The numbers RBI governor Raghuram Rajan did not get: 2014 and 282
I have a completely different take on L’affaire Rajan — or #Rexit as the media has dubbed it — the decision of the Government of India not to offer a second term to the incumbent governor of the Reserve Bank of India, Raghuram Rajan
The author is an Indian political commentator and policy analyst, currently serving as honorary senior fellow, Centre for Policy Research. He has been editor for numerous financial publications and served as Manmohan Singh's media advisor and chief spokesperson from 2004 to 2008.
I have a completely different take on L’affaire Rajan — or #Rexit as the media has dubbed it — the decision of the Government of India not to offer a second term to the incumbent governor of the Reserve Bank of India, Raghuram Rajan.
To appreciate my theory one has to understand the significance of the electoral verdict of May 2014, the political importance of the ruling party’s 282 members in Parliament and the political economy of policy in India.
From 1989 till 2014, New Delhi has lived in the era of coalitions. The so-called ‘ruling party’ in New Delhi often felt it was not ruling at all. The authority of the executive was increasingly challenged by the judiciary, the legislature, the media, civil society, a range of regulatory institutions and the executive’s own arms like the Comptroller and Auditor General (CAG). From the days of VP Singh to those of Manmohan Singh, especially in his second term, the prime minister and his office became increasingly besieged. Every occupant of that high office longed for the authority that an Indira Gandhi and even a Rajiv Gandhi enjoyed.
In May 2014, the leader of the Bharatiya Janata Party, Narendra Modi, recovered that authority for that office by the magnitude and manner of his victory. The problem for Modi has been that an entire generation has grown up in between that has no memory of a powerful PMO and has little appreciation for Delhi’s desire to recover that authority for itself.
Getting a clear majority in Parliament was not the only achievement for Modi and his party. Vanquishing their prime opponent, the Indian National Congress, which had diminished itself to become nothing more than the Sonia Congress, was also an important political achievement. Modi’s slogan of “Congress-mukt Bharat” was a message to the country and to all its institutions that the 2014 verdict was not just another election result, but constituted a regime change.
Modi took the long view.
The decline of the Congress and the rise of the BJP began simultaneously in the mid-1980s. It went through its ups and downs and had reached a turning point. The quantitative change over those years came to a boil in the Summer of 2014 contributing to a qualitative change. The message since then of the Modi government to everyone, at home and abroad, has been “get used to it”.
The problem with Raghuram Rajan is that he came to believe his intellectual and global credentials were so impressive that he would survive the regime change without ‘getting used to it’. Indeed, and on the contrary, it was for Modi, the Sangh Parivar and the Ministry of Finance to get used to him.
Undoubtedly Rajan is a talented professional. He should be a professor at an Indian university (why only in Chicago?), and should write, speak and educate. His lectures will be heard, his books will be read and he will continue to be widely-respected and well-regarded.
But the Reserve Bank of India is not a university.
For far too long has India’s ‘steel frame’ — the Central government — taken this ‘get used to me’ from other institutions of the State. After May 2014, the Indian State has been systematically reminding everyone that the word State comes with a capital S and at its apex lies the prime minister and his office, manned by the IAS.
While other institutions started falling in line, the RBI under Rajan continued to imagine it would remain an exception. Rajan seemed to imagine that he could combine the role of central bank governor with becoming a global public intellectual and media icon without let. The Empire Struck Back, so to speak.
What is the City of London’s big criticism of Prime Minister David Cameron on the Brexit issue? That he did not act like a prime minister with an absolute majority. That he chose to be a populist calling for a referendum in a parliamentary democracy. And the same people want the Indian prime minister to make his policy based on what fund managers and the pink press wants?
At least one reason for the communication gap between Mint Road (home to the RBI in Mumbai) and Raisina Hill (home to the PMO and finance ministry in New Delhi) was the growing view among bankers, economists and the financial media that the Indian central bank had acquired a certain institutional autonomy from the central government, like some other central banks in the western world. This view has been fed by the western media, egged on by western financial institutions and investors, who have assiduously sought greater autonomy for India’s market regulators from domestic politics.
A popular story among central bankers used to be about the relationship between the Bundesbank and the federal government in Germany. It was said that even the windows in the office of the president of the Bundesbank, located in Frankfurt, opened to the south, while Bonn – home to Germany’s chancellor (before Berlin) - was to the north. Over the past decade or so the media spread the mythology that the Indian central bank chief was also now like the Bundesbank chief. He spent more time looking at the Arabian Sea, and beyond, than the vast plains and high mountains to the north.
This myth gained currency during the tenure of Yaga Venugopal Reddy. However, what many have not appreciated is the fact that not only did YV Reddy belong to the hallowed IAS, but his policy credentials were burnished over the years by excellent crisis management both at North Block and on Mint Road. And, those who understand India’s political economy will appreciate, YVR was a Rayalaseema Reddy with personal friends across all political parties. During his tenure at RBI the most powerful Congress leader in India was also a Rayalaseema Reddy!
Finally, and most importantly, while Reddy crossed swords with the finance minister of the day, he was always deferential towards the prime minister.
On one occasion when some worthies in New Delhi were particularly incensed with Reddy, they sought the prime minister’s intervention to upbraid the RBI governor. At one such meeting with the prime minister, a senior policymaker in Delhi raised his voice in exasperation, “Does the governor know who the sovereign is?”
The reference was to the fact that the last word on policy would have to be that of the Government of India, not the governor. My guess is that question may well have been echoed in more recent months.
In response to that question even the tough-talking and independent-minded Reddy made sure he had an open line of communication with the prime minister, that he knew the prime minister’s mind and there was no misunderstanding between the two. Maybe even Rajan was mindful of the prime minister’s views on policy in its narrow economic terms, monetary and exchange rate policy, but he seemed to be unmindful of Mr Modi’s larger policy thinking and goals.
From Jawaharlal Nehru to Manmohan Singh, every single prime minister has appointed his trusted man (and till now, it has only been a man!) to the job. Morarji Desai appointed the highly-talented IG Patel in 1979 and when his three year term ended, Indira Gandhi did not give him an extension. She replaced him in 1982 with Manmohan Singh. Rajiv replaced Manmohan Singh at the end of the latter’s three year term. With the exception of S Venkitaramanan (1990-91), all governors appointed by one prime minister were replaced at the end of their term by the next one. Subba Rao secured a second term from the same prime minister who gave him his first. Modi has merely kept in step with precedent.
Rajan has very impressive academic credentials and international experience, he spotted a black swan on one occasion and he is very articulate. However, it seems from the outside that he was not willing to come to terms with India’s political economy. To imagine that the central bank is independent of a nation’s political economy is at best, naïve and at worst, arrogant.
The Prime Minister of India does not decide who his central bank governor should be on the basis of an editorial view of the Economist or a Wall Street fund manager. Nor would the head of government in China or any other large sovereign republic. Those who think he should, and there are many in the globalised financial sector, in academia and in the media who seem to, live in a different world.
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