Bhaktonomics 101: All You Wanted to Know but Were Afraid to Ask - Vivek Kaul's Diary
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Bhaktonomics 101: All You Wanted to Know but Were Afraid to Ask

Jun 21, 2016

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There is economics and then there is Bhaktonomics-or so called economics which is used regularly these days, to justify the actions of the Narendra Modi government.

This new faction of economics has never been explored before-at least not until today. In this column I will look at Bhaktonomics that is being used to justify why Raghuram Rajan should not have been offered a second term, as the governor of the Reserve Bank of India.

Here are a few arguments being made:

  1. Rajan wasn't cutting interest rates fast enough: This is an old argument that keeps getting made whenever a central bank does not cut interest rates as the government of the day would like it to. So the followers of Bhaktonomics say that Rajan should not have got a second term because he was not cutting interest rates fast enough.

    The irony is that Rajan did cut the repo rate. The repo rate has been cut by 150 basis points since January 2015. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

    But let's leave that aside for a moment. Hence, the argument is Rajan wasn't cutting interest rates fast enough. And because he wasn't cutting interest rates fast enough, the bank lending had been growing at a slow rate. Since bank lending has been growing at a slow rate, individuals haven't been borrowing to spend and companies to expand. Hence, economic growth hasn't been robust enough. Given this, Rajan had to go.

    But didn't India grow at 7.6% in 2015-2016? Isn't India the fastest growing major economy in the world? I personally don't believe that India is growing at 7.6%. There are many other sceptics as well. But try telling that to the practitioners of Bhaktonomics and see how they react.

    So, if India is indeed growing at 7.6%, and is the fastest growing major economy in the world, then Rajan has cut interest rates fast enough. And if he has cut interest rates fast enough, why is he being fired? Okay, okay. He has not been fired. He has chosen to go on his own.

    If India is growing at 7.6%, then Rajan has cut interest rates fast enough. Or to put it as the conventional economists do, he hasn't been behind the curve. On the flip side, if he hasn't cut interest rates fast enough, then India isn't growing at 7.6%. The broader point being that you can't have it both ways like the Bhaktonomists are currently.

    There are other points on the interest rate front that need to be made here. Rajan ensured that the real rate of interest on deposits was in positive territory, after a long time. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

    This worked well for savers who had seen inflation eat away their hard earning during the Manmohan Singh years. It has also helped household financial savings grow, as less money went into gold and real estate, in comparison to the past. It is ultimately these financial savings which will finance the Make in India programme. So Rajan essentially was batting for the government and not against it, as Bhaktonomists have been pointing out.

    But a real rate of interest for depositors means that the government had to bear a high rate of interest on its borrowings, something it is clearly not comfortable doing. This is after many years of paying a lower rate of interest on its borrowings than the prevailing rate of inflation.

    Take a look at the following chart:



    The green line is the rate of inflation. And the red line is the interest that the government pays on what it borrows. Between 2007 and 20013, the government paid a lower rate of interest than the prevailing rate of inflation.

    The real rate of interest available to the depositors these days, does not allow the government to do that. Hence, as the biggest borrower going around, it wants lower interest rates. QED.

    The saver be dammed. Bhaktonomics has no place for the savers. They are only bothered about the borrowers, which includes the government and the crony capitalists.
  2. Individuals are not important/Nobody is indispensable: This is another point that is being vociferously made to justify the exit of Rajan. This is absolute rubbish. If that was the case then Manmohan Singh, would have still been prime minister.

    Individuals make institutions and governments. They make institutions and they destroy them as well. Hence, individuals are important. What India lacks are institutions. One man cannot take this country out of the rut that it is in. Good institutions can. And institutions are ultimately built as well as nurtured by individuals. So saying that individuals are not important is not even an argument.

    Also, India's government these days gets as much attention as it does, globally, primarily because Narendra Modi heads it. Modi is an individual. His being the head of the Indian government gives it more credibility than the last one and given that he matters. And like he matters, so does Rajan, when it comes to the RBI.

    Further, you don't hound out an employee who is doing well, especially when you have a serious talent crunch anyway, when the best brains do not want to work for the government (and I mean any Indian government here not just this government) and stay far away from it. If something is working why try and destroy, in order to fix it again? Beats me. Perhaps, Bhaktonomics has an explanation for this as well.

    Also, the next RBI governor, whoever he or she is, will take time to settle into the job. And precious time will be lost. This is when inflation has started to go up again. So have oil prices. The cleaning up of bad loans of banks has reached a very important stage. Continuity would have been good here.

    In fact, The Indian Express reports that earlier this year the government scrapped the search for a new chief of the Securities and Exchange Board of India(Sebi) and extended the term of UK Sinha on the pretext that ""continuity may be desirable" at times of "excessive volatility - mainly due to external factors"".

    If this was true for Sebi earlier this year, it is more than true for the RBI at this point of time. So, why the double standards? Also, UK Sinha, the Sebi chief, like Rajan, is a UPA appointee.
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  4. It's the government's prerogative to decide who works for it: This is the third argument being made justifying Rajan's exit and is by far the most sensible of the lot. Also, it is better than saying nobody is indispensable.

    But is this the way you hound out an RBI governor, when RBI remains one of the few government institutions which hasn't degraded over the years? You don't let an unelected member of Parliament run a malicious campaign against the RBI governor and then come out and say this is not the party's stated position on the issue.

    If you didn't want him, the same could have been communicated to him, in a good way. Tata, bye bye.

    The way Rajan's exit has been handled, it is clear that the message that the government wants to send out is, that if you want to work for us, then you need to be a cheerleader (or team player as the euphemism goes), and if you have an opinion your own, then it's better to keep your mouth shut.

    As Chandan Mitra of the BJP put it in a column on NDTV.com: "He also demonstrated a less-than-patriotic enthusiasm to play cheerleader, expected to tom-tom his government's achievements."

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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28 Responses to "Bhaktonomics 101: All You Wanted to Know but Were Afraid to Ask"

Sailendra

Jul 1, 2016

In my opinion, the author is worried about possible affects on the economy when RR is gone.
I think we do not know who will be the next RBI governor and what would be his/her actions. Without this information, it is is too premature to comment on the impact of RR's exit.

Like (1)

SG Choudhary

Jul 1, 2016

As always such a delight to read your column Vivek.Perceptions matter! Do'nt they ? Sure! Ask the investors overseas.
As Namo carries a Brand Valueso does an eminent Economist like Rajan. If we as a nation do not recognise oue heroes and hand them the shabby treatment. We wo'nt have them in future. Simple!.
Yes men we shall get with no opinions of their own and ready to kowtow to the ruling dispensation of the day.
NoSSIr. Excellent work requires recognition - otherwise what you get is mediocrity.
Then you have a self styled - unelected morons like S. swamy training his guns on anyone who is an acheiver - or bigger sin 'opiniated'- to soothe his bruised Ego.

Like (1)

Hardik Patel

Jun 24, 2016

I think point is simple, but looks like you have set your mind against Modi and BJP.
First, when did as citizens even worry about who's RBI governor ? Let people give the names of 3 last governors before RR. so why RR is important ? All governors are mostly good in economics and finance. Why to give so much media space to him and worry about his exit ?

Second, Every govt has right to choose people with whom they can implement their policies. RR was appointed by UPA and spoke against NDA multiple times. Even advised on multiple non-economical issues to govt indirectly. Basically, that says that you are not aligned to govt. Then, no matter how good he is, govt is not going get trust on him. so irrespective of any party, Govt should choose a person which govt can trust and align with their policies.

Open up !!

Like (1)

Ravi shah

Jun 23, 2016

I appreciate your effort Mr Vivek in highlighting the wrongs of Modi govt.I condemn subscribers like ARUN,GOPALKRISHNA BHAT.They sound very arrogants.Because of such people you rightly said,no self respecting intellecuals want to work for govt and take orders from them.Our govt want YES sir men to work for them.Please write more about long term outlook of economy where we can earn some good return.We must be able to look and take right decisions.

Like (1)

Sethu

Jun 22, 2016

Excellent write up.this country does not deserve Rajan likes.some of the comments written here clearly indicates the mind set up of the people in this country.this clearly shows why many indians are highly successful outside India.

Like (1)

Arun

Jun 22, 2016

It seems Vivek has a some emotional baggage with present government, which he is entitled to.
I am not paying subscription to EM to hear rants, but to get insights on how to increase and preserve my wealth.
So I suggest he vent his emotions on various other media outlets dedicated for that purpose.
Am unsubscribing his daily article now as it just clutters my inbox and deleting old msgs. Cheers.

Like (1)

S Surendranath

Jun 22, 2016

Vivek, you seem to become habitual wrong-finder who always finds flaws in everything and anything.. which is neither fair nor good to academic and intellectual health.. please be wise with your experience to understand that Criticism is Fair Impartial Appraisal with logical sense of application rather than the attitude of 'Whatever you do I will say it is wrong'... If you continue this, only consequence will be you will remain alone to read whatever your write.. Kindly do not be offended, and I am writing this piece of feedback after reading your write-ups with considerable interest and respect...

Like (1)

Subramanian Ram

Jun 22, 2016

The author it seems is extremely biased and Pro Rajan just like the anti Rajan lobby. There is no doubt about his credentials but did he apply himself to know about the conditions prevailing in our country. It is definitely a valid argument that no single individual is greater than the country. Several eminent economists have held this post prior to Rajan and have made significant contributions to our banking industry and economy. For instance Mr. Reddy who was the predecessor steered our banking sector without any tremors during the peak of the global meltdown in the year 2008/09. When he demitted office was their so much hue & media hype ? The media is trying to get political mileage out of a purely administrative decision. After all his term is ending is September & the government is perfectly justified in looking for alternatives. Why was Rajan protecting the big corporate defaulters & refused to divulge the names in-spite of receiving instructions from the high court and supreme court. Who was he trying to shield & why he did not reply to certain valid allegations made by Dr. Swamy ? Why did he precipitate the crisis in the banking industry now by forcing bankers to come clean on all the Non Performing Loans in one go? All the CMDs of the PSU banks were the appointees of the UPA Government which appointed him. He was part of the UPA as Economic Advisor also. Who was he helping when he deliberately made banks pay much more than the prevailing rates on FCNR Deposits than the international rates and thus creating an arbitrage opportunity for foreign banks to make a killing in our foreign exchange markets ? Please don't glorify an individual. He performed normally for which he was paid a salary and our country has several eminent economists knowing the ground realities much better tha Rajan.

Like (1)

Mkd

Jun 21, 2016

Very well written. I have been reading readers comment for last few days. It is interesting to note that you write something good about RRR some people start trolling you as they do to Rajdeep on Twitter. You hv just found a sure way to become celebrity ( though you are already one of your own kind).

Like (2)

M. R.Grover

Jun 21, 2016

Hi readers,
I would like to say only one point that Rajan is a devoted, learned economist,sincere to nation though he resides abroad. With his all good qualities he has managed our poor economy and brought to robust status, national banks were beyond control ,he with his vision & perspective planning tried his level best to control them. Bad assets,loans , foreign exchange , inflation etc. how he handled efficiently is recognised not in India but Globally. Modi have his team which have selfish intrest is bent upon to destroy basic fabric of economy. During Rajan tenure how Modi & Jaitly could sleep comfortably ,it will be realised after Rajan depature. Teri Yad Aayegi Tere Jane Ke Bad . Good luck Rajan & Bad luck to Modi,Jaitly & Subramanium Swamy.........

Like (2)
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