Smell of Change…

No Sky Is Going To Fall If Raghu Ram Rajan exits RBI


Our first perception of right and wrong”, argued Adam Smith once, “can’t be the object of reason, but of immediate sense and feelings.” This can’t be more true than it is in the case of Raghu Ram Rajan, whose decision to leave the Reserve Bank of India at completion of his term on September 4, 2016, has created shockwaves all across. The media, the intelligentsia and the socialites are falling over one another in making out a case that Rajan’s imminent exit, or “Rexit”, as it is called, would be the end of everything good in the Indian economy. And worse, they claim it reflects shoddily on the way the present central government functions.

Mr Rajan certainly deserves a big hand for the outstanding works he’s done and for his achievements during these three years at the central bank since 2013. He reined in the rampaging inflation and tamed it to a cheery level of 3.8%, checked the runaway rupee and stabilized it, gave license to two universal banks and opened 11 payment banks, adopted Consumer Price Index (CPI) as the key indicator of the inflation replacing the deceptive WPI, helped an unprecedented build-up of forex reserves that now touches US$ 360 billions and kicked off a herculean drive to cleanse the banking sector of their bad loans which is now cumulatively touching Rs. 4 lakh crore. Thumps up to what he’s done because none of these is a mean task. But does this give the R3 a smooth ticket to sail through his second inning in the central bank? No. And, that’s why I find many of the reactions of the media and the intelligentsia over-the-top.

Well, it’s much to do with Dr. Raghu Ram Rajan serious disagreements with the Modi Government over the macro-economic policies. He’s voiced his opinion in unequivocal terms that Modi Government’s flagship program ‘Make in India’ is not going to take the country anywhere.

In June 2015, he took to the forum of Bharat Ram Memorial lecture and created ripples by saying that India’s export-led growth strategy through the ambitious ‘Make in India’ campaign of the Modi Govt wouldn’t succeed because of a global economic slow-down. See what he said:

There is a danger when we discuss “Make in India” it means a focus on manufacturing, and an attempt to follow the export-led growth path that China followed. Slow-growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future…the world as a whole is unlikely to be able to accommodate another export-led China.”

Rajan’s solution is that the Make in India campaign should focus more on ‘Make for India’ type strategies. He suggested, “We are more dependent on the global economy than we think. That it is growing more slowly and is more inward-looking, means we have to look to regional and domestic demand for our growth to make in India primarily for India.”

Further, he believes that instead of focussing on labour-intensive industries, the Govt should create an opportunity for all sectors of economy to grow. “Instead of subsidizing inputs to specific industries because they are deemed important or labour-intensive, a strategy that has not really paid off for us over the years, let us figure out the public goods each sector needs, and strive to provide them,” he added.

Dr. Rajan is an economist, a top-notch one, having the reputation of foreseeing the 2007-08 sub-prime crisis and the subsequent global economic melt-down. Like all heroes, Rajan, too, must walk with his halo stuck firmly behind him. But, he’s not infallible. He walks on his own feet of clay.

Rajan has consistently failed to satisfy the question as to how a labour-dependent nation like India, with existing labour count to the tune of 480 millions, is going to solve the employment questions for the millions of labour pouring each year into the market with little or scant skills? PM Modi came to power in 2014 on the promises of jobs to 100 million youths. How that promise is going to be kept?

The Make in India program, together with National Skill Development Mission that aims to train 400 millions of youth into various low and middle level employable skills by 2022, is central to the promise of the Modi Government to give employment to the youth. The idea is centered around making India a global manufacturing hub on the strength of a huge labour pool and few strong traditional occupations, such as leather industry.

“Make in India has the potential to emerge as a force multiplier to provide the emerging workforce with new livelihood opportunities.” Says Chandrajit Banerjee, director general, CII.

A labour-surplus nation, historically and empirically, flourishes through a sound manufacturing-based economy than a service sector-based economy as of US, of which Rajan is a big proponent. The majority of Indian workforce, comprising mainly of a low-skilled rural population, just out of agriculture with low or negligent skills, would take decades to fit into the US-styled service economies’ schemas.

Thus, it goes without saying that the Make in India campaign needs an unflinching and unqualified support from various agencies, especially from Government ones, and hence a person, sitting at such a crucial position as the head of the country’s central bank, with his explicit and unequivocal scepticism over this ambitious program, would as well be a huge stumbling block as it would be an embarrassment to the government.

Secondly, Rajan’s claim that the globally slowing economy wouldn’t be able to absorb India’s manufacturing exports, is also not supported by empirical data. Another celebrated economist, Dr. Arvind Panagaria nails him on this count:

There is a common fallacy that exports can expand rapidly only in a rapidly growing world economy. Factually, from 1995 to 2013, when the Chinese exports grew by leaps and bounds, the OECD countries together grew only 1.4 per cent annually.”

Panagaria’s explanation for the success of Indian manufacturing exports is credible.

Conceptually, slow global growth can hinder export expansion only if several countries are expanding export of the same goods at the same time. This, however, is almost never the case. Historically, only a handful of the developing countries, at most, have simultaneously taken the path of growth led by the export of labour-intensive products. In the 1960s and 1970s, these were South Korea, Taiwan, Singapore and Hong Kong. Then, as wages in these four East Asian tigers rose, China replaced them in the 1980s.”

As we can see, Rajan’s pessimism is unwarranted and doesn’t carry sound merits.

Thirdly, Dr Rajan’s emphasis on maintaining a high-interest rate regime with the sole objective of inflation-control is also damaging in the long run for the small and medium scale industries. This is one count on which he has drawn maximum flak from Dr. Subramanian Swami, his biggest critique. In a recent tweet Dr. Swami quoted an IMF report on India where a high-interest regime has been deprecated as being harmful.

IMF India Report No.16/75 says on page 34 “An upward shift in domestic interest rates continues to be a key risk for Indian corporates”, tweeted Dr. Swami.

Thus, Dr. Raghu Ram Rajan is not infallible. Despite all the hypes around his good works, we must never be oblivious of the imminent pitfalls lurking in his plausible decisions.

Well, all through this difference of approach between the Modi Government and the Governor of the RBI in steering the future course of Indian economy, I find myself aligned with Modi for the simple reason that the people of India have chosen him on his promises of better days where there would be abundant job and employment opportunities for the youth of India. Now, Modi has to fulfil this promise and for the same he must be given a free hand to choose his men and means.

Why I thought of writing this is because I found many of such articles and opinions published over the past weeks bemusing and over-the-top. Most of these lamenting men and women knew as much about economy as Alia Bhatt probably did about the rocket science. Shobha De was upset because Rajan was the only man who had brought sex into the Sensex by his boyish appeal. Many in the intelligentsia, nursing deep wounds against the present dispensation, had suddenly found a big stick in Rajan to beat Modi and his men with.

Rajan has not been sacked, removed or terminated though the media, all through this week-long jeremiads and chest-thumping, wants us to believe otherwise. There, of course, was a campaign in some quarters of the BJP, led by the feisty and indomitable, Subramanian Swami, who just wanted him not to be considered for the second term. And, like ever, he was not without reasons. After all, he himself is a Harvard-educated economist, not a “luddite” (Rajan knows well what it means). But, the intelligentsia made out a case as if he was hounded out from his job.

Hold no grudges, Mr Rajan; you’ve played your part in the welfare of the nation. But, now your time is up. Here, we’ve democracy and we must be pragmatic enough to allow the PM we’ve chosen to have the freedom to choose his team. It is necessary to let him choose his team so that if at all he fails, he may not hide behind the convenient argument in the hustings of the 2019 that he failed because of a certain Raghu Ram Rajan in the RBI who had all the innovative ideas to frustrate his turnaround plans.

Therefore, no sky is going to fall if Raghu Ram Rajan exits RBI. India story is replete with many outstanding men and women who keep surprising the nation with their unexplored talents. The RBI is poised to contribute a historic role in shaping the nation that emerges from here. The next governor, surely, would fit the bill.

 Krishna Kumar@THoughtPourri2016


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