With Raghuram Rajan leaving as Governor of the Reserve Bank of India by year’s end, the Indian economy and democracy faces new challenges.
Rajan—the 23rd Governor of the Reserve Bank of India—is likely to leave a lasting message for the government when he leaves his office this year, having bolstered a fledgling Indian economy. News of Rajan’s exit, now popularly referred to as “Rexit,” has drawn attention from all quarters of Indian civil society. To be certain, his resignation carries great significance for both the future of the Indian economy and the effectiveness of its Central Bank.
Rajan’s turnaround of the Indian economy
Rajan, formerly the chief Economist at the IMF, was appointed the Governor of the Reserve Bank of India in August, 2013. He was given the uphill task of stabilizing an economy facing a currency crisis and high inflation. Currency reserves were down, the Rupee-USD ratio was at an 18-year low, and inflation—both Whole-sale Price Index and Consumer Price Index—was in double digits.
Economic rating bodies (both domestic and international) were busy writing obituaries of the India growth story, convinced that India had officially joined the “Fragile Five.” In response, Rajan took bold measures: establishing a new monetary framework, rolling out the Foreign Currency Non-Repatriable Deposit Scheme (FCNR) scheme, and introducing the Asset Quality Review (AQR) which forced banks to have a timely recognition and provision for bad debts.
He simultaneously managed the expectations of other central bankers and foreign investors, who saw him as a symbol of stability, merit, and integrity. His sound macroeconomic policies reflected his prowess in using existing monetary instruments to the economy’s advantage while driving efforts to create an innovative and internationally recognized management framework within the RBI.
The shock of “Rexit”
It was for this reason that—when Rajan announced in June 2016 that he would not seek a second term as Governor—the industry, markets, and investors made their disappointment vocal.
While Rajan has initiated ambitious structural reforms, there is widespread worry that the new governor will be unable to retain the momentum Rajan had created. In his resignation letter, Rajan himself recognized these long-term concerns, stating:
“Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.”
Additional worries remain that schemes like the FCNR, which helped boost capital flows to the tune of an estimated $25 billion USD, may be at risk of account outflows when the deposits mature. Furthermore, controlled inflation during Rajan’s term—attributed to the unusually low price of oil, which dominates India’s import bill—could return as commodity prices are set to rise.
A warning signal to existing and future bureaucrats?
Despite these real concerns about India’s economic future, Rajan’s resignation has sparked a larger debate about the autonomy of the RBI and its relationship with the ruling government. It is a well-known fact that Rajan had many disagreements with conservative members of the ruling Bharatiya Janata Party (BJP), who were in favor of populist policies that Rajan would not accept.
In 2014, he publicly cautioned against the government’s flagship “Make in India” program—which Prime Minister Narendra Modi has himself so aggressively marketed. His comments on taking a restrained view of the Indian economy and not “getting carried away by the GDP growth rate” irked the ruling class further as they strove to tell a different and more celebratory story to its electorate.
Ultimately, his remarks on intolerance may have been the greatest controversy. Rajan remarked that tolerance “means not being so insecure about one’s ideas that one cannot subject them to challenge,” a call for maturity and equality in the political discourse. With the government making every effort to quash debates about their ideology and policies being even mildly intolerant, this statement drew ire from the ruling class.
Raghuram Rajan will be the first governor since 1992 not to renew his term. His continued commitment to unpopular structural reforms, his absolute sense of ethics, and his refusal to assimilate to the political establishment may just have been the losing combination for the role he was expected to undertake.
Whatever the real reason for Rajan’s exit, his exemplary achievements during his term as a governor were undermined by his disagreements with the political elite, a trend that could be dangerous not just for the Indian economy, but for a society that is striving to exemplify a healthy democracy.
