RAGHURAM RAJAN
The book under review is a collection of speeches and articles by Raghuram Rajan who was RBI Governor from 2013-16. How did he choose this title?. He was asked if he was dovish like Janet Yellen or hawkish like Paul Volker.
"I was getting a little tired of these bird analogies as well as being compared with all these other people," Rajan says. "And so I started off laughingly, James Bondish: My name is Raghuram Rajan and I do what I do." That phrase stuck on.
Rajan is a world-class economist who was the twenty-third Governor of the Reserve Bank of India. He is now the K.D.Miller Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. Rajan was Vice-Chairman of the Board for International Settlements. He was the Chief Economist and Director of Research of the International Monetary Fund.
The American Finance Association awarded him the inaugural Fischer Black Prize for the best finance researcher under the age of forty. The other awards he bagged include the Deutsche Bank Prize for Financial Economics, the Euromoney magazine’s Central Banker of the Year Award and the Banker magazine’s Global Central Banker of the Year Award.
When Rajan took charge as Governor of RBI in September 2013, the rupee was in free fall, inflation was high, India had a large current account deficit, and the country’s exchange reserves were falling and India was considered one of the fragile five economies. Rajan sent a stern message about the strength of India’s institutions and the nation’s ongoing programme of reform. He outlined a vision with a focus on long-term growth and stability during his “ Thousand Days” in Office. Rajan explains economic concepts in a readily accessible way whether he deals with debt relief or dosanomics .He addresses key issues essential to growth: the need for tolerance and respect to assure India’s economic progress
.
The book is divided into three Sections. The first is on “RBI Days”. The second section is devoted to ”The Global Financial Crises” and the last section incorporates “Occasional Pieces”.
The first chapter sets the stage and gives a gist of Rajan’s statement on assuming office as Governor. He lays emphasis on “Transparency and Predictability” apart from maintaining the value of the Rupee. He lays down the Five Pillars of Financial Sector which are—1.Clear monetary policy; 2.Strenthening banking structure; 3.Broadening financial markets; 4.Help to small and medium entrepreneurs and 5.Allaying distress of Corporates and financial institutions.
He explains Dosanomics—how inflation and higher interest rates work against the retirees than low inflation and lower interest rates.(The rate slipped from10.59 % to 4.39% during Rajan’s tenure).In a speech at the TIFR the
Governor explains the rationale for fighting inflation to ensure sustainable growth.
Talking of a competitive and vibrant banking system Rajan analyses the problem thoroughly. The most pressing task for public sector banks is to clean up their balance sheets, improve governance and management and to recruit talent with special expertise.
Discussing financial inclusion Rajan declares that technology is the key and will ensure interoperability and obtain benefits of networking and enhance security and financial inclusion.
Rajan calls for new institutions such as bankruptcy courts and turnaround agents and a change in the mindset where the willful defaulter is not lionized but chastised.
In his lecture at the D.D.Kosambi festival in
Goa,Rajan included a reference to “Hitler” which attracted a lot of flak. It was aimed at the need to remedy the weakness of government capacity in general. The I I T lecture is an argument for tolerance, respect and the right to have different views. Rajan includes his speech at the Brookings Institution on international issues—competitive monetary easing.
In his four lectures on Global Financial Crises Rajan points out that we are experiencing a widespread high productivity growth but low investment relative to desired savings, which has pushed down interest rates and pushed up asset prices.
“Occasional Pieces” contains gist of seven articles/ speeches. In a critical analysis of the American role in Iraq Rajan declares that the end of the cold war gives the U S both the power and the interest to spread democracy and capitalism by force. He records that institution building is one area where international financial institutions and policy makers have learned from experience and used commonsense to devise practical approaches without much guidance from academics.
Regarding Demonetisation Rajan clarifies that in February 2016 when the government asked his views on demonetisation, “in no uncertain terms” he expressed his reservations against it, saying short-term economic costs would outweigh long-term benefits and there were “better alternatives to achieve the main goals” (unearthing black money, fighting terror finance and fake notes). When he was asked to prepare a note, he reiterated this, outlined the preparations needed for it and also what would happen if the preparation was inadequate. “At no point during my term was the RBI asked to make a decision on demonetisation,” Rajan writes.
Rajan wants to put the record straight that the central bank was not a party to demonetisation and to that extent he wants to rescue the reputation of the institution. The RBI, which had shied away from declaring how much of junked currency was deposited in banks in the limited window provided, last week in its annual report said 99 per cent of the currency had returned.
On RBI’s Dividend Policy Rajan is trenchant about paying a larger amount to Government. The RBI pays no interest on its liabilities but earns interest on its financial assets. RBI earns surplus profits as the manager of the country’s currency. The Central Board has paid out the entire surplus to the Government amounting to Rs 66,000 crore during the last two years. During 2016-17 the amount transferred was Rs.30,659 crore. If RBI pays a special dividend it creates additional permanent reserves—equal to printing money. The bottom line is that the RBI should transfer to the Government the entire surplus retaining just enough buffer that are consistent with good central bank risk management practice. “There is no free lunch”, declares Rajan. The Government should acknowledge its substantial equity position in the RBI and subtract it from its outstanding debt when it announces its debt position.
Rajan writes tersely on the independence of R B I. According to him the multiple layers of scrutiny, especially by entities that do not have the technical understanding will only hamper decision-making. The Government appointed
R B I Board which includes ex-Officio Government officials as well as Government appointees should continue to play its key oversight role. Vacancies in the R B I Board, which have remained unfilled
for many months now should be filled quickly so that the full expertise and oversight of the Board can be utilised. There is an informal understanding that the R B I Governor has the room to make needed decisions in the interests of the macro-economic stability. None of this should be changed. It has to be explicitly stated that the Governor’s rank is commensurate with the position of the most important technocrat in charge of economic policy in the country. More clarity about the R B I's role and a clearer assertion of its independence would be in the nation’s interest, declares Rajan.
On his laying down office the former Governor declared that he had not resigned. He quit when his term ended. Rajan said, “We never reached a point where the government made me an offer to stay on... There was no offer on the table. That’s fair to say.”The least pleasant aspect of my job was dealing with bureaucrats who were trying to undercut the Reserve Bank so as to expand their turf”
Raghuram Rajan has confessed his failure to solve the problems of RBI retirees who number over 25,000.He has written “...On the internal front, my biggest regret is that I could not solve a long-pending matter that I inherited from my predecessors: securing for retired RBI staff the same pension benefits that government employees enjoy, despite repeated government assurances that the matter would be addressed. I hope the government will do the right thing here...”(Page 211)
Rajan’s speeches and articles do take forward the reform agenda in Indian banking and financial sector.
A book to be read carefully by all interested in India’s economic advancement.
P.P.Ramachandran.
17 / 09 / 2017
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