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Okay, Let's Get Subramanian Swamy's Nonsense on Raghuram Rajan Out of the Way

May 19, 2016


Subramanian Swamy has gone after the Gandhi family over the last few years and been fairly successful at it. Now he seems to have moved on to a new target-the Reserve Bank of India(RBI) governor, Raghuram Rajan.

Swamy, who recently became a Rajya Sabha member, wrote a letter to the prime minister Narendra Modi, asking him to terminate the services of the RBI governor immediately or when his term ends in September, later this year.

As Swamy writes in the letter: "The reason why I recommend this is that I am shocked by the wilful and apparently deliberate attempt by Dr Rajan to wreck the Indian economy. For example the concept of containing inflation by rising interest rates is disastrous."

Let's take the point of Rajan raising interest rates turning out to be disastrous. When Rajan took over as the RBI governor, inflation was close to 10%. Interest rates offered on bank fixed deposits were lower than that. Hence, people were losing money once inflation was taken into account.

Due to this, money had moved into real estate as well as gold, as people looked for a "real" rate of return. In fact, when Rajan took over as RBI governor, the rupee was rapidly losing value against the dollar. One of the reasons was that there was a huge demand for dollars because Indians were buying gold to hedge against inflation. Rajan cracked down on this, and managed to stabilise the value of the rupee.

The stabilisation of the rupee was important because India imports 80% of the oil that it consumes. And when the rupee depreciates oil becomes expensive in rupee terms. This isn't good for the government nor the overall economy.

Also, over the years high inflation has essentially ensured that the household financial savings as a proportion of the gross domestic product have been falling. Between 2005-2006 and 2007-2008, the average rate of household financial savings stood at 11.6% of the GDP. In 2009-2010, it rose to 12% of GDP. By 2011-2012, it had fallen to 7% of the GDP. The household financial savings in 2014-2015 stood at 7.5% of GDP.

Household financial savings is essentially a term used to refer to the money invested by individuals in fixed deposits, small savings schemes of India Post, mutual funds, shares, insurance, provident and pension funds, etc. A major part of household financial savings in India is held in the form of bank fixed deposits and post office small savings schemes.

In order to ensure that household financial savings go up, basically two things are needed-lower inflation as well as a real rate of return on financial savings that people make, in particular fixed deposits. Fixed deposits offer a real rate of return when the interest rate on the fixed deposit is higher than the inflation.

Since the beginning of 2015, after a very long time, the interest rates on fixed deposits have been in real territory. And this is a very important achievement for Rajan. The interest rates need to stay in real territory, if household financial savings need to go up, in the years to come.

In fact, it needs to be said here that Rajan recognises the fact that interest rates are not just about borrowers. They are also about savers as well. The savers include the young trying to save for the future of their children and the old trying to live a decent life in retirement. And savers need to be paid a reasonable rate of return on their savings as well. This is something that Rajan set right.

Swamy further said: "When the Wholesale Price Index (WPI) started to decline due to induced recession in the small and medium industry, he shifted the target from WPI to the Consumer Price Index (CPI) which has not however declined because of retail prices. On the contrary it has risen. Had Dr. Raghuram Rajan stuck to WPI interest rates would have been much lower today, and given huge relief to small and medium industries. Instead they are squeezed further and consequent increasing unemployment."

It is important to understand here why the Rajan led RBI moved from following inflation as measured by the wholesale price index to inflation as measured by the consumer price index. When the RBI tracked inflation as measured by the wholesale price index, it took a very long time to raise interest rates, and by the time the high consumer price inflation had well and truly set in.

The high inflation then caused problems, as I have explained above. Let's take the point about high interest rates hurting small and medium industries. Recent data shows that this is not true at all. Data for 2.37 lakh unlisted private firms was recently released by the RBI. This primarily includes small and medium enterprises, which Swamy feels are having a tough time.

This data clearly shows that these firms are doing much better than the big listed firms, over the last three years. Aarati Krishnan writing in The Hindu Business Line points out: "Unlisted firms managed far better sales growth in the last three years. They went from 13.3 per cent sales growth in FY13 to 8.7 per cent in FY14 before bouncing back to a healthy 12 per cent in 2014-15. In contrast, listed companies saw their sales growth dwindling from 9.1 per cent in FY13, to 4.7 per cent in FY14 and further to an abysmal 1.4 per cent by FY15."

The same trend was seen when it comes to net profit as well. As Krishnan points out: "Their profits grew at 16 per cent, 23.6 per cent and 12.3 per cent in the last three years. Listed companies struggled with shrinking profits, their net profits falling by 2 per cent, 5.1 per cent and 0.7 per cent in the same three years."

So what is Swamy really talking about here? And why is he misleading the prime minister Modi in particular and the nation in general?

Swamy further says: "Thus, in the last two years estimated NPA in public sector banks has doubled to Rs. 3-1/2 lakhs crores."

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What Swamy is basically saying is that the high interest rate regime initiated by the RBI led to small and medium enterprises defaulting on their loans and bad loans of public sector banks doubling. The first point that needs to be made here is that before Rajan took over as the governor of RBI, banks were not recognising their bad loans. He has pushed them to recognise their bad loans. Hence, the jump in bad loans has been primarily because of that.

What this means is that even before Rajan led RBI started raising interest rates, many corporates were not in a position to repay their loans. The banks were pretending all was well, when that wasn't really the case. Rajan forced them to start recognising bad loans. All these huge losses that banks have suddenly started to report can't have been created overnight. They are a result of banks not recognising these bad loans for a substantially long period of time. Hence, Swamy's charge doesn't hold true.

Also, defaults by mid and large corporates are a very important reason for public sector banks being in the mess that they are in. Crony capitalists close to the previous UPA regime are primarily responsible for this.

The last that I checked the RBI was a regulator of banks and did not give out any loans. So how can the RBI governor be held responsible for what are basically bad lending decisions by banks? How can the RBI governor be held responsible for banks not insisting on enough collateral for the loans that they gave out? And how can the RBI governor be held responsible for politicians forcing public sector banks to give loans to crony capitalists?

Swamy further said: "These actions of Dr. Rajan lead me to believe that he is acting more as a disrupter of the Indian economy [italics are mine] than the person who wants the Indian economy to improve." I agree with the part of the statement which says that Rajan is acting as a disrupter of the Indian economy.

In fact, on many fronts, the Indian economy did need a disrupter. Rajan has forced banks to start recognising their bad loans instead of extending and pretending, as they were doing earlier. This has brought out the real situation that public sector banks are in.

Further, he has also empowered banks to go after defaulters. A few Indian promoters have started selling their assets in order to repay banks. This is something that hasn't happened before.

Rajan has also initiated the formation of a monetary policy committee where monetary policy will be made by a committee. As of now, only the governor is responsible for it. A central bank operating through a monetary policy committee is the norm the world over. And by doing this, the governor is essentially diluting his powers.

Further, he has given small banks licenses and payment bank licenses as well, with the idea of expanding financial inclusion across the country. So, yes Rajan is a disrupter, who wants the Indian economy to improve.

Swamy also accused Rajan of being mentally not fully Indian. As he said: "Moreover he is in this country on a Green Card provided by the U.S. Government and therefore mentally not fully Indian. Otherwise why would he renew his Green Card as RBI Governor by making the mandatory annual visit to the U.S. to keep the Green Card current?" Rajan still has an Indian passport. This after having lived in the United States for more than 25 years. How many Indians who have lived in the United States for 25 years still have an Indian passport?

And if Rajan wants to keep his green card active, what is wrong with that? He is a professional in his early 50s and still has his career to think about. He needs to think about his career beyond the RBI and if that means visiting the US once every year, then so be it.

Swamy finally asked for the termination of Rajan's appointment as RBI governor. As he said: "I cannot see why someone appointed by the UPA Government who is apparently working against Indian economic interests should be kept in this post when we have so many nationalist minded experts available in this country for the RBI Governorship. I therefore urge you to terminate the appointment of Dr. Raghuram Rajan in the national interest."

This is a very silly argument. Appointing Rajan as the RBI governor was one of the few correct things that the UPA government did in the second half of its second term. Why undo that?

And as far as Swamy is concerned, there are better ways of showing interest in the RBI governor's job than this.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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29 Responses to "Okay, Let's Get Subramanian Swamy's Nonsense on Raghuram Rajan Out of the Way"


Jun 20, 2016

Amazing person with a great communication capability. It is quiet sad to see that Indian lacks the skills to work as team where we try to carry people rather than being right. History has given great defeat because of that and still we are yet to learn. Probably R3 would be a great asset to the economic forum of India. Hopefully Narendra Modi takes him as a special adviser for economic policy development

Success is a Bas****, it has many father while failure is an orphan nobody owns it.

Some of my humble views are as under :
a. Inflation coming down : the inflation came down due to the act of god [oil price came down ], Government increased cess to take the savings to reduce fiscal deficit
b. Asset quality review [ government has given green signal to write off loans ], It is an open secret and the only difference is neither the previous governor nor the finance ministers had the guts to take the bull by horn
c. transparency in licensing [ that is what it is supposed to happen ]
Interesting that our media does not want to give bjp credit for inflation control but to RBI Governor. In fact Modi's government listened to whatever was suggested by R3, but i feel there was no reciprocation by R3 for the gesture

Like (1)


Jun 1, 2016

My view is that India has been fortunate in having three successive RBI governors, namely VenugopalReddy, Subba Roa and Rajan. But for them Government would have wrecked the Indian economy. Hats off to all the three of them,who showed courage of conviction and steered the Indian economy through difficult times. People should be objective, and not use the power they have to humiliate and make baseless allegations for personal glorification as a great crusader. But For M r. Rajan's laudable and brave policy for cleansing the suppressed bad loans of banking industry, it would have descended into disaster, affecting the large number of small and middle class people who actually form the bulk of the population of India.

Like (1)


May 28, 2016

Why some people are interested a US Resident to continue as head of Central Bank. Are we sort of people in India to head this great institution. Rajan has worked against indians. His policies are anti growth.Thus job creation is stagnated.Let him be replaced by an experienced Banker/economist.His policies are exposing Banks more than actual NPAs.Thus Banks are not advancing loans to corporates. He must understand that slow moving world economy always defers payment of interest to bankers. Even a small trader who supplies on credit, gives space to his borrower/client. Rajan ignores this simple economic theory and in a world of negative interest rates Rajan keeps higher interest rates. Sooner he is sacked better for indian economy.

Like (1)


May 22, 2016

Hi Vivek Kaul,

I have no doubt that Mr Rajan's policies wrt interest rates are spot on & completely agree with you.

Why have you not looked into the another allegation mentioned in the letter, i.e. accusing him of trying to hush-up Enforcement Directorate(ED)'s probe on former Finance Minister P Chidambaram's son Karti's firms' money trail to Singapore.

I understand that as on date these are allegations are not backed by any concrete proof. Hence, doesn't seem warrant any comment or article as it may seem quite speculative.

The point to be noted is that Swamy is the only politician taking on other corrupt politicians.

Like (2)

suresh yezhuvath

May 20, 2016

dear mr.kaul,
i go through your diary on a daily basis and find it very informative. The post against subramania swamy's letter to PM is very valid, hope the prime minister takes note of this rather than swamy's letter, as you rightly said appointment of Rajan was one of few good things done by UPA government. Hope the PM will extend Rajans term (instead of terminating) for the sake of Indian economy like he decided to continue with Aaddhar which was initiated by UPA. Iam afraid Mr.Rajan may not accept the extension since there is no reason why a man of his caliber should do a thankless job like this and hear all these nonsense from irresponsible politicians.
I sincerely hope our prime minister will extend his term and also convince Rajan to accept the same.

Like (2)


May 20, 2016

I fully agree with your view. BJP government does not really believe in democracy.Their achievenments will be through suppression and divide and rule policy. They discriminate the persons. so naturally they do not like people like Mr.Rajan, who is upright and independant when comes to taking a decision in unbiased manner in overall interest of the country. Decisions of the RBI Governor affect the many big shots in repaying the loans. Prime minister should categorcally disown the statement of Mr. Swamy if the party do not subscribe to the individual view's of the M.P.

Like (2)

Mihir J Ashar

May 20, 2016

I respect Mr. Swamy for his relentless pursuit of the truth. Please target the ones who are manipulators, as you have been doing always. Spare professionals who only take simple logical decisions based on their experience and knowledge.

The ignorance of Subramanium Swamy with regard to macro economics has come out here. I am quite shocked at the letter he has written. The problem with some politicians is they shoot their mouths off about things about which they actually have little idea, other than what their few industrialist friends tell them. The slow recovery of the Indian economy is due to reasons other than low interest rates. He has to learn not to talk about things he has little idea about. We in India need Rajan way more than he will ever need the job. He is a free thinker who will always speak his mind. Politicians hate people who speak the truth. Mr. Swamy, please understand you need people like this so you know the direction needed to be taken in every situation. Please be humble and respect that.

Thankfully this does not seem to be the view of the Government. Rajan is not going to talk like an employee of the Government. Thank God we have him.

Like (2)


May 20, 2016

The mainstream media very conveniently kept mum on the letter written by Swamy to Rajan, accusing him of trying to hush-up Enforcement Directorate(ED)'s probe on former Finance Minister P Chidambaram's son Karti's firms' money trail to Singapore. Here are some excerpts

"In his letter to Rajan, Swamy not only accuses him of not co-operating with the ED, but also for alerting Chidambaram on ED's move to track down Karti's banking transactions. The ED, on November 27, 2014, sought from RBI about the money transfer details of three Karti-controlled companies including Advantage Strategic Consulting in connection with Aircel-Maxis scam probe."

"It is surprising that the RBI has not yet responded to the said communication from ED on the probe monitored. My sources inform me that you in your personal capacity have instead alerted the former Finance Minister P Chidambaram, who is the father of Karti Chidambaram about the ED's letter. I do not know whether you are aware that the both father and son are suspects of CBI and ED to be interrogated further in the Aircel-Maxis probe."

"After your alerting Chidambaram, he had sought to tamper with the evidence by putting pressure on Finance Ministry to dampen the investigation of ED with a view to hush up the matter. It is possible that since you were chosen by Chidambaram to be RBI Governor, you may feel obliged to alert him to the ongoing investigation, but as an RBI official you must know that informing and alerting him is a grave contempt of Supreme Court as potentially abetting tampering of investigation and evidence," said Swamy to Rajan, cautioning the consequences.

"Hence, I urge you in the interest of the purity of judicial process to immediately co-operate with the probe of ED and furnish all details of Karti Chidambaram's companies as sought by ED to ensure unhindered investigation. It will be consistent with the duties and ethics of the office of the RBI Governor not to inform or tip off the suspects named for the investigation. I am keeping the Prime Minister informed of this letter," said Swamy.

Like (3)


May 20, 2016

Mr. Kaul , thank you very much for this fine article on Governor Rajan's RBI tenure. Can you please get to the bottom of who and what forces are behind this smoking gun Dr. Subramanian Swamy ? He is a mercenary whose services many people avail of and BJP needs this man for harassing the Congress and raking up period political muck at suitable targets. It is reasonable to assume that there are powerful people here who want Rajan out of the way . Without that constituency Swamy would not have started this. That the Modi government will not act swiftly to silence Swamy could be as much a matter of tactical behaviour as it is of its political compulsion. Who could these people/ forces be ? Large Industrial, Commercial, Infrastructure ( crony and rent backed ) loans are stuck and a Mallya like enquiry will expose the very top of the business world here. With the Bankruptcy laws being passed and a hawkish Rajan getting at their throats ( most likely with the blessings of the Government ) , it is BAD news for the crooks . That the government probably released a Mallya test balloon to gauge the market reactions seems very likely . Unless Swamy got some support from within the establishment ( say RSS or anti-Jaitley groupings or powerful moneybags crucial for party funding or the BJP old guard etc ) he would not have gone to the formal extent of writing to the PM as he did. There seems to be a brewing tug of war involving some serious blocs here. The future of Banking reforms is critical and a spring cleaning ( critically needed) will be highly disruptive for every one. The government however well intentioned and determined will have to walk in a very nimble footed manner. Is it possible for you to research this and facilitate an open debate ? A wider discussion will help bring out much of the facts hidden under the carpet. May be that is just what the doctor ordered. Regards. Sundaresan.

Like (1)


May 20, 2016

Vivek, i have all along followed you and learnt a lot from your analyses. However, i do tend to disagree with you though only in a small way. I am not a professional in this subject, but base my views on what other bankers / financial analysts stated during the debates.

My take is that there were at least 2-3 occasions when RR could have lowered the rates, but he did not.

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