Debate on Rajan’s reappointment is welcome as long as it is on performance

It is high time for all of us to get real, recognise and reward Raghuram Rajan for a job brilliantly done

Written by Surjit S Bhalla | Updated: June 11, 2016 12:53:35 pm
Raghuram rajan, Rajan, Indian economy, RBI, Reserve Bank of India, RBI governor, Indian economy under Rajan, Rajan Indian economy, BJP, Congress, India news It is high time for all of us to get real, recognise and reward Rajan for a job brilliantly done.

It was back in January 2008 when I started my column No Proof Required (NPR). Prior to this, I had experimented with five different titles — Looking for Logic, Beyond Logic, Calling the Bluff, Jadu Economics and It Doesn’t Matter. There is a reason for the longevity of NPR — It is so Indian, so logic proof. This fact could have been easily deciphered from that prescient first NPR article, “Only in India” whose blurb read: “How long before the Indian intellectuals, leaders, and policymakers are held accountable for their judgements and discourse on important matters of public policy?”

The recent controversy (and for reasons illustrated below, one cannot, in all honesty, call it a debate, for debate means a discussion and exchange of reasonably valid views) over whether RBI Governor Raghuram Rajan should be appointed for an additional two-year term, has led to a flurry of Trump-like ad-hominem attacks. It is not my intention to dignify low comments by “analysing” them here. But a debate on Rajan’s reappointment is very welcome, even necessary, as long as it is on performance and merit.

For the first time since the highly successful partnership between Yashwant Sinha, as finance minister, and Bimal Jalan, as RBI governor, in the late 1990s, India has observed a very close relationship between the RBI governor and the FM — a necessary ingredient for economic success. The lack of co-ordination is almost always (okay, almost) the fault of the politicians and not that of the blessedly independent RBI governors. Full credit, therefore, to Arun Jaitley for helping engineer this close co-ordination over the last two years — and to PM Narendra Modi for allowing it to happen.

So where, or what, is the beef regarding Rajan’s record? We will present accusations below, followed by recorded facts, not opinions.

Accusation: Rajan has made a “wilful and apparently deliberate attempt to wreck the Indian economy”, and his interest rate policies have been responsible for “squeezing small and medium industries (SME) and consequent increasing unemployment”.

Fact: In each of the last two years, India has enjoyed a 7 per cent plus growth rate. This despite the fact that India suffered two successive years of drought. Therefore, whatever you may choose to call the economy, a wreck is beyond imagination.

But how real was this GDP growth? The recent GDP release gave those who have been perennially wrong about the new GDP series, another excuse for their seemingly permanent ineptitude in assessing the GDP data. The Central Statistical Office publishes two estimates of the GDP at current prices (and two at constant prices) — one from the production (supply) side, and one from the consumption (demand) side. The two should theoretically match, but never do.

The discrepancy as reported by the CSO between these two is 1.9 per cent of the real GDP and only 0.06 per cent of the nominal GDP. The Cassandras, like Rottweilers, have latched on to the difference in real estimates and concluded that Rajan is responsible for wrecking the economy!

However, the entire 3-4 percentage point decline in GDP growth estimates is accounted for by differences in the respective price deflators — and the CSO readily admits that its demand side deflator is problematic. The supply side (convention around the world) shows 7.6 per cent real GDP growth.

This discrepancy controversy is useful in highlighting a new fact about India’s political economy — that the left-liberal-Congress ecosystem has its fortunes tied to the belief that the only way to defeat Modi in elections is with the “evidence” that the Indian growth rate is slow, and slipping. Hence, the rejection of any data that shows Indian economic growth as good or strong.

The smallest manufacturing firms (less than Rs 25 crore in sales) showed the highest EBIT (or earnings before interest and tax) growth rate of 12.8 per cent in 2014-15. The non-SME registered an average growth of 10.8 per cent, with the highest sub-sector (75-125 crore in sales) registering 11.8 per cent. Stated bluntly, the accusation about SME firms growing slower than the rest is bunkum.

Accusation: RBI’s shift to consumer price index, as against wholesale price index, as a measure of inflation was wrong, and that “the concept of containing inflation by raising interest rates is disastrous”.

Fact: First, I must take some amount of immodest credit in that the first National Statistical Commission (2006-2009), of which I was a member, recommended the development of a national (both rural and urban) CPI. The first such CPI survey was done in 2010. Raghuram Rajan became governor in September 2013, and in double quick time, in March 2014, the RBI shifted from the traditional, and hugely inaccurate, WPI to CPI.

Second, no country uses WPI as a measure of inflation. The IMF, in its World Economic Outlook database, lists only two countries that do not have CPI data for 2015 — Argentina (hyper-inflation) and Syria (war). So, it is simply wrong to assert that the shift to CPI was an error.

Even more embarrassing is the accusation that India has not been able to “contain” inflation, at least according to the CPI. The CPI has declined from 10.5 per cent (September, 2013) to 5.4 per cent (April 2016). During the same period, the WPI has declined from 7.0 per cent to 0.3 per cent. Critics seem to have forgotten that a major reason for the Congress’s extra-large defeat in May 2014 was that it ushered in an era of very high inflation.

Finally, the CPI decline that has occurred in India (with some credit to the RBI and Rajan) is the fourth fastest two-year decline in 2015 and among the top 10 per cent fastest declines in world history since 1980 (excluding hyperinflation economies). So the critics should get their facts right. And before you even begin to chant the refrain that inflation decline in India has been helped by the large oil price decline, realise that in India, petrol prices (weight of 2.4 per cent) declined by a mere 2 per cent (y-o-y April 2016) while the price of pulses (same CPI weight as petrol) shot up by 34 per cent.

Accusation: Some critics argue that the Indian growth rate would have been higher if Rajan had depreciated the rupee to a greater extent.

Fact: I will address this complicated question at a later date. (Hint: I don’t have much sympathy with this complaint). The fact remains that the RBI has managed the exchange rate brilliantly (with few exceptions) since the inception of a dirty managed float in 1993.

It is high time for all of us to get real, recognise and reward Rajan for a job brilliantly done.

(This article first appeared in the print edition under the headline ‘No proof required: Only in India — redux’)

The writer is contributing editor, ‘The Indian Express’, and senior India analyst, The Observatory Group, a New York-based macro policy advisory group 

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