Rajan didn’t step down. He was pushed out in one of the most unfortunate decisions of the Modi administration. There are a lot of similarities with how Abdul Kalam was denied a second term as the President by Sonia Gandhi. In both cases, you had an amazing individual who had the energy, reputation and the will to stand up to the government. The political heads hate such a challenge.
Unlike the past RBI governors who were given 5 year terms, Rajan was only given a 3 year term by the previous government and the present government used that chance to deny him a second term [for the same reason that the previous government gave him such a short term]. I will give you some background.
There were sparks publicly flying between RBI and the government for a while and this end result was probably not a total surprise. RBI and the government are two opposite forces [sort of like developers and testers in a software team] who work to build the economy.
The government has the control of the “fiscal policy” – dealing with matters like spending and taxing. The reserve bank has the control of the “monetary policy” – dealing with matters like interest rates and bank loans. Governments would typically love to spend/invest a lot to grow the economy, while the RBI would love to have the government spend less & maintain a low inflation [more government spending equals more inflation].
In short, the government is the accelerator and the Reserve Bank is the brake.
If you don’t press the accelerator, you won’t get anywhere. If you don’t press the brake, you will get somewhere [not necessarily alive]. There is a healthy conflict between the two.
While there were tensions even in the past, they were quite less. The RBI governors are usually mellowed men [in a land of many women bankers, they never get picked to head the RBI] who are honest and smart, but will quickly back down from a conflict. They are typically old too – sort of like the Presidents – chosen carefully to not have too much energy.
Rajan is among the youngest RBI governors and is a live wire. He has an international reputation no other RBI governor ever had. Within his 40s, he has seen some of the world’s best economics related posts – including being the youngest Chief Economist of the IMF (International Monetary Fund) . He doesn’t require a job. India required him.
Rajan was an energetic drill sergeant who makes you sweat and no body likes to sweat. He was brought in as a desperate move in the last days of the Manmohan Singh government which lost all its credibility and needed something to restore India’s credibility in the financial markets.
As India’s economic prospects improved with Modi’s arrival [and with a healthy dose of Rajan’s policies] the desperation of politicians went away. The tough medicine started to taste bitter as the emergency passed. They believe Rajan is applying the brakes even after the calamity has passed and you have a free road ahead of you. Rajan believes that he needs to keep off the sugar so that the government can snack on a healthy diet.
Unlike the previous RBI governors, Rajan also made a few political statements that unlike how the media reported, were not that controversial. However, like the President, the RBI governor is expected to stay away from politics and not make any statements unrelated to their job.
These two things cost his job. a) He was an inflation hawk whom the government and business community accuse as pressing the brakes too much. b) He had too much energy and independent thinking.
The question is not just one of Rajan or inflation or interest rates. It is about a system where the heads of key institutions are not expected to stay independent. This political meddling has been there since the start [from the times of Nehru]. We always elect old, unambitious, insipid, uncontroversial leaders for our top posts because the top politicians are scared of ambition, energy and independence. In the rare times these get selected, the politicians push them out sooner or later.
Even if the government doesn’t like their ideas or policies, it has to work with them – because our system is only as strong as its institutions. The government has to change its mind and bring back Rajan.
Credit goes to: Balaji Viswanathan