Tuesday, August 06, 2013

Raghuram Rajan

In advanced economies, policy makers and politicians have come to regard appointment of 'chief banker' (the bank which prints its own national currency) as a crucial decision making point. It shows in the raging debate about Fed Chief appointment in USA, or celebrated news of Carney talking over improving UK or difficulty of Netanyahu in finding a right head for Israeli bank to follow in footsteps of great Stanely Fischer. Whereas in Japan strongman PM Abe has BOJ policies as the cardinal part of his solutions to what ails to Japan and likewise appointed his trusted person to BOJ chief position. But Indian Public would yawn on hearing the news of new RBI head and I take that as a sign of healthy democratic politics of the country. Not only day to day struggles of most Indians are much different than economies of West, Indian people know that tricks by RBI have much less influence in daily lives than what would happen at central banks in other economies. 

From the perspective of Indian Public, the narrative on Dr. Singh's Second term is reasonably simple and clear: that Dr. Singh's Government essentially squandered all the good will during early years of the second term by ignoring raging corruption from Coalgate, to 2G scam to Commonwealth Game fiasco. With total destruction of Political Capital, UPA government did not have much credibility to push any meaningful reforms. No wonder, Opposition took the advantage of this weakness by completely stymieing UPA government in parliament. Unable to stop pervasive corruption, nor able to deliver on next stages of economic liberalization; UPA government is resorting to Brazilian Lula'a trick of 'direct subsidy payments' to poor and needy in India under various schemes. In itself, those are politically powerful ways to address poverty in Indai. Those policies are needed in some sense and indeed would help to make progress. However, what is needed for those policies to succeed is:
- transparent and efficient delivery / administrative mechanism, and
- resources to finance to those schemes apart from printing notes (which results in fast depreciating rupee).

There are steps taken by UPA government in bringing transparency in these new 're-distributive policies'. But one does not get a sense that those efforts are adequate and there are real dangers that 'leakages in the system' would still make these policies ineffective and waste of resources. As far as 'financing' of these schemes go, UPA government has clearly failed in identifying and mobilizing extra resources. UPA government has not found any new sources of revenue (since selling of Public Sector companies did not progress well nor auction of national assets like air wave frequencies and mining rights; all got caught up in the tangle of corruption). No wonder Market is fretting about the fiscal mismatch and running away in droves from Indian Market as well as her currency.

Easy liquidity immediately after 2008 recession provided comfortable context for developing economies like India because of easy availability of global capital. Instead of taking advantage of those easy finance conditions; Dr. Singh's UPA government has nothing to show and as Fed is starting to tighten up in response to improving American Economy; capital is leaving emerging markets like India.

So what can new RBI Governor Raghuram Rajan do in these circumstances? I believe, not much. Worse, I also doubt whether he is any better choice at this point. First, I am not sure whether Rajan understands the political context of UPA government's mismanagement; which hopefully would have prompted him to extract certain private assurances from Dr. Singh. (But we have no ways to know about those in public and in any case those assurances have no place in an open democratic system.) Next, what about internal contradictions in Rajan's own economic understanding? He may be picking up wrong lessons at wrong time in wrong places.

Though Rajan is famous for having warned Fed in 2005 about the impeding housing crash, he has been on the wrong side of the debate in American Economic Policy by not prescribing to standard Keynesian means (government to spend money without concern to debt and Fed to keep low interest policies). We all only need to read Paul Krugman to understand how thoroughly discredited Raghuram Rajan thinking is in this regard. Krugman has been vindicated and Rajan has been wrong here.

Next, Rajan has been susceptible to supply sider fetish of 'don't tax job creators' kind of non-sense. Romney defeat in 2012 not only has shown that people do not take this 'maker versus taker' argument any seriously; but rescinding of Bush Tax Cuts since January of 2013 has been a blessing to American Economy as well. So Barack Obama is indeed showing that 're-distributive policies' can help mitigate economic crisis too. Once again Rajan finds himself on the wrong side of economic debate.

What did Dr. Singh see so promising in candidacy of Rajan then? But I suspect that the damage may not limit in Rajan having only contradictory views. It could be that he will forget how profligacy of State without backing resources in Indian context, however would not deliver results as well as unduly tight monetary policy in India would choke export and business expansion. Indian Rupee needs to depreciate for competitive reasons, the challenge is make those currency movements gradual over period and not any sudden to create an economic shock. In Indian context, deficit inducing stimulus may not work that well because of corruption induced extreme leakage in the system and unresolved structural deficiencies. In absence of transparency and enforcement; stimulus in India is stimulus for corrupt politicians and middlemen. That is the lesson not lost on Indian Public and hence they all yawn on appointment of new RBI Governor. In appointing Raghuram Rajan, Dr. Singh might have placed a leader with faulty economic understanding and  wrong judgement to compound the problem further.


Anonymous said...

Your views on his competency are totally in contrast to his contribution. He had predicted the coming of the global recession in 2005. Although you are indicating that he has been on wrong side couple of times, but again it should be noted that Indian economy is totally different from the American economy. More so Rajan has a very sound knowledge on Indian economy given the fact that he had done his education from IIM's.

Anonymous said...

Well, the author is merely stating that Raghuram Rajan, with low familiarity of indian politics, and lack of track record may not be the blessing for Indian Economy as the media portrays him.

And studying at IIM is hardly a panacea for these shortcomings. We dont have to agree with the conclusions, but these may be possibilities.

The complete lack of disclosure of agendas and lack of public debate that must exist before such prominent appointments means we and authors can only grope in the dark. Is this a democratic way of functioning? To my mind not.