Why Did Raghuram Rajan Go? Was He Pushed Or Did He Jump?

Personally, I have been impressed by Raghuram Rajan ever since I heard him speak at the global Pan-IIT meet in IIT, Madras in 2008. There were two outstanding speakers there, both, by coincidence, American professors: Rajan and the late C K Prahalad. I could see why both were considered at the top of the game in American circles, because they were extremely articulate, polished, and clearly top-quality intellectuals.

So I was not amazed when Rajan was chosen to the Governor of the Reserve Bank of India, although I did wonder how the Congress, not known for recognising merit, would bring on board someone who was obviously smart, and who, with his Chicago and IMF credentials, didn’t need to be subservient to the Nehru Dynasty. Besides, I thought it was funny that India’s central banker had matinee-idol looks, especially in comparison to other central bankers I could name (but dare not!).

Therefore I was surprised by the major hoo-haa over Rajan’s second term, and the reams of column inches spent on making his re-appointment a touchstone for the PM’s economic credentials. In fact, the mainstream media, essentially argued that if Rajan were not re-appointed, it would be the end of civilisation as we knew it, and that India would go to the dogs.

That too was not totally unbelievable, because Rajan had a certain standing in international circles, and his soothing presence may well have quelled the nerves of foreign investors, leading to record amounts of FDI coming into India in the last year. The fact that there was an independent central banker, who could stand up to the usual short-term pressures from government, would be a good thing.

So I was startled when the Rajan story became the principal focus of media attention over the last couple of weeks, when there were several other stories of importance: the tussle between India and China over admission to the Nuclear Suppliers’ Group (NSG), the potential impact on India from the possible British exit from the Euro, and the vagaries of the US Presidential race, to name a few.

Raghuram Rajan, in this myth-making, became a legend, a giant among men. If Rajan was not re-appointed, said the Cassandras, not only would it be disastrous, as “billions of dollars” in FDI would immediately exit, and the rupee would tumble. In the event, neither happened, and the Sensex didn’t collapse. Which should have “show’d the rogues they lied”, but of course that won’t happen.

There are four issues here. The first is whether FDI is as important as it is made out to be, and in any case recent moves by the government have made India “the most open economy in the world”, with many caps on FDI lifted and, presumably, the process made transparent and easier.

The second is whether a single individual makes that much of a difference as central bank head. Most economies are like battleships, and it is difficult to turn them quickly, so there will be a lot of continuity because of sheer inertia. It is not possible for any one person to suddenly change everything, even if he’s a superior intellect.

The third is the question of bank Non-Performing Assets (NPAs) and, more broadly, Rajan’s connections to the Congress party and his – if you will – acquiescence with the late-term scorched-earth policies UPA-2 pursued. It is not that Rajan just arrived yesterday: he has been an advisor to ManMohan Singh since 2007, and could have had some visibility into what the UPA was doing.

The fourth and most wretched question is whether Rajan had been turned into a proponent of the Washington Consensus, the failing post-WW2 American-led economic regime that is now under threat as power shifts from the Atlantic to the Indo-Pacific.

There is some concern, best articulated by Professor R Vaidyanathan of IIM Bangalore, as to whether FDI is all that necessary, considering the enormous amount of funds available and needed in the domestic economy, especially in the informal sector. Nevertheless, the massive opening up of FDI as of 20 June makes this issue moot, as there is positively a welcome mat being laid for the foreign investor.

Besides, let’s be honest: where is FDI going to go? China, the erstwhile favourite, is facing a giant financial time bomb based on bad debt. Of the other BRICS, Russia, Brazil and South Africa are all in trouble. If you take a look at the other economies, none of them is large enough to be worthwhile for a big investor: India, after all, is the best bet today.

Second, this whole business of some Great Man or Woman leading a central bank with oracular omniscience. I remember how US Fed Chairs Paul Volcker, Alan Greenspan, and later Ben Bernanke, were all held up as nothing short of Immortals. Their utterings were scrutinised with the same passion Kremlinologists have (or those reading tea leaves or chicken entrails have) to divine how things would happen in the future. But just do a Google Trends analysis on mentions about them: as soon as they leave office, they become rather obscure, and yet the office continues to function.

In fact, I find it entertaining that Alan Greenspan, who was some demi-god, is now blamed for not anticipating (or, worse, enabling the greed that led to) the 2008 crisis. People are embarrassed by him. So much for omniscience.

I think we’ll blunder on in India even after Rajan exits. If you remember, there was this pressing question: “After Nehru, who?” In fact, we’ve done much better after Nehru, and will do even better… ok, I probably shouldn’t go there.

That brings me to the third question: where do Rajan’s sympathies lie, and how come he didn’t object when UPA-2 piled up huge NPAs by enabling cronies? If he is a Congress sympathiser, then the NDA-2 government has every right to unceremoniously boot him out. This is what an UPA-3 (heaven forbid) would do, and what UPA-1 actually did.

The fact that these huge NPAs are coming out of the woodwork is, however, a good thing, after having been swept under the carpet for long. It is possible to do something about them. There you have to give full marks to Rajan, and to the NDA. And none to the UPA-2, which merrily looted.

The final, and most wretched question: is Rajan a plant of the #DeepState? I am not inclined to think that he is, but an interesting argument was made by Arvind Kumar in DNA (“Why should India pay for the mess it didn’t create?” ) suggesting that the IMF and the World Bank are desperately trying, using any means available, to retain their erstwhile importance in the wake of the arrival of the BRICS Bank etc not under the control of the West. This may also well explain Subramanian Swamy’s assault on Arvind Subramaniam.

But there really is one good reason that Raghuram Rajan is considered an economics superstar. He was one of maybe two or three economists who had any clue that the 2008 crisis was about to happen. Now economists are very good at analysing in hindsight why some catastrophe happened, but almost none of them is ever able to predict one before it happens. That’s probably why they call it the ‘dismal science’, although it is far from being a science. Thus, Rajan, in the land of the blind, is certainly a “one-eyed king”, as he himself said in a different context.