एक थे रघुराम राजन (Once There was Raghuram Rajan) - Vivek Kaul's Diary
Free Reports

एक थे रघुराम राजन (Once There was Raghuram Rajan)

Jun 20, 2016


If you want to survive in a bureaucracy, any bureaucracy, it is important that you market your bosses well.

It is important that you say things that your bosses like.

It is important that you repeat things that your bosses have been saying and like to believe in.

It is important that you laugh at the jokes that your bosses crack-even the ones you do not understand.

It is important that you do not have an opinion of your own. And if you do, it is better if you keep your mouth shut.

Because if you don't, chances are that you might be asked to leave very soon.

That is one of the unwritten rules of India's democracy.

The Congress excelled at it for close to the six decades that it governed the country. And the Bhartiya Janata Party has just continued where the Congress left.

Raghuram Rajan, the twenty-third governor of the Reserve Bank of India (RBI), probably did not understand this.

As a consequence, he won't be getting a second term. This will be the shortest term any RBI governor has got since 1992.

The loss, of course, is ours.

When Rajan took over as RBI governor in September 2013, he brought a sense of balance to the Indian economy, which was all over the place.

The rupee was crashing against the dollar.

The inflation was in double digits.

And people had just started to realise that public sector banks were sitting on a pile of bad loans.

India wanted to be China. But it was looking more and more like Brazil.

As Ruchir Sharma writes in his new book Rise and Fall of Nations-The Rules of Change in the Post Crisis World: "Though India was hoping to be the next China, its government was building another Brazil, a low-growth, high-inflation economy. Between 2009 and 2013 India's key economic numbers flipped for the worse: GDP growth fell by nearly half, to 5 percent, and inflation doubled to 10 percent."

Strong inflationary expectations had set in. As Indian workers started to believe that prices will continue to rise at a fast rate, they demanded higher wages. As Sharma writes: "This is a particularly dangerous cycle. Once the spiral begins, it is likely to spin for a few years before the central bank can contain it...Rajan...immediately made clear he understood that fighting inflation was the bank's top priority. And then in 2014, [India] got a new prime minister who, despite the populist pressure for the central bank to cut interest rates, seemed to back Rajan's plan to move cautiously with an eye to anchoring inflationary expectations."

This, along with a huge fall in oil prices, helped control inflation. In fact, Rajan has been severely criticised for keeping interest rates too high in order to bring down inflation. But the fact of the matter is, that after a very long time, depositors are actually getting a real rate of interest on their deposits. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

As Rajan told NDTV in a recent interview: "When inflation was 9% they [i.e. depositors] were getting 9%. This meant earning nothing in real terms and losing everything in inflation...Today they are getting 7% on their deposits and inflation is 5.5%. They are earning 1.5%. It is a real difference."

This was a real achievement and people are being encouraged to save. In fact, if real interest rates on deposits continue to be the order of the day, then this will help build India's household financial savings, which have fallen majorly in the last few years.

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. The 2015-2016 figure should be better than 7.5%.

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 fact, because of high inflation, a lot of money went into gold between 2008 and 2013, as people looked at hedging against inflation. With real interest rates in positive territory this has changed. Further, it needs to be said here that if Narendra Modi's flagship programme Make in India, needs to take off, then India's household financial savings need to go up as well. It is these savings that will finance the projects under the programme.

For this to happen, real interest rates are important. As Rakesh Mohan and Munish Kapoor of the International Monetary Fund write in a research paper titled Pressing the Indian Growth Accelerator: Policy Imperatives: "In the near future, we expect financial savings to be restored to the earlier 10 per cent level, as inflation subsides, monetary conditions stabilize and households begin to obtain positive real interest rates on their deposits and other financial savings. Financial savings are then projected to increase gradually to around 13 per cent by 2027-32."

And how is this going to happen? As Mohan and Kapoor point out: "A sustained reduction in inflation that leads to the maintenance of low nominal interest rates, but positive real interest rates, will help in restoring corporate profitability, while encouraging household savings towards financial instruments."

This clearly tells us that Rajan was clearly on the right path and it would have been terrific Modi had offered him a second term.

On the flip side, the critics of Rajan keep saying that bank lending is growing at a very slow pace because of high interest rates. Between April 2015 and April 2016 (actually it' a little more than a year between April 17, 2015 and April 29, 2016), bank lending(non-food) has just grown at by 8.4%. Indeed, this is slow and not as fast as it was in the past. But that is only if we look at the overall bank lending.

In the last one year, the retail loans of banks have grown by 19.7%. Between April 2014 and April 2015(between April 18, 2014 and April 17, 2015), these loans had grown by 15.7%. In fact, the growth in the lending of non-priority home loans in the last one year had stood at 28.6%.

Hence, the retail loan growth has clearly picked up over the last one year, after Rajan cut the repo rate by 150 basis points, starting in January 2015. What is interesting is that in the last one-year retail loans have formed around 45.6% of the total loans given by banks (i.e. non-food credit).

Interestingly, between April 2014 and April 2015, retail loans had formed 32.4% of the total lending. Taking these points into account along with the fact that lending to industry grew by 0.4%, it is safe to conclude that banks are not in a mood to lend to industry. This is primarily because of the huge amount of bad loans that public sector banks are carrying on the loans previously made to industry.

This slow growth has pulled the overall growth number down. Rajan has encouraged banks to clean up their books and at the same time, go after the assets of crony capitalists who have defaulted on their loans. This is likely to yield results in the days to come, assuming that the next RBI governor and the government continue on this path. Of course, in the short run, it has upset the calculations of many a crony capitalist, who would now be feeling relieved with Rajan's exit in September. But what is good for the crony capitalist cannot be good for the country. Hence, Rajan's going is not good for the country.

Further, it is worth pointing out here that the appointment of the next RBI governor is of immense importance. A country is not built by a single individual, but it is built by the institutions that he or she nurtures.

In India, precisely the opposite things have happened. Our politicians, starting with Indira Gandhi, have used the bureaucracy and the institutions to create jobs for their supporters and not to support the country.

As Gurcharan Das writes in India Grows At Night: "No one anticipated that politicians in India's democracy might gradually 'capture' the bureaucracy and use the system to create jobs and rents for their friends and supporters." The previous Congress led governments excelled at this.

Narendra Modi has shown a similar tendency. The latest such appointment is that of ex-cricketer Chetan Chauhan as the Chairman of National Institute of Fashion Technology (NIFT is not just about fashion design, if that is what you think). I sincerely hope that Modi does not make the same mistake while appointing the next RBI governor.

If he does appoint one of his friends or supporters as the next governor of RBI, it will not send a good signal, either nationally or internationally. If Modi doesn't appoint a proper professional to the RBI, it will tell us that even though Congress Mukht Bharat might be possible politically, institutionally that day is never going to come.

Loyalty to the King, will remain the only way of surviving in the Indian bureaucracy. And that can't be a good signal in any way, especially for a leader who had briefly offered us hope of being different. But by failing to give Rajan a second term he has shown that institutionally India has just one model of governance and that is the Congress model, where blind loyalty to the leader is most important.

Postscript: One argument that is being made is that India has many good economists to replace Rajan. We sure do.
But none of them has the same international stature as Rajan. Not Arvind Panagariya. Not Arvind Srinivasan. Not Rakesh Mohan. Not Urjit Patel. Not Bibek Debroy and all the other names who are supposedly in the race.
And honestly, who fires an employee who is doing well? Only, an insecure boss.

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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Deep State First August 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
A Darkness Is Spreading Across the US August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

Equitymaster requests your view! Post a comment on "एक थे रघुराम राजन (Once There was Raghuram Rajan)". Click here!

43 Responses to "एक थे रघुराम राजन (Once There was Raghuram Rajan)"

Tikam Patni

Jul 2, 2016

In your do's to survive in the present establishment, you have missed out one very important condition: join RSS.. When All Governors in India are RSS members, how could a RBI Governor be any different ?


Nararasimha Prakash

Jun 22, 2016

There is too much of ado about nothing. It is the media created hype around the person. RBI has always had good governors and he is no exception. The media has made him a james bond of the central bank overshadowing everyone else. Even in the worst of financial crisis, the then governor YV Reddy steered clear of the crisis and media did not appreciate him because he was not charismatic!The country has no dearth of talented people to head the RBI.



Jun 22, 2016

I agree with Ramakant here.

Vivek's mail yesterday and this update today reminds me of a baby whose pacifier has been taken away from it.
I feel the paranoia of gloom and doom arising from R3's exit is being blown way out of proportion, and Equity Master's position reminds me of that of politically influenced mainstream media (which is available for free 24 hrs a day) although vivek's missive is better supported by numbers.

Few points:
- As far as I can see from the news reports, ideological differences notwithstanding, Modi government did NOT interfere in R3's work in any way (although there were voices of criticism which any public office/officer should be anticipating). We cannot say the same about prior governments. So we are in a better place today than before. And we can only hope that it remains this way.
- Regarding "international repute", MMS was also an economist of international repute and the governor of RBI. However the credit for reforms are attributed to leadership, i.e., PVNR. So I guess what we should continue to watch out for is Modi's leadership and how he converts promises to actions, irrespective of the instrument or resource used in RBI.
- Going forward, the government elected by the people has the implicit choice to select the bureaucrats who share their line of thinking. And by giving them the mandate, we have given them the choice. We need to wait and watch now, and not go into anxiety driven panic mode. (For the record, selecting contrary thinkers has not always proven to boost progress - it frequently leads to chaos. Even in companies, while contrary voices are respected, leadership prevails - that's why we pay CEO's more than Chief Risk Officers, and fire them on failure).

Frankly there are so many macro economic and social factors that can throw the world economy into red territory overnight, and there's nothing a single person or a government can do to anticipate it, let alone prevent it. We can only react to it, and recover from it. If 20 years of working as a professional across the world and watching governments all over is anything to go by, change happens, and adopters continue to survive. And individuals don't make institutions (although they can be a great influence), but the institutions continue on.

What I would like to hear as a subscriber of Equitymaster instead, is how to handle the uncertainty and immediate future from an investor's point of view.

Just my 2 cents. That's all.


yogendra pal singh sirohi

Jun 21, 2016

All world economies are suffering from stupid politics. India is worst. B.J.P. is capitalist in real with mask of socialism.
Economics is highly Dynamic, globalization has added to dynamics further.
NO WONDER most economist fail. Expectations from Economists are highest, because money runs life.
I have liked Vivek Kaul article, every word. S.B.I. C.E.O., Arundhiti also running for post. She is a dark horse.
God save India.

Like (1)


Jun 21, 2016

Many Governers came and went, he is also one of them. There is no dearth of his successors, then why so much ado about nothing. No sky is falling.

Like (1)


Jun 21, 2016

MR.Vivek, in one of my earlier comments I said that Rajan will be out soon. So the developments are
on expected lines, not surprised. This Government is not different from UPA, in fact it is UPA-3.
Soon monetary policy committee will be formed and political nominees will enter in to it. They will dance to the tunes of their political masters and will bring down the repo rate to rock bottom level to trigger liquidity driven phony growth. we can expect higher inflation and asset price bubbles leading to another mega burst. savers will be punished,borrowers will have a gala time and crony capitalists will gain strength and will raise their ugly head. This is not a country for honest upright bureaucrats but a good place for chamchas.

Like (1)


Jun 21, 2016

Why do we need international approval or recognition for any person ?
Just because he had a good international reputation makes him a good governor ?

Even MK Gandhi used this discretion that Nehru has a very good international stature & made Nehru the PM overruling the then congress vote which had voted for Sardar Patel as PM. The country is still paying for this bias in Kashmir & various other follies.

Lot of noise is being is made of this. Now I have serious doubts about Mr. Rajan as he got support from Pappu G & other notable prestitutes like Rajdeep & Barkha. Till date, I have not seen these people support a cause that is good for the country. Not sure why it is different this time ?

Also, why did Mr. Rajan not name the top 10 loan defaults when asked by the judiciary ?
Why protect the people who have siphoned-off public money & not name & shame them ?

Like (1)

laxmikant saboo

Jun 21, 2016

i think the best governor of rbi was d subbarao when in 2008 the financial crisis hit the world and every country was decreasing int rates he kept on increasing rates and no bank in india failed 'while rajan kept on his eyes closed on increasing npa and didnt take strict action angainst banks/clients

Like (1)

manish sharma

Jun 21, 2016

With respect to Postscript, what are your views on Kaushik Basu?

Like (1)


Jun 21, 2016

I also read Richa's article on related topic and observed comments from many investors. I have few questions to you and few comments.
1 Is your (and Richa's) article based on the facts & figure you collected or is it based on assumptions, speculations about government's intention ?
2 Why do you think Raghu Ram Rajan is so much indispensable ?
3 Is your analysis of government's performance after comparing it with UPA's performance or "expectations" from Modi ?

1 Raghu Ram Rajan acted independent, seem to have done good job of keeping inflation low & straightening PSU banks. But so did all previous governors and I am sure we do have good potential candidates around to rope-in. Given a choice , definitely R3 should have continued for one more term to complete the jobs he undertook. I read the backlash from many investors for #Rexit as "fear of their investment getting eroded/marginalized" in near/medium term.

2 RBI Guv's position needs to be autonomous, BUT, also need to work in "synchronous/harmony" with government's policy/agenda/vision. It need not be confrontation always.

3 Subramanyam Swami's allegations on R3 were not liked by many, BUT, I dont see anyone tried to challenge/refute with facts & data points ; At least I have not come across it. R3 should have responded to it.

Like (1)
Equitymaster requests your view! Post a comment on "एक थे रघुराम राजन (Once There was Raghuram Rajan)". Click here!