1. Debate on RBI Governor Raghuram Rajan welcome, but not Trump-like attacks

Debate on RBI Governor Raghuram Rajan welcome, but not Trump-like attacks

A debate on Rajan’s reappointment is welcome as long as it is on performance and merit, not Trump-like attacks

By: | Updated: June 11, 2016 8:26 AM
rbi monetary policy, rbi monetary policy 2016, rbi monetary policy june 2016, Raghuram Rajan, Raghuram Rajan repo rate cut, Raghuram Rajan policy, rbi policy 2016 For the first time since the highly successful relationship between FM Yashwant Sinha and Governor Jalan in the late 1990s, India has seen a very close relationship between RBI and FM—a necessary ingredient for economic success. (AP)

It was back in January 2008 when I started my column “No Proof Required” (hereafter NPR). Prior to this, over the previous decade, I had experimented with five different titles—Looking for Logic, Beyond Logic, Calling the Bluff, Jadu Economics and It Doesn’t Matter. There is a reason for the longevity of NPR—it is so Indian, so logic-proof. This fact could have been easily deciphered from that prescient first NPR article, ‘Only in India’ whose blurb read: “How long before the Indian intellectuals, leaders, and policy makers are held accountable for their judgments and discourse on important matters of public policy?”

The recent controversy (and for reasons illustrated below, one cannot in all honesty call it a debate, for debate means a discussion and exchange of reasonably valid views) over whether RBI Governor Dr Raghuram Rajan should be appointed for an additional two-year term, has led to a flurry of Trump-like ad-hominem attacks. It is not my intention to dignify low comments by “analysing” them here. But a debate on Rajan’s reappointment is very welcome, even necessary, as long as it is on performance, and merit.

For the first time since the highly successful relationship between FMYashwant Sinha and RBI Governor Bimal Jalan in the late 1990s, India has observed a very close relationship between RBI and FM—a necessary ingredient for economic success. The lack of co-ordination is almost always (okay, cut almost) the fault of the politicians and not that of the blessedly independent RBI Governors. Full credit, therefore, to Arun Jaitley for helping engineer this close co-ordination over the last two years—and to PM Modi for allowing it to happen.

So where, or what, is the beef regarding Rajan’s record?  We will present accusations below, followed by recorded facts, not opinions.


Accusations: Rajan has made a “willful and apparently deliberate attempt to  wreck the Indian economy”; and his interest rate policies have been responsible for “squeezing small and medium industries (SME) and consequent increasing unemployment”

Fact: In each of the last two years, India has enjoyed a 7% plus growth rate. This despite the fact that India suffered two successive years of drought. Therefore, whatever you may choose to call the economy, ‘wreck’ is beyond imagination.

But how real was this GDP growth? The recent GDP release brought those, who have been perennially wrong about the new GDP series, with another excuse for their seemingly permanent ineptitude in assessing GDP data. The CSO publishes two estimates of GDP at current prices (and two at constant prices)—one from the production (supply) side, and one from the consumption (demand) side. The two should theoretically match, but never do.

The discrepancy as reported by the CSO between these two is 1.9% of GDP (real), and only 0.06% (nominal).  The Cassandras, like Rottweilers, have latched on to the difference in real estimates and concluded that Rajan is responsible for wrecking the economy!

However,  the entire 3-4 percentage points (ppt) decline in GDP growth estimates is accounted for by differences in the respective price deflators—and the CSO readily admits that its demand side deflator is problematic. The supply side (convention around the world) shows 7.6% real GDP growth.

This discrepancy controversy is useful in highlighting a new fact about India’s political economy—that the left-liberal-Congress ecosystem has its fortunes tied to the belief that the only way to defeat Modi in elections is with “evidence” that Indian growth rate is slow, and slipping.  Hence, the rejection of any data that shows Indian economic growth as good, or strong.

Fact: The smallest manufacturing firms (less than R25 crore in sales) showed the highest EBIT growth rate of 12.8% in FY15 ! The non-SME registered an average growth of 10.8%, with the highest sub-sector (R75-125 crores in sales) registering 11.8%. Stated bluntly, the accusation about SME firms growing slower than the rest is bunkum.


Accusations: First, that RBI’s shift to CPI from WPI  as a measure of inflation was wrong, and second, that “the concept of containing inflation by rising interest rates is disastrous.”

The first ‘WPI to CPI’ criticism is wrong on so many counts that one does not know where to begin. But, begin we must. There are three comments. First, I must take some amount of immodest credit in that the first National Statistical Commission (2006-2009), (of which I was a member) recommended the development of a national (both rural and urban) CPI. The first such CPI survey was done in 2010. Raghuram Rajan became Governor in September 2013, and in double quick time, in March 2014, RBI shifted from the traditional—and hugely inaccurate—WPI to CPI.

Fact: No country uses WPI as a measure of inflation. The IMF lists in its WEO database only two countries that do not have CPI data for 2015—Argentina (hyper-inflation) and Syria (war). So, it is just plain simple WRONG to assert that the shift to CPI was in error.

Even more embarrassing accusation is that India has not been able to “contain” inflation, at least according to the CPI.

Fact: The CPI has declined from 10.5% (Sept 2013) to 5.4% (April 2016), a decline of 5.1 ppt. During the same period, WPI has declined from 7.0 % to 0.3%—a decline of 6.7 ppt. Not as large a difference as the “accusers” had in mind!
Critics seem to have forgotten that a major reason for Congress’s extra-large defeat in May 2014 was because they had ushered in an era of very high inflation. In their last seven years (FY08 through FY14), average annual inflation exceeded 9.7% per year, the longest such streak in Indian history, and higher than the previous peak 8.1% annual average between FY74 and FY80.

Finally, the CPI decline that has occurred in India (with some credit to RBI and Rajan) is the fourth fastest two year decline in 2015 and among the top 10% fastest declines in world history since 1980 (excluding hyper-inflation economies). So the critics should get their facts right, but No Proof Required suggests that the wait might exceed the wait for Godot.

And before you even begin to chant the refrain that inflation decline in India has been helped by the large oil price decline, realise that in India, petrol prices (weight of 2.4%) declined by a mere 2% (y-o-y April 2016) while the price of pulses (same CPI weight as petrol) shot up by 34%.

Exchange rate management

Some critics argue that Indian growth rate would have been higher if Dr Rajan had depreciated the rupee to a greater extent.

I will address this complicated question at a later date (Hint—I don’t have much sympathy with this complaint). The fact remains that RBI has managed the exchange rate brilliantly (with few exceptions) since the inception of a dirty managed float in 1993.

It is important for a well-functioning economy that there be differences of opinion. I myself have disagreed with RBI on interest rate policy. But the disagreement has been minor, and it would be churlishly stupid for me to argue that just because RBI has not reduced the repo rate by an extra 50 basis points,  he has done a “bad” job as Governor. It is high time for all of us to get Real and Recognise, and Reward, Rajan for a job brilliantly done.

The author is contributing editor,

The Financial Express, and senior India analyst, The Observatory Group, a New York based macro policy advisory group Twitter: @surjitbhalla

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