A ‘trust deficit’ was gradually building up between RBI Governor Raghuram Rajan and the government establishment at many different levels. Not only were a couple of ministers within the government — Piyush Goyal and Nirmala Sitharaman — taking broad swipes at Rajan, but a deep disdain at a more ideological level had struck roots within the BJP and Sangh Parivar affiliates such as the Swadeshi Jagran Manch.
That Rajan was appointed by the then Congress-led UPA government may have been viewed with suspicion in the beginning, but the fact that he taught in an American university and served the IMF for most part of his work life was seen with contempt by the party leadership and the Sangh Parivar. BJP’s Rajya Sabha member Subramanian Swamy and Swadeshi Jagran Manch co-convenor S Gurumurthy sought to challenge his policies and blamed him for the poor momentum in the economy.
But for this, Rajan may have very much wanted to continue as his message to all RBI staff clearly indicates. He was left with no choice.
According to government sources, the first hint of Rajan’s straining relations with the Finance Ministry were visible in the beginning of calendar 2015, during discussions on the monetary policy framework agreement. The RBI, tasked with the job of keeping inflation at 4 per cent (within a +/- 2 per cent band) under the agreement, wanted to retain its independence through a bigger role for the Governor and a larger representation for its representatives in the monetary policy committee (MPC) that would decide on crucial issues including policy rates.
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Even as discussions on the MPC were on, sources in the Finance Ministry claimed in March 2015 that Rajan had, in a white paper, sought a Cabinet Minister rank for the RBI Governor’s post and that of Minister of State for RBI’s Deputy Governors. The government never acknowledged these ‘demands’. A senior government official had in fact told The Indian Express then that the Prime Minister did not believe in according ministerial status even to the top brass in his office such as the National Security Advisor and the Principal Secretary.
A turf war between the RBI and the Finance Ministry on who will regulate the government securities market too ended with the ministry beating retreat. It first decided to set up a Public Debt Management Agency, taking away RBI’s powers to manage government debt, by introducing provisions in the Finance Bill 2015-16. Eventually though, Finance Minister Arun Jaitley deleted these provisions last May in his Budget reply and let RBI handle the government’s debt.
Healthy arguments between the ministry and the RBI were always seen as leading to productive outcomes, reckon former regulators and Finance Ministry officials. But the RBI’s alleged ‘demands’ on rank and tenure during the MPC debate were being cited by the ministry as a move to deflect attention from the core debate. The RBI did not join the issue with the ministry, formally or informally. Rajan and the RBI, however, agreed to the middle ground with the government in February deciding to set up a six-member MPC (three from the RBI and three from outside), with the Governor getting a casting vote.
But the decision to not extend his tenure goes beyond this tug of war between the RBI and its administrative parent, the Finance Ministry. It was just the tip of the iceberg. The government’s consternation with Rajan took wings over the last one year. Commerce and Industry Minister Sitharaman sharply reacted when Rajan described India as “In the land of the blind, the one-eyed man is king”. He said that in the context where India was often described as a bright spot in the global economy. She criticised Rajan for the high rates and so did Swamy earlier.
Rajan was “not appropriate for the country” and “mentally not Indian”, Swamy had said, and argued against extending his tenure. Gurumurthy too had said that Rajan doesn’t know about India and also criticised the “sledge hammer approach” to bank woes taken by the RBI under Rajan.
A former RBI Governor, who did not wish to be named, said such politicisation of the Governor’s position was quite “unprecedented”. “It has never happened before. Rajan was perhaps speaking out of turn on issues that do not concern monetary or fiscal policies or the economy,” he said. “Why should he stray into areas like ‘tolerance’, Hitler, etc. Have you heard the Federal Reserve chair ever talk like this? This is not the regulator’s remit,” he added.
On October 31, Rajan had at IIT Delhi said that tolerance can take offence out of debate. “Tolerance means not being so insecure about one’s ideas that one cannot subject them to challenge — it implies a degree of detachment that is absolutely necessary for mature debate. Tolerance can take the offence out of debate, and indeed instil respect.”
Earlier February last year, he had said strong governments may not move in the right direction. “No matter how thuggish or arbitrary the government in a tin-pot dictatorship, these are weak governments, not strong ones. Strong governments may not, however, move in the right direction. Hitler provided Germany with extremely effective administration — the trains ran on time, as did the trains during our own Emergency in 1975-77. His was a strong government, but Hitler took Germany efficiently and determinedly on a path to ruin, overriding the rule of law and dispensing with elections,” he said at Kosambi Ideas Festival in Goa.