Raghuram Rajan's exit was ugly, but India’s economy is not a one-man show

The author is a political-economy analyst and the author of Accidental India: A History of the Nation’s Passage through Crisis and Change. He tweets @shankkaraiyar

  Everyone should be respected as an individual, but no one idolised - Albert Einstein

Someday someone somewhere in or out of government will put together a manual on “How Not to Do Things”.  And R3XIT, the exit of Raghuram Rajan from RBI, will find a place in it. Sure there were differences — ministers had petitioned for his ouster. Yes, there was much grief about Rajan’s utterances — the one about the one-eyed king apparently being the tipping point. The cause list though doesn’t mitigate the consequence — it doesn’t take away from the fact the orchestration of R3XIT was ugly and avoidable. Equally ugly, avoidable and unwarranted is the buzz of gloom drummed across echo chambers. Of course there is disappointment — continuity is always preferable as is known competency. Sure, the individual does matter, but so do outcomes. The fact is the counter-factuals are as yet unknown — for instance who the next incumbent is? Surely, the fundamentals crooned about till the other day — for instance, India being the fastest growing economy — cannot be discounted overnight. R3XIT is not the end of the world. A popular thesis bandied about suggests that investors and millions of dollars will flee in the wake of Rajan’s exit. It would seem the India Story is a lone star Bollywood flick of yesteryear. Another theory suggests that crony capitalists have engineered the ouster. Even if one buys into the argument the question is how does his ouster help. There is the process that precedes and follows declaration of NPAs. Can the new incumbent enable its circumvention? Timing is often the critical factor in politics, in economics and of course in markets. The worst facet of R3XIT is the timing. It comes at a time when markets could be roiled by speculation and by news – Britain is voting on BREXIT, EU is voting lifting/extending sanctions on Russia, Japan is wrestling with negative rates and an appreciating Yen and the US is confronted with a reality check on its growth and therefore stock valuations. [caption id=“attachment_2844370” align=“alignleft” width=“380”] File image of Reserve Bank of India (RBI) governor Raghuram Rajan. Reuters[/caption] Will it be a Manic Monday? You could bet volatility will visit the markets as players rush in to vote their views. It is possible that the rupee and stock indices could be rocked. Why? Would that be because of R3XIT, because of BREXIT, because of EU’s  decision, because of fears in the US, because of scepticism about the green shoots recovery story in India, because of concerns caused by a delayed monsoon? It could be one or all of the reasons. As Alan Greenspan said famously, something or anything can be the “proximate cause for re-evaluation” in the markets. And of course since “proximate” is the operating phrase whatever happens in the next few days and in the next few weeks and in the next crisis can and will be attributed to the exit of Rajan. In any case in India — and increasingly elsewhere — the location of the trigger for reactions is a vexing exercise considering the complex matrix that markets operate in a globalised world. Very simply coincidence is often interpreted and redefined as co-relation. Markets – like much else in economics – must operate on facts. Remember the Sensex scraped 22,000 levels and the Dollar touched Rs 68.73 even as Rajan was around. The question that begs to be asked is if material facts have changed fundamentally between Saturday and Monday? What did Rajan say about preparedness for global events? He said “I have said repeatedly we have three defences, good policy, we have longer term liabilities in this country, we have not contracted too many short-term liabilities and we have a reasonable amount of reserves, all of which should help us weather volatility in financial market.” Has that changed? Every governor since the 1991 crisis — S Venkitaramanan, C Rangarajan, Bimal Jalan, YV Reddy and D Subbarao — dealt with challenges. Remember that between 1991 and 2016, the Indian economy has faced a series of challenges to its management of the external account – be it the Asian Contagion, the post-Pokhran sanctions, the 2008 Global Financial Crisis and the 2013 Taper Tantrum. The question that needs to be asked is whether the Indian economy is a one-man show? The narrative of “one and one alone” reeks of idolatry tendencies. It is true that Rajan brought to the table integrity and knowledge of the complexities of global economies and clarity. It is also true that he did a competent job as governor. However it could not have been a one-man show. The lowering of inflation, cutting interest rates, stability of the rupee, new bank licences and transparency on NPAs came in collaboration with the government. The flip side of the argument is that the fall in inflation is largely due to the precipitous fall in crude prices and even though headline inflation has come down there has been no impact on the vexing food price inflation. Interest rates have been cut but the benefits have not flowed to those burdened by EMIs and to other borrowers. While there is more transparency about NPAs the resolution required is yet to be crafted. Intriguingly, through the controversy two parallel stories were in contest – about India doing well and India suffering because of Rajan. Indeed, the method and madness that defined the episode will weigh heavily on whoever wants to work in the system and haunt the anxieties of the next incumbent. At a different level what is the logic of the current three-plus-two tenure? Why not give the governor a clear five-year term? Unsurprisingly, the episode triggered debate, robust performance analysis and opinion on what the government must do. That is fair in any representative democracy. However the episode also raises a troubling question. Must players – lenders, borrowers, investors – issue certificates of competency and weigh in on the appointment/extension of a regulator? How do we define legitimacy of process and conflict of interest when players want to weigh in on who the umpire will be? These are issues India must mull on as it weathers the storm of R3XIT.