Raghuram Rajan: The perils of cult status

After the recent vitriolic outburst from Subramaniam Swamy, an important question for financial markets and for India Inc is whether Governor Rajan’s term will be extended. The PM will likely evaluate the governor on two sets of issues: 1) Is he an effective governor and 2) is he in sync with the government or antagonistic to it.

Given the 5 percent inflation, the extraordinarily stable rupee and the 7.6 percent GDP growth, it is difficult to fault Rajan’s performance as governor. Our CNBC-TV18 poll showed that the market pretty much endorsed his work.  On effectiveness as a monetary policy-maker, 40 percent of our respondents graded him excellent, 60 percent  graded him good; None checked the box that said “poor”. On the rupee, 100 percent gave him excellent (the other options were good, poor) and on banking regulation 85 percent gave him excellent; 15 percent good; again no one checked the box that said “poor”. An Economic Times poll of CEOs appears to have given him a similar grading.

Now for the other parameter the PM may want to consider: “Is he in sync with the regime”. It appears Rajan has been more in sync with the govrnment than previous governors. Recall Chidambaram’s angry ”I shall walk alone” retort when governor Subbarao refused to cut rates in September 2012. There have been no such angry disagreements from the government post any Rajan policy.  Rajan’s first policy cut came on January 15, 2015, 15 days before his scheduled credit policy, quite clearly to placate the government. He endorsed the 2015-16 Budget (although it did not abide by its fiscal target) by cutting rates just 3 days after the budget.  Later in the year he even obliged with a double-cut when probably the government was expecting only one.

Likewise, Rajan has clearly worked to convince the government a good bit before he issued his “clean-up your books” diktat to banks. It was obvious from Jayant Sinha’s statements that the RBI and the ministry had worked the numbers together. Rajan, in fact, is managing the clean-up without the government having to shell out a single extra penny from its coffers. The recapitalisation plan, even before the bad asset cleanup was Rs 70,000 crore from the government in 4 years. That hasn’t changed. It is the RBI which has gone the distance to help the profit & loss and balance sheets of banks: RBI has allowed deferred tax assets to be added into the P&L and allowed real estate revaluation assets to be recognised as capital.

On financial inclusion, another pet project of PM Modi, Rajan has always been a keen ally. The Unified Payments Interface and the clutch of licences given to small and payment banks are key pieces that should enable inclusion.

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Latha Venkatesh

Executive Editor|CNBC-TV18

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While Rajan has openly exhorted the government to keep the fiscal deficit to the targeted 3.5 percent, he has also cushioned the blow by giving a higher dividend payout from the RBI than any previous governor. In fact, the RBI under Rajan’s three years will have paid the government nearly Rs 1.9 lakh crore as dividend (counting a likely Rs 65,000 crore this year), an amount that will be more than all the dividend paid by the RBI in the past 10 years.

The only dissonance between Rajan and the government appears to be his sporadic stimulating statements that appear at variance with the government. The problem is not the statements themselves but the cult status of Rajan.  Take the much discussed  “India is a one-eyed king in a country of blind” comment of the governor. The occasion was the IMF-World Bank meetings in April and the interview was to MarketWatch (a part of the Wall Street Journal Digital Network) Rajan was hardly disparaging of India’s growth. His subsequent sentence was  "a bunch of good things have happened" in India, but there were "still some things to do". He, in fact, went on extol the low current and fiscal deficits and the bankruptcy and GST laws that the government is about to pass. By any standards it was high praise.

Contrast this with the fund-bank meeting of 2011-12  when Chidambaram spoke glowingly of India’s growth. My colleague who was sent to cover the meeting, came back and told us about the discomfort in the RBI contingent. “Why is he over-stating our case so much,” Governor Subbarao mentioned to her.

But the point is MarketWatch or Wall Street Journal did not interview Dr Subbarao. It is possible if they had, Dr Subbarao would have disagreed with his finance minister’s description of the Indian economy.  The problem clearly is Rajan’s cult status which makes him a much interviewed and much reported governor. Again his cult status makes him attractive game for those who want to grab headlines by taking pot shots at him.  It is unlikely that Subramaniam Swamy nor Niramla Sitharaman would have bothered to comment if the RBI governor today had been Subbarao instead of Rajan.

Coming back to the issue of the extension of his term, market men believe the government will be scared to terminate him because the financial markets will shudder in protest and because of the severe beating their image will take globally. That will be an unfortunate state of affairs. If the government is extending his tenure only out of fear of market backlash or impact on its image, it will mean a tortuous next two years in the relations between RBI and government which will be bad for the RBI, for the government and more so for the economy. It is better to terminate him and face the consequences. Rajan should be continued only if the PM sees him as largely following the same goals as the government is.

As I see it the PM as head of government and party will want the next three years to be the best ones for the economy, before he seeks to renew his work permit in 2019. At such a time he should logically  want the economy, the currency and the banking system in solid hands. He would want a top class central banker. And for these responsibilities, do they make them better than Rajan?