In a surprise move, Raghuram Rajan, the governor of India’s central bank, has announced his resignation. Rajan was highly regarded by international policymakers and investors, but he had created many enemies in India who resented his status, questioned his understanding of his job and even challenged his understanding of his country. The question now is whether India will remain committed to the policies Rajan advanced, or whether his departure signals a retreat from reform.
Rajan, who will quit when his first three-year term ends in September, was generally acknowledged to be one of the best qualified individuals to ever head the Reserve Bank of India (RBI), the country’s central bank. He spent most of his career in the United States, working as an economics professor at the University of Chicago. He served as the first non-Western chief economist at the International Monetary Fund and then returned to India in 2012 to serve as chief economic adviser to the Finance Ministry.
He was named head of the RBI in 2013, appointed by the then ruling Congress party, in a move that was designed to provide instant credibility for an economy under assault from global financial shocks that triggered a sharp devaluation of the Indian rupee. Then, India was considered part of the “Fragile Five”; the economy was shrinking at an annualized rate of 2 percent per quarter, consumer prices were growing 9.8 percent, the rupee had lost 16.6 percent of its value from the previous year and the current account deficit was estimated at 4 percent of its gross domestic product.
Today, the Indian economy is one of the fastest growing in the world. It is expanding at a rate of 9.6 percent, inflation has been cut substantially to 5.8 percent, the rupee lost just 4.7 percent from its level the previous year, and the estimated current account deficit has been cut to a quarter of its previous level and is reckoned to be 1 percent of GDP. Recovery from the worst currency crisis in decades and its position at the top of the heap — it is outpacing Chinese growth — owes much to Rajan’s steady hand and influence.
The actions he took were straightforward and conventional: He raised interest rates and kept them high to tame inflation and pressed banks to clean up their loan portfolios. Less traditionally, but also important, he encouraged commercial banks to increase deposits from overseas to entice the 25 million overseas Indians to send money back home.
Officially, India’s business community and national politicians backed his determination and praised his independence; in fact, however, many who applauded him were dismayed by his reluctance to bend to pressure and lower rates when it was politically expedient to do so and troubled by the consequences to their own fortunes of his commitment to get the banks to get rid of nonperforming assets. In his letter of resignation to the staff of the RBI, Rajan conceded that both processes — setting up a monetary policy committee that would set interest rates independent of political pressure and the banking cleanup — were unfinished.
While Rajan’s chief offense was the threat he posed to India’s culture of crony capitalism, he was forced to step down from RBI (or refused a reappointment) because of charges that he had strayed into politics. In several speeches, he had criticized rising intolerance in India, arguing that a culture of debate and openness were central to India’s success. This was seen as a challenge to the nationalist ideology of the ruling Bharatiya Janata Party (BJP), and triggered searing criticism from right-wing elements within it. The most pointed — and revealing — comments came from Subramanian Swamy, a member of Parliament, Hindu nationalist and former Harvard economist, who argued that Rajan was “mentally not fully Indian.” The combined influence of ideological critics and grubby-minded politicians and businessmen who faced possible personal loss from Rajan’s commitment to deregulation and less indulgent banking practices proved sufficient to make him the first RBI governor since 1992 to have just a single term in office.
The government of Prime Minister Narendra Modi has denied that it forced Rajan out and that his departure will dampen its commitment to reform. By all accounts, the prime minster had a good relationship with Rajan, and sought to advance the same objectives. To counter the charge that Rajan’s departure would slow the momentum to reform, the government announced immediately afterward a series of liberalization measures that demonstrated its commitment to continued opening, by allowing wholly foreign-owned companies to compete in previously closed industries. Of course such measures were in the works for some time, but the speed with which they were revealed suggests that the government is well aware of the negative perceptions surrounding Rajan’s departure and the need to provide a counter narrative.
Much will depend on who replaces Rajan. An initial list of seven candidates has been winnowed down to four. It has been recommended that Rajan join the selection committee. In his letter announcing his decision to return to academia and decline a second term, he said he would remain available to help his country in whatever way possible. Helping select his successor may be the most important contribution he can make after leaving office.
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