RIP Indian Economy

New Delhi, June 20 : Raghuram Rajan took control of Indian monetary affairs when the economy was facing its most serious stress since 1991. He had said at the time that he would try to do what is necessary rather than what is popular. That statement resonates today.

His achievements are considerable. Inflation has halved. The overdue cleaning up of bank balance sheets has begun. Foreign exchange reserves have been built up to help India deal with global shocks. This newspaper has often said that the credit for stabilising the Indian economy since the rupee shock should be given to the trio of P. Chidambaram, Arun Jaitley and Rajan. Look at what is happening in countries such as Brazil to understand the importance of what has been done in the past three years.

Rajan has now decided that he does not want to seek an extension. This makes him the first Reserve Bank of India (RBI) governor in nearly a quarter of a century to be at the helm for less than five years. His letter to the employees of the central bank suggests that he would have liked to finish the job that he has begun. We may never know why he finally decided to go back to academic life, but it is quite obvious that the vicious attack on him in recent weeks must have played a part.

Tensions between the government and the RBI on the conduct of economic policy are not unknown in India. The jugalbandi of Manmohan Singh and C. Rangarajan or Yashwant Sinha and Bimal Jalan is now increasingly rare. However, no central bank governor has had to face the sort of personal attacks that Rajan has been subjected to. These attacks were led by Subramanian Swamy, but the final responsibility for not standing by Rajan should rest with Prime Minister Narendra Modi and finance minister Arun Jaitley. They cannot pretend otherwise.

The most recent parallel is the failure of Manmohan Singh to protect C. B. Bhave at the Securities and Exchange Board of India, from political pressures that could be traced back to financial market interest groups unhappy with the regulator doing his job. What is astonishing is that a group which believes India can simultaneously appreciate its currency to achieve parity with the dollar on the one hand as well as cut interest rates aggressively on the other hand — and it does not need a Harvard PhD degree to figure out why this is a ridiculous proposition — have managed to get leverage in this government.

There has been a lot of sanctimonious talk about how any institution should be bigger than the person leading it. That is blindingly obvious. The Reserve Bank of India will survive the departure of its governor in these unfortunate circumstances. But one of the few surviving quality institutions left in the country has been rattled badly. One of the main achievements in recent years has been rebuilding the credibility the central bank lost during the inflation crisis, thanks to fiscal profligacy in New Delhi combined with the delay in rate hikes in Mumbai. Rajan played a big part in that process of rebuilding credibility — through a new monetary policy framework, higher interest rates and, yes, his personal qualities.

It is not that Rajan has not had his critics — from those who believe he was too aggressive with interest rate hikes to those who say he was too timid in giving out new bank licences to those upset with his speeches on issues outside his remit as a central bank governor. But criticism is one thing while personal attacks are other thing altogether. One can only speculate about what this sorry episode will mean for the next governor.

In April 2015, Modi had grandly said in Mumbai during the 80th foundation day of the RBI that his government and the central bank thought along similar lines. He added that he often depended on Rajan to explain complex economic issues to him. The Prime Minister should ask himself why he kept silent as one Rajya Sabha member with an army of Twitter devotees got away with attacking his accomplished central bank governor in this manner.

Five points where Subramanian Swamy went wrong

How many erroneous claims can a Harvard economist make in six paragraphs? We present the letter written by Bharatiya Janata Party MP Subramanian Swamy to Prime Minister Narendra Modi asking the latter to remove Raghuram Rajan from the post of Reserve Bank of India governor.

One, Swamy argues that fighting inflation with higher interest rates is disastrous. One country did recently try to reduce interest rates in response to high inflation—Turkey. And what happened there later is well known.

Two, Swamy says that Rajan should have been looking at the trend in wholesale rather than retail prices—but that is precisely the mistake the previous government made after 2010. The result was double-digit inflation, a shift of savings into gold and an eventual rupee crisis.

Three, Swamy claims that small businesses are uniquely hurt by high interest rates—even though the most recent data from the ministry of corporate affairs shows they are doing better than large businesses.

Four, Swamy points to the fact that bad loans have doubled over the past two years as proof of Rajan’s incompetence. Evidently, this is not because banks have been forced to recognize them but because we have a central bank governor who is not Indian in mind.

Five, Swamy pens this gem: “… the consumer price index has not declined because of retail prices”. It is like saying rainfall was high because there were good rains.

Modi should have ignored this missive.