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 “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

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


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.