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The Raghuram Rajan syndrome

Ashok V Desai in The Hindu

The outrage following Raghuram Rajan’s decision to leave the RBI in September reflects the degree to which India’s politicians have turned civil servants into note-takers.

These are exciting times — and not just for economists. Raghuram Rajan is just governor of the Reserve Bank of India — a satrap sent by the Badshahi of Delhi to rule a colony on the western seashore. It has been doing this for 80 years. Getting rid of a minion, putting another in his place — this game of patronage is being played all the time. There are governors for 29 States and seven Union Territories as well, most of them men and women of little distinction; they are installed in ornate mansions and then removed every once in a while, and no one gives it a thought. This governor, perched in a skyscraper looking out on the Bombay harbour, he has not even been dismissed. All he has said is that he does not want to be reappointed. The entire media have gone crazy about his self-abnegation.

Why the grief?

The other remarkable fact about this incident is the sympathy this man has evoked in the media. Suppose Deepika Padukone declared tomorrow that she was retreating to Madeira to grow camellias; many might like to join her, but I am not sure there would be such lamentation. Mr. Rajan is going to retreat to the shores of Lake Michigan to grow ideas. It is an enviable life for an economist; no one need feel sorry for him. True, Mr. Rajan looks enviably winsome; I do not think anyone else in the government comes anywhere near him. But that is not the reason behind the outbreak of grief; it is that he is by common consensus the best man for the job, and even people who never gave a thought to the exchange rate think that it is a bad idea that he should have been eased out in such an unceremonious manner.

But then, he is being eased out by luminaries whom the people of this country gave a massive majority; if they trusted these politicians only two years ago to rule them wisely, why can they doubt that their representatives have acted in their best interests? For one thing, people do not elect rulers to think for them; they only create institutions and procedures which permit rulers to take decisions when there are different opinions. It is common amongst rulers, especially inexperienced ones, to think that an electoral victory was a vote for their wisdom. But even in a democracy, a majority vote is the last resort. Democratic institutions are mechanisms of consultation and debate; they are intended to give voice to reason.

Mr. Rajan’s decision to leave is just one instance of the breakdown of this mechanism of consultation. Admittedly, he has been expressing opinions that do not fall strictly within the purview of monetary policy and can be taken to be critical of government. Free expression too is a part of democratic government. It happens that past governors of the Reserve Bank have been economical in resorting to free expression. Most of them spent their working lives serving ministers silently; by the time they came to Mint Street, most of them had lost the art of free expression, and those who retained it in some measure thought it irreligious to venture beyond the most conventional and boring statements. The sensation that Mr. Rajan has caused is more a reflection on the way politicians have turned civil servants into slaves. All democracies are governments in the making. In theory, the discretion of those in power is constrained by propriety as much as by law. But there is no foolproof mechanism for drawing the line between discretion and propriety. The conventions in this country are so fragile that propriety is overwhelmed by impunity.

Central bank vs Finance Ministry

The conflict between political discretion and economic circumspection sharpened in the last years of Mr. Rajan’s tenure. Politicians in power tend everywhere to be expansionist; they would prefer to spend more and borrow without interest. If they do so without restraint, the country can have inflation which, if not controlled, can turn into hyperinflation. In a world of open economies, excessive spending by governments can also result in payments problems. This is why, in recent decades, better-run countries (Editor's comment - which one?) have freed central banks from finance ministries and given them power to control money supply, influence interest rates and regulate financial markets.

That power was not used in this country when governors were sent from Delhi to the Reserve Bank. They were too subservient to finance ministers. As a result, we had a payments crisis at least once a decade; and we had chronic inflation. When I was taken into the Finance Ministry in 1991, I was shocked to see how much power we had, and how casually we exercised it. We transferred some of the powers to the Reserve Bank and Securities and Exchange Board of India, and tried to exercise self-control in fiscal management. It did not work immediately. Finance ministers were amateurs; they took some years to learn the ropes, by which time they were often defeated or removed and replaced by new ones. But slowly, under the long rule of Manmohan Singh, conventions began to take shape — including induction of outside intellectuals in government. I was the first. Manmohan Singh readily accepted invitations to academia, and knew many academics. So his government had no difficulty in attracting intellectuals into the government. Mr. Rajan was one of them. Manmohan Singh heard him when he went to inaugurate a conference in Neemrana, liked what he saw and heard, and lured Mr. Rajan into government.

Return to nativism

Not surprisingly, no leader of the Bharatiya Janata Party has such rapport with academics and intellectuals. Its leaders believe that knowledge is hidden in ancient Hindu scriptures. More important, they do not believe that knowledge emerges and grows through contention of ideas and testing them against facts. After coming to power, the party’s new appointees have tried to replace the long tradition of contention with a new one of indigenous faith. (Editor's comment - Market Economics is also faith based). Mr. Rajan is a worshipper of a foreign economic faith. He turned the Reserve Bank into a temple of western-style independent monetary policy. Monetary policy must be retrieved from the heretic, and be brought back into the ideological pantheon. Mr. Rajan would not be handled roughly like Kanhaiya Kumar, but sedition will be dealt with without mercy.

But — what will be the new monetary policy? It is too early to ask that. The shastra of monetary policy, like all shastras, has been suppressed by agents of the western civilisation. It will take some time to be rediscovered and reinvented. It is not possible at this moment to appoint a monetary mahant. What will be done, however, is to appoint someone with the right faith, who will work in harmony with the holy powers in Delhi. Everyone will remember the victory Arun Jaitley declared in March in the nationalism debate. The monetary policy debate too will be won just as easily, without argument, contention or persuasion.

This is not the first time faith has triumphed. It did so once before, in the 1950s; dissenters were thrown out of the government, and the nation progressed on a planned path — to the famine and payments crisis of 1966. This time, though, the exit will not be so straightforward; the economy is doing too well.