Wearing the crown of thorns

Photo: Reuters
Photo: Reuters

They call themselves Sri-Vaishnavas. Most of us know them as Iyengars, a sect of Tambrams. For such a tiny ethnic group, their contribution to the monetary history of free India is disproportionate. Of our 20 Reserve Bank of India (RBI) governors after Independence, four have been Sri-Vaishnavas: HVR Iengar, S Jagannathan, M Narasimham and C Rangarajan. Now it is the turn of one more of their tribe: Raghuram Rajan.

Raghu comes with impeccable credentials: an alumnus of IIT Delhi, IIM Ahmedabad, MIT and a professor at the University of Chicago. Raghu has, over the years, developed virtually his own school of the political economy of monetary economics.

He articulated the insight that politicians of all persuasions, when faced with sluggish wage growth, tend not to take the difficult path of improving human capital and productivity, but instead, encourage citizens to borrow beyond their means and consume. There is a short-term “feel good” factor in spending unearned, borrowed money. But chickens do come home to roost as they did in the US, Spain, Ireland and elsewhere in 2008. He has refused to be caricatured as a simple-minded market fundamentalist. Established elites create barriers around size, complexity and networks to pre-empt capital, thus making life more difficult for new entrepreneurs, who tend to be the source of growth and innovation in any society. Eternal vigilance on the part of all of us is key to ensuring that markets function in a manner that is efficient and welfare-inducing for society.

Raghu has spent a great deal of time thinking about the way the financial and real sectors of the economy interact and influence each other. One of our more interesting conversations was on the subject of the Napoleonic Wars and how Britain, with its more developed impersonal, organised financial market had an advantage over France, which was still stuck in the world of wealthy social networks. Despite the mathematical sophistication that his engineering background gives him, Raghu’s natural inclination is towards the Scottish Enlightenment traditions of Adam Smith and David Hume. He once astounded me with a relatively less-known piece of historical information that the Quakers of Pennsylvania so detested inherited wealth that they actually had provisions in their Constitution inimical to such wealth.

Raghu has received extensive coverage and kudos for taking on the once omniscient Alan Greenspan and raising a red flag about the dangers inherent in an interconnected financial system, where players take on risks that they little understand. He is in the distinguished company of Jacob Frenkel, another Chicago professor who moved from theory to becoming a practitioner, when he took over as the Governor of the Israeli Central Bank. Frenkel is credited for helping the Israeli economy dig itself out of high inflation and dirigiste lethargy.

The RBI governorship today is verily a crown of thorns. We are in a slough of despond: stubborn consumer inflation, declining growth, a dangerously high current account deficit, dependence on fickle short-term foreign fund flows, a high and fragile fiscal deficit, flat industrial growth, corporations across sectors (coal, power, infrastructure, telecom, airlines) stuck with unsustainable debt levels, astronomical sums on bank balance sheets locked up in what are euphemistically called “non-performing” or “restructured assets” — bad loans for us mortals.

But there is a silver lining. Sri-Vaishnavas are traditionally great devotees of Lakshmi, the goddess of wealth and prosperity. Surely, the goddess knows that Raghu and his country need a lucky break or two now. My friend SS Tarapore once told me that when he had joined the RBI as a young economist, the then governor HVR Iengar worked only in the mornings. Every afternoon he had to be on the tennis court. Let us hope that Raghu is able to imitate his predecessor. After all, on some afternoons it is better for a central bank chief to do nothing, instead of trying to defend the indefensible (Dear Reader: Did I say the indefensible rupee or did you?).

(The writer is an entrepreneur and a friend of Raghuram Rajan)


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