 "Why Raghuram Rajan has been polite with his ‘one-eyed’ statement")
Indian politicians are a touchy lot with no appetite for criticism. RBI governor Raghuram Rajan has been rolling with the punches by government ministers over the last couple of years. In the latest verbal duel, Finance Minister Arun Jaitley, his junior minister Jayant Sinha and Commerce Minister Nirmala Sitharaman reacted strongly to a statement by Rajan on Indian economy.
Without checking the details or the context of the statement, government ministers have reacted to a news headline which was different from the context in which Rajan made the comment.
On being asked to comment on International Monetary Fund’s (IMF) description that Indian economy was one of the few bright spots in the world Rajan said, "I think we have still to get to a place where we feel satisfied. We have this saying - 'In the land of the blind, the one-eyed man is king'. We are a little bit that way,"
He added “We feel things are turning to the point where we could achieve what we believe is our medium-run growth potential. Because things are falling into place. Investment is starting to pick up strongly. We have a fair degree of macro-stability. Of course, we are not immune to every shock, but immune to a fair number of shocks," Rajan said in an interview to MarketWatch.
Nowhere in the statement has Rajan tried to demean India’s progress. On the contrary he has implied that India has the potential to grow much faster. A similar view was also put forward by Arun Jaitley when he was asked to comment on Rajan’s statement. Jaitley said that "We are still impatient because we know that our potential is to do distinctively better."
Jaitley, however, also said that at 7.5% growth rate, any other country in the world would be celebrating. Sinha was more direct in his attack on Rajan when he said that “We are the shining star. I don't agree with what the governor said.”
Sitharaman said "I may not be happy with his choice of words. Whatever action is being taken by this government is showing results. Foreign direct investment is improving. There're clear signs manufacturing is reviving. Inflation, current account deficit is under control." She added that "If better words were used to say whatever he wanted to say, it would have gone down better."
Government ministers have repeatedly blamed Rajan for the slow pace of interest rate reduction followed by the Reserve Bank. Rajan has reduced interest rates by 150 basis points since January 2015 keeping in mind the fall in retail inflation. However, his efforts to ease credit have only see limited impact as most banks have refrained from passing on the full quantum of the interest rate cuts.
Rajan and his team needs to be acknowledged for bringing in a mechanism which is now forcing banks to pass on rate reductions. Not only has his team been tackling the problem of non-performing assets (NPA) head-on by using a carrot and stick approach to banks to disclose the actual losses, but they are also addressing the issue of liquidity which will help banks cut rates and start lending in the economy.
It was because of Rajan and his team’s out-of-the-box thinking that the country has been able to come out of the currency mess in August 2013 when the rupee had almost breached the 70 mark against the US dollar. New instruments were introduced to attract foreign investment in the country. Had such a step not been taken, the Indian economy would have taken much longer to recover.
Rajan has been at the striker’s end when the government was missing and confused on reforms. RBI’s policy statements over the last two years reflect the central bank’s anxiety on government reforms, which has been high on decibels but low in visibility. It is only recently that the central bank has witnessed green shoots of activity picking up.
Rajan acknowledged this in the same interview with MarketWatch when he listed achievements on fronts like current account and fiscal deficit, and said inflation has come down from 11% to below 5%, creating room for interest rates to come down.
"Of course, structural reforms are ongoing. The government is engaged in bringing out a new bankruptcy code. There is a goods and services tax on the anvil. But there is a lot of exciting stuff which is already happening," he said.
Rajan could have also highlighted the dismal performance on the export front which has fallen for 16 straight months or the poor track record of the government in pushing reforms and improving business confidence. He stuck to the positives. If anything he was polite with his ‘one-eyed’ reference. Rather than commenting on headlines without looking at the context government’s ministers should look at their own performance, which leaves a lot to be desired.
