By Abhishek Gaurav
Edited by Shambhavi Singh
RBI and its counter-inflationary policies by raising interest levels, had taken wind out of the Indian growth trajectory in the first half of 2013. Nothing seemed to work for D. Subbarao, the then RBI governor and a senior bureaucrat, who was due to retire shortly. He famously commented then that were it not for his policies, the situation could have been worse. Someone would prove him wrong and not far ahead in future. Enter Raghuram Rajan, the man with a characteristic calm demeanour, unassuming nature and an uncanny ability to win allies easily, and everything seemed suddenly falling in the right place. Rajan took charge last year in September when the Indian economy was going through one of the worst phases of rupee instability and rising prices. His immediate monetary policies not only brought normalcy into the markets but also helped the economy sail ahead with vigour and stability in the face of rising global imbalances.
For most part of his academic life, Rajan has had a fascination with three-lettered elite institutions – First it was the IITs & IIMs, then the MIT & IMF and currently his association with RBI. Prior to being elevated to the post of Central Bank governor, Rajan was holding the office of the Chief Economic Advisor of India, where also, his unconventional style of working had become the talk of the day. He has had an illustrious career at IMF, being their youngest chief economist and helping to steer the organisation to clear out some long standing multilateral issues. His bold persona and ability to always keep sight of the future and factor it in key decisions, is what separates him from most other central bankers of the day. This takes me back to the Jackson Hole Symposium Conference 2005, one of the most elite banking conferences in the world, where he did not shy away from asking the tough questions and warning the members of the audience about the catastrophic failures of the financial markets that he felt were imminent. The conference was meant to celebrate the achievements of the bygone free market era ushered in by Alan Greenspan and, thus, Rajan’s comments were not appreciated by many, and understandably so. History would again show that Rajan was right.
Coming back to India and his governorship role, Rajan has tried his level best to pave way for greater transparency and accountability in RBI’s functioning. The constituting of Urijit Patel Committee, right after his induction, was a historic move towards radically overhauling the central bank operations. The last time such an exercise was done was way back in 1985. He made his stand clear in his introductory speech itself where he mentions that maintaining the internal and external value of rupee is his fundamental responsibility as the central bank governor. Such a strong mark of clarity in the long term goals was hardly discernible in the erstwhile governors. The decision to do away with WPI index as a measure of inflation was long due and he wasted no time in migrating to inflation indexed Consumer Price Index (CPI). No wonder now that it is the rapidity of changes that has gotten people amazed and wondering as to what will come next. Rajan has a strong sense of belief in healthy competition and has taken himself onto the task of expediting the clearances of new bank licences which would herald a new era of financial inclusion in the county. Alongside this, he has also cracked down on excessively indebted banks and the defaulter companies, trying to dismiss the illusion that “public sector banks are the equity-kitty of business groups”. The results are evident. Gross non-performing assets of banks are on a decline. GDP growth which was crawling at around 4.4 % last has picked up since then to 5.7% recently. The Indian Rupee which was floundering at 68.85 to a dollar in August’13 before Rajan is now solid and stable, at 61 to a dollar. To add to this, one of his most subtle achievements has been to bring back credibility to the central bank and allow the economic actors to form rational expectations in a time consistent framework. This is perceptible from his commitment to rein in inflation even at the risk of being labelled the bad guy. Inflation has been a persistent problem for our economy. Between, 2008-2012, India was the only BRICS country where inflation consistently rose. We have the highest inflation levels amongst all the G20 economies. It is no surprise then that he has been extremely cautious on the matter of lowering interest rates amidst rising political and business pressures. In this context, the 2nd December review of RBI is highly awaited. Rajan made a powerful observation in his inaugural speech last year that “Change is risky but not changing is even riskier”. From what all he has done in a year or so, it seems that change is here to stay.
Abhishek Gaurav is a B.S. – M.S. dual degree student in Economics at IIT Kanpur. He has a prior experience with the development economics centric research arm of MIT, Abdul Latif Jameel Poverty Action Lab (J-PAL), primarily working in the area of evidence based policies. His interests lie at the intersection of economics, politics, policy and finance.