The choice of a governor for the Reserve Bank of India is no minor administrative appointment, no matter what Prime Minister Narendra Modi may tell foreign interviewers. It is not only absurd but pointless to demand that domestic and foreign observers studiously think about something else while the government, with all its stellar reputation as a picker of people for powerful positions, goes about the process of choosing a governor.
Yes, Raghuram Rajan is not irreplaceable. There are, no doubt, many other people who could do as good a job, or even better. Yes, he is an inflation hawk, who refuses to accept that supply-side dynamics do not respond to tight monetary policy — like the governor before him, for that matter. Yes, it is a bit irritating when all his nice globalised friends, like Mohamed el-Erian or Luigi Zingales, presume to tell the awesome majesty of the Government of India what it should do about Mr Rajan’s appointment.
But, frankly, it is a bit petty of us to imagine it would be any different. In a country starved of credible figures, Mr Rajan stands out. He is willing to question India’s out-performance of the global economy; he is willing to be cautious about growth momentum; he is clearly not subject to the whims of New Delhi. Independence and credibility are the most important prerequisites of a modern central banker, and Mr Rajan has them in spades.
Which means that if the government chooses to replace him, his successor will have a triply difficult job. First, to create their own credibility; second, to live up to Mr Rajan’s reputation; and, third, and most importantly, to demonstrate that they have not been chosen to replace the outgoing governor because of their own pliability. This is a severe handicap, and one that I am not sure we can afford at this time.
But should we even care who the RBI governor is? That’s the question that everyone is asking. And, sure, it's an interesting theoretical pursuit. But that’s all it is — theoretical. It doesn’t matter whether or not we should care who the governor is. What matters is that people do care. Investors care; global capital cares. We are not yet in a position to ignore what these people think. When we are, then we have the luxury of indulging in post-colonial angst about whether anyone should or should not care about an administrative appointment.
So it does matter who the RBI governor is, and it matters how he or she is chosen, and it matters why Mr Rajan is or is not replaced. These provide a clue to future RBI behaviour, and such clues move markets. It is futile to imagine that they don’t.
Personally, I think Mr Rajan needs to stay on. Good arguments have been made about why someone more interested in the internal reconfiguration of the RBI and respectful of its institutional heritage should replace him. Similarly powerful arguments exist suggesting that given that reforming Indian banks is the premier task of the next few years, he should be replaced with someone familiar with, or even from, the state-controlled banking sector.
I do not deny the power of these arguments. However, to my mind they pale before the stability that Mr Rajan’s continued presence would provide.
We have been led to imagine that we are secure at the moment. Macro-economic fundamentals look good, and a growth recovery secure. But this is in fact an extremely uncertain position. First of all, it depends upon oil and other commodity prices remaining low, and a banking crisis being contained. Secondly – and more importantly – it ignores the very real tail risks to the global economy today. Rising tensions in West Asia; the possibility of Brexit and of a President Donald Trump; and the continued weakness of global monetary policy combined with a bubble in government debt are just some of the reasons why we cannot be certain that there will not be a sudden and catastrophic decrease in the appetite for risk in the future.
If that happens, India could once again come under pressure. At that point, Mr Rajan’s presence is vitally important as reassurance that Indian monetary policy and exchange rate management is in safe hands.
Many reasonable people argue that Mr Rajan has done himself no favours by apparently taking on the government over issues that are not strictly the domain of monetary policy. His statements that a climate of tolerance is important for the development of a proper market economy are frequently mentioned in this context.
But prognostications about how government action affects the economy in the long term are indeed something the governor of the central bank should speak out about. Ben Bernanke, for example, frequently spoke out about how partisan divides in Washington held back sensible policy — and that this was taken by the Republican majorities in the US Congress as criticism is clear from the way his monetary policy decisions were subsequently attacked. And Mervyn King of the Bank of England became a controversial figure in a past British election, when he appeared to criticise Labour Party spending and support the Conservative’s proposed budget cuts. In the 21st century, good central-bank governors speak out.
In any case, the appointment of an RBI governor should not be left to the last minute. The transition should be openly discussed, the pros and cons of possible candidates weighed by the public, and a transparent process initiated well in advance of any possible handover. When Larry Summers went up against Janet Yellen for the top job at the US Federal Reserve, that’s what happened — and Ms Yellen’s position and credibility was the stronger for it.
Mr Rajan should not go anywhere. But, even if he does, the government owes Indians and the world a clearer – and early – explanation as to why he might be removed.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
