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
Email:summertickets@gmail.com
(Published in The Pioneer on 25September2013)

Deviant lines

Book Review: Non-fiction/Economics, Fault Lines: How Hidden Fractures still Threaten the World Economy by Raghuram G.Rajan, Collins Business/Harper Collins publishers, 354 pp; Rs350 (Paperback)

I have read many books on the financial crisis including of Andrew Ross Sorkin’s Too Big to Fail, Michael Lewis’s The Big Short and Hank Paulson’s On the Brink besides being in consistent touch with numerous papers written on the concerned theme by scholars from the nook and crannies of the world. But in most impartial opinion, will rate Raghuram G.Rajan’s Fault Lines as the best ever written book not only on ongoing financial crisis but also over the behavioural macroeconomic policies.

His international exposures before returning to India for IIT education made his path later more seamless with his metamorphosis from a technical man to overgrown economist over the years while living mostly in USA. He rose to be the chief economist of IMF but fortunately, at no cost, he deserves to be called the stereotypical economic genius. Rajan’s observations are very pragmatic and it’s hard to confine them in the shackles of any rigid ideological frame, and obviously for knowing his contention better, such firmness should not be applied in any condition. Instead polarizing his views in three easier optional blocks-leftist, rightist and centrist; he chooses rather a less travelled path which determines by the ground realities, rather by the preoccupied convictions.

So, he thought to act hard on the down sides/greeds of finance rather conceiving high finance itself harmful-that might be an insane position for the puritan leftists, with colour and tags. Similar contradiction arises though with constructive tantalizing mirage, when he talks of welfare measures, with them citizens must be entitled by the government might be enough for causing embarrassment for rightist or to a large extant among the centrists as well. Raguhram Rajan’s expectation is very rational as far he sees that “government” can’t solve the every persisting problem for citizens but he too miserably fails exploring in general, what should be the optimum government intervention?

Though atleast on USA, his findings are pertinent, in which he correlates the popular pressure on government for providing cheap credits in unsafe hands. That indeed was a major cause of sub-prime crisis besides the greed ridden adventures emanated from the exotic financial constructs, which shattered the overall confidence of capitalist triumph to a lowest possible label. At the height of financial failures, democratic governments were in deep trouble, not only in solving its own puzzle of governance but also about the whole deterioration of falling businesses that causing the interests of corporate with big money in complete antagonism of mass welfare programmes.

The big dilemma remains with the democratic governments to choose between bailouts and debt waive off? Undoubtedly, capitalist prudence orders for previous. So often its interface comes more frequent than mass waivers of debt, albeit on similar point, a country like India presents little difference with its distinct polity and populist commitments. This book also remarkably underlines how USA government met toughly with the financial failure and succeeded well to retrieve jobs within a short span of time, however Rajan cautions that it should not be considered a complete recovery. Indeed, complete financial recovery could be a desired endgame, though conquering it would be merely a pipedream under the present set of circumstances on regulators, governments and financial institutions are functioning across the powerful economies.

So what’s to be done now? Broadening of Rajan’s statement, “I (the author) have been frank in pointing out the pitfalls (in India’s policy and politics), not because I am pessimistic about India but because I think self-delusion is the first step towards disaster for individuals as for countries” gives the clear picture of whole scenario that constitutes the basis of socio-economic superstructure. The cheap flow of foreign capitals made Asian economies like China, Japan exclusively powerful in the region for long time before opening of other economies, significantly of India. But lately both the Chinese and Japanese economies are under excessive strain because of their over integration with western economies in every possible terms-case with India is still somehow different, as here the liberalisation came late and with active regulatory restraints.

Fault Lines end with a very scintillating Afterword: What Lies Ahead for India. Rajan mentions India’s growing income inequality and the dangers that a social underclass poses to economic future. His strong emphasis on the ills of maturing cronyism in India’s power centre is worthy enough to be considered a grave threat to the essence of India’s constitutional mandate. He appears exactly right is pointing out the growing numbers of Indian billionaires, more as products of the networking than of enterprise. His stand is very important not only as sophisticated Chicago economist but more as the man in government working with none lesser than the practicing economist Prime Minister of India.

Fault Lines deserves to be read widely in this imprint-in international market, it has already registered huge success, now Indian readers would found this paperback edition worth of reading and knowing the innumerable fault lines of the global economic system. Personally, I am in agreement with the crux of Rajan throughout the book but essentially not with all his beliefs, especially when he justifies conformism in retrieving the lost shine of western economies through the same outshined financial models that wrecking the normalcy of economies. Here more radicalism of ideas, though not of obstinate ideology was needed to solve some of the very damaging fault lines!

Atul Kumar Thakur
March 27, 2012, Tuesday, New Delhi
Email: summertickets@gmail.com