Raghuram Rajan on 'venal politicians', crony capitalism and merging banks

For the second time this week RBI Governor Raghuram Rajan took on the illshe says are affecting the Indian economy - namely, crony capitalism and greedy politicians.

The Economic Times reports that Rajan, while speaking at an event in Mumbai, pulled up ‘venal politicians’ by saying that poor access to pubic services had helped politicians take undue advantage of the masses.

“The tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access. This may be why he survives,” he was quoted as

Rajan also spoke about the prevalence of crony capitalism in India saying that the practice of democracy was hurt when public interest gave way to special interests.

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Earlier this week, Rajan spokeon the same subject , sayingthat crony capitalism also hurt the economy.

“By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth,” he had said.

He further said that one of the greatest dangers to growth of developing economies like India is the middle income trap where crony capitalism “creates oligarchies that slow down the growth.”

At last evening’s event, Rajan also spoke on several other issues.

On the issue of high interest rates, the RBI governor said thatcentral bank’s elevated rate structure may be painful in the short run, but will help in the long-term by containing inflation.The RBI governor,who has been under fire for keeping the interest rates high, explained that in the face of bottlenecks on supply sides the RBI is seeking to keep some control over the demand side by keeping the interest rates high.

Rajan also stressed on getting the fiscal deficit and current account deficit under control, saying complacency on this front had led to some adverse effects including the heavy depreciation in the rupee.

He, however, reiterated that work on various fronts has yielded good results and the country is not vulnerable if some adverse developments were to happen externally, as it was the last time when the rupee depreciate

When questioned about the need for insolvencylaws, Rajan voiced his approval for the idea, saying the country needed a strong and efficient bankruptcy code.The central bank headsaid he was hopeful that the code embedded in the amended Companies Act passed last year will help things, but it has been stuck due to some issues which need to be worked out.

Hesaid there should also be clear distinction between debt and equity, saying that we often confuse between the two while dealing with stressed assets.

Rajan also shared his views on the issue of bank mergers saying,“One has to be very careful in deciding who to merge with whom. The best of all where you merge strong banks together because they have the resources, health and culture, and they will not have any problems to fix other than merger itself."

Rajan said that if two unhealthy banks are merged, the created entity will also be unhealthy and it could create a bigger problem in the economy.

He further said the if one merged an unhealthy bank with a large healthy one, it may bring problems for the large healthy bank at the time of consolidation.

With inputs from PTI