Slamming his “uninformed and motivated” critics for “arguments unsupported” by evidence, Reserve Bank Governor Raghuram Rajan on Tuesday said the governments should ignore such criticism and protect the independence of the central bank for sustainable growth.
“It is important that governments around the world look beyond sometimes uninformed and motivated public criticism and protect the independence of their central bank to act. That is essential for stable sustainable growth,” Rajan said. “Criticism of the central bank using arguments unsupported by evidence is not just an Indian phenomenon. The Bank of England was criticised for laying out the economic costs of Brexit, the ECB (European Central Bank) has been criticised for doing too much to restore health to troubled peripheral economy financial sectors, and the (US) Fed is under fire for departing from the Taylor Rule,” Rajan said.
BJP’s Rajya Sabha MP Subramanian Swamy had written two letters to Prime Minister Narendra Modi demanding Rajan’s removal as the Governor. Swamy had alleged that the RBI’s high interest regime under Rajan had affected growth and small businesses were hit. Rajan, who is completing his three-year tenure on September 4, had already announced he’s going back to the academic world.
Highlighting the need for using data and evidence to shape policy debates, the Governor gave two examples — inflation and clean-up of bank balance sheets — two initiatives of the RBI. With the help of charts, he showed that the slowdown in the growth of non-food credit by public sector banks was probably not because of lack of demand or capital; nor was it because of high interest rates but largely because of stress in public sector banks, stemming from past mistakes in lending. “This will not be fixed just by a cut in policy rates. Instead, what is required is a clean-up of the balance sheets of public sector banks, which is underway and needs to be taken to its logical conclusion,” he said at the Statistics Day Conference here.
Worrying that there was little anxiety in the public commentary when inflation was moderately high, the Governor argued it had pernicious effects on the weaker sections of society. “The best way central banks can support growth over the medium term is by keeping inflation low and stable,” he said and added that without any political push back as inflation rises, it is necessary to build institutions to ensure macroeconomic stability. “Perhaps this is why successive governments, in their wisdom, have given the RBI a measure of independence,” Rajan said. According to Rajan, as with inflation, it was easy to ignore the problem of loan losses and hope it somehow goes away. But as with inflation, loan losses had a tendency to increase, get too big to ignore, too late to manage, and push the system into crisis. “Fortunately, after an initial reluctance, banks have entered the spirit of the clean-up and some have gone beyond what was demanded of them,” Rajan said.
The stock market, after reacting negatively initially early this year, was more supportive of public sector bank stock prices, probably reflecting the belief that the clean-up was good over the medium term. Promoters were selling assets and paying up, and new asset reconstruction companies were being started to buy assets. As with inflation, therefore, it was the duty of the central bank to press for bank clean-up earlier, when few among the public support the central bank’s activism, the Governor said.
Rajan said criticism comes with the territory, and central banks need to make the case for their policies. “Critics offer two contradictory arguments on inflation. On the one hand, they argue that we have killed demand and growth through high rates — though this itself seems at odds with the received wisdom that we are the fastest growing large economy in the world. On the other, they argue that our policy has had little effect on curbing inflation, that disinflation has been a result of the fall in oil and other commodity prices,” he said.