	9.68	4.74

In 2007-2008, inflation was at 6.2 per cent and the economic growth came in at 9.32 per cent. In the aftermath of the financial crisis that started in 2008-2009, the union government increased its expenditure in the hope of ensuring that the economic growth did not collapse.

The government expenditure budgeted for 2008-2009 was at Rs 7,50,884 crore. The final expenditure for the year was at Rs 8,83,956 crore, which was around 17.8 per cent higher. The expansive fiscal policy led to inflation, which in turn led to lower economic growth in the years to come.

The increased government spending led to high inflation in the years 2009-2010 and 2010-2011, but at the same time it also ensured that economic growth continued to stay strong in the aftermath of the financial crisis. Nevertheless, high inflation ultimately caught up with economic growth and it fell below 5 per cent during 2012-2013 and 2013-2014.

The point being that extra spending and lower interest rates leading to inflation might help bump up economic growth in the short-term, but over the longer term it clearly does not help. What made the situation even worse was that RBI did not get around to raising interest rates as fast as it should have.

As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “Since fiscal policy was expansive, the job of demand-side inflation control was left to the RBI. Given the strength of both demand and cost-push forces, monetary policy would have had to be tough to be effective. Put bluntly, the RBI muffed it. It took a softly-softly approach to raising interest rates. While this may perhaps have been understandable because it feared hurting investment and growth, it is surely no surprise that inflation proved to be persistent.”

High inflation also leads to a situation where the household financial savings fall. This is precisely how things played out in India. Between 2005-2006 and 2007-2008, the average rate of household financial savings stood at 11.6 per cent of the GDP. In 2009-2010, it rose to 12 per cent of GDP. By 2011-2012, it had fallen to 7 per cent of the GDP. In 2014-2015, the ratio had improved a little to 7.5 per cent of GDP.

A fall in household financial savings happened because the real rate of return on deposits entered negative territory due to high inflation.

This led to a situation where savers have moved their savings away from deposits and into gold and real estate. As RBI governor Raghuram Rajan said in a June 2016 speech: “In the last decade, savers have experienced negative real rates over extended periods as CPI has exceeded deposit interest rates. This means that whatever interest they get has been more than wiped out by the erosion in their principal’s purchasing power due to inflation. Savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits.”

If a programme like Make in India has to take off, low household financial savings cannot be possibly a good thing. This hasn’t created much problem in the recent past, simply because bank lending to industry has simply collapsed. Banks (in particular public sector banks) are not interested in lending to industry because industry has been responsible for a major portion of bad loans in the last few years.

But sooner or later, this situation is going to change. And then the low household financial savings ratio, will have a negative impact and push interest rates up. In this scenario, it is important that inflation continues to be under control and the real rates of return on deposits continue to be in positive territory. That is the only way, the household financial savings ratio is likely to go up.

As Joshi puts it: “In today’s world of low inflation, India’s long-run inflation target should certainly be no higher than 4 or 5 per cent a year.” And that is something both the RBI as well as the union government should work towards achieving and maintaining.

The column originally appeared in Vivek Kaul’s Diary on July 12, 2016

19 May, 2016

Okay, Let’s Get Subramanian Swamy’s Nonsense on Raghuram Rajan Out of the Way

ARTS RAJAN

Subramanian Swamy has gone after the Gandhi family over the last few years and been fairly successful at it. Now he seems to have moved on to a new target—the Reserve Bank of India(RBI) governor, Raghuram Rajan.

Swamy, who recently became a Rajya Sabha member, wrote a letter to the prime minister Narendra Modi, asking him to terminate the services of the RBI governor immediately or when his term ends in September, later this year.

As Swamy writes in the letter: “The reason why I recommend this is that I am shocked by the wilful and apparently deliberate attempt by Dr Rajan to wreck the Indian economy. For example the concept of containing inflation by rising interest rates is disastrous.”

Let’s take the point of Rajan raising interest rates turning out to be disastrous. When Rajan took over as the RBI governor, inflation was close to 10%. Interest rates offered on bank fixed deposits were lower than that. Hence, people were losing money once inflation was taken into account.

Due to this, money had moved into real estate as well as gold, as people looked for a “real” rate of return. In fact, when Rajan took over as RBI governor,
rupee was rapidly losing value against the dollar. One of the reasons was that there was a huge demand for dollars because Indians were buying gold to hedge against inflation. Rajan cracked down on this, and managed to stabilise the value of the rupee.

The stabilisation of the rupee was important because India imports 80% of the oil that it consumes. And when the rupee depreciates oil becomes expensive in rupee terms. This isn’t good for the government nor the overall economy.

Also, over the years high inflation has essentially ensured that the household financial savings as a proportion of the gross domestic product have been falling. 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.

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 order to ensure that household financial savings go up, basically two things are needed—lower inflation as well as a real rate of return on financial savings that people make, in particular fixed deposits. Fixed deposits offer a real rate of return when the interest rate on the fixed deposit is higher than the inflation.

Since the beginning of 2015, after a very long time, the interest rates on fixed deposits have been in real territory. And this is a very important achievement for Rajan. The interest rates need to stay in real territory, if household financial savings need to go up, in the years to come.

In fact, it needs to be said here that Rajan recognises the fact that interest rates are not just about borrowers. They are also about savers as well. The savers include the young trying to save for the future of their children and the old trying to live a decent life in retirement. And savers need to be paid a reasonable rate of return on their savings as well. This is something that Rajan set right.

Swamy further said: “When the Wholesale Price Index (WPI) started to decline due to induced recession in the small and medium industry, he shifted the target from WPI to the Consumer Price Index (CPI) which has not however declined because of retail prices. On the contrary it has risen. Had Dr. Raghuram Rajan stuck to WPI interest rates would have been much lower today, and given huge relief to small and medium industries. Instead they are squeezed further and consequent increasing unemployment.”

It is important to understand here why the Rajan led RBI moved from following inflation as measured by the wholesale price index to inflation as measured by the consumer price index. When the RBI tracked inflation as measured by the wholesale price index, it took a very long time to raise interest rates, and by the time the high consumer price inflation had well and truly set in.

The high inflation then caused problems, as I have explained above. Let’s take the point about high interest rates hurting small and medium industries. Recent data shows that this is not true at all. Data for 2.37 lakh unlisted private firms was recently released by the RBI. This primarily includes small and medium enterprises, which Swamy feels are having a tough time.

This data clearly shows that these firms are doing much better than the big listed firms, over the last three years. Aarati Krishnan writing in The Hindu Business Line points out: “Unlisted firms managed far better sales growth in the last three years. They went from 13.3 per cent sales growth in FY13 to 8.7 per cent in FY14 before bouncing back to a healthy 12 per cent in 2014-15. In contrast, listed companies saw their sales growth dwindling from 9.1 per cent in FY13, to 4.7 per cent in FY14 and further to an abysmal 1.4 per cent by FY15.”

The same trend was seen when it comes to net profit as well. As Krishnan points out: “Their profits grew at 16 per cent, 23.6 per cent and 12.3 per cent in the last three years. Listed companies struggled with shrinking profits, their net profits falling by 2 per cent, 5.1 per cent and 0.7 per cent in the same three years.”

So what is Swamy really talking about here? And why is he misleading the prime minister Modi in particular and the nation in general?

Swamy further says: “Thus, in the last two years estimated NPA in public sector banks has doubled to Rs. 3-1/2 lakhs crores.”

What Swamy is basically saying is that the high interest rate regime initiated by the RBI led to small and medium enterprises defaulting on their loans and bad loans of public sector banks doubling. The first point that needs to be made here is that before Rajan took over as the governor of RBI, banks were not recognising their bad loans. He has pushed them to recognise their bad loans. Hence, the jump in bad loans has been primarily because of that.

What this means is that even before Rajan led RBI started raising interest rates, many corporates were not in a position to repay their loans. The banks were pretending all was well, when that wasn’t really the case. Rajan forced them to start recognising bad loans. All these huge losses that banks have suddenly started to report can’t have been created overnight. They are a result of banks not recognising these bad loans for a substantially long period of time. Hence, Swamy’s charge doesn’t hold true.

Also, defaults by mid and large corporates are a very important reason for public sector banks being in the mess that they are in. Crony capitalists close to the previous UPA regime are primarily responsible for this.

The last that I checked the RBI was a regulator of banks and did not give out any loans. So how can the RBI governor be held responsible for what are basically bad lending decisions by banks? How can the RBI governor be held responsible for banks not insisting on enough collateral for the loans that they gave out? And how can the RBI governor be held responsible for politicians forcing public sector banks to give loans to crony capitalists?

Swamy further said: “These actions of Dr. Rajan lead me to believe that he is acting more as a disrupter of the Indian economy [italics are mine] than the person who wants the Indian economy to improve.” I agree with the part of the statement which says that Rajan is acting as a disrupter of the Indian economy.

In fact, on many fronts, the Indian economy did need a disrupter. Rajan has forced banks to start recognising their bad loans instead of extending and pretending, as they were doing earlier. This has brought out the real situation that public sector banks are in.

Further, he has also empowered banks to go after defaulters. A few Indian promoters have started selling their assets in order to repay banks. This is something that hasn’t happened before.

Rajan has also initiated the formation of a monetary policy committee where monetary policy will be made by a committee. As of now, only the governor is responsible for it. A central bank operating through a monetary policy committee is the norm the world over. And by doing this, the governor is essentially diluting his powers.

Further, he has given small banks licenses and payment bank licenses as well, with the idea of expanding financial inclusion across the country. So, yes Rajan is a disrupter, who wants the Indian economy to improve.

Swamy also accused Rajan of being mentally not fully Indian. As he said: “Moreover he is in this country on a Green Card provided by the U.S. Government and therefore mentally not fully Indian. Otherwise why would he renew his Green Card as RBI Governor by making the mandatory annual visit to the U.S. to keep the Green Card current?”

Rajan still has an Indian passport. This after having lived in the United States for more than 25 years. How many Indians who have lived in the United States for 25 years still have an Indian passport?

And if Rajan wants to keep his green card active, what is wrong with that? He is a professional in his early 50s and still has his career to think about. He needs to think about his career beyond the RBI and if that means visiting the US once every year, then so be it.

Swamy finally asked for the termination of Rajan’s appointment as RBI governor. As he said: “I cannot see why someone appointed by the UPA Government who is apparently working against Indian economic interests should be kept in this post when we have so many nationalist minded experts available in this country for the RBI Governorship. I therefore urge you to terminate the appointment of Dr. Raghuram Rajan in the national interest.”

This is a very silly argument. Appointing Rajan as the RBI governor was one of the few correct things that the UPA government did in the second half of its second term. Why undo that?

And as far as Swamy is concerned, there are better ways of showing interest in the RBI governor’s job than this.

The column was originally published in Vivek Kaul’s Diary on May 19, 2016.