Messiah on Mint Street: Why expectations of Raghuram Rajan are so high
Sometime towards late May and early June last year, the government was vetting the names of a few economists to take over from India's chief economic adviser Kaushik Basu who was leaving after completing his term.
Pranab Mukherjee who was finance minister then had been sounded out on some potential candidates and early stage informal discussions in the finance ministry centered on the merits of some of these economists. For sure, Raghuram Rajan, a top-drawer economic and academic mind featured in those talks, but a standout name at that time was that of Subir Gokarn, then a deputy governor of the Reserve Bank of India (RBI).
Within weeks, in a twist of fate, the script changed. Mukherjee, now widely blamed for fiscal mismanagement during his tenure in the ministry between 2009 and 2012, was nominated by the Congress as a presidential candidate and then elected as president in July. Within weeks of his departure, the government moved swiftly to bring on board Rajan as chief economic adviser when prime minister Manmohan Singh had oversight of the finance ministry for over a month before his cabinet colleague P Chidambaram returned to his old job.
In the process, the government smoothened the path for the entry of a distinguished academic and economist into the realm of Indian public policymaking. Rajan who comes with formidable qualifications for the job has been greeted with a gushing welcome by the Indian media according to the condescending foreign press which, for its part, was slow on the uptake when the new central bank governor announced a raft of measures, hours after taking over.
It is rare that central bank chiefs open their innings by taking recourse to Open Mouth Operations — as different from the conventional Open Market Operations. But calculated bets like boosting reserves through NRI deposits — a throwback to an option abandoned two decades ago — did their bit to lift sentiment in financial markets. The elation may also have to do with the new governor's credibility and approach at a time when fellow policymakers in Delhi have been shown up for their poor marksmanship.
Managing Conflict
India's second-youngest RBI chief may have fuelled expectations with his radical and confident opening. Traditionally, many institutional heads in India have sought to underplay promises while attempting to deliver more, indicating a cynical but practical approach to harsh ground realities in the country. Such an approach takes into account structural problems which they have to surmount besides political and bureaucratic hurdles to changes in the financial and real sectors based on their long stint in the government.
Pranab Mukherjee who was finance minister then had been sounded out on some potential candidates and early stage informal discussions in the finance ministry centered on the merits of some of these economists. For sure, Raghuram Rajan, a top-drawer economic and academic mind featured in those talks, but a standout name at that time was that of Subir Gokarn, then a deputy governor of the Reserve Bank of India (RBI).
Within weeks, in a twist of fate, the script changed. Mukherjee, now widely blamed for fiscal mismanagement during his tenure in the ministry between 2009 and 2012, was nominated by the Congress as a presidential candidate and then elected as president in July. Within weeks of his departure, the government moved swiftly to bring on board Rajan as chief economic adviser when prime minister Manmohan Singh had oversight of the finance ministry for over a month before his cabinet colleague P Chidambaram returned to his old job.
In the process, the government smoothened the path for the entry of a distinguished academic and economist into the realm of Indian public policymaking. Rajan who comes with formidable qualifications for the job has been greeted with a gushing welcome by the Indian media according to the condescending foreign press which, for its part, was slow on the uptake when the new central bank governor announced a raft of measures, hours after taking over.
It is rare that central bank chiefs open their innings by taking recourse to Open Mouth Operations — as different from the conventional Open Market Operations. But calculated bets like boosting reserves through NRI deposits — a throwback to an option abandoned two decades ago — did their bit to lift sentiment in financial markets. The elation may also have to do with the new governor's credibility and approach at a time when fellow policymakers in Delhi have been shown up for their poor marksmanship.
Managing Conflict
India's second-youngest RBI chief may have fuelled expectations with his radical and confident opening. Traditionally, many institutional heads in India have sought to underplay promises while attempting to deliver more, indicating a cynical but practical approach to harsh ground realities in the country. Such an approach takes into account structural problems which they have to surmount besides political and bureaucratic hurdles to changes in the financial and real sectors based on their long stint in the government.
It certainly helps that Rajan does not have the burden of carrying such baggage. A perceived weakness of a lack of policymaking experience in India may well turn out be his strength in terms of a fresh approach to old problems. That approach could also help in the makeover of the institution which he heads now and which prides itself on its self-earned autonomy but is often seen as resisting changes which are needed in a modernizing economy.
India's institutional history shows that ties between central bank chiefs and finance ministers have soured half-way through the tenure of the governors. For a good part of the RBI's history, it had to manage two conflicting objectives: an expansionary fiscal policy and the compulsion to keep interest rates low; and the need to tamp down on inflation.
Rajan will soon have to cope with such challenges and more including countering the government on fiscally irresponsible but vote-catching schemes especially when national polls are less than eight months away. Similar conflicts abound in other jurisdictions too. But the powwow is far more severe in India when the government which owns several banks that control over 70% of the assets of the banking system often negates the RBI's policies on interest rates by putting pressure on lenders not to raise rates.
Making a Difference
Clouding policymaking from the central bank's perspective also will be the unsolicited advice of senior and influential policymakers in New Delhi. That is unless the new governor has extracted a promise from the boss in Delhi that these gentlemen will be kept in check to put an end to confusing market signals. Much of Rajan's success will also hinge on the equation he builds with the finance minister and key finance ministry officials, some of whom have in the past three years been busy sniping at the central bank and muddying the waters.
For now Rajan is fortunate that he has enthusiastic backers in the prime minister and the finance minister. That could change if a new government takes over next year. Equally challenging will be rebuilding what many see as a fractured relationship between the finance ministry and the RBI. The government has already moved to mend ties, which is reflected in the set of measures announced by the new governor with the finance ministry fully on board.
The promise of better coordination will be put to test soon as the US Federal Reserve starts unwinding its stimulative quantitative easing policy, and the resultant impact on local markets. Managing ties with government will be critical as recent experience shows that differences over policy issues have had their adverse impact on markets.
There is sometimes the risk of such coordination being perceived as giving in to the sovereign, a charge that is bound to be raised when the government attempts a makeover of the RBI in line with the recommendations of the Financial Sector Legislative Reforms Commission. Rajan's predecessor D Subbarao had opposed some of the proposals; Rajan may well have a different take, given that quite a few recommendations are broadly aligned to his broader philosophy on markets and the financial sector.
But any government will have to be mindful of maintaining ties with the new central bank chief considering that, unlike some of the past governors — many of them career bureaucrats — Rajan has the option to walk out of the role anytime and secure prized jobs anywhere in the world. Unsolicited advice from senior administrators and regulators to Rajan is that he should temper expectations about reforming the institution he heads. They would rather that he bide his time and expend his energies more on potential blowouts in the days ahead.
India's institutional history shows that ties between central bank chiefs and finance ministers have soured half-way through the tenure of the governors. For a good part of the RBI's history, it had to manage two conflicting objectives: an expansionary fiscal policy and the compulsion to keep interest rates low; and the need to tamp down on inflation.
Rajan will soon have to cope with such challenges and more including countering the government on fiscally irresponsible but vote-catching schemes especially when national polls are less than eight months away. Similar conflicts abound in other jurisdictions too. But the powwow is far more severe in India when the government which owns several banks that control over 70% of the assets of the banking system often negates the RBI's policies on interest rates by putting pressure on lenders not to raise rates.
Making a Difference
Clouding policymaking from the central bank's perspective also will be the unsolicited advice of senior and influential policymakers in New Delhi. That is unless the new governor has extracted a promise from the boss in Delhi that these gentlemen will be kept in check to put an end to confusing market signals. Much of Rajan's success will also hinge on the equation he builds with the finance minister and key finance ministry officials, some of whom have in the past three years been busy sniping at the central bank and muddying the waters.
For now Rajan is fortunate that he has enthusiastic backers in the prime minister and the finance minister. That could change if a new government takes over next year. Equally challenging will be rebuilding what many see as a fractured relationship between the finance ministry and the RBI. The government has already moved to mend ties, which is reflected in the set of measures announced by the new governor with the finance ministry fully on board.
The promise of better coordination will be put to test soon as the US Federal Reserve starts unwinding its stimulative quantitative easing policy, and the resultant impact on local markets. Managing ties with government will be critical as recent experience shows that differences over policy issues have had their adverse impact on markets.
There is sometimes the risk of such coordination being perceived as giving in to the sovereign, a charge that is bound to be raised when the government attempts a makeover of the RBI in line with the recommendations of the Financial Sector Legislative Reforms Commission. Rajan's predecessor D Subbarao had opposed some of the proposals; Rajan may well have a different take, given that quite a few recommendations are broadly aligned to his broader philosophy on markets and the financial sector.
But any government will have to be mindful of maintaining ties with the new central bank chief considering that, unlike some of the past governors — many of them career bureaucrats — Rajan has the option to walk out of the role anytime and secure prized jobs anywhere in the world. Unsolicited advice from senior administrators and regulators to Rajan is that he should temper expectations about reforming the institution he heads. They would rather that he bide his time and expend his energies more on potential blowouts in the days ahead.
While it is fine to take along colleagues, adopting too much of a collegial approach may hamper decision making when the central bank is called to respond in real time, they say adding that it may also help if Rajan does not publicly air differences if any with the government. The cost of that is too severe as we have seen in the last year or two.
Rajan appears to be in favour of a resolution corporation which will identify troubled firms and act before it is too late. That may be laudable but it is far from clear whether it will be feasible when the country lacks an effective bankruptcy code like in the US. But where he could make a difference is in his understanding and knowledge of the financial markets — a rare trait in an Indian central bank chief, many of whom had disdain for this segment.
And also given his sense of global finance and economy — which means that there won't be any learning curve for him on the external front. This is where he can make a difference in shaping policies and making structural changes to ensure that the currency markets are rooted more in India. Rajan could do exactly what the RBI hadn't when it ignored the recommendations of a committee he headed in 2007-08 which scripted a report on financial sector reforms and advocated 100 small steps to boost growth.
Friends of Rajan
Many civil servants are tempted to dismiss academics who are parachuted to head institutions, cynical about their ability to handle issues in a complex economy such as India. But in many global jurisdictions, academicians seem to be making for good central bankers. Examples: Stanley Fischer, who quit after a successful seven-year tenure in the Bank of Israel, Ben Bernanke, Erdem Basci, the current head of the Central Bank of Turkey — who like Rajan is an engineer, an MBA and an economist — and closer home C Rangarajan, who taught at IIM-Ahmedabad, from where Rajan obtained his degree in management.
The level of hype which marked his entry into Mint Street has never been seen earlier. But Rajan does have the potential to emerge as a fine and successful governor, with some luck and given his intellectual ability. But as Rangarajan who headed the committee which chose Rajan as chief economic adviser says, when an academic takes on an executive position, he has to find answers immediately. According to the former RBI governor, an academic who takes on an executive assignment will have to apply his knowledge and find solutions swiftly as there is no luxury of time in the real world unlike in academia. So what will count is delivery not intellectual heft.
Rajan's most enthusiastic backers are those abroad. Austrian economist Peter Klein tweeted that Rajan was 1,000,000 times better than Larry Summers (United States secretary of the treasury when Clinton was president) and Federal Reserve vice-chair Janet Yellen, both contenders for the US Fed Reserve chief's job. John Cochrane, Rajan's colleague at the University of Chicago Booth School of Business says in his blog that if anyone can resist the political pressures that central bank governors face, it will be Rajan.
"You won't ask for a person on the planet who has thought more clearly and productively about issues relating to regulating the financial system and avoiding crisis. And he won't be tempted to think that any monetary magic or financial dirigisme from a central bank can fix all of India's problems."
That is the kind of faith which many both back home and globally reposed in him including Manmohan Singh who first appointed Rajan as his adviser in 2008. If Rajan does succeed, it will also be an endorsement for the gutsy choice of the PM and FM and a part of their legacy too. More, it will be a vindication of the fact that it is critical to choose the best man for the job. And if Rajan pulls it off along with his colleagues and fellow policymakers, it will also signal to both home and global constituencies that India can indeed deliver.
Rajan appears to be in favour of a resolution corporation which will identify troubled firms and act before it is too late. That may be laudable but it is far from clear whether it will be feasible when the country lacks an effective bankruptcy code like in the US. But where he could make a difference is in his understanding and knowledge of the financial markets — a rare trait in an Indian central bank chief, many of whom had disdain for this segment.
And also given his sense of global finance and economy — which means that there won't be any learning curve for him on the external front. This is where he can make a difference in shaping policies and making structural changes to ensure that the currency markets are rooted more in India. Rajan could do exactly what the RBI hadn't when it ignored the recommendations of a committee he headed in 2007-08 which scripted a report on financial sector reforms and advocated 100 small steps to boost growth.
Friends of Rajan
Many civil servants are tempted to dismiss academics who are parachuted to head institutions, cynical about their ability to handle issues in a complex economy such as India. But in many global jurisdictions, academicians seem to be making for good central bankers. Examples: Stanley Fischer, who quit after a successful seven-year tenure in the Bank of Israel, Ben Bernanke, Erdem Basci, the current head of the Central Bank of Turkey — who like Rajan is an engineer, an MBA and an economist — and closer home C Rangarajan, who taught at IIM-Ahmedabad, from where Rajan obtained his degree in management.
The level of hype which marked his entry into Mint Street has never been seen earlier. But Rajan does have the potential to emerge as a fine and successful governor, with some luck and given his intellectual ability. But as Rangarajan who headed the committee which chose Rajan as chief economic adviser says, when an academic takes on an executive position, he has to find answers immediately. According to the former RBI governor, an academic who takes on an executive assignment will have to apply his knowledge and find solutions swiftly as there is no luxury of time in the real world unlike in academia. So what will count is delivery not intellectual heft.
Rajan's most enthusiastic backers are those abroad. Austrian economist Peter Klein tweeted that Rajan was 1,000,000 times better than Larry Summers (United States secretary of the treasury when Clinton was president) and Federal Reserve vice-chair Janet Yellen, both contenders for the US Fed Reserve chief's job. John Cochrane, Rajan's colleague at the University of Chicago Booth School of Business says in his blog that if anyone can resist the political pressures that central bank governors face, it will be Rajan.
"You won't ask for a person on the planet who has thought more clearly and productively about issues relating to regulating the financial system and avoiding crisis. And he won't be tempted to think that any monetary magic or financial dirigisme from a central bank can fix all of India's problems."
That is the kind of faith which many both back home and globally reposed in him including Manmohan Singh who first appointed Rajan as his adviser in 2008. If Rajan does succeed, it will also be an endorsement for the gutsy choice of the PM and FM and a part of their legacy too. More, it will be a vindication of the fact that it is critical to choose the best man for the job. And if Rajan pulls it off along with his colleagues and fellow policymakers, it will also signal to both home and global constituencies that India can indeed deliver.
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