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The recent attack on the RBI Governor by Subramanium Swamy raises several issues beyond the immediate demand that Raghuram Rajan be replaced for repeatedly hiking interest rates. The media response so far, largely arguing that Rajan must continue for a variety of reasons, not the least of which is that he has stabilised the economy and given us balanced growth, equally misses some of the more significant aspects that lie at the heart of this demand.
The clamour for lowering interest rates is not new but it has acquired a new edge in recent years with powerful interests pushing the line, unconcerned about rising inflationary expectations and often unmindful of higher inflation, which, the argument goes, a liberalised India yearning for faster growth must learn to live with.
By arguing forcefully that the present Governor “has hiked interest rates in the garb of controlling inflation” and that “his actions have led to the collapse of industry and rise of unemployment in the economy”, Swamy stands unabashedly in favour of pushing growth and appears unmindful of the consequences of inflation.
By further arguing that this view enjoys the support of a large number in the BJP, Swamy is committing the ruling party to a line and an argument that carries deep implications not only for the economy but also for the political tone and direction of the ruling party.
The clamour for lowering interest rates is not new but it has acquired a new edge in recent years with powerful interests pushing the line, unconcerned about rising inflationary expectations and often unmindful of higher inflation, which, the argument goes, a liberalised India yearning for faster growth must learn to live with.
Unless the government comes out against this position, the argument of Swamy willy-nilly becomes (if it is not already) the argument of the BJP. In fact, some voices suggest that this is indeed so, and it may already be too late for the party to disassociate itself from Swamy’s line. For the record, the finance Minister, Arun Jaitley has said a decision on whether Rajan gets a second term (his first three-year term ends in September 2016) will be taken “without any outside influence”.
Of course, the government is not obliged to renew the tenure of the current Governor. However, any decision now not to continue him will inevitably be seen in the light of the criticism let loose by Swamy, and so this turns out to be the worst way to go about not renewing a tenure. And any decision to continue with the current dispensation leaves the stature of the institution and the office of the Governor, particularly this Governor, diminished. This is a no-win situation.
At the core of the attack lies the thinking that growth matters and cannot be sacrificed at the altar of inflation. This is less of an economic position and more a political one. It is a position consistently argued by chambers of commerce and industry and it is a view that was propounded rather forcefully by the same forces during the tenure of the UPA under Dr. Manmohan Singh.
Reclaiming that argument misses the picture as seen by the large number of people who inflation hits the hardest: the poor of India. Inflation, after all, works like a tax on the weakest and the most disadvantaged, and the argument that BJP cares as less about this constituency as the industry, is a political position that will bring its own consequences for the ruling party.
Though the position is now couched in terms of a debate being created on RBI’s actions (or inactions, as in the case of Non-Performing Assets, or NPAs of banks), the logic will find its flow and force in multiple other decisions that will inevitably link the government to shoring up growth numbers and stock markets rather than working for equitable and inclusive growth.
As a highly qualified economist, Swamy knows that any economic management to bring down inflation from a higher to a lower level, the so-called “disinflationary glide path”, demands a sacrifice, and that sacrifice is growth.
In fact, the economic arguments on the subject have been best addressed by the Governor himself, who can be credited with being as succinct as is possible with technical data and with trying to reach out to the common man on multiple occasions.
Those who watch the inflation numbers in isolation, or “inflation followers”, as the Governor described them in a notable speech, “advocate cutting policy rates whenever inflation is low until inflation starts picking up.” But what happens when inflation picks up?
“I have never heard them say what we should do then, but I presume that they would advocate raising rates at that point. But because monetary policy works with long lags, inflation could surge significantly before policy starts working. A policy that tracks current inflation, rather than anticipates inflation, is inherently biased towards more volatile inflation, which is not in the public’s interest,” said the Governor in a speech that deserves more publicity than it got.
The finance minister’s remarks that issues rather than personalities matter is relevant, more so in the case of the RBI, where the Governor has often been seen to occupy a larger than life role. The media waxes eloquent on what the governor thinks or will do, less appreciating that he is not a knight in shining armour and should not be portrayed as such either.
Swamy’s other argument that NPAs have soared under Rajan is answered best by the secretary, department of financial services in the finance ministry, who told the Parliamentary Standing Committee on NPAs of financial institutions: “RBI is a very strict regulator. It is doing its job properly…a part of the reason why the NPA percentage is building up is also because of the strictness of the RBI because no kind of a leeway is allowed to banks in terms of fudging their balances…That is how it should be."
The Committee submitted its report barely three months ago and the position of the government could not have changed dramatically in so short a time unless there is an agenda being fired up.
Recently, there has also been a demand that the RBI not be too strict in the classification of NPAs, indicating the pressures and fissures that are at play in what is a complex situation because on the one hand the RBI is being asked to be more strict in enforcing its guidelines and on the other is being faulted for doing the same thing.
In sum, the finance minister’s remarks that issues rather than personalities matter is relevant, more so in the case of the RBI, where the Governor has often been seen to occupy a larger than life role. The media waxes eloquent on what the governor thinks or will do, less appreciating that he is not a knight in shining armour and should not be portrayed as such either.
(The writer is Editor, SPJIMR. Views are personal)