Burning Effigies

A central bank governor’s appointment or reappointment is rarely debated in public forums. RBI governor Raghuram Rajan completes three years in September 2016 and, in an unprecedented situation, speculation about his reappointment has been trending on social media. BJP’s Rajya Sabha member Dr Subramanian Swamy has waded into this ani­mated debate like a riptide, ready with his dubiou­sly distinction for vitriol. The rhetorical flourishes aside, his demand for Rajan’s ouster and the accompanying tirade can be viewed in two ways.

The first is a popular interpretation: Dr Swamy is campaigning on behalf of hundreds of hapless, beleaguered Indian companies which are on verge of penury because of an unrelenting (and thus an anti-national) interest rate regime. The belief is lower interest rates will solve the country’s economic and social problems. And since Governor Raghuram Rajan is shackling the country’s animal spirits, he has to go. Surprisingly, many top leaders of India Inc—Adi Godrej, Rahul Bajaj, Uday Kotak, Sajjan Jindal—have all come out in fav­our of Rajan. Does it mean that Dr Swamy’s crusade is limited to the small-scale segment, which doesn’t have pockets to weather a high interest rate regime? Or was he speaking for over-leveraged corporates? The second is a slightly contrived reading: Dr Swamy actually wants the governor to stay on. The best way to ensure that is to campaign loudly for his ouster. If the government does heed it, and refuses to grant Rajan a second term, it will be seen as acceding to unreasonable demands. Conversely, if it does agree to a second term, the government will be viewed as an adherent of due processes and one not to be ransomed by mavericks.

Whatever the eventual outcome, the government will have to take a nuanced call: judging a central banker’s efficacy and performance cannot be devoid of political overtones but it has to be divorced from the vagaries of politics. And besides, it would seem that Dr Swamy’s unsolicited intervention is an attempt to introduce routine politics into a very delicate decision-making process: the way he slips anti-nationalism into the narrative (by referring to Rajan’s green card) is a rude rem­inder of competitive politics hijacking fair discussions. He also overlooks the fact that some countries have employed a foreigner to head their central bank. Mike Carney (a Canadian) heads the Bank of England—an institution where tradition must be a big priority. And Stanley Fischer, vice-chairman of the board of governors of Federal Reserve System, was governor of Bank of Israel before moving to Washington DC.

Now, if we could ignore Dr Swamy’s rants, what would Rajan’s balancesheet be like? On the credit side, there would be four entries at least. One, he stood up to the Western economic orthodoxy and demanded an alternative global financial architecture that is not unipolar nor tries to foist a one-size-fits-all solution to all problems. Two, in the wake of taper tantrum in September 2013, he managed to halt the rupee’s precipitous fall, staunched outflow of portfolio investments, brought in additional foreign currency by borrowing from non-resident Indians and shored up the central bank’s foreign exc­hange reserves. Three, he has been able to prevail in the fight against inflationary pressures embedded deep in the economy, though this might have made him unpopular with many. Finally, he has made it difficult for the banker-industrialist-politician nexus to conceal ­unpaid loans and now there is an eager process under way to clean up the bank balance sheets.

But then, there is the debit side of ready acceptance of a monetary policy committee, allowing fiscal authorities to have oversight over policy. Even more insidious is the fact that this act admits (indirectly) persisting ­allegations that RBI’s rate-fixing mechanism is arbitrary. Second, Rajan’s candour—or, as one commentator puts it—his habit of speaking on things outside his “policy domain” (http://goo.gl/QXQVSG) may count as weakness. Finally, what might tilt the scales is how global market perceives Rajan’s future. Will they stay even if he is denied a term? It is time to place the bets.

The author is a consultant (policy, research & strategy) with Essel Finance and a senior fellow (geo-economic studies) at Mumbai-based thinktank Gateway House