8 Things Rajan Could Have Handled Better

Nobody, but nobody, should be happy at the manner in which Reserve Bank Governor Raghuram Rajan is leaving, but this is not to say he could not have handled some things better.

First, he lacked political sensibility. It is naive to believe that the RBI is insulated from politics. In fact, its independence depends on developing a political sensibility so that the institution is insulated from political pressures. In an badly fractious political atmosphere, where the Modi government has been pilloried every day for alleged intolerance, does the country’s chief moneyman need to talk loosely about “Hitler” and “‎one-eyed kings”, thus giving the government’s opposition a further handle to beat it with? Rajan unnecessarily fanned a fire he need not have. Political naivete is not something that helps an RBI governor.

Second, poor supervision. Rajan did the right thing by empowering banks to tackle recalcitrant “wilful defaulters”, but these loans did not build up under the new government that was formed in 2014, but under the UPA. As a key economic advisor to the UPA and then an RBI Governor, the central bank clearly was complicit in the buildup of bad loans. If you give Rajan the credit for creating tools to deal with defaulters, he also needs to take a part of the blame for its buildup.

Third, double-think. You can either believe the economy is growing as fast as the GDP numbers show, or disbelieve it. But you can’t do both. If the new GDP series is off the mark - as many astute observers believe - it needed a different calibration of monetary policy than if it were right. Rajan both doubted the GDP numbers and carried on as if they were right, thus needing higher interest rates.

Fourth, ‎inflation targeting. Rajan was right on his interest rate policy, but wrong by overemphasising its importance in targeting inflation. Most elements in India’s retail inflation - food prices and fuel - can’t be dealt with through higher rates. The only thing to target is core inflation, which is amenable to monetary cure. Food and fuel inflation have to be targeted by supply management, long-term farm reforms, and fiscal policy. The targeting of overall retail inflation instead of just core inflation (inflation excluding food and fuel) is what is wrong about the agreement between the RBI and the government.

Fifth, wrong sequencing of reforms. ‎In a situation where nationalised banks dominate banking, fiscal consolidation and monetary tightness cannot be done together without damaging the banking sector’s ability to lend. When government was tightening its belt, the RBI forced banks to disclose their bad assets, ensuring that banks can neither get government capital nor money from the markets. And when you open up bank licensing just when the incumbents are bleeding, you ensure that even the monetary easing you have done is neutralised. Thus while the RBI eased rates by 150 basis points, banks did not pass on even half the rate cuts. Rajan thus defeated his own rate easing policies. None of his policies were wrong, but he certainly could have timed them better.

Sixth, protecting savers ‎is important; protecting the banking system even more so. If banks go under, you cannot protect savers either. The one thing previous governors have been criticised for was that their actions were more intended to protect banks from competition than the economy from an inefficient banking system. With Rajan the criticism could be the opposite.

Seventh, Rajan became larger than the institution. This is not his fault, for media tends to go where the news is, but Rajan often made himself the news, as he did when he pointedly - and wrongly - criticised the government’s Make in India policy by saying it should be “Make for India”. Whatever the intention behind his statement, he surely did not need to make this kind of statement that effectively went against what the PM was trying to promote.‎ What could have been said in a private interaction with the PM was blared with Dolby sound in public.

Eighth, he could have announced the timing of his own exit better. He put out his statement on leaving the RBI barely a week before Brexit. Thus the market turbulence that will result from this uncertainty will be attributed to him rather than Brexit.

Well, now that he has announced his exit, he has to handle the turbulence - if Brexit happens - adeptly. Nothing less is expected of him.