The controversy surrounding an extended term for Raghuram Rajan, the incumbent RBI Governor, is perhaps unprecedented. It isn’t as though the possibilities of past Governors’ extensions have not been discussed or probabilities assigned before.
They have, and what’s more – the higher the reported or perceived differences between the government and RBI, lower has been the expected probability of an extended term. Actual decisions have not always corresponded to this logic. But the current controversy outmatches all previous ones, if only because of Rajan’s international stature, academic abilities and past achievements on the one side and on the other, a dismissive disregard for all this and more in terms of the perceived disruptions he has caused to the economy in the two-and-half years he has been at the helm.
The case for another term for Rajan, however, must rest on pillars quite other than these. Not on his past academic records, the positions he has held, the prescience he may have displayed or the superstar status conferred upon him by an adoring media. These attributes were always regarded and very much figured into his appointment as the Reserve Bank’s Governor in the first place. It is superfluous then, to proffer these for extending his term now.
On the other hand, the time to consider whether Rajan’s actions or policy choices have been good, bad or ugly is well past. In fact, this is not the time to get into these matters at all. Why? Because, every reform action and policy frameworks adopted by him have been favored, accepted and backed firmly by the government, seeming as it were, that Rajan and the government jointly embarked on the reform course. Can then a stumble here, an accident there, or a blockage elsewhere, constitute an excuse to pack off the partner?
The case for Rajan’s extension, in fact, rests upon altogether different reasons: a consistency of leadership at a time of deep, structural change; standby to resolve problems and modify the path, if need be; and to synchronise the direction and pace of real, structural reforms the government is so deeply committed to.
Rajan wasted little time when he came in September 2013, outlining his tasks at the very outset. The scale and depth of monetary and financial sector reforms he has since instituted is breathtaking. In his very first step, he built a framework for conducting Indian monetary policy, which he sold to international investors with great success. The government was no minor partner in this venture: its commitment through a formal inflation agreement between the two parties, further enhanced credibility. Surely there is clear understanding that under the new framework, the policy interest rate must be adjusted whenever the path of inflation diverges from the inflation target.
Financial market reforms in the debt, currency futures, overseas rupee-denominated debt, etc. have followed. One of the biggest fields of Rajan’s reform focus is the banking sector, where he envisages a broader architecture and in pursuit of which he has encouraged new, differentiated banks. In time, a new structure will emerge and expectedly, better serve the economy. But at a nascent, founding stage, there can hardly be a disagreement about continuity of leadership. The sweep of reform extends to cleaning balance sheets of public sector banks, fortifying and restoring the sector’s health by other measures, including a restructuring to correspond with the new design, of which Rajan is the key thinker and driver, perhaps leading even the government in that regard. These tasks are very much work-in-progress; in fact, tackling bad assets with strength is a job just begun and one that is, from all accounts, unlikely to be a short-term affair.
Deep structural reforms can also throw up some unexpected outcomes, particularly in emerging market economies that are very complex and characterised by excessive rigidities. There can also be unintended consequences when fundamental changes are underway. Who then is better equipped than Rajan, the leader and instigator, to steady the course and reorient reform strategy if required.
Last, the government too has a structural reform agenda for the real economy, which often needs synchronisation with changes on the financial side. For example, achieving inflation targets needs matching reforms by the government to resolve supply side issues. Likewise, the transition to full-fledged inflation targeting requires lasting fiscal commitments that are credibly backed. There are other areas as well. It then makes sense to opt for consistency of leadership for success.
No person is indispensable, it is true. But across the world, governments have persisted with good leadership at central banks, choosing not to interrupt. What should matter for another term for Rajan is not if his policy choices or actions have been good or bad, but that the chosen reform path, endorsed and agreed to by the government, is persisted with. On its part, the government too must ensure its pace of real sector reforms matches Rajan’s on the monetary-financial side. There cannot now be a turning back middle of the course.