The decision by the widely respected economist Raghuram Rajan not to seek a second term as governor of the Reserve Bank of India (RBI, the central bank) is likely to roil India’s financial markets, which regarded him as a critical anchor for the country’s economy.
Investors will now dissect the implications of his departure for the ability of the monetary authorities to ensure price stability and encourage growth, or rebuild a banking system beset with non-performing loans.
Ever since Alan Greenspan’s chairmanship of the US Federal Reserve Board, both markets and the media have tended to lionise and personalise institutions like central banks. But the “Greenspan effect” can impede dispassionate analysis.
There were genuine policy differences between the RBI and Prime Minister Narendra Modi’s government, and tensions flared when officials perceived public comments by Rajan as being outside his domain. But the ad hominem attacks on Rajan in recent months raise large questions with serious implications for India.
The most important question is this: Will Modi continue to maintain his strategic ambiguity about addressing his own party’s extremist elements, or will he demonstrate true leadership by curbing party members’ tirades about core state institutions and exercising greater care in selecting the heads of public institutions?
The principal source of the attacks on Rajan was Subramanian Swamy, a bloviating Donald Trump-like figure, who was nominated to the Rajya Sabha (the upper house of parliament) by Modi’s Bharatiya Janata Party (BJP) in late April.
Having selected Swamy for Parliament despite his unsavoury reputation, the government’s failure to curb his indiscriminate attacks led to speculation that it had chosen him precisely to attack those – like Rajan – whom it wanted to undermine.
A singular weakness of Modi’s government has been its tendency, when it comes to BJP extremists, to run with the foxes and hunt with the hounds. One of the grounds for attacking Rajan was that he has permanent residency in the United States and, despite being a citizen, was “mentally not Indian”.
This was rank hypocrisy, given that Modi has been travelling the world lauding the achievements and contributions of the Indian diaspora. India’s best and brightest are apparently free to contribute their talents to other countries, but are suspect when it comes to helping their homeland. And if they do, it must be in the private sector and not in the talent-starved public sector.
Earlier this month, in an address to the US Congress, Modi emphasised that “for my government, the Constitution is its real holy book”. But BJP cadres have been stoking communal tensions, most recently in Uttar Pradesh, a critical state that is due to hold elections next year.
Encouraging ethnic and religious polarisation for electoral gain is of course not unique to the BJP or India. But Modi’s interventions to calm troubled waters have lacked the leadership and passion he demonstrates elsewhere.
His government’s judgment in selecting heads of public institutions is similarly questionable, especially in the case of cultural and educational institutions.
Even if motivated by a conscious strategy to undermine the domains of the left’s cultural power, it has needlessly courted controversy by appointing people with weak credentials.
Given the importance of human capital for India’s future, choosing people of questionable merit to lead institutions of higher education will inevitably have negative economic consequences. Here, too, it should be noted that all political parties in India share blame for politicising and undermining India’s human-capital foundations.
But a government that defends its record by claiming to be no worse than its predecessors is not one that can claim the mantle of change, as Modi’s so often does.
To be sure, the boundaries of acceptable public discourse have been changing globally: Trump has shown that in the world’s oldest democracy, and people like Swamy exemplify it in the world’s largest. But rhetoric has consequences, and a politician as gifted as Modi must be aware that those in his party who are deploying public speech to undermine reputations can also weaken the very institutions that are crucial to his own laudable economic ambitions for India.
Public servants have few defences when attacked so openly by prominent politicians. An elected government may have genuine policy differences with the person heading its central bank, and it is well within its rights not to extend the incumbent’s tenure when it expires.
But if it abandons institutional roles and norms of civil behaviour, and embraces known provocateurs, it will drive away the people of talent and integrity that sound, effective institutions need. Just ask Raghuram Rajan. - Project Syndicate.

- Devesh Kapur is professor of political science at the University of Pennsylvania.