Why The Current State Of The Economy Makes Raghuram Rajan’s Exit More Worrying

Posted on June 24, 2016 in Business and Economy

By Bishal Paul:

“#India must be the wealthiest country on earth to let Raghuram Rajan @RBIGov stand down,” tweeted Olli Rehn, the Finance Minister of Finland on June 19, 2016, when RBI Governor Raghuram Rajan announced that he won’t be seeking a second term while returning to academics. And that kind of sums up the global mood on the Indian economy. By no means do I wish to say that the validation or commentary of a particular world leader is definitive when representing the image of India at a global stage but it does show us a mirror.

The way in which governor Rajan was almost hounded out hasn’t been good for projecting the image of our country as one which is serious about doing business and turning the economy around. Instead, the ruling Bharatiya Janata Party, under the leadership of Prime Minister Narendra Modi has allowed its motormouth MP, Dr. Subramanian Swamy to constantly attack him on public forums and leave behind an extremely bad taste. Rather than treasuring an economist like Rajan, the government almost validated Dr. Swamy’s point by not extending his term. This sets aside a healthy precedent since 1991 of giving an extension to every RBI Governor and it would be for the first time that such a practice has been overlooked.

Despite the glaring warnings from leading financial institutions about a large number of investments moving out on Dr. Rajan’s departure, the government didn’t budge. What does it signify? It signifies the fact that the current government values patronage and sycophancy over merit. Otherwise, what could possibly be the reason behind letting someone like Rajan depart while appointing incompetent individuals such as former cricketer Chetan Chauhan as the Chairman of the fashion institute, NIFT, when he has nothing to do with fashion? But that has been the trend ever since this government took charge.

Dr. Rajan never minces his words and has always maintained that he would never compromise on inflation for the growth of a few individual corporate houses. Hence, he has repeatedly turned down offers of lowering interest rates to benefit big corporate giants. At a time when the country is struggling with bad loan debts worth thousands of crores, why is the government so adamant on lowering interest rates which would encourage more such bad debts? Not to mention his follow up on all corporates with bad loan debts hasn’t been taken well by the government. So in such a situation, the question that arises is who should governor Rajan be loyal to, the country or the ruling party?

To be fair to him, Dr. Rajan has contained inflation significantly. High food prices have a negative effect on consumer spending and aggregate demand because they contract household budgets and leave little for spending on other goods and services. To argue, as some within the BJP have, that the RBI governor is willfully wrecking the economy by maintaining higher interest rates is to display profound ignorance. In such a scenario, it is prudent that we then look at the condition of the economy under the two-year governance of Prime Minister Narendra Modi. The government recently celebrated the completion of its two years in office but did it live up to the promises and expectations as far as the economy is concerned? Let us look at some hard figures and decide.

To begin with, the GDP growth rate for the current fiscal has been estimated to grow at around 7.5% but economists around the world have raised suspicion over the number and rightly so, given the falling parameters of the economy. This has stemmed from the fact that when most of the crucial sectors of the economy are showing a negative trend, how come the overall GDP growth is doing well? The growth in eight core sectors has fallen from 6.5% in 2013 to a mere 2.7% last year. Make in India, which aimed at transforming the country into a manufacturing hub seems to have failed to deliver.

Exports have fallen to 6.74% in April and have been down for 17 months in a row. Trade deficit more than halved to $4.84 billion in April. In the same month last year, it was $11 billion. The manufacturing sector witnessed a significant drop to a four-month low in April, a latest business survey shows. The spending in infrastructure projects has fallen to record levels as well. FICCI’s latest quarterly survey on Indian manufacturing also fails to bring in any cheer.

This at a time when the country is facing a jobless growth. The Narendra Modi government had in his manifesto promised to create 10 lakh jobs every year whereas the data released by its own ministry shows a completely different picture. As per the data released by the Labour Bureau in April this year, no new jobs were created but there was actually a decline of 20,000 jobs across eight labour intensive sectors in the December quarter of 2015.

The Narendra Modi government had in his manifesto promised to create 10 lakh jobs every year whereas the data released by its own ministry shows a completely different picture. As per the data released by the Labour Bureau in April this year, no new jobs were created but there was actually a decline of 20,000 jobs across eight labour intensive sectors in the December quarter of 2015.

The total number of new jobs created across the eight sectors of textiles, leather, metals, automobiles, gems and jewellery, transport, information technology and the handloom sectors together stood at just 1.35 lakhs jobs during 2015, 67% lower than 421,000 jobs that were added in 2014, the last year of the United Progressive Alliance government. This is the slowest pace of new jobs being created since 2009. So job addition in the first full year of this government fell to just a fourth of 2014 and was only a tenth of the growth seen in 2009 when the UPA was in power.

And this is just the tip of the iceberg while the economy continues to be in tatters with a sluggish rupee. This was reflective post Raghuram Rajan’s decision against a second term, when market benchmark BSE Sensex opened on a negative note on Monday, that is 178 points lower at 26,447.88. The NSE Nifty also dropped by opening 62.85 points at 8,107.35. The effect was not just restricted to the Sensex but was also reflected in the valuation of rupee which fell by 60 paise to open at 67.68 per dollar. Just as a reminder, the value of rupee against the dollar was around 58.50 in May 2014 when Narendra Modi took over as Prime Minister. What is surprising is that the ‘ease of doing business’ is being promoted at the cost of socio-economic factors including employment generation and agricultural livelihoods.

The government recently allowed 100% FDI in defence, pharmaceuticals, aviation, animal husbandry, trading of food products produced in India (including through e-commerce), private security services and broadcasting carriage services (such as DTH, cable networks and mobile TV). It is beyond my understanding how the government wishes to encourage initiatives like Make in India with a special focus on the defence sector while also opening up FDI gates to a monumental 100%.

This increase in FDI is expected to hurt India’s prospects even further. A 100% FDI in sectors such as animal husbandry, retail and trading of food products, for example, will encourage large corporations to further consolidate their control over farmland and various other agricultural assets. As a result, a vast majority of small agrarian families will become more vulnerable.

History bears testimony to the fact that usually economies with higher income and lower social friction tend to be more open to foreign capital in a higher degree. However, such encouragement comes only after achieving domestic economic stability, manufacturing and technological prowess and a robust economy to support such endeavours. When a large economy is opened to foreign investments without sufficient mechanisms and welcomed by a lacklustre domestic economy, hostile markets and inadequate technological know-how, it indicates that they’ve chewed more than they can digest and that is a dangerous precedent. With great talents like Dr. Raghuram Rajan moving out, it is difficult to predict who can show the government a mirror that it desperately needs.