Raghuram Rajan is an intellectual rock star of our age. There are few who have combined his academic insights with policymaking acumen. In 2005, he warned of the risks to the global economy well before the crisis struck American and European banks and financial institutions. His later warnings about cronyism sapping the economic vibrancy of a country like India, too, have been prescient.
He is also outspoken, a trait that does not gel with the usual impression of a central banker. His disagreement with the Union government over the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) are well known. In the last seven months, Rajan has spoken on a number of issues that have provoked controversy. In December, his comments on the Make in India campaign were read as a warning against a return to import substitution industrialization. In November, in his speech “Saving Credit”, he highlighted the problem of non-performing assets (NPAs) and came close to blaming big borrowers for a part of the problem. In August, in his Lalit Doshi lecture, he went back to his pet theme of cronyism and the issue of corrupt politics in India.
His comments and disagreements, for the most part, have been well regarded even among governments that are at their receiving end.
Last week, during an event in Goa that commemorated the late D.D. Kosambi—who was another outspoken Indian intellectual—Rajan made remarks that have attracted controversy. In the course of his speech, “Democracy, Inclusion, and Prosperity”, the governor of the Reserve Bank of India (RBI), highlighted the recent work of political scientist Francis Fukuyama. Applying Fukuyama’s analysis to India, Rajan cautioned against the danger of too many checks and balances leading to an ineffective government.
What he said in his speech has a contemporary ring. His words are worth recalling: “An important difference from the historical experience of other countries is that elsewhere typically strong government has emerged there first, and it is then restrained by rule of law and democratic accountability. In India, we have the opposite situation today, with strong institutions like the judiciary, opposition parties, the free press, and NGOs, whose aim is to check government excess. However, necessary government function is sometimes hard to distinguish from excess. We will have to strengthen government (and regulatory) capability resisting the temptation to implant layers and layers of checks and balances even before capacity has taken root.”
The difference lies in the context. The issues that Rajan addressed are no longer those of economic policy. Even if one uses the catch-all expression governance, what he said last week comes very close to commenting on political subjects.
Few, if any, RBI governors have gone this far. There have been outspoken governors who have ruffled the feathers of ministers and civil servants alike. Y.V. Reddy is a good example of this outspokenness. Then again, Reddy’s disagreements and concerns were about the Indian economy. He never spoke publicly about politics or other matters that did not concern central banking.
Globally, too, Rajan is an outlier in this matter. No credible Western central banker, be it Ben Bernanke at the US Federal Reserve or Mervyn King at the Bank of England, have spoken on subjects outside their domain. Incidentally, last year Rajan and Bernanke had a spat over the phasing out of quantitative easing and its negative effects on emerging market economies.
There is, of course, no bar on what an RBI governor can speak on. To be fair to Rajan, he did mention in his speech that he was wearing his professorial hat and was not speaking in his capacity as RBI governor. But is that distinction so easy to make? And more importantly, given what Indian governments are, is it so easy to partake?
The danger is institutional. It has taken a lot—convention, experience and plain resistance—on the part of RBI governors to insulate the central bank from pressure by the Union government for blatantly demanding what it wants.
Irrespective of the political colour of the government—populist or conservative—all Indian finance ministers demand lower interest rates from the RBI. Those demands, especially when they are made close to a monetary policy announcement, are considered as an interference in the functioning of the central bank.
But an RBI governor wandering into the realm of the political could then justify the government transgressing into areas that should be the preserve of the central bank. That is the risk Rajan is creating. There are many ways in which this can happen—from key appointments to outright friction between the finance ministry and RBI. The consequences of such friction cannot be wholesome. If only for that reason, Rajan ought to be careful.
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