Why Governor Rajan bowed out.....a cultural perspective and what to look out for

This appeared in  The MINT dated July 07, 2016 as an Op-Ed article under Columns > Opinion > Expert View

A lot has been written on this issue which has sharply divided economic commentators over the past few weeks  …a heady mix of politics, governance, economic policies, his charisma and even Shobha De’s starry eyed comments ! More than Brexit, most Foreign Institutional Investors I am in touch with have the question of Rajan's replacement on their minds. It is thus important now, after all the emotional outbursts, to dispassionately analyse the event under three captions : the policies followed by the RBI under his watch, the importance given to meritocracy in our governance framework whilst building institutions and the cultural challenges of driving fundamental change in India. And form a reasoned view of what to watch out for as indicators of the way forward.

His policies have resulted in taming inflation to half, raising foreign exchange reserves thru FCNR (B) deposits, providing stability to the Rupee amidst turmoil in emerging market currencies, transparent licensing norms for awarding banking licenses, forcing banks to recognize and provide for hitherto undisclosed bad debts and finally the roll out of the United Payments Interface for mobile P2P payments. Jaitley and he can jointly be credited for enacting law to curb automatic monetization of the fisc, imposing statutory limits on fiscal profligacy and a formal monetary policy agreement signed between the Government and the RBI. Impressive achievements considering the situation when he took over in 2013. One can argue ,though, that  his resistance to PM Modi’s pet Mudra Bank project ( to fund 60 million unorganized businesses with a capital requirement of Rs. 12 lakh crore) was due to his being out of sync with the concept of India’s unique unorganized economy represented by the likes of Tirupur, Sivakasi, Rajkot or Bhatala….entrepreneurship models based on community conglomerations almost fully disconnected from the formal banking system and funded primarily by cash with interest rates as high as 30% to 120%. This is probably the only policy area where his expertise was lacking. With Brexit now a reality, expansionary fiscal policies globally and volatility in capital flows is a given ; coupled with the uncertainty of Fed actions, a strong dollar outlook and the looming maturity of $ 20 Billion of  FCNR(B) bonds in a few months, pressures on EM currencies, including India, will be accentuated and Rajan’s calming influence  would be sorely missed as we negotiate this whilst taming rising inflationary expectations once again.

There is a clear cultural context in India in terms of the resistance towards the type of change being brought about by Rajan as it fundamentally affects the deeply entrenched interests across the spectrum !  Rajan has paid for the zeal he has demonstrated in taking on the system in an unbiased, professional and completely transparent manner. I am convinced this is to do with our feudal national mindset  and a deep seated dislike in the Indian psyche for professionals who are unbending in their pursuit of their statutory responsibilities, and who have the courage of conviction to stand up against the powers that be, or indeed against the  high decibel, "noisy" opinion of the illiterate or compromised majority. Our distaste for promoting meritocracy is evident in most spheres.....corporates, institutions, the bureaucracy, village panchayats and the political organisations. During my stint as the CFO, and BT shareholder nominee, of Wipro BT , the Finance Director of British Telecom, had forewarned  me in 1995 that I, being an Indian Chartered Accountant with a western outlook and training, would face stiff resistance from the dominant controlling interests in promoter driven Indian companies if I brought about radical change in processes to ensure transparency and financial discipline. As things played out over many years, the wisdom of his advice dawned on me as I tried to implement many global best practices in the sensitive domain of corporate finances and governance. Not being politically inclined worsened matters. More famously, Sam Pitroda faced motivated campaigns and personal threats post the Rajiv Gandhi regime in 1988 despite his exemplary work in ushering in our telecom revolution. The list is long irrespective of regimes and time periods. Cultural transformations take generations.

Rajan too has been a victim of precisely this thinking on the national scale. The decision for his ouster has regrettably proven, once again, that this  trait continues to remain the core issue plaguing the country's governance system !  Swamy's tirade, in hindsight, was nothing more than setting the stage for his removal. Sun Tzu’s Art of War should be updated with a chapter on this crafty, but time  tested, manouever to oust unpliable professionals. I am disappointed, though, that my very high hopes on PM Modi's ability to resist this pressure was eventually proven wrong : I had thought Rajan would have been the ideal bulwark in his war against changing the status quo and cleansing the system in which he has had remarkable success thus far. I have no doubt in my mind that what is playing out is a case of shadow boxing (with Swamy donning the gloves) between different political groupings within the Sangh Parivar and PM Modi's progressive economic policies. The PM would have done well to stand by people like Rajan to ensure he ultimately emerges victorious in his efforts to drive meaningful change in the country. More importantly, he must use his enormous goodwill and electoral clout in building democratic institutions to promote mechanisms for consultation, debate and reasoned outcomes…..filling them with the likes of Chetan Chauhan, Pahlaj Nihalini and Gajendra Chauhan is not helping the cause.The unceremonious exit of Jayant Sinha from the Finance Ministry over the weekend for ostensibly "speaking his mind" gives some further,though still unconfirmed, indicators to the Government's thinking. The success of Rajan’s unfinished agenda of creating the institution of monetary policy committee for rate setting, to isolate the individual actions of a potentially errant Governor in the future, will depend on the Government’s will and wisdom to populate this with credible people and not subservient individuals.

Whilst the nation prepares to bid a painful goodbye to Governor Rajan…..one of the best things to have happened to us in a long time… it will keenly watch Modi’s choice of the new Governor, not so much for the credibility and competence which will undoubtedly exist, but for the trait of independent thought and the courage of conviction the incumbent possesses to implement correct, but unpopular, monetary policy initiatives in the interest of the RBI and the nation during the coming economic turbulence.         

Adieu Governor Rajan......Auf Wiedersehen !

(PRABAL BASU ROY)

Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant: the writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies.