Rajan’s dad proud, but says task before Governor is a challenge | Business Line

Rajan’s dad proud, but says task before Governor is a challenge | Business Line

This article(above link) was published in The Hindu Business Line on September 8, 2013.

My article on Dr Rajan (copied below) was published in September 2013 issue of The Global ANALYST.

New RBI Governor Dr Raghuram Rajan
- MG Warrier, ex-GM, RBI

Huge Challenges
Await the New RBI Governor

It has to be said to the credit of the government that, even if it was in self-interest, generally, compared to other statutory bodies and PSUs, Reserve Bank of India 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.
This should give considerable confidence to Dr. Raghuram Rajan who takes over charge from
Dr. D Subbarao in the first week of September 2013. The only negative in the whole affair is, as on several occasions in the past, once again the government 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 Dr. Raghuram Rajan, the former chief economist of the International Monetary Fund and one of the leading economists of our times, is a fast learner and capable of finding solutions to the toughest of economic and monetary problems. He was among the few who successfully predicted the global financial crisis of 2008. As Chief Economic Advisor to the GOI, he has played an important role in devising strategies to steer the economy through difficult times.
Now in his new role as the head of the country’s central bank he is faced with a slew of some old and some new challenges. His challenges lie in (a) how fast he will be able to ‘unlearn’ the IMF lessons which were modeled with prosperity of the developed world in view; and (b) how quickly he will get convinced about the historic dual responsibility of RBI to ensure distributive justice while supporting economic growth and reframe his arguments to convince North Block that after all RBI has been on the right path and what the central bank lacked was the support from the government.
Dr. 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 someone in the media already observed, 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.
Ideally, RBI Governor should have an average tenure of 5 to 10 years. If such a norm was followed, the ex-Chief Economist of IMF would have been perhaps the 15th Governor of RBI. Now he is 23rd! It would be worthwhile to mention that all the Governors who have stayed in the office beyond 4 years have contributed to the strength of the central bank.
Dr. Rajan, as is evident from his academic and professional record, is a fast learner and capable of finding solutions to the toughest of economic and monetary problems. His challenges lie in (a) how fast he will be able to ‘unlearn’ the IMF lessons which followed a syllabus with prosperity of the developed world in view and (b) how quickly he will get convinced about the historic dual responsibility of RBI to ensure distributive justice and supporting economic growth.
He will have to reframe his arguments to convince North Block that after all RBI has been on the right path and what the central bank lacked was the support from GOI. If he succeeds in this and take out RBI from the apron strings of finance ministry, RBI will remember him as its savior.
Given the state of our economy and the relationship issues between Finance Ministry and RBI that have surfaced in the recent past, the new RBI Governor’s job profile will need much more than the normal requirements such as understanding economics, monetary and financial issues, familiarity with the way the system works in India in the international context, etc. He should keep the interest of the majority of the country’s population, which lives below the internationally accepted poverty line (per day expenditure of $2), in mind, and should not just being a good listener, and also should not hesitate to give the government his advice even if it is disturbing to the government struggling to keep together an incoherent coalition.
Challenges Galore
The new Governor will continue to be confronted with observations like “RBI has traditionally fought for status quo”; “India is at a juncture when more of the same policy won’t help”, etc., which mock at the reality and do not do justice to RBI’s history. India’s central bank has all along done justice to its mandated role and more often beyond that.
The criticism emanates from comparisons with central banks of developed countries which have their role limited to certain aspects of monetary management. RBI since at least the dawn of independence has taken upon itself the responsibilities relating to institution building and credit deployment for various purposes depending on priorities of the governments of the day, in addition to the central bank’s core functions. The present focus on financial inclusion and taming inflation which are incidentally in tune with the vision expressed by the newly appointed Governor, Dr. Rajan is consistent with the tradition maintained by RBI.
Once he gets a feel of the constraints with which RBI has been having a tight rope walk in harmonizing the monetary policy in the recent past with the unbridled fiscal policy guided by pulls and pushes of a coalition government at the Centre, Rajan is unlikely to toe the GOI line on fiscal deficit and Current account deficit, particularly that of the Finance Minister. As a corollary, the FM may not find an RBI Governor who will support his pet project FSLRC (Financial Sector Legislative Reforms Commission) which has produced a report aimed at making RBI a ‘department’ of the Finance Ministry. The FM who put his Secretary Dr. D Subbarao as the Governor of RBI hoping to have a submissive Governor found a different person in Subbarao soon after he started functioning from Mint Road. In that context, perhaps, the FM is going to be ‘second time’ unlucky. I would like to quote from a mail I received soon after the appointment of Rajan was announced:
“Raghuram Rajan is well known for his independent views and he was one of the economists who had predicted the Global Financial Crisis. During the farewell function for Alain Greenspan in 2005, Rajan delivered a controversial paper with the title “Has Financial Development Made the World Riskier?”.
Rajan predicted the Global Financial Crisis. He argued that financial sector managers were encouraged to take risks (called tail risks) that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. He further argues that the most important concern is whether banks will be able to provide liquidity to financial markets. This is exactly what happened.
The US treasury Secretary Lawrence Summers (known for his arrogance) was on the dais and he accused Rajan as a “luddite” (a 19th century expression for being a violent protester). Rajan was proved right. Rajan has also clear positions on austerity measures and he is at loggerheads with the liberal Princeton economist Paul Krugman (Nobel Prize Winner).”
FSLRC report inter alia makes the following recommendations:
• The actual functioning of the regulator should lie in three areas — regulation-making, executive functions and administrative law functions.
• Any policy should be made not just by the RBI Governor but by a council comprising Governor and Deputy Governor from RBI and five more external members appointed by the Government.
• The Government, in consultation with the Governor, should give the Central Bank quantifiable, measurable objectives; the RBI will need to state reasons why it has failed to achieve the objectives and what remedial action it will take to achieve the objectives.
• The government and not the RBI should make rules with respect to capital inflows. This recommendation is irrespective of whether the inflows are FDI, FII, Forex loans or NRI deposits.
• The RBI will also be the banking regulator but it won’t have any control over non-bank finance companies (NBFCs).
• The Reserve Bank of India should be responsible only for overseeing the banking industry and for monetary policy, while the management of the government’s debt and of foreign remittances (thus far under the exclusive domain of the RBI) should be directly under the supervision of the government.
• With regard to capital control, the Finance Ministry should make rules for inbound capital flows, while the onus of making rules for outbound capital flows should rest with the RBI.
As observed in the earlier part of this article, Rajan is a fast learner. One hopes, during his OSD (Officer on Special Duty) days in RBI from the second week of August, 2013, he had occasion to glance the following books:
1. History of the Reserve Bank of India Vol. I
2. All India Rural Credit Survey
3. Review of the Indian Monetary System (Sukhmoy Chakrabarty)
4. Report of the Committee on Financial Sector Reforms (Narasimham Committee)
These will give Dr. Rajan, a technocrat-turned economist, a feel of the role played by RBI since its inception in the evolution of the financial system to meet the country-specific needs. A reading of these books will also tell one why the ‘cut-and-paste’ FSLRC report is not finding favour inside RBI.
To conclude, I must say, the appointment of Dr. Rajan has raised huge expectations. Can the new RBI governor help the economy, besieged by a plethora of challenges including a weakening currency, burgeoning deficits, sluggish growth, runaway inflation, rising interest costs, etc., regain momentum?
Well, only time will tell.

New RBI Governor
PM’s remarks on releasing a Volume: “History of the RBI.
It goes without saying that the history of the Reserve Bank is the history of the growth of our country since independence. The Reserve Bank has done the country proud - the role which it has played in shaping the monetary policy, in shaping the credit policy, and, if I remember correctly, in also influencing, particularly, the supply of credit to rural areas. The Reserve Bank has served our country with great distinction. But I venture to think that the best is yet to come.
Dr. Subbarao has touched upon various facets of policy-making, and I dare say, Dr. Raghuram Rajan will build on the experience of his predecessors to chart out a new course of action in very difficult circumstances that our economy is facing. We can never be satisfied with the status quo. When I became the Governor, I had no great knowledge of what monetary policy is about, and therefore, I asked the late Prof. Chakravarty to head a committee to look at the functioning, the goals, the means and measures of monetary policy, and that report was pretty influential for a period of time. And I would venture to think that the time has come, when we should revisit some of those areas - the possibilities and limitations of monetary policy in a globalized economy, in a fiscally constrained economy - I think that is one subject. But macro-economic policy-making, targets and instruments, I think, is another area, where I feel fresh thinking is called for, and I sincerely hope that the Governors of the future, particularly Dr. Raghuram Rajan, will attempt to revisit some of these difficult areas.
And thank you all, at least among professional people, a degree of national consensus, which we need, if we have to carry out social and economic change in a country as large, as diverse, as complex as India is. As I said, the Reserve Bank has served our country with great distinction. But as I ventured to think, the best is yet to come. With these words, I wish Dr. Subbarao the best. he has served the Reserve Bank and our country with great devotion. And I extend a hearty welcome to his successor, Dr. Raghuram Rajan. In him, we have a very distinguished economist of international fame. I sincerely hope that the Reserve Bank of India will see a more glorious period under his Governorship.
Source: www.pib.nic.in


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