Raghuram Rajan exit: With rock star gone, PM Modi's task will be lot tougher now

Forget Raghuram Rajan, the serving Reserve Bank of India (RBI) governor, who declared on Saturday that he isn’t in for another innings at Mint Road. Come September, Rajan will be part of our past. There is no point lamenting on brain drain and trying to discover new angles to ‘Operation R3’, which was executed with surgical precision by BJP warhead Subramanian Swamy and duly supported by the Rashtriya Swayamsevak Sangh (RSS) camp. [caption id=“attachment_2842696” align=“alignleft” width=“380”]  Raghuram Rajan. Reuters[/caption] All those ladies and Rajan fan-club members who have drooled over the good looks of the central bank governor, it is time to get ready to bid adieu to your idol, the rock star, for he will no longer be around to add that extra spark to an otherwise boring RBI lecture or a post policy presser. Try and look out for a new idol. The Rajan era will be soon over. The next big question that begs an answer is: What lies ahead for the RBI? There isn’t an easy answer to that. Rajan and other RBI chiefs What differentiated Rajan from his predecessors (most of them IAS officers who served the central government or former career bankers) was that he saw things from an international perspective. Rajan was no superman or an avatar sent by the heavens to restore lost dharma. Not even his enemies will dispute that Rajan possessed the international experience and perspective that most of his predecessors at RBI lacked. More importantly, Rajan had the stature to question the government if the situation demanded. The job of an RBI governor cannot be strictly compared to other top bureaucratic positions created by the government since the RBI is the real guardian of the economy. Its mandate is to do what it takes to ensure financial stability in the economy, not what the government wants it to do from time to time. The credibility of the institution is ascribed to its ability to function fearlessly regardless of the political dispensation it is operating under. Often, the central bank takes up the role of a corrective force in the system and calls a spade a spade compared with the political dispensation, which is largely guided by please-the-electorate agenda. This is why international observers and academics attach more credibility to the voice of RBI than the finance minister or prime minister on economic matters. It is not wise to conclude that majority of the media, economists and industry captains batted for Rajan due to what novelist and columnist Shobhaa De found in him—chiselled features and sex appeal. There is much more to the central governor than that! The reason Rajan has the support of  a large and diverse section of the country and abroad is simple and logical to even a naïve mind. Rajan, who had initiated monetary policy reforms in the crucial banking sector in India after a very long time and dared to take on the powerful crony capitalist-political lobby, should have continued as the RBI chief for another year or more till the task was accomplished. Rajan was open to see those challenges through as he has stated in his farewell letter. The importance of being Rajan Why Rajan? Can’t these tasks be continued by another pair of hands? Not unless the governor’s successor has the right mix of a strong spine and a fine brain that Rajan possesses. There is no surety that his successor can see things through with the same sense of urgency, especially with respect to digging out bad loans in the banking system. Many of Rajan’s policies, including the bank cleanup exercise, were not welcome to the Modi-government (on account of the huge capital implications attached to it). No one dared to gag Rajan because of his stature and acceptance globally. Just as Rajan predicted the 2008 financial crisis, he has saved India from an impending banking crisis by setting the ball rolling for a massive bad loan cleanup. Theoretically, the RBI is answerable to the government. It is not an independent organization. That’s the reason why the government has had the last laugh after most debates and ‘creative tensions’ with the RBI in the past. Government vs RBI Many a times, the government has dictated policies to the central bank. In 2010, it was announced in the February Union Budget that the RBI will issue new bank permits. Remember, this was at a time when the central bank was battling for consolidation in the banking sector. There have also been instances when the government has announced the RBI monetary policy a few hours before the RBI could, thanks to the customary pre-policy consultations between the RBI governors and finance ministers. There is also a precedent of finance ministers openly expressing anguish over the central bank’s reluctance to cut rates. Remember the famous line of P Chidambaram, former finance minister, “if the government has to walk alone to face the challenge of growth, then we will walk alone". Chidambaram was miffed that the then RBI governor D Subbarao refused to cut rates in the way government wanted him to do. But, even Subbarao, himself a former civil servant before he took charge as RBI governor, did not have the persona to take on the government publicly. Subbarao was known to be more of a consensus man in RBI circles. It was Rajan who put up a brave face when he had to take tough calls even against the government’s wishes and public perception. If PM Narendra Modi fails to appoint someone who can stand up for the RBI’s independence and credibility, then it will undermine the RBI’s role on two immediate issues. First, the new monetary policy committee will effectively set the policy direction by deciding the inflation target for the RBI. In the new regime, the new committee (which is yet to be formed) will have equal members from the RBI and the government with the governor having the casting vote in case there is no majority view. If the new governor is a government man, effectively, the government will hijack the monetary policy. That’s bad news for the country, since RBI always has a long-term view on monetary policy, while the government typically looks at short-term priorities. Two, will the ongoing bad loan cleanup continue or not is a question whose answer will have to be seen, after Rajan’s exit. Rajan’s bold call to dig out the dirt in the banking system once and for all and bring credibility to the bank balance sheets made him the enemy of cronies and crooks. The central bank governor had opponents even within the RBI with respect to the bank cleanup exercise, let alone among sections of the government. Cronies were unhappy because Rajan’s twin steps—curtailing fresh restructuring by withdrawing special dispensation on provisions and the March 2017 deadline for full disclosure of bank balance sheets—meant that the era of constant evergreening of corporate loans in the system came to an end. Some of the big, politically-connected industrialists, who have been looting the public sector banking system as if it was their personal piggy bank, were angry since there would be no more free lunches for them. Post Rajan, PM Modi’s task of reviving the economy and bringing back the credibility of the world to India will be even tougher. Rajan was the face of credibility for many outside India when the official growth numbers announced by the government were seen with skepticism and suspicion. Credibility and transparency are big factors for international investors.Once Rajan leaves RBI, Modi’s challenge is to bring in another face who can offer the same comfort to the outside world. A strong central bank is critical in the context of the unfolding global scenario, Brexit, and commodity price reversals. That task is a lot tougher for PM Modi now that the trusted sentinel of the Indian economy is set to retire from the battlefield.