RBI Governor Raghuram Rajan never hesitated while speaking his mind on various issues. Rajan, who will unveil the 6th bi-monthly policy statement for FY16 on Tuesday, took on defaulters, explained how people benefit from low inflation and spoke about tolerance without fear or favour in the last two-and-a-half years as the head of the central bank. A look at the excerpts from some of his speeches:
Wilful defaulters are freeloaders of capital
Faced with this asymmetry of power, banks are tempted to cave in and take the unfair deal the borrower offers. The bank’s debt becomes junior debt and the promoter’s equity becomes super equity. The promoter enjoys riskless capitalism — even in these times of very slow growth, how many large promoters have had to curb their lifestyles? A consequence of the inequitable sharing of losses in distress is that it brings the whole free enterprise system into disrepute. When some businessmen enjoy a privileged existence, the public and their representatives get angry. We need a change in mind set, where the wilful defaulter is not lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country.
(V Kurien Memorial Lecture at IRMA, Anand on Nov 25, 2014)
Defaulters should not flaunt wealth
Let me emphasise that this is not about big businesses. This is not Robin Hood issue. This is an issue about the wrong doer, who had raised the cost of borrowing for everybody. If we can get those guys to behave… If you flaunt your massive birthday bashes etc even while owing the system a lot of money, it does seem to public that I don’t care.
This gives wrong message. If you are in trouble you should show that you care by cutting down your expenses and not flaunting more spending in public. Now we are pushing them to be more firm in their dealing with the borrowers and cleaning their balancesheets with idea that not to shut down firms but to put them back on track into an earning mode so that they can repay the banks.
(Interview to NDTV in Davos on Jan 22, 2015)
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. Finally, respect requires that in the rare case when an idea is tightly associated with a group’s core personality, we are extra careful about challenging it.
If I go berserk every time a button is pressed, rebels are tempted to press the button, while mischief-makers indeed do so. But if I do not react predictably, and instead ask button pressers to explain concerns, rebels are forced to do the hard work of marshalling arguments. So, rebels do not press the button frivolously, while the thuggish mischief makers who abound in every group are left without an easy trigger…
(Speech at IIT Delhi, Oct 31, 2015)
Industrialists grumble about high rates while retirees complain about low rates on deposits. The truth is that the retiree is getting more today but he does not realise it, because he is focusing only on the nominal interest and not on the underlying inflation which has come down from about 10% to 5.5%. To see this, let us indulge in Dosa economics. Say the pensioner wants to buy dosas and at the beginning of the period, they cost Rs 50 per dosa. Let us say he has savings of Rs 1,00,000. He could buy 2,000 dosas with the money today, but he wants more by investing. At 10% interest, he gets Rs 10,000 after a year and his principal. With dosas having gone up by 10% to Rs 55, he can buy 182 dosas (appx) with the Rs 10,000 interest. At 8% interest, he gets Rs 8,000. With dosas having gone up by 5.5%, each dosa costs Rs 52.75, so he can now buy only 152 dosas (appx). So the pensioner seems vindicated: with lower interest payments, he can now buy less.
But wait a minute. Remember, he gets his principal back and that too has to be adjusted for inflation. In high inflation, it was worth 1,818 dosas, in low inflation, it is worth 1,896 dosas. So in high inflation, principal plus interest are worth 2,000 dosas, while in the low inflation it is worth 2,048 dosas. He is about 2.5% better off in low inflation. Indeed, with 10% return and 10% inflation, the deposit is not giving you any real return net of inflation, which is why you can buy only 2,000 dosas after a year of investing, the same as you could buy before you invested. In contrast, when inflation is 5.5% but interest you are getting is 8%, you are earning a real rate of 2.5%, which means 2.5% more dosas.
(At NCAER, New Delhi, on Jan 29, 2015)
On strong governments
Hitler provided Germany with extremely effective administration — the trains ran on time, as did the trains during our Emergency in 1975-77 … but Hitler took Germany efficiently … on a path to ruin…
(At Kosambi Ideas Festival, Goa on Feb 20, 2015)
There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth … sometimes we get growth because of people moving into different areas. It is important that when they move … they are doing something which is adding value. We do lose some, we gain some and what is the net, let us be careful about how we count it. If mother A went to look after the children of mother B and mother B went to look after mother A’s children, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off.
(At IGIDR, Mumbai, Jan 28, 2015)