Raghuram Rajan could catalyse recovery and also transform RBI: Vivek Sengupta
Wednesday, September 18, 2013 at 07 : 49 Raghuram Rajan could catalyse recovery and also transform RBI Raghuram Govind Rajan made history on his first day as the 23rd Governor of the Reserve Bank of India. At 50, he is one of the youngest incumbents ever of the RBI Governor’s office. But he made waves for reasons other than just that. The kind of media adulation that he has received is unprecedented for the head of such a staid institution as the central bank of the country. He has been called James Bond, Rajinikanth, and Rock Star, among other names. And he has received top billing in newspapers and news channels. Not just the media, he has been greeted with gusto by the markets and leading influencers. “Whoa…Raghu is rockin! Rupee regains 64 per dollar level…”, tweeted the South Asia MD of a global IT giant. Another adulatory tweet came from a top industrialist: “Raghu Rajan gave a master class in how to handle your first day in a new leadership role during a crisis.” To what do we attribute such a response? He is, of course, extremely personable. With that he has combined a certain earnestness, freshness of approach and a sense of purposefulness that have not been seen in anyone assuming public office in India in recent times. Rajan has a formidable track record, having had the middle-class Indian’s dream career in education (IIT, IIM and MIT) and professional life – in the US (Eric J Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School and President of the American Finance Association), in India (Chief Economic Advisor to the Ministry of Finance, Government of India), and in the global arena (Chief Economist and Director of Research at the IMF). Author of two books, including the bestselling ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’, which won him accolades from such distinguished readers as former British Prime Minister Gordon Brown and the President of the European Central Bank, Jean-Claude Trichet, he is widely credited with having had the prescience to foresee the global financial crisis three years before it actually occurred. Clearly, his credentials are impeccable. But did credentials alone get him his coveted job? Perhaps not. It appears that he has been close to the Prime Minister, Dr Manmohan Singh who, as a veteran economic administrator, can reasonably be expected to have kept an eye out for the bright stars among Indian economists of global standing. In 2007, Rajan was appointed the head of the High-Powered Committee on Financial Sector Reforms set up by the Planning Commission, headed then as now by the Prime Minister’s confidant, Montek Singh Ahluwalia. After 2008, his work over with the committee, Rajan remained an informal advisor to Dr Singh, sending him notes and speaking to him occasionally. Then last year, when for an interregnum, between the time Pranab Mukherjee quit as Finance Minister to become President and Chidambaram returned as his successor, the Prime Minister himself held the finance portfolio. It has been reported that during this time Dr Singh pressed for Rajan’s induction into the government as Chief Economic Advisor to the Finance Ministry, though months of preparatory work must have preceded his move. It follows therefrom that Dr Singh would have happily blessed Rajan’s appointment as the Governor of the central bank. It is quite apparent that neither he nor Finance Minister Chidambaram was keen on granting another extension to the last Governor, D Subbarao. Delhi may have gone along with Subbarao’s relentless rate increases to rein in the stubborn inflation that has bedevilled the economy in recent years, but it could not have had any appetite left for the resultant negative pressure on growth. Sadly, the political establishment was not able to convey the impression that inflation had been tamed. However, the perception that growth had been killed by the rate increases only grew over time. Now, quarter after quarter, month after month, the numbers are bearing out this perception. For the first time in many years, the growth rate has plunged below 4.5 per cent. And the “droopy rupee” tells its own tale of an economy in a tailspin. It is a tough war to fight and, clearly, the Prime Minister and his core economic team of Chidambaram and Montek have sought an ally on Mint Street. Somebody, at least, who would, as Dr Singh himself said in mid-August at an RBI event to release the fourth volume of the central bank’s history, look at “possibilities and limitations” differently. “Fresh thinking is called for in monetary policy,” he declared. Rajan certainly came as a breath of fresh air in his interaction with the press on his first day in office. When YV Reddy had taken over as RBI Governor in 2003, he had laconically limited his press interaction to just three words: “Continuity with change”. Not for Rajan such cryptic reticence. Telegenic and eloquent, he read out a six and a half page statement that took the country by storm. He rattled off a series of reformist and forward-looking measures, injected a personal note (he was not there to win Facebook “likes”) and, as Finance Ministers are wont to in their Budget speech, ended with a line of poetry. These measures related to Monetary Policy, Inclusive Development (including the banking system),Financial Markets, Rupee Internationalisation & Capital Inflows, Financial Infrastructure, and Households. There was very little emphasis on continuity, but a lot more on change. “This is part of my short term time table for the Reserve Bank,” he said in conclusion. “It involves considerable change, and change is risky. But as India develops, not changing is even riskier.” There was one telling line in Rajan’s statement that emphasised the importance of communication. His media interaction was certainly proof positive of the efficacy of communication. The subsequent press coverage was overwhelming. It was as if a Finance Minister had presented the Union Budget. There comes a time, but rarely, when multiple newspapers have the same headline. September 5 was one such day. Several leading newspapers ran their story on Rajan’s media interaction with the headline: “Rajan hits the ground running”! As if taking their cue from the breathless press, the markets have responded magnificently – though, to be fair, this rally of both the rupee and the sensex has been prompted also by external factors. Be that as it may, a clearer picture of what Rajan stands for will emerge when he makes the monetary policy statement on September 20, two days after the scheduled date (the deferment showing that he is, after all, human!). The one big question that awaits answer is whether he favours hiking rates with a view to fighting inflation or moderating them with the intention of promoting growth. In the past he has been known to favour fighting inflation and in his speech on September 4, he said, “The primary role of the central bank… is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation.” On the other hand, he has been called a pragmatist and he has himself indicated in the past, in another context, that between two contrasting schools of thought he prefers treading the middle path. The sense we have is he would be inclined to do just that, given that he knows only too well that the economy is in a pitiable state and business confidence is at an all-time low. But can he single-handedly turn the economy around? His pronouncements have been widely hailed and the markets have responded positively. But this could well be because, in an atmosphere of utter hopelessness, he has appeared as a beacon of hope. When leaders do not lead and are given to prevarication and equivocation, here is a man who gives every indication that he is determined to lead from the front, usher change, even paradigmatic change, and do so without wasting precious time. But two caveats need to be sounded: One, Rajan has been part of the policy establishment in Delhi for a year now. He has been part of the same decision-making apparatus that has let the economy down. If there are guilty men in North Block, he is one of them. He remains one of them, only his role has changed. Further, even if it is argued that Rajan is finally his own man now and, therefore, will be able to operate with a degree of autonomy that was unavailable to him earlier, there is no wishing away the fact that he is no more than the Governor of the Reserve Bank. He can be very proactive and make substantial contributions to galvanising the economy, but he is neither the Finance Minister nor the Prime Minister. The primary responsibility for economic policy making rests with them. What they can do to lift the flagging fortunes of the economy is not within the remit of the RBI Governor. Whether they have the will or the ability to do so is another question. Even so, it is heartening to see a man who, so far, has sent out nothing but positive signals – about his determination to do what it takes to not only fulfill the Reserve Bank’s “primary role” of ensuring monetary stability but also to address two other mandates – that of “inclusive growth and development” and “financial stability”. What is quite possible is that he will transform the Reserve Bank. The Prime Minister was not off the mark when at the aforementioned event, attended by half a dozen RBI Governors (including himself), he declared, “RBI has served the country with distinction. But I would say the best is yet to come.” That could well be under the stewardship of Raghuram Rajan. CNN IBN
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