Raghuram Rajan era ends; Swamy has the last laugh in this political thriller

So, that’s the end of all speculations, conspiracy theories and frenzy surrounding the extension of Raghuram Govinda Rajan, the God of Mint Street, at the Reserve Bank of India (RBI). In a letter to RBI staff on Saturday , Rajan has said he wouldn’t take up a second term at the RBI after his term comes to end in September. [caption id=“attachment_2822506” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan. PTI[/caption] “…on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed,” Rajan said in the letter. “I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months.” Whether Rajan’s decision is the outcome of a political campaign targeting him in the last few months led by BJP MP Subramanian Swamy or purely on account of personal reasons (interest to return to academia) is a mystery that would perhaps never get solved. But the last laugh in the battle is clearly Swamy’s who had mounted an unprecedented attack any RBI governor has faced in history. Swamy has campaigned against Rajan with charges and accusations ranging from his “mentally not fully Indian” status to “wrecking” the economy with his monetary policies. On the face of it, Rajan’s decision is unlikely to be the outcome of his academic ambitions alone; there is more to it. Just last month, in an interview to CNBC Awaaz channel, Rajan had said that “there is more to do” in the job, when the interviewer asked whether his work will remain unfinished if he isn’t granted a second term. “It’s a good question. I think we have accomplished a lot… I think that … I mean, there is always more to do.” For Rajan who saw more opportunities in a well-recognized role, what has changed in one month? There are indeed reasons to believe that the Swamy saga has had its share in this. But, that’s of course debatable and forever inconclusive. Also in the Saturday letter, Rajan says he was “open to seeing these developments” (bad loan clean up and risks emanating from global markets) through. This one can interpret as Rajan’s willingness to continue to a second term if requested (by the government). But that request never came it appears. Swamy’s immediate reaction to Rajan letter confirms that there is a larger political design behind Rajan not continuing for a second term. “Raghuram Rajan is a Government employee and government employees are not selected on the basis of popular vote.” Swamy is right. RBI governor’s term shouldn’t be decided based on popularity and looks, but on the merits of work and Rajan has an impeccable track record as the RBI governor on any parameter one looks at . But for Swamy, perhaps the selection of a government employee should also be based on whether the government wants him or not. As _Firstpost_ noted earlier , there are reasons to believe that Swamy’s Rajan Hatao campaign wasn’t a one man show. Now that Rajan era is over. What next? Clearly, the sky isn’t going to fall down. RBI policies and its larger reform plans for the financial sector isn’t a one-man show but an institutional effort. The government will find someone else to replace him and life will go on in RBI and outside as usual. But the larger point is this. If Rajan’s successor fails to continue with the reform impetus he has offered to the financial sector, through a series of measures and high-risk calls (like putting a deadline for banks to clean-up bank balance sheets), it could take the sector and the economy few steps back. Rajan’s exit will likely cause short term impact in the rupee, bond and equity markets in the short term as panic reactions are due. It wouldn’t be an easy task for the Narendra Modi government to find someone capable to fill Rajan’s shoes. Global investors wouldn’t take it in good humour if Rajan is replaced by a ‘Yes man’ to the government, who wouldn’t stand up to save the independence and credibility of RBI and take bold decisions. Looking at the Gajendra Chauhans and Chetan Chauhans of the world, investors will certainly be worried for now. Rajan is leaving his job halfway. Many critical reforms he initiated are half done. The biggest of them is the bad loan clean up exercise. After Rajan put a deadline to banks to disclose all non-performing assets (NPAs) by March, 2017, banks have reported massive jump in the bad loans in the last two quarters. This was a painful step for the banking industry since declaring NPAs in large chunks also meant huge amount of capital and erosion in investor confidence. Rajan also put an end to the practice of rampant restructuring of corporate loans. This irked crony capitalists who have been ever greening their loans for years silently building a bad loan bomb in the banking system. Continuing this exercise is a challenge for Rajan’s successor. Similarly, when Rajan took over on 4 September, 2013, he laid out a broader roadmap to bring in structural reforms in the banking sector by permitting new set of small banks (payments banks, small finance banks), on-tap licencing of universal banks, besides pushing for early recognition of bad assets. This exercise too is halfway. Another exercise currently underway is reforming the monetary policy mechanism. Rajan, under the recommendations of Urjit Patel panel, was also instrumental in rewriting the monetary policy mechanism by binding the government to initiate a joint monetary policy committee which will set an inflation target to RBI and give a freehand to the central bank to achieve that target. PM Modi’s silence on Swamy’s personal, and often baseless, attacks on the RBI governor has strengthened theories that there is a political angle to Rajan’s exit. Modi has remained largely silent on Rajan-Swamy controversy despite the fact that top rating agencies, economists, investors and industry persuading the PM to end the uncertainty in the investor community and announce a second term for Rajan. It’s a victory for Swamy. But once the party is over, the NDA-government will have a much bigger headache to find a worthy successor to Rajan.