A compilation of essays and papers by the former RBI governor has some added perspective, and some justifications
Raghuram Rajan has created a niche for himself in Indian finance, not just for being categorised as a ‘rock star central banker’, but as one who never flinched from saying what he was convinced about. This is how he is very different from his successor Urjit Patel, who is a measured, controlled professional. The incident behind what drew out the famous words, “I do what I do”, which have now been elevated to the title of Rajan’s book, is quite typical of the persona called Raghuram Rajan. The book is a good read, as Rajan backs his views with theory and logic. But it could be a disappointment for some, as most of the essays are downloads of his speeches made when he was governor of RBI, or papers written while he was working with the IMF.
Interestingly, the latter are refreshing, as they take us back to the days of the financial crisis. For a person not following the RBI website, even the compilation of essays is an excellent thing to revisit. Is the book a justification of everything Rajan did or did not do? In a way yes, because he also provides a clarification and at times gets defensive over some controversial statements he made during his tenure as RBI governor. Take, for instance, the case of the ‘one-eyed king’, which made headlines, as it literally seemed to hit the government hard even as the author spoke of how India was progressing well relative to the world. Did the media then pull it out of context or was it interpreted in the wrong spirit by the government? The reader would have to decide on this one.
Similarly, Rajan gets defensive on his comment on the Make in India issue, when the government announced its programme. It was interesting nonetheless, as the debate over export promotion and import substitution got reignited. But what made Rajan’s view significant was the fact that the media caught on to it. It made headlines and several business channels had prime-time discussions on it. His views on tolerance, too, have been clarified in the book, specifying that his allusion had more to do with the general way of life and was not a reference to the government or its stance on fundamental issues relating to saffronisation.
Rajan is more forthright on the independence of the RBI and this is where he makes some really cogent arguments. His view is that as the governor of RBI and a practicing economist, there is nothing amiss in advising the government, which, in turn, has the prerogative to take it or leave it. This can’t be interpreted as being a fundamental fissure in the relationship between the two entities. On the views he has expressed, there could be three sets of people who would probably not agree at times. The first is the economist, who would not find the linkage he draws between monetary policy and food inflation convincing. While he gives various reasons for food inflation, increasing policy rates can’t bring down food prices. Here, he links rates to future wages, but they do tend to be sticky. Besides, food being a necessity would still be consumed by people, as it is absolutely essential and can’t be compromised. Even if the explanation works, it would be improper for any monetary authority to claim that inflation has been controlled by lowering the demand for food by the wage earner who is also relatively lower down the income scale.
Second, the pensioner would take umbrage at Rajan’s analogy with dosa consumption. He uses the example of the dosa to show that the retired gentry is actually better off when interest rates come down, but inflation is lower. He misses the point that the pension-earner has a fixed capital and gets hammered by cumulative inflation. By just looking at one episode of lower rates and low inflation, a pensioner is not better off, as purchasing power lost is on a cumulative basis. Lower interest rates fetch lower income for the person with fixed savings. If the inflation rate comes down from 10% to 5%, he would not feel better off, as the fixed income received in nominal terms keeps falling, while the cost has gone up twice—by 10% first and then 5%.
Last, the media would not be pleased, as the author shows little respect for this class. He says it is dangerous to repeat speeches when you are governor because if there was less of something new, then it was more likely that the media would make news by latching on to ‘something peripheral’. Maybe that was how he was interpreted incorrectly on the one-eyed king or the issue of tolerance! The media could counter argue that knowing that it is looking for scoops, he should have been doubly careful. But quite clearly, he did relish the controversies that were ignited when he made those bold remarks.
The book includes his farewell essay to the employees of the RBI, who, he declares, are the best in the world in terms of talent and dedication. This could be a departure from the statement he had made earlier during his tenure when he lamented the absence of good economists for policymaking despite the Department of Economic Analysis and Policy within the RBI being equipped with a fairly large contingent of this breed.
Madan Sabnavis is chief economist, CARE Ratings