The eve of June 18, 2016, brought two unpleasant surprises to the nation. The first was the loss against Zimbabwe in the first T-20 international after having comprehensively whitewashed the minnows in the ODI series. The other one that was far more depressing and could have wide-ranging negative repercussions was that of the current RBI Governor Dr. Raghuram Rajan not wishing to continue for a second stint at the central bank, thus putting an end to immense political speculation. The reason ostensibly was to pursue academics but anyone who has been following the recent public diatribes by a certain individual against the widely renowned and highly venerated economist knows that it was just an excuse to distance himself from such political slugfests.
Dr. Rajan is a person of incredible credentials. Apart from being a gold medalist from IIT Delhi and IIM Ahmedabad, he has invaluable experience in various international banks and forums. He is widely acclaimed for being one of the very few economists who correctly predicted the impending US housing bubble crisis in 2005, a move for which he was widely criticised at that time. He holds the coveted distinction of being the youngest person to be appointed as the ‘Chief Economist’ of the International Monetary Fund and was also awarded the inaugural Fischer Black Prize. These are just a few achievements of a person who has attained great and unseen heights in his academic and professional career.
Dr. Rajan was brought into the Indian bureaucratic system by the erstwhile UPA government when he was appointed as India’s Chief Economic Adviser in 2012. A year later in one of its few good decisions, the then UPA government appointed Dr. Raghuram Rajan as the Governor of the Reserve Bank of India. Since then under his able leadership, the RBI has undertaken many bold measures which propelled the Indian economy towards macroeconomic stability and sustainable growth. Aggressive provision of non-performing assets by public sector banks, a strong commitment to the fiscal deficit target, effective moderation of the repo rate – all were measures taken by the RBI on his behalf, sometimes even at the face of veiled criticisms by the finance ministry.
When Dr. Rajan took over the reins of the central bank, the nation’s economy was in dire straits. With retail inflation well over 10%, GDP growth at surprisingly low rates of 4-5% and continuous failures to meet fiscal deficit targets, India was no longer the ‘Shining Star’ that it had been since 1991 economic reforms. Instead, it was listed as one of the ‘Fragile Five‘ economies that posed a great risk to the global financial system.
Dr. Rajan’s immediate task at hand was to somehow moderate the unsustainable level of inflation through strict monetary policy. He did not give in to the constant demands of India Inc. and many politicians to drastically cut repo rates while maintaining that such high rates were essential to prevent any further loss in the value of the ‘rupee’. He though cautiously and systematically reduced the interest rates from around 8% in 2013 to the current 6.5% to boost private investments. As a result of his undying commitment to macroeconomic stability, retail inflation reduced to around 5.5% in 2016 even though the nation faced successive droughts in the last two years. Even his decision in the RBI’s last bi-monthly monetary policy of not reducing the repo rate any further, due to concerns of weak monsoon triggering a hike in retail prices, proved correct, as the inflation rate for the last month was a record 21-month high of 5.76%.
By his undying commitment to fiscal discipline, he has helped India win over the confidence of global investors which is very well reflected in the surge in the Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII) inflows earning much needed foreign exchange. The Indian currency which was plummeting to new lows in 2013, has since then regained stability against the dollar. This is no mean feat considering the competitive devaluation of the Yuan and a global recession leading to a fall in commodity prices. This atmosphere of economic stability played a huge part in ensuring a growth rate of 7.5%, the fast among large economies, even though the rest of the world faces recession.
The initiatives undertaken by the RBI under Dr. Rajan’s stewardship to boost financial inclusion and promote cashless transactions have been commendable. The in-principal approval given to 11 payments banks would go a long way to ensure financial inclusion, easy remittances, cashless transactions and a check on tax evasion. Another landmark step has been to introduce the MCLR (Marginal Cost of Lending Rates) system which ensures that the benefits of the rate cuts reach the general public as it requires all commercial banks to continuously alter rates in line with the marginal cost of lending replacing the earlier concept of average cost of lending.
It won’t be wrong to say that all was not well between the government and the RBI Governor. His candid remarks on ‘intolerance‘ and India being ‘Andher Nagri, Kana Raja‘ didn’t make him a favourite of the current ‘nationalist’ government. He refused to drastically lower rates even at the insistence of the Finance Ministry. The government on its part reduced the powers of the Governor and the recent formation of a committee to appoint the successor of H.R. Khan (one of the four current RBI Deputy Governors) without Dr. Rajan heading it shows the growing discomfort between Dr. Rajan and the NDA.
It is really disappointing when such an eminent personality is drawn into controversies due to mindless comments by an irrational fanatic whose sole aim in life appears to gain limelight by stoking controversy. A Governor who brings about much needed and progressive reforms must be honoured with a second term to implement and moderate the full benefits of his reforms. India would greatly miss the sincere services of the ‘Rockstar’.
Featured image credit: Indranil Bhoumik/Mint via Getty Images.