Former Reserve Bank of India (RBI) Governor Raghuram Rajan had cautioned the government that the long-term benefits of demonetisation would be outweighed by the short-term economic costs and that there were potentially better alternatives to achieve the main goals. In the introduction of his new book —”I do what I do” — Rajan writes, “At no point in my term was the RBI asked to make a decision on demonetisation,” adding that the central bank had prepared a note outlining the potential costs and benefits. He said he offered his views to the government orally in February 2016.
While most Reserve Bank of India (RBI) governors are known to have run-ins with finance ministers, Rajan seems to have had more trouble with bureaucrats. “The least pleasant aspect of my job was dealing with bureaucrats who were trying to undercut the Reserve Bank so as to expand their turf,” Rajan writes, adding he left the government a few tips on how this unproductive friction could be reduced.
The former RBI governor cautions that “efforts to belittle the position by bringing it into the bureaucratic hierarchy are misguided and do not serve the national interest”. Rajan observes there is a danger in keeping the position (of RBI governor) ill-defined, because the constant effort of the bureaucracy is to whittle down its power. “The RBI risks becoming dangerously weakened as successive governments and finance ministers misunderstand its role,” he says.
Rajan, who was criticised by many for speaking his mind on subjects that were thought to be beyond the limits of a central bank governor, says on the controversial “Hitler” speech that had he known the connections that would be made on social media, he would not have used it.
“The speech was about the need to remedy the weakness of government capacity in general in India — with no specific administration in mind. Instead it was construed as a warning against strong government, specifically the current administration,” he writes.
Rajan writes that the area where the central bank made least progress was in getting banks to recognise financial stress and deal with it. With the exception of a few hard-changing and conscientious bankers, he notes, the others were by and large willing to “continue to extend and pretend”. “As we found bankers reluctant to recognise problems, we decided not just to end forbearance but also to force them to clean up,” he says. FE