Raghuram Rajan takes charge at a time when the country faces multiple problems

Every time Sachin Tendulkar walks in to bat, he carries the expectations of a billion Indians.

Similarly, Raghuram Rajan, the 23{+r}{+d} Governor of Reserve Bank of India, too could feel the weight of expectations as the country looks up to him to fix some of the ills plaguing the economy.

He comes to the RBI as an economist of international standing and a reputation for prescience — through a National Bureau of Economic Research working paper, he dropped ample hints about the 2008 global financial crisis three years before its onset.

The 50-year old will have to summon all the skills and experience gained over the years to not only foresee possible crises in the real and financial sectors but also come up with out-of-the-box solutions to deal with them.

From being an ace economic thinker, the new RBI Governor has to turn into a practising economist, keeping in mind the well-being of all stakeholders in the economy — be it the ‘aam aadmi’, the agriculturist, the trader, the industrialist, the financial intermediaries and, of course, the Government.

When Raghuram’s predecessor, Duvvuri Subbarao, took over the reins at RBI in 2008, the global financial crisis, triggered by the collapse of financial services firm Lehman Brothers, was just unfolding.

However, for Subbarao, the comforting factors then were that growth was surging along at 9 per cent, fiscal deficit was on the mend, the rupee was appreciating and asset prices were rising.

There were inflationary pressures but the general perception was that inflation was a problem of success, not of failure.

Growth worries

The new RBI Governor has taken charge at a time when multiple negative factors have converged — the GDP growth in the first quarter slipped to 4.4 per cent, the slowest pace of quarterly growth in four years; and deteriorating government finances — fiscal deficit (the excess of Government’s expenditure over revenues) has already touched 63 per cent of Budget estimates in the first four months.

Then he has to contend with the spectre of rising inflation in the backdrop of hardening global crude oil prices; high consumer price inflation, which is worryingly close to double digits; and subdued factory output growth.

Further, Raghuram has to deal with the fallout of a weak domestic currency, which is under relentless pressure due to widening current account deficit (which arises when a country’s total import of goods, services and transfers is greater than its exports); foreign investors pulling out their investments from the Indian equity and debt markets as dollar assets are turning safe haven amidst the likelihood of the US Fed withdrawing its monetary stimulus; and the country’s inability to attract foreign direct investments despite liberalisation in rules.

Given the challenges he faces, his capacity to join the dots across both domestic and global economies will be put to test. He has done this in the past. Referring to a number of models of early warning systems for crises, the tall and fit RBI Governor presaged in 2005 that the probability of an emerging market crisis increases when US interest rates rise. Clearly, the emerging markets are distinctly staring at such a possibility.

Needed, a palliative

Then, he also made the point that common factors such as low interest rates — potentially caused by accommodative monetary policy — can engender excessive tolerance for risk on both sides of financial transactions. (Those expecting immediate rate cuts, beware!)

While his prognosis on the global economy seems to be on the ball, what the country requires from the RBI chief is a palliative so that it can ride out the boom and bust cycles without much damage.

Hopefully, Subbarao, who went all out to subdue inflation as he perceived it as hurting the poor the most, has given valuable tips to Raghuram during the last three weeks that the latter spent in the RBI as an officer on special duty. Perhaps, he has also provided some advice on standing up to various pressure groups, including the Finance Ministry, and handling criticism from various quarters, including storied Indian economists based abroad.

ramkumar.k@thehindu.co.in

satyanarayan.iyer@thehindu.co.in

(This article was published on September 4, 2013)
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