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Raghuram Rajan’s Exit—His Achievements, Initiatives, and the X Factor
Rockstar, James Bond, Dosanomics…these words have never been used with reference to public servants in India, especially with reference to staid and sober positions like the Governor of the Reserve Bank of India.
At a time when India aspires to become an economic superpower, this, perhaps, is ex-RBI Governor Raghuram Rajan’s biggest achievement—placing the RBI’s role in Indian economic policy firmly under the spotlight.
Yet, to merely focus on much-talked and much-debated aspects of Rajan’s tenure would be a disservice to the individual who has done a lot more than just explaining complex economic concepts through Dosas.
Rajan’s Impressive Feats
With so much focus on his exit, not many remember the turbulent times in which Rajan took charge.
In 2013, India was one of the ‘Fragile Five’ economies facing the risk of significant problems and complications. The Rupee was bleeding at close to Rs. 69 per dollar. Inflation was at a staggering 9.8% and the Current Account Deficit had exceeded 5% of the GDP. The banking system was struggling from the excesses of past years and nobody really knew the extent of bad loans or Non-Performing Assets in the system.
Today, the Rupee is stable at Rs. 66-67. More than the number, investors have been reassured by RBI’s commitment to maintaining stability and transparency in the management of the Rupee.
Inflation fell by 3.5% and is currently hovering around 6%. Again, more than just the number, the fact that the RBI had a specific inflation target and remained committed to it throughout the past three years boosted sentiments in India as well as abroad.
From a Current Account Deficit, the coming months may see India recording a Current Account Surplus of 0.8% of the GDP. Although low oil prices have helped, there is no denying that the RBI has played a significant role in this impressive achievement.
Finally, regarding the NPA problem, Rajan’s insistence on a comprehensive Asset Quality Review compelled banks to come clean about the problem. The AQR saw addition of bad loans worth $120 billion on banks’ Balance Sheets.
While this had a short-term negative impact on sentiments, the fact that the problem was no longer being brushed under the carpet has enhanced the credibility of the Indian banking system. Diagnosis is the first step towards cure and, today, bankers and investors know the true extent of the bad loan problem in the system.
Emphasis on recognition of bad loans may have contributed to the recent government decision where companies were allowed to use bank guarantee funds locked in arbitration disputes and appeals towards reduction of debt. This is probably a very good example of sensible regulatory action helping the government deploy innovative measures to resolve a tricky economic issue.
Rajan’s Policy Initiatives
The RBI performs the significant responsibility of assisting in the government in formulation of better monetary policies. One of Rajan’s first decisions was to reconstitute the existing monetary policy framework.
As Rajan demits office, the next monetary policy will be finalized by a Monetary Policy Committee consisting of six members—three from the RBI including the Governor and the Deputy Governor and three independent individuals. Interestingly, the author of the report that recommended the new framework is Rajan’s successor—Urjit Patel.
By emphasizing the importance of maintaining RBI’s independence, Rajan ensured that the government quietly dropped a proposal where the RBI could have been overruled by the independent members in the MPC.
Acknowledging the need to bring more people into the financial framework, the RBI granted new bank licenses, permitted the establishment of payment banks and small finances banks, and more importantly, released guidelines for on-tap banking licenses.
Other policy measures included Foreign Institutional Investors (FII) friendly measures like allowing their participation in the unlisted bonds market and transition from a ‘deficit’ to ‘neutral’ liquidity framework, which resulted in release of more than Rs. 2 lakh crores into the banking system.
The X Factor
These achievements and policy initiatives, while definitely creditable, are expected from any individual who aspires to do a good job as India’s top banker. What set Rajan apart was his decision to air views on matters and topics that seemed unrelated to his duties and responsibilities.
Make for India instead of Make in India, don’t compromise on tolerance for growth and progress, and not to remain contented with being a one-eyed person in the kingdom of blind—India was not used to its top public officials expressing such bold views in public.
This approach exacerbated the challenges Rajan faced even as economic experts called for an aggressive approach towards rate cut, emphasis on promoting growth over inflation targeting, and other populist measures.
Should he have been given a 2-year extension? Should he have reigned in his views and adopted a more pragmatic approach when talking about non-economic issues? Will India suffer from his absence as oil prices rise and Brexit’s impact becomes clearer?
While only time holds the answers to these questions, there is no denying that Rajan has done a commendable job shepherding the Indian economy through turbulent and complicated times.
Urjit Patel—Major Policy Reversals Unlikely from The New Governor
Serving as a country’s top banker is a thankless job. One has to strike the balance between long-term stability and consistency with governments’ preference for short-sighted populist measures. Urjit Patel, the 24th Governor of the Reserve Bank of India, faces a tougher challenge for various economic and non-economic reasons.
For starters, he is replacing India’s first, and probably the last, Rockstar central banker. Rajan’s exit and the search for his successor has occurred amidst speculation, rumors, and media frenzy normally associated with the selection of the captain of the Indian cricket team.
Further, he takes charge at a time when the global economy is still vulnerable to shocks. While things may not be as bad as they were when Rajan took over in 2013, the new Governor just cannot afford to take his eyes of the game.
The Right Man for the Job
A look at the list of past Governors of the RBI shows that governments have always preferred qualified individuals with impeccable qualifications and varied domestic and international experience for the top job. One ex-Governor even went on to become the Prime Minister of the country.
Urjit Patel certainly has impressive qualifications and experience. He has studied at the London School of Economics, Oxford, and Yale, was the head of the IMF India desk, and served as consultant to the Government of India before being appointed as the Deputy Governor of the RBI.
Virulent attacks on Governor Rajan that went beyond mere criticism of his performance led to concerns about weakening of the RBI. Investors, domestic and global, were viewing the choice for Rajan’s successor as an indication of the Government’s commitment to respecting RBI’s independence. Appointment of Urjit Patel, who headed the committee that proposed the biggest policy change implemented during Rajan’s tenure—the Monetary Policy Committee— has allayed these concerns.
New Governor…. New Challenges
Patel will have to tackle some challenges that his predecessor faced along with new problems that Rajan was lucky to escape. For starters, oil prices are likely to rise significantly in the next three years. While this may be good news for the global economy, India may see her energy bill, and consequently her Current Account Deficit, rise sharply.
Secondly, the new Governor will have to bring the war against NPAs to its logical conclusion. While comprehensive recognition of bad loans was a good start, focus will now have to shift on recovery of the bad loans. This can become tougher if instances of bad loans continue to rise.
Thirdly, rising oil prices combined with low growth in investment may result in inflation missing its March 2017 target of 5%. If that happens, then the RBI may find it impossible to cut rates without violating its commitment to sustained inflation targeting. Further, ignoring the targets may raise questions about RBI’s independence and the risk of MPC serving as an excuse for implementing populist policies.
Finally, Urjit Patel may have to deal with foreign challenges like the aftermath of Brexit, problems in the Chinese economy, US interest rate hikes, and the US Presidential election. As India gets integrated with the global economy, foreign problems may complicate issues at home.
What can we expect?
For starters, we are likely to see a low-profile Governor who shies away from unnecessary publicity. Rajan’s public utterances may have led to unnecessary complications in the performance of his duties and Urjit Patel is likely to avoid the same.
Secondly, we are unlikely to see any major reversal or change in the current policies. Rajan’s insistence on keeping inflation under control was probably the primary reason for public criticism.
The new governor is unlikely to buy praise by cutting rates. The inflation target has been set by the government and the RBI is unlikely to lose credibility by ignoring the same. Urjit is likely to continue as an inflation warrior that Rajan was. Of course, he may, like Rajan, front load a few interest rate cuts depending on the condition of the economy.
Thirdly, Urjit Patel will focus on ensuring the new Monetary Policy Committee is a success. The new framework heralds a new beginning in the way monetary policy is set and implemented in India. Its success may help the country avoid many problems and complications in the future.
Finally, banks and borrowers are unlikely to get any respite from the new Governor. Rajan’s rigid stance has led to revolutionary changes in the banking system and Urjit Patel is unlikely to let the momentum die. Such an approach may also compel the government to come up with innovative measures to resolve the issue.
As the new Governor, Urjit may not be as outspoken or flamboyant as his predecessor. However, having served two terms as the Deputy Governor of the RBI, he is probably going to be just as beneficial for the institution and for the country as Raghuram Rajan.
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