Raghuram Rajan, one of the most widely acclaimed economists in the world and the present governor of the Reserve Bank of India,announced that he’s going to step down from the prestigious post after his 3-years tenure and won’t be seeking an extension. Here is my take on the various aspects of reforms which took place under his reign.
The Good
Dr Rajan successfully brought down the deficit from 4.8% in 2012-13 to 0.1% of the gross domestic product in 2015-16 by incentivizing banks to raise deposits from Indians living overseas and restricting import of gold to a certain extent.
A combination of better food management, a new inflation framework, calibrated monetary policies aided by a sharp fall in global commodity pricing lead to a lower consumer price inflation which almost halved to 5.8% last month from a precarious double digit rate of increase in late of 2013.
- Stabilizing volatile rupee
Dr. Rajan’s steps to raise overseas deposits and increase the amount of money that Indian banks can raise through overseas bonds helped ease the pressure on the currency. In 2013, the rupee weakened 11.5% against the dollar. In subsequent years though, its decline slowed to between 1% and 5% — making it easier for importers to manage foreign currency risks.
Before Dr Rajan took over in the office, bad loans were growing rife in the banking sector. With him at the helm at RBI, banks were forced to close the loan taps and take promoters of those companies who resorted to ever-greening of loans to court to for their recovery. This measure cleared around 13 lakh crores of bad debts, resulting into more transparency.
- Rising foreign-exchange reserves
India’s foreign-exchange reserves were about $275 billion before Dr. Rajan took charge. Central bank data issued this month showed India’s foreign-exchange reserves have climbed to a record-high of over $363 billion. That provides significantly more firepower to protect the currency from overseas financial shocks.
The Bad
Over the past three years, the central bank’s policies have failed to bring about any significant improvement in the performance of Indian industry. During Dr. Rajan’s tenure, the RBI made controlling inflation its main objective. But in its pursuit of this goal, the focus on growth appears to have weakened. Most recent government data show industrial production fell 0.8% in April, the fourth month of decline in six months.
Numerous public sector banks reported record losses while several such as State Bank of India saw a massive decline in profits. A need for equity infusion has been felt on account of rising bad debt, but Dr Rajan’s monetary policies have been unfavourable towards this proposition.
The Ugly
- Conflicts with fiscal authorities
Governor Rajan’s cautious view on using low rates for growth and stabilizing economy made him an obstacle to fiscal authorities’ agenda of using low rates for the ease of borrowing. Many of them felt that his ideas and policies are influenced by western methodologies and are unapt in Indian circumstances.
Dr Rajan’s statements have been perceived as anti-government at several occasions. Apart from the monetary policy of RBI, he was quite vocal in expressing his opinion about matters such as intolerance and the ambitious ‘Make in India’, which upset the politicians.
- Allegations of Subramanian Swamy
Parliamentarian Subramanian Swamy alleged Dr Rajan of an “apparently deliberate attempt to wreck the Indian economy” and complained that his decisions have squeezed small and medium businesses and increased unemployment in the country. Also, in an unpublished letter to Dr Rajan, he accused him of not co-operating with Enforcement Directorate, Finance Ministry in tracking Karti Chidambaram in connection with Aircel-Maxis scam probe.
Dr Raghuram Rajan revived the Indian economy from befalling a catastrophe but now the emergency is over and the government wants to pursue robust growth by slackening the monetary restrictions. In such times Dr Rajan’s policies appear to be an impediment. Will his departure be detrimental for the economy or is it for the greater good? Only time will tell.
Midnight Soprano 