If you’d thought that the hyperbole and over-the-top opinion pieces in the lead-up to Raghuram Rajan’s decision—stay or go?—couldn’t be topped, you’d be wrong. The hyperbole unleashed since the Saturday announcement that he’s not seeking a renewal to his term as Reserve Bank of India (RBI) governor has bordered on lunacy. One would think that the proverbial sky was about to fall—both on the Narendra Modi-led Bharatiya Janata Party (BJP) government and on the rest of India.
Thus, in the lead-up, we witnessed ludicrous claims by well-known commentators to the effect that the economy would all but collapse if Rajan weren’t given an extension by the government.
Now, in the aftermath, we’re being treated to preposterous claims such as democracy has died, the middle class has lost its icon, the Modi government has made a grievous error from which it cannot recover, and so forth. It’s high time to sort fact from fiction.
First, and for the record, I believe that Rajan has been an able steward of India’s monetary policy and on this ground alone deserved to be re-appointed. Second, however, a central bank governor is not appointed with the goal that he uses his bully pulpit to be a free-wheeling public intellectual, lecturing Indians and the world on the follies of the government’s Make in India project, on the dangers of intolerance to our republic, and so forth.
It is not just that it is beyond the remit of a central bank governor to speak outside the narrow topic of monetary and financial economics, and that too only as it concerns RBI business—it is that Rajan more or less directly criticized the government for which he was working. No democratically elected government will stand for such criticism from a technocrat within the bastion, as it were, beyond a certain point. Can you imagine the governor of the Bank of England or the Bank of Canada or the US Federal Reserve criticizing, more or less directly, the governments which appointed them or under which they serve?
The canard that has been put out by detractors of the Modi government, who are using the Rajan affair to try to bash them further, is that there is a peculiar deformation in the politicization of Rajan’s putative re-appointment. This is pernicious and false.
It is also a falsehood, peddled by well-known commentators sympathetic to the Congress, that invoking a litmus test of loyalty for a political appointment is a peculiar defect of the BJP. In truth, such a basic test of loyalty is the reality in all political dispensations in all places and at all times. Governments deviate from such an approach at their discretion. Indeed, the Modi government ought to be given credit for continuing on with Rajan and appointing Arvind Subramanian as chief economic adviser—the latter, of course, being the choice of former finance minister P. Chidambaram, ratified by his successor, Arun Jaitley.
Yet, the reality is this: the process of appointing or in this case re-appointing (or not), a central bank governor, is intrinsically a political process. And, in a democracy, this is not only how it necessarily will be, it is how it ought to be. There will be noise and clamour and there will be contestation. Recall what can only be described as a street fight between supporters and detractors of Harvard economist and former US treasury secretary, Lawrence Summers, and the eventually successful candidate, current Fed chairperson Janet Yellen, back in 2014?
The bottom line is that Rajan was appointed by the previous Congress-led government at the behest of then finance minister Chidambaram. The Modi government would have been entirely within its rights to let him go when they came to power in 2014. But, wisely in my view, they decided not to do so, as this would have created needless market jitters at a time of macroeconomic turbulence. That is not the reality today, when India’s public finances are in reasonably good order, inflation is low, and the country is the fastest growing large economy in the world.
Strip away the hyperbole, and what has happened is that Rajan has decided not to seek a renewal to his term, perhaps in response to hints by the government that it was not inclined to offer him a renewal. This is how things work in a democracy, and how they should work.
Ironically, Rajan’s own good work as RBI governor makes the choice of his successor perhaps less consequential. Given that India has now put in place a Monetary Policy Framework Agreement (MPFA), institutionalizing a flexible inflation targeting regime, which is to be administered by a Monetary Policy Committee (MPC), monetary policy will be, going forward, much less a function of the idiosyncrasies of who sits in the big chair.
Now that Rajan is on his way out, what will be important for the government is to announce in short order the choice of a successor who is credible and will be trusted by the markets. Equally, government appointees to the MPC must carry credibility.
It’s high time for India to put the Rajan affair behind and get on with things.