Looking back at the Raghuram Rajan years

A few hours after he took charge as governor of the Reserve Bank of India three years ago, Raghuram Rajan took the unusual decision to speak with great clarity about the tasks that he had set for himself.

He said that a new monetary framework would be developed, a greater variety of financial entities would be allowed to operate in India, financial markets would be seen as complements rather than competitors of banks, the banking business is as much about loan recovery as it is about loan disbursal, there would be baby steps to internationalize the rupee, financial inclusion would be an important theme during his tenure, and financial infrastructure would be improved.

Rajan ended his speech on two improbable notes that sound very prescient today. First, he said that a central banker such as him starts his innings at the height of popularity, but taking unpopular decisions is also part of the job, so he would not go ahead with an eye on how many Facebook likes he collects. He then quoted from a poem by Rudyard Kipling: “If you can trust yourself when all men doubt you, but make allowance for their doubting too”.

As Rajan ends his tenure at the Indian central bank, each of these themes resonate. Rajan pushed through most of the changes he had promised, especially a new way to conduct monetary policy, a more open attitude towards financial innovation and forcing banks to deal with problem loans.

He also stepped on many toes in pursuit of his goals, be it powerful business groups that had defaulted on bank loans, ministers whose sole contribution to economic debate was to call for lower interest rates, or many others who thought he had made it a habit to speak on issues outside the boundaries of what public officials are expected to.

Rajan eventually had to face a social media lynch mob that focused on making personal attacks on him. We have already argued in these columns that the final responsibility for not standing by Rajan during this sorry episode should rest with Prime Minister Narendra Modi and finance minister Arun Jaitley. Any political leadership has the right to appoint public officials of its choice—but it should also understand that mature democracies work through independent institutions that are not beholden to the politics of the day.

This newspaper has also at times been critical of Rajan’s outspokenness, but some of Ben Bernanke’s sharp comments on US fiscal policy or Mark Carney’s criticism of Brexit are counter examples of central bankers speaking on issues that seem to be outside their remit. More importantly, the expectation that a central bank governor should only speak on monetary affairs should be matched by the commitment that officials in New Delhi should not hold forth on interest rate or exchange rate policy, as is their wont.

Rajan took charge at a time when high inflation had not only damaged the economy but also dented the credibility of the Indian central bank. The fight against inflation is not yet completely over, but there is no doubt that the significant victories over the past few years is largely explained by four factors: The fiscal correction that began after P. Chidambaram came back to the finance ministry at the end of the tenure of the United Progressive Alliance; the determination of Jaitley to continue to bring down the fiscal deficit despite the obvious pressures to not do so; the deft handling of the food economy by the Modi government; and overdue retreat from loose monetary policy under Rajan.

The credibility of the Indian central bank has not yet been fully restored. The most obvious proof is that inflation expectations are still way above the inflation rate that is being signalled. The mess in the banking sector continues to present a daunting challenge—in fact, it could be the biggest threat to economic stability right now. Institutional territory markers will have to be defined. These are some of the tasks that Urjit Patel will have to focus on from next week.

Has Raghuram Rajan accomplished what he set out to achieve three years ago? Tell us at views@livemint.com