As the governor of the Reserve Bank Of India (RBI) since September 2013, Raghuram Rajan oversaw an economy on the mend. His predecessor D Subbarao had taken much of the bruises caused by the 2008 global subprime crisis, various rounds of easing measures by the US and others, and elevated commodity prices globally. Wholesale price inflation had dropped from as high as 10.8% in September 2008 when Subbarao took over to 7% in September 2013.
Rajan’s record as an inflation warrior has got mixed reviews from analysts. Some argue that Rajan’s primary task of fighting inflation was made substantially easier by the global commodity price crash. A net importer, India gained profusely from the crash in commodity prices, especially in oil. Also, two successive years of drought through 2015 dented rural demand while putting a lid on rural wage growth. However, some others like Surjit Bhalla argues that Rajan must be credited for breaking the back of inflation, and not the global commodity crash. Since September 2013, the price of imported crude oil dropped from Rs 6,700 a barrel to Rs 3,290 a barrel in June 2016; but the Indian consumer hasn’t seen much of the decline, as the CPI for petrol fell from 112 to 95—just a 17% decline, Bhalla says. This was mainly because of the excise duty hikes on oil during that period.
In fact, wholesale price inflation stayed in the negative territory for 17 long months through April 2016, and retail inflation eased significantly during Rajan’s tenure (from 9.4% in 2013-14 to 5.9% in 2014-15 and 4.9% in the last fiscal). For its part, the government, too, kept hikes in benchmark prices of key crops modest (up to 5%, mostly) and usually stuck to financial discipline despite calls for a brief period of fiscal expansion (It retained the fiscal deficit target of 3.5% for 2016-17). This aided the central bank’s efforts in controlling inflation.
To Rajan’s credit, he resisted pressure from the government and industry really well and trimmed key policy rates when he felt was the right time for it (He could also surprise markets, pleasantly). “My name is Raghuram Rajan and I do what I do,” he said in September last year, when asked if he was being Santa Claus in cutting the benchmark interest rate by 50 basis points– more than what the markets were expecting. He also nudged banks on several occasions to pass on benefits of the cuts in the repo rate to borrowers.
Rajan’s role as the saviour of the rupee has also been appreciated as well. The domestic currency survived the aftermath of the easing measures and the first interest rate hike by the Federal Reserve in around a decade in December 2015. Under his watchful eyes, the rupee attained the much-needed stability, barring occasional flip-flops.
Rajan’s tenure saw the central bank adopting the consumer price index (CPI) as the benchmark price gauge to anchor monetary policy, departing from the decades-old practice of giving precedence to wholesale price inflation. It formally adopted a flexible inflation targetting approach, another first. In yet another first, after initial disagreement with the finance ministry, Rajan agreed to the concept of a monetary policy panel, which will have power to decide interest rates, instead of the governor possessing a veto on the matter.
The government has now formally adopted the CPI target of 4% plus or minus 2% for the period between now and March 31, 2021. If the RBI fails to meet the target for any three consecutive quarters, it will have to set out a report to the Centre stating the reasons for the failure and propose time-bound remedial action to achieve the target. In parallel, the government has also started the process to select its three members in the six-member monetary policy committee.
One of the most daunting challenges during Rajan’s tenure, however, was the rise in non-performing assets of banks, especially the state-run ones. According to an Indian Express report earlier this year, twenty-nine state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years. Instead of sending confusing signals, Rajan took the challenge head-on. In the monetary policy statement in last December, he said: “I want to put something like March 2017 on the table as when we hope that a full clean-up will have been done.” Subsequently, the RBI gave a list of 130 top stressed accounts to banks and asked them to label these accounts as NPAs and to make additional provisioning for them. Consequently, banks witnessed a whopping 96% jump in NPAs to Rs 6,29,774 crore as of June 2016 (public-sector banks together accounted for Rs 5,71,443 crore), compared with Rs 3,20,553 crore a year earlier. While, the clean-up process has been well begun, it still has a long way to go, and Rajan admitted it when he cited it as his unfinished agenda.
As the 23rd governor of the RBI, Rajan’s fame preceded his term at the central bank (He shot to global fame after–as the then economic counsellor at the International Monetary Fund–he accurately warned in 2005 about serious consequences of rising complexities in financial markets that are responsible for churning out instruments like mortgage-backed securities; these ultimately led to the sub-prime crisis in 2008). But his public utterances on intolerance in India and the state of its economy (He said the Indian economy was something like an “one-eyed king” in the land of the blind, signalling the fact that “our out-performance was accentuated because world growth was weak”) made him one of the most outspoken central bank governors and added to the government’s discomfort. As the Opposition used the comment to target the government’s claim of India being the world’s fastest-growing major economy, commerce and industry minister Nirmala Sitharaman criticised the wrong choice of words by Rajan. On one occasion, he even invoked Hitler, trying to prove a point that strong governments didn’t necessarily bring progress:”His was a strong government, but Hitler took Germany efficiently and determinedly on a path to ruin, overriding the rule of law and dispensing with elections.” Some saw it as a veiled criticism of the projections that only a “strong” government like Prime Minister Modi’s could herald an era of prosperity for India.
Some say such utterances added to his credibility that he could dish out uncomfortable truth about the state of the economy, which most governors or policy-makers wouldn’t. However, these ultimately were cited by some as the main reason the government didn’t signal an extension of his term well in advance, resulting in his declaration that he would go back to academics by the end of his term on September 4. Not to forget, BJP MP Subramanian Swamy’s personal attacks on Rajan.
Sadly, with the benefit of hindsight, it can be said Rajan’s extension was denied when India perhaps needed his expertise the most–to clean up NPA, which could arguably have been his most challenging task.