Home >Opinion >Subramanian Swamy’s terrible crusade

Not content with his distasteful act of releasing to the public his letter to the prime minister on the reappointment of the Reserve Bank of India (RBI) governor, Subramanian Swamy is keeping up the pressure by suggesting that many members of the Bharatiya Janata Party back him in his moves. He is causing irreparable damage to the prime minister, to the economy, to the post of the central bank governor and to the RBI. Indeed, the prime minister cannot oblige him now without diminishing the RBI and the role of the governor. Raghuram Rajan may have his faults. Perhaps, he spoke once too often on matters outside his policy domain. He was a public intellectual even before he came to the RBI. However, being a public intellectual and a public official do not often go together. The statesman-like restraint of the prime minister and the finance minister to his public opinions and public advice deserves praise. Many other countries might have reacted differently. In this aspect, the governor has more adjustments to make than the government.

However, it must be said that, in all other areas, the cooperation between the government and the RBI has been harmonious. The governor had pointedly noted in one of his speeches that there was full prior consultation and agreement with the government in all that was being done in licensing new financial institutions, new types of institutions, in the pursuit of corporate defaulters and in the recognition of non-performing loans at government-owned banks.

Further, the governor had not given due credit to Y.V. Reddy in public forums for his foreign exchange reserves accumulation while doing the same as the RBI governor. Conversely, it also reveals his intellectual flexibility. Then, perhaps, he waited too long to abandon his own recommendations of 2008 that, arguably, paved the way for the Financial Sector Legislative Reforms Commission and its hare-brained and pernicious recommendations.

The other complaints are that he has allowed the rupee to depreciate against the US dollar and he had kept interest rates too high for too long and had lowered them only reluctantly. Actually, the rupee, in real effective terms, has appreciated since he took office. Further, emerging economies remain captive to the capriciousness of capital flows in and out. Forex reserves are a necessary evil.

That is why Rajan has been banging the table on spillovers from developed world monetary policies and on the need for a new set of rules of the game for the global monetary regime. It is unlikely that any other governor from the developing world would have been able to muster the intellectual conviction and respect that he commands against the might of the Federal Reserve, International Monetary Fund and European Central Bank.

The other complaint is that interest rates have not been lowered quickly enough. That the switch to the Consumer Price Index (CPI) from Wholesale Price Index (WPI) was a deliberate effort to keep interest rates higher and choke the Indian economy. Whether India needed inflation targeting or not is debatable. The finance ministry should have engaged in wider consultation before agreeing to it. But, in their favour, it could be argued that the terrible inflation record of the United Progressive Alliance (UPA) government left no other option for the RBI and the government to regain credibility. Hence, once the decision on inflation targeting was made, it was natural that CPI rather than WPI be used. No country uses WPI or producer prices. In the Indian context, WPI components and weights are wholly unrepresentative of the economy. Third, despite WPI inflation rates being in the negative for 17 months till March, inflation expectations of households are in high single digits.

In a balance sheet-constrained environment, there is enough empirical evidence from around the world that lower interest rates do not achieve the intended positive result—higher investment spending. Instead, it results in higher consumption spending, lower savings and unsustainable asset price booms. India can ill afford all three.

In the mid-1990s, Indian banks’ non-performing assets were high at that time. C. Rangarajan pursued a tight money policy. Companies worked on reducing their debt. Indian bond yields declined. Banks were automatically recapitalized by the rise in bond prices. By the time, boom conditions arrived, Indian corporations were in fine fettle to take advantage of it, raise investment spending and propel growth higher, at least for a while. Rajan is closely shadowing Rangarajan. No one asked for Rangarajan’s head then.

In any case, blaming the governor for the rise in non-performing assets is risible. Doing so gives a free pass to the UPA, under whose regime these bad loans arose. The governor deserves credit for confronting the problem rather than leaving it for the future.

Losing credibility with financial markets is something that this government can ill afford. Bonds and the currency will plunge and there is the issue of maturing non-resident deposits. Trapping the government in the swadeshi shibboleth is no less dangerous than the short-sighted socialism of the National Advisory Council under the UPA government.

Above all, Swamy’s public crusade has made it a lose-lose situation for the government and for the country. As for the future, there has to be a better way—both for the governor and for the government.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.

Comments are welcome at To read V. Anantha Nageswaran’s previous columns, go to

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