Rajan stands firm, shows way ahead

The manner in which outgoing RBI governor Raghuram Rajan took on his critics shows not just a fighting mood brought on by the slanderous tone of the likes of Subramanian Swamy; there is irrefutable honesty in how he spelt out the economic scenario in a lucid way on the basis of empirical data — consumer price index-based inflation surging for the fourth straight month in June to 5.77 per cent — while also presenting a rosy picture of India’s economy after a possible normal monsoon. It’s a pity that Dr Rajan will pronounce his last policy statement soon before heading back to academia, where his independent thinking will be appreciated more than it is by a government desperate for growth numbers.

It’s an economist’s duty to tackle the classic confrontation between growth and inflation, which is why governments task a monetary policy body like the Federal Reserve in the US to take decisions based on economic data. If bank heads are beholden to the government in swinging money policy, the system’s checks and balances will be hit. But this is what the Indian government may be trying to do by appointing a six-member committee to fix rates, with equal representation for the government and central bankers. It is to the credit of Dr Rajan and his immediate predecessor, Mr Subbarao, that they were steadfast in their faith in numbers rather than politicians’ desires on interest rates, and the supposed likely impact of low rates on industrial growth.

The old debate on Chicago rules versus modern, Taylor-type rules may rage about the suitability of discretionary monetary policies, but the fact remains that if governments were to control interest rates, the result may be chaotic, with runaway inflation that would mainly hit the poor, particularly in India where food prices have shown an incremental rise regardless of other economic conditions. The significant role that Dr Rajan’s policies has played is obvious: with India being a high growth oasis. The rupee too hasn’t done too badly in the last three years, although foreign exchange movements are far harder to predict, more so after Brexit.

The interest rates issue reveal something else about firms borrowing from banks. Many are overleveraged, as seen in the problem of non-performing assets that is worrying the government. Industrialists accustomed to crony capitalism, will ask for the moon, and it’s not the central bank’s job to dance to their tune. As governor, Dr Rajan may have adjusted repo rates to accommodate money flows, but it’s his independent decision-making that India will be thankful for in the long run.