RAJAN'S CROWN OF THORNS
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COMMENTS:
M G WARRIER
August 08,2013 at 09:20 AM IST
This is a
well-balanced analysis of what actually awaits Dr Rajan when he takes over as
23rd Governor of RBI on September 4. It has to be said to the credit of GOI
that, even if it is in self-interest, on majority of occasions, compared to
other statutory bodies and PSUs, the Indian central bank has been getting a
fair deal in selection and timely appointment of its head. This time, the
process has been more transparent and all have accepted that among the
candidates considered, the most meritorious has been selected.
The only negative in the whole affair is, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As this paper observed on August 7, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
M G WARRIER
The only negative in the whole affair is, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As this paper observed on August 7, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
M G WARRIER
Rajan’s
Crown of Thorns, Economic
Times, August 8, 2013
In the
Indian ecosystem, it’s not often that merit trumps all other considerations.
Extraneous factors — caste, community, religion and that important political
backing — often seem to count far more than merit, far more than simply being
the best man for the job
So when
a government, faced with the choice between a pliant bureaucrat and a pragmatic
technocrat, eschews the softer option and appoints a technocrat as the next
Reserve Bank of India (RBI) governor, there is reason to be cautiously
optimistic: it means that the government may finally be willing to heed advice
it might not like to hear; but is what it needs to hear. And that’s half the
battle won.
More so
since the challenges facing the economy today call for tough decisions,
decisions that could put the RBI governor on a collision course with the
government. But which are, nonetheless, necessary for the economic health of
the country.
Thus,
there will be times when economic considerations demand a hike in interest
rates even though it will hurt government finances by increasing interest
payments and possibly dampen investment sentiment.
On
issues like government finances, there will be occasions when he will have to
pull up the government and tell his former colleagues in the finance ministry
that they have to cut their coat according to the cloth. Hardly music to
government ears.
Politics,
as that economist-turnedpolitician Prime Minister and former governor of the
RBI, Manmohan Singh, once confessed, is “the art of the possible.” The main, if
not sole, objective is to win the next elections.
Central
banks, in contrast, are not hostage to political compulsions. Their timeframe
is long term. And there lies the crux of the conflict between central banks and
governments — not only in India but all over the world. In the words of the
former chairman of the US Federal Reserve, Alan Greenspan, “The Fed and the
Treasury are not natural allies.”
Short
Term vs Long Term
That
should not make them adversaries either! But we’re not talking of an ideal world.
In the real world, fundamental disagreements over the direction of policy can
tip the balance. And when it does, the economy and ordinary citizens lose out.
The
reason: fiscal and monetary policies are the two prongs of macroeconomic
policy. They have to work in tandem. So, while it is unrealistic to expect
unanimity of views between the RBI and the government at all times, it does not
help matters when they work at cross-purposes; when the government focuses on
immediate outcomes, disregarding long-term adverse effects on the economy.
Frederic
Mishkin, former member of the US Federal Board of Governors, called it, “time
inconsistency”. Elected policymakers have an incentive to exploit short-run
trade-offs between employment and inflation to pursue short-run employment
objectives even though the result is poor long-run outcomes.
This is
what happened in India in the post-2008 years. Stimulus measures put in place
after the crisis were continued longer than warranted though signs of
overheating were evident. Something had to give, and it did.
The RBI
was, doubtless, aware of this. But political pressures (read, demands to keep
interest rates down), perhaps, resulted in its keeping interest rates down
longer than warranted. By the time it realised its mistake, it was too late and
inflationary expectations had got entrenched in the economy. At which point,
there is little choice. The only alternative is to use a sledgehammer where,
otherwise, a chisel might have sufficed.
Rajan
Fits the Stiff Chair
Given
this subtext and the precarious state of our economy, the man who steps into
Subbarao’s shoes on September 5, 2013, has to be someone who understands
economics, monetary and financial issues, has familiarity with the way the
system works in India, is a good listener and, most important, will not
hesitate to give the government his advice even if it is not music to the
government ears. Raghuram Rajan fits the bill on all counts. Having said all
that, Rajan will have to earn his spurs on Mint Street.
The only
way to do that is to get inflation under control. Almost all of India’s present
ills can be traced to high and persistent inflation. Consumer price inflation
has now been in double digits for 15 consecutive months.
Writing
on the GoI Wall
As the
report on macroeconomic conditions released on the eve of the First Quarter
Review of Monetary Policy makes clear, “high inflation is a source of internal
and external disequilibrium”.
It
lowers household savings that support investments, puts pressure on government
finances through demands for larger fiscal subsidies, erodes our export
competitiveness, widens the current account deficit and weakens the rupee.
That’s a
long list of woes. But it is a direct consequence of ignoring inflation and the
RBI’s inability to make government read the writing on the wall. No wonder the
present PM once described his stint as RBI governor the “loneliest job in
India”.
Possibly.
But as long as Rajan and all future RBI governors remember that their duty is
to the country, not to a particular government, they will not be alone. They
will have the silent support of a billion-plus people.
August 08,2013 at 08:05 PM IST
On the face
of it Mr. Rajan appears to be right choice for the job.I hope he will not
remain fixated with inflation only but will also take care of Development even
at the cost of some inflation.
August 08,2013 at 07:37 PM IST
Given that the 'high
inflation' currently is cdue in large part to a sliding rupee which,in turn,is
due to CAD being much higher than ever before,it would seem that the aims of
the RBI and the FinMin would be the same and,far from being
'an impossible trilemma',the actual solution is very well known.It is what kept the Indian economy in 1997 from collapsing when the East Asian tigers caught a bout of severe cold.
'an impossible trilemma',the actual solution is very well known.It is what kept the Indian economy in 1997 from collapsing when the East Asian tigers caught a bout of severe cold.
August 08,2013 at 04:39 PM IST
Silver: 3
1
Governor RBI is a different game altogether. The IMF experience
and his short stint in Government may stand him in good stead but the nuances
and intricacies involved while formulating policies as a Central Banker without
much of independence and without displeasing the mandarins of ministry of
Finance are really complicated. Dr Reddy's period was some what smooth and he
had the skill of communication and diplomacy to have his own way of handling
Central banking policies and the Ministry of Finance.Mr Subbarao came at a
period when the global Financial crisis was looming large and his whole
attention was to insulate the economy from the damages of the financial crisis
the world experienced from Lehman breakdown.The political stability which
helped Dr Reddy a lot to have his own way of doing things was unfortunately not
there for Dr Subbarao and he had to take some tough policy stand much against
the wishes of the Government. The saying that when problems come they always
come in battalion has been well proved and Dr Subbarao unmindful of the
displeasure of the Government stood firm on his policy stand to fight inflation
first and then support growth. Some of the moves of the Government widened the
Gap between the RBI and the Govt and RBI and the Banks distorting the whole
confidence in the financial system.Many have warned the consequences of having
such a disturbed relationship and repeatedly advised through media to have a
coordinated approach, but they have all fallen in deaf ears and the economy is
in a mess now.These are perhaps some of the pinpricks the new Governor may not
be familiar with and more than the sound knowledge of economics and experience
in the field of finance, handling politicians is an art by itself and this is
where the new Governor has to worry about. Herein lies the success of any
governor. Wish the new Governor all the best.
The
author has beautifully analysed the issues involved through this article in a
succinct manner.
August 08,2013 at 11:50 AM IST
Keep the
Politics apart, The technocrat RBI Chief, may end-up suggesting a Technology
alternative to the Financial problems; Leaving All of you (speculators). ..
High and Dry.
August 08,2013 at 09:20 AM IST
This is a
well-balanced analysis of what actually awaits Dr Rajan when he takes over as
23rd Governor of RBI on September 4. It has to be said to the credit of GOI
that, even if it is in self-interest, on majority of occasions, compared to
other statutory bodies and PSUs, the Indian central bank has been getting a
fair deal in selection and timely appointment of its head. This time, the
process has been more transparent and all have accepted that among the
candidates considered, the most meritorious has been selected.
The only negative in the whole affair is, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As this paper observed on August 7, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
M G WARRIER
The only negative in the whole affair is, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As this paper observed on August 7, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
M G WARRIER
August 08,2013 at 08:47 AM IST
The choice by the FM is
hail Mary pass and only time will tell if falls near the hands of some capable
of catching it.
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