Rajan Should Get A Second Term, But Only For The Right Reasons

By August or early September, preferably earlier, we will know whether Raghuram Rajan will remain as Reserve Bank Governor or not. The man himself has been quoted by The Economic Times today (9  May) as refusing to answer the hypothetical question on whether he will stay or go, preferring to point out that he will answer when he is asked.

We are looking at the wrong question here. The question is not whether Rajan stays or goes – India can surely find other good governors to run the central bank competently - but whether the government retains him for the right reasons. We will know the decision has been made for the right reason if we are told early – now or in the next one or two months – about the decision.

Governments have a tendency to keep a decision hanging till almost the final hours, and this is the worst possible way to appoint or retain a Reserve Bank Governor. If Rajan has earned the world’s grudging acceptance as an equal in the fairly impotent world of post-2008 central banking, it is because he talks from a high pedestal, a high degree of intellectual competence. Every speech of his, whether you agree with him or not, is laden with ideas and insight. Even while talking to faculty at Shiv Nadar University faculty yesterday (8 May), Rajan had words of keen observation about the Indian attitude of shouting too much without adequate preparation for the argument.

So, Mr Narendra Modi and Mr Arun Jaitley, Rajan is a gem worth having for its own sake. This does not mean there aren’t better choices available, but choosing Rajan is about making a commitment to central bank independence, not about just exercising the government’s right to choose. It is better to let Rajan go if he is chosen for the wrong reasons.

The bad reasons for giving him a second term of two years would be the ones being trotted out by his fans.

One, not giving him another term will rattle the markets and the international community. This is ridiculous, for India does not lack talent in central banking. We found 22 others before him, and can surely find one good enough to replace him.

Two, the government will be seen as keen to have its own man in Mint Street. This is a display of lack of confidence in independent thinking – something that does not do the government any credit.

Three, the business community will be happy to see interest rates reduced faster, something Rajan has been more cautious about. This is bunkum. Business borrows based on expected profits and not just interest rates. If profits are higher than the cost of money, business will invest. So, if business is not borrowing and yelling about interest costs, the answers may lie more with the finance ministry and the cabinet, which need to speed up reforms and revive the investment climate.

However, it does not make sense to let go of a good man when he may be willing to continue his good work. The right reasons for retaining Rajan are the following:

#1: Rajan provides an independent outside-inside view to the government, ensuring that what the government gets to hear is not a mere replay from the echo chamber of views favourable to its way of thinking. A doctor who prescribes only sugar water is unlikely to help cure your illness.

#2: Rajan is an intellectual with integrity, who can hold his own against the best minds in the west. He can also hold a mirror to their bankrupt thinking, as he did with Alan Greenspan – America’s most influential Fed chief before 2008 undid his reputation. Central banks are currently bankrupt on ideas. All that they have done since 2008 is give zero-cost money to borrowers, and now they are thinking negative cost money. This is lazy thinking. The cure for an untreated illness cannot be more of the same. Rajan is the only Indian who can tell the Global Emperors of Money that they are running stark naked. India’s problems cannot be fixed in isolation of the world’s problems, and it is important for us to have a voice in how the world is run. Rajan fits the bill neatly.

#3: Rajan is not just a banker or economist. He can provide intellectual and practical inputs on economic policy far beyond his role as a central banker. This is what Modi needs more than anything else since Rajan will be able to tell it like it is. Rajan is just the kind of sounding board the government needs when it lacks a solid thinktank of its own.

The Modi government should not reappoint Rajan out of fear of the consequences, but out of genuine respect for a man who will be a great help in guiding the state in making the right decisions. The world, and India under the UPA, has been rocked by economic incompetence and mismanagement of a high order. Rajan reduces the incompetence score by a few notches.

The time to make the decision on him is now, or in the next few weeks. But certainly not on 3 September, Rajan’s last day in office. That would be unfair both to him and/or his successor if that is what the government wants to do.