Rajan’s exit marks major setback to independence of Indian institutions

J Mulraj | Updated on: Jan 20, 2018




It is a sad day for India that a competent person such as Raghuram Rajan is edged out for petty reasons. The main charge against him was his reluctance to lower interest rates, thus, ostensibly, sacrificing growth. This is balderdash!

Slew of slower growth

Look at countries which have done quantitative easing. Japan and the Euro Zone are in recession. China’s growth has slowed down. America’s is tepid enough to make Janet Yellen pause in the upward cycle. Lower rates did not boost economic growth.

To drive home the fact, India has the highest economic growth rate amongst large economies.

An RBI Governor is best equipped to judge when to raise interest rates and when to lower them for he has all the data. Swamy has not. And if Rajan was considered to be competent to do his job (he is) he ought to be left alone to do it.

Setting of a benchmark interest rate is a very tricky business. Like Goldilock’s soup, interest rates must neither be too hot nor too cold. Low interest rates, in theory, help spur consumption, especially of durables, such as two-wheelers, cars, homes, and white goods, by reducing the EMIs. But low interest rates also punish savers and so discourage them from saving more.

Need for high savings rate

India is a country that needs a high savings rate. We need to finance infrastructure. We need to build factories, to provide jobs. So, savers need to be encouraged.

A lot of the jobs are coming from small and medium enterprises (SMEs) who are paying high interest rates, but nonetheless setting up or expanding business. In fact, it can be argued that setting a high benchmark using high interest rates ensures that sustainable projects are set up.

Lower interest rates would hugely benefit the heavily-indebted corporate groups whom Raghuram Rajan was trying to compel to pay their dues.

A thriving democracy needs independent and strong institutions. They act as checks and balances. We have quite a few, in the RBI, the Election Commission, the Judiciary. These institutions need a strong hand at the helm to guide them.

It’s a pity that for nonsensical reasons we allowed a good talent (Raghuram Rajan won the Fisher Black prize, given to an economist under 40, who has made the most contribution to the theory and practise of finance) to leave.

Bad precedence

We are placing the independence of our institutions in jeopardy, and that would be bad.

Our PSU banks took a hit, providing for non-performing assets. It was Rajan who was pressing banks to recognise and provide for NPAs and to pursue recovery of outstanding loans. These heavily indebted companies will now heave a sigh of relief.

Stock markets did not react to the news of Rajan’s impending exit as RBI Governor. Perhaps domestic institutions were asked to support. But if the malaise of wanting to control each aspect of our lives (films, the Internet, what regulators should and should not say) continues, if the independence of institutions is whittled away by petty thought and if competent persons are treated disdainfully, markets will react for sure.

The writer is India Head, EuroMoney Conferences

Published on June 24, 2016
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