It is not much of an exaggeration to say that the reappointment of Raghuram Rajan as RBI governor has become an important question for investors. It would be easy to dismiss this preoccupation as stemming from a fixation on personalities. But the extraordinary global fixation on the future of Rajan is also a deeply interesting window on the functioning of institutions in India. I have no competence to go into the technical merits of Rajan’s policy stances on inflation and banking regulation. This is a matter for economists to sort out. But the institutional politics around Rajan reveals much about the nature of our government.
The most striking thing to ask about Rajan is this. Why is his credibility miles ahead of anyone else in government? To be fair, despite a lack of formal autonomy, many RBI governors have in the past asserted their independence from government. But seldom has the premium placed on the RBI governor’s public credibility been greater. This is so for several reasons. First, the dominant government culture is now so consumed by the need to spin, that even its truths fall under the shadow of suspicion. Admittedly, a democratically elected government will have to trumpet achievements. But the cumulative effect of the emphasis on spin is to erode long-term credibility in the government’s claims. When Rajan said that the Indian economy was like a one-eyed person in the land of the blind (and promptly apologised to the blind) he grasped a fundamental truth about credibility: credibility is not generated by “talking things up”, it is generated by the confidence that you have the ability to speak truth.
RBI governors have constraints on what they can say, and what is appropriate for them to signal. But still they can provide some reassurance of a counterweight to government spin. What the government needs to understand is that even in an age of spin, acknowledging bad news might actually enhance your credibility. The premium on the RBI governor is that he is the font of reassurance that someone might actually be willing to state the bad news.
This function of the governor has become even more important in light of recent experience. Governments have not been short of talented, independent economists. But by their very structural position, government economists, or “econocrats” as Kaushik Basu once dubbed them, are limited in what they can say in public. In fact, UPA 2 was a prime example of an astonishingly talented team of econocrats unwilling to tell us in public just how potentially deep the economic and banking crisis was. That collective failure should have led to the conclusion that the government is actually well served by having a “doubting Thomas” or two around. Second, this tendency of government to swallow up independent economic thinking is likely to be enhanced. Institutions like the Economic Survey and internal presentations can often acknowledge the bad news. But levelling with the public is not generally the government’s forte.
Take what we have seen as the public role of the Niti Aayog so far. It seems to think its role is to spin on behalf of government, not to provide an independent voice of clarity. In short, we have a government system with fewer internal independent voices with the freedom to speak publicly. Outsiders can provide critiques but there is nothing like a warning from within government to concentrate the mind. Institutionally and structurally, the RBI is the only counterweight left to perform this function. The government must recognise that this critique, inconvenient as it is, enhances the credibility of the system as a whole. And the economy is as much about credibility as anything.
This role of critique is even more acute given the peculiarities of our context. The one refrain you constantly hear is that these days economic policy-making is a little like flying in the dark. The issue is not that people are making up numbers. But there is a sense that our data systems are simply not up to date in terms of the information a modern economy needs on everything from inflation to employment. Second, many of the conceptual relationships between different economic variables are probably more deeply contested, and perhaps even more so in times of global economic uncertainty, where the slightest tinkering with assumptions can have huge impacts on outcomes. In such circumstances, the reassurance that there is a major economic actor who is not structurally beholden to government is important. This is not about the capacity of individuals, or getting everything right. It is about the assurance that you are institutionally capable of saying the right thing.
We are also at three other critical conjunctures. With the creation of a monetary policy committee, the institutional functioning of the RBI will change. An institutional innovation like this will have to be shepherded carefully. Second, we are in the midst of a serious banking crisis. Resolving these will require a combination of hardnosed pragmatism, but also the imprimatur of integrity. For both of these functions, it will be important for the RBI governor not just to be independent but to be seen to be independent. And finally, since India is a globalised economy, a deep attunement to the global policy process has probably become more imperative than just a grasp of the local bureaucracy. The reason there is such abiding interest in Rajan’s fate is not just because of his individual personality but because the premium on institutional credibility is now of a different order of magnitude, given what is happening elsewhere in the system.
The attack on Rajan by Subramanian Swamy is not just a lone ranger firing indiscriminately. It is no secret amongst investors that several senior ministers have been on a whisper campaign against his monetary policies. Certainly, expressing disagreement with any governor’s policy cannot be stopped. Government also has the prerogative to appoint whoever it wants, all things considered. But if there is now an unseemly controversy around the appointment, it is one that has been generated entirely by the ruling party, not the media.
This does not portend well for the kind of signal you might want to give to a future governor about the conditions they will have to deal with. It exacerbates exactly the crisis of institutions that makes so many people pin so much hope on Rajan: when the government creates a credibility crisis for itself, the premium on anyone who looks half credible goes up. The government will do well to ponder the meaning of one word it barely understands: “credibility”. It will also acquire a bit more dignity in the process.