Raghuram Rajan was the poster boy of the Indian financial establishment before he fell out with Prime Minister Narendra Modi’s government for reasons not yet clearly established or explained.
Now, as the 53-year-old hands over the reins of the Reserve Bank of India to new Governor Urjit Patel, who functioned as his deputy, he has issued a stark warning to the government on its keenness to further lower interest rates.
The 53-year-old Rajan, who predicted the global financial crisis of 2008 and was Chief Economist with the International Monetary Fund between 2003 and 2006, is credited with getting the Indian economy back on track after being appointed as the RBI Governor in 2013.
With the rupee threatening to go into a free fall and inflation seemingly galloping at an alarming rate – it was a whopping 9.8% in September 2013 – it was a stellar move by then prime minister Dr Manmohan Singh’s UPA government to appoint him at the helm of the RBI.
Of course, Dr Singh being an economist himself who is credited with liberalising the Indian economy when he was the finance minister between 1991 and 1996, knew full well that Rajan’s credentials were impeccable for the hot seat.
Soon enough, Dr Singh was vindicated when Rajan focused on curbing inflation and succeeded in bringing it down to 3.78% by July 2015, the lowest in about 20 years.
However, despite his widely-acclaimed success, he was the target of some harsh personal remarks by Rajya Sabha MP and perpetual loose cannon Subramanian Swamy, who insinuated that Rajan was not a committed Indian and his work was not driven by patriotism, but by some mysterious, dark agenda which would benefit the country’s enemies.
Although Modi backed Rajan, it was too little too late, besides being somewhat half-hearted, and soon it was clear that a new RBI chief would have to be found.
India’s finance minister Arun Jaitley and others in the top echelons of the government are reportedly keen advocates of much lower interest rates, and it will be interesting to see how Patel deals with it. Will he follow the policy of his previous boss who was cautious with interest rate cuts, or would he be easily “persuaded” by the government to go for speedier cuts?
Rajan himself slashed interest rates to their lowest level since 2011 but angered some in the ruling BJP who wanted deeper and faster cuts intended to boost growth further.
In the US, Japan and several Western nations interest rates are kept low to keep the economy going, but the big question is can India afford to do so?
With millions of Indians relying solely on their bank savings to get by after retirement, unlike in the West where a strong social security system exists, regular interest rate cuts may not be the right answer to all of India’s financial ills.
“Often when monetary policy is really easy, it (low interest rates) becomes the residual policy of choice,” Rajan told the New York Times, adding that “other instruments of policy” may be needed to encourage economic growth.
It is inevitable that the Modi government heed his advice. Otherwise, the BJP would be risking its political future by disregarding the concerns of its supporters, millions of whom are from the middle class with nothing more than their salaries and pensions to look forward to at the end of every month.