Sunday, September 29, 2013

More than a rockstar performance

The new RBI Governor has loosened capital controls to attract investments from abroad. But the weather is still rough and the economy weak. Raghuram Rajan has a lot to do, and his debonair looks will not see him through...

These days everyone, including celebrity author Shobhaa De, is writing about Mr Raghuram Rajan for the country’s leading pink papers, which surprisingly cover lifestyle alongside business news. In the Reserve Bank of India’s long history, such excitement over a new Governor is unprecedented. But much of this has been manufactured by the Union Ministry of Finance which also clouded the end of Mr Rajan’s predecessor’s term.

Mr D Subbarao was given a politically-motivated farewell for his conservative handling of the central bank. He will also be remembered for his principled tussle with the Finance Ministry for quite a long time. It is a cliché that the nitty-gritties of politics overrule broad-based approaches because, for now, politics has won, and the Finance Ministry and the RBI are enjoying a rare harmony.

I have known Mr Rajan since his early days in Government, was impressed by his celebrated 2005 lecture, The Greenspan Era: Lessons for the Future, that was delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. I also read with great interest his radically upfront book on capitalism, Fault Lines: How Hidden Fractures Still Threaten the World Economy.

If his 2005 lecture placed him among visionaries who sensed in advance the impending trouble in the Anglophone financial model, his 2010 book added to his position as a rational thinker who had confronted the ills of the financial model, spoke against the rise of cronyism and the suspicious increase in the number of billionaires in post-reform India. Unfortunately, I fear we will miss that person now that he has taken his position at the helm of the RBI.

There is good reason why Mr Rajan’s nicely tailored suits are more talked about than his policies. Some of these, for instance, he has taken overnight to stop the downfall of the vulnerable rupee. Mr Rajan has also loosened capital controls to attract investments from abroad. But the weather is still rough and the fundamentals of the economy still weak. The pampered corporate sector is in no mood to fight its incompetencies.

In the last three decades, financial systems around the world have witnessed major change. The credit system has liberalised and the reaches of financial markets have expanded. But these changes have come with greater risks. The RBI, on many occasions, has had to step in to control visible and imminent challenges such as the earlier East Asian crisis to the worldwide recession of 2007-2008, from which we are yet to recover.

The RBI especially deserves praise for maintaining an effective regulatory grip over the new entities in the financial sector such as private equity and hedge funds. But on the other side, it remains a helpless hawk that cannot control the unethical business model of the capital market or rein in the impractical mutual fund sector which is destined for be untrustworthy. But with regard to the banking sector, the RBI has appeared to be in sync with the Finance Ministry. As a result, this sector has remained semi-reformed and non-progressive.

The last two decades have seen the emergence of diverse institutional networks in India and together they make a huge impact on policy-making. From inflation control to monetary policies, the RBI is controlling them all but individually. The clout of established third party financial assessors and lobbyists is also being strongly felt, now that India’s financial system too is seeking to become a clone of the Anglophone financial model. This is fine in the short run, but will lead to heavy losses in the medium to long term.

Mr Rajan has to take a position on this. But in the short span of time that he has been in office, he already seems to be losing his sheen. The Economist, which for some reason is religiously read in India, has compared the RBI with a pressure cooker and covertly offered sympathy for Mr Rajan. I don’t subscribe to such an extreme evaluation but have no doubt that leading the RBI during the last months of a beleaguered UPA2’s term is not a comfortable task.

At a time when the Government has made governance a redundant theme, reviving growth and containing price rise are among toughest tasks for the new RBI Governor. Also, since election is around the corner, agencies that have been sleeping all this while, such as the Planning Commission, will awake to action and offer concessions to cover up the incumbent regime’s fiscal imprudence. The RBI will come under pressure from the top and play safe, or not play at all.

Of course, India will eventually bounce back but the recovery will happen with a volatile financial sector that will remain densely populated by crony-capitalists and marred by their incompetent corporate spirit. The impressive ratings of the new RBI Governor must be taken with a pinch of salt.
Atul K Thakur
(Published in The Pioneer on 25September2013)

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