Here are my top reasons why Modi govt should remove Raghuram Rajan as RBI governor –
- There is no reason why a govt elected by the strongest mandate in 3 decades should bear with someone chosen by its predecessor which was perceived to be the most corrupt govt we ever had.
- If the NSA can change when the govt changes then why can’t RBI governor? Economic security of the nation is no less important than security of our borders.
- Why should we have a RBI gov who gives lectures on tolerance instead of doing his job & also belittles our economic growth by calling us ‘One Eyed King’?
- Was Rajan the best candidate for the job? He had little experience of working in India when he was appointed as RBI governor. Most of his illustrated and distinguished career he has served outside India. Wouldn’t it be better to have someone in an important position who was familiar with the ground realities of India?
- Rajan shot to fame by predicting in advance the 2008 financial crisis. But does that automatically qualify him for his current job?I don’t see such questions discussed in mainstream media. After all, there are several economists/analysts who stay permanently bullish or bearish.So even if markets one day give a huge move in their direction, does it make them great? Markets have been cyclical since the beginning of time. So if I stay bearish for next 10 yrs, it is highly likely that i will encounter a bear market. The converse may happen if I stay bullish for 10 yrs in a row.
- Someone who predicts a crisis correctly is not a hero. To become a hero you must do something to avert the crisis. Raghuram Rajan has had no notable success in sorting out the mess of our banking system. Bank NPAs look worse today than they were 3 yrs ago with no light at the end of the tunnel.
- When Rajan came to office, he raised interest rates a couple of times to stabilize the Rupee and to tame the inflation in 2013.This greatly helped him build an image of an inflation warrior who was there to preserve the value of savings of the common man in a world flooded with quantitative easing. Since then the RBI gov hasn’t missed any opportunity to give sermons on what he believes to be the flaws of modern economic policies of QE and NIRP.
- More importantly, when inflation started coming down, instead of cutting rates, the RBI instead chose to change the yardstick by shifting to CPI inflation instead of WPI inflation as benchmark for determining interest rates. If that wasn’t enough, now the RBI says that interest rates should give ‘1.5% real returns’ over CPI inflation.No wonder the global brokerages love this sort of madness. The 3rd largest& fastest growing economy in the world giving you 4 times as much risk free return on govt bonds than what you get in the USA.
- As a consequences of artificially inflated interest rate in times of zero inflation, it is no wonder that capital intensive industries are doing horribly.Steel companies are barely making operating profits. Many of them are even unable to generate enough profits to pay interests on their loans. Power companies are dong slightly better after the govt came out with a grand restructuring scheme for DISCOMs. Construction activity in real-estate sector remains subdued. Agri sector is also in deep trouble because of twin droughts. High interest rates have only added to the debt burden of the farmers and has driven them to suicide.
What was needed to solve the woes of these troubled sectors was increased liquidity and cheap credit.Why couldn’t we have had a ‘quantitative easing’ where RBI could have bought bad loans of stressed sectors?
- What we got instead was a grand witch hunt of the corporate sector. Clueless banks who were already in deep trouble because of reckless lending were asked to take over failing companies and throw out the promoters in name of ‘Strategic Debt Restructuring’ one year ago. Such recklessness has made the crisis even bigger as of today.Now that the failure of SDR plan is clear, the RBI is panicking and has asked banks to declare several large borrowers as NPAs. As a result, banks declared loans worth Rs 1 TRILLION as fresh NPAs in December quarter taking percentage of bad loans to highest in almost two decades.
This is an extremely serious over-reach of authority. RBI is meant to be a regulator and its job is not to interfere in day-to -day running of the banks. RBI can set guidelines and make rules but it has no business to tell banks which loans should be classified NPAs and which should not.
More importantly, why should we remain chained to economic principles of last century.How can doing more of the stuff that has kept us in poverty for decades will give a different outcome in the future? The time has come to adapt to the new world order of QE and NIRP. The government needs to appoint a RBI governor who is capable and willing to do things differently and can take us to GDP growth rates of 10% and beyond.