Can the new RBI chief revive the economy?

Raghuram Rajan Photo: PTI
Raghuram Rajan Photo: PTI

Give him a chance. That’s the verdict from economists, analysts and CEOs as the current chief economic advisor to the Finance Ministry, Raghuram Rajan is announced RBI’s next governor. That he takes over the economy at a most critical juncture guarantees to make his appointment significant, promising and even controversial. Poor parameters of growth, low global confidence on India and an election year will put Rajan’s mettle through a real test. It will be a break from the charming life of writing for international publications, economist style global conferences, from being protected by the strong red brick walls of north block.

As the central bank governor he will be watched for his prudence and not political-correctness, as was the case being economic advisor. Let’s not forget that D Subbarao had served as finance secretary and was considered to be the ideal government choice to implement its measures but eventually did what he thought the RBI ought. Even if, in the process, he gained the wrath of the finance ministry, evident by the recent public display of disagreements between the two.

Workwise, Rajan’s task is cut out. The market is worried about the high interest rates and the low rupee, both of which are adversely impacting the spending power of Indians. “The first thing he should do is bring interest rates down,” says Andrew Holland of Ambit Corporate Finance.

Rajan admits there is no quick fix to sorting the problems out. “These are challenging times though no one can have any doubt about the country’s progress,” Rajan asserts on being announced the governor. “We don’t have a magic wand to make the problems disappear.”

But as usual the warnings come from industrialists who have been suffering as manufacturing, fresh investments and future expansion all come to a standstill. Deepak Parekh of HDFC says while there is always need to balance inflation and growth, India cannot afford to have any further poorer growth. “We will see how Raghu behaves on that. We have not been successful in lowering inflation. Will India be able to even get 5 percent growth? It will be a disaster for us. Let us see what he does.”

Despite his big to-do list, Rajan’s appointment has made headlines across the world. As Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business in Chicago, a visiting professor for the World Bank, Federal Reserve Board, Rajan is among the most widely tracked economists today for discourse on both the Indian and American economies and the global crisis.  Surjit Bhalla of Oxus Management says Raghu’s appointment is long overdue because “he has proven his credentials as an economist and his ability to understand global crisis and macro. There is no better choice right now.”

Rajan’s fan club goes beyond the economist circles. Inside the classroom, Rajan’s students credit him for being a most engaging faculty who “wasn’t data driven.” Maina Sahi one of his students shares he didn’t use the teacher’s table and instead walked around the class discussing real-world case studies.

Aside of economics, Rajan’s appointment is being hailed because it announces the departure from tradition of having bureaucrats as governors.  “India has so far been an exception that we continue to rely on IAS officers to run our major economic organisations,” shares Bhalla. “It can also be speculated that one reason for India’s terrible performance is because its regulators are not professional.”

What should central banks do when politicians seem incapable of acting? When does boldness turn to foolhardiness? Those were questions that Rajan raised in his article for The Guardian in October 2012. Now he will need to answer those for himself.

For an economist who always aspired to be the RBI governor, one wonders if this accolade is coming at a most difficult moment. Starting next month, Rajan will need to put north block’s vision into action and deal with the core challenges to fix India’s very own economic fault lines.


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