Why A Sailor Should Be A Seaman How The New RBI Governor Will Fit Into Big Shoes



How do we choose an airline pilot? Do we keep reservations for SC/ST and 5% for Jats/ Yadavs? Or do we simply set the technical standards for the job and “may the best man win”…..even the worst public sector airline in the world (I mean Air India) does not have quotas, or non-technical qualifications for a complex, technical job that can kill you if the pilot gets it wrong. Who, which Jat Minister, would want to be operated upon by a Doctor who has acquired his qualifications through a quota RBI?

Declaimer: This article was originally in May 2016, and some of the data points may be outdated

The mentally Indian

And yet, we have just booted out the world’s best Central Banker for not being sufficently “mentally Indian”, a qualification that seemingly, only Mr. Swamy can decide upon. How does a person become “not mentally Indian”…… because he speaks in English, or is heard from the platforms of Davos or Brookings?

Macro-economic management requires trade-offs, which are really actions based on an underlying ideology, or set of principles. The RBI applies the Monetary brake to the Fiscal accelerator controlled by the Govt. If a person displays character and a robust ideology in doing his job, he should earn our respect for it, not our opprobrium. Raghuram Rajan was a born-again ‘Austrian’, a school of economics that believed in ‘Moral Philosophy’, i.e., it lays out the principles of good behavior in a world that is looking for quick-fixes to escape from the consequences of last night’s revelry.

But to get back to the “mental nationality” demanded by Dr. Swamy. Is the UK doing something wrong, in handing over the reins of the Bank of England (BoE) to Canadian Mark Carney……did they ask for “mental nationality” certificates before making the appointment, and more importantly, has his nationality come in the way of his decisions? The principal qualification, I would surmise, in choosing a man for RBI Governor, would be his understanding of “the global sea”, for which you would need a ‘seaman’…….the current RBI Governor has won the highest debates in the world on global financial/ economic trends with the redoubtable Larry Summers, and is something of a rockstar if an economist can ever be called that. By comparison, Dr. Swamy looks like a shoe-thrower at Mother Teresa, blaming her for being a foreigner…..yes, public memory is short, but there were people doing that once upon a time!!! Come to think of it, greater people (Larry Summers) have called him (Rajan) worse…….Luddite, which, if anything, is at least more erudite an insult than anything Dr. Swamy can think of.

Let’s now divert from the personal attacks, and come to the problems with Rajan’s policy that Dr. Swamy has. In the first phase of India’s resurgence, we have followed textbook “Austrian” policies that prioritize stability over growth. Looking back, was there any other way? I mean, could we have promoted Private Investments, from our position as the worst of the “Fragile Five”, pushing lending from Banks that had real NPA ratios of up to 12%?

In his next term, Dr. Rajan would have made a difference in the following ways:
  • Retain India’s credibility as it launches on a Public Investment spree. Most investors are wary of Govt investments, which are usually distorted by the multiple political pressures and vested interests that pervade all Govt decisions. Which Govt can follow the principles of good investing, the highest of human vocations that need the most character and forbearance? A Modi-Rajan Govt could have…!!!
  • Be the protector of (the value of) the Re, bolstering its reputation as a safe haven currency, as he navigates the still-turbulent global economy, which is seeking a new world order. India stands a better chance if its currency has the right reputation, and Rajan is now optically linked, in the minds of the international investor, with the destiny of the Indian Re.
  • The reputational space vacated by China as the world’s leading Big Emerging Market (BEM), could best have been captured by the Modi-Rajan combine. This is a major project, which will drive an upward spiral. Optics matter, somehow Ram would not look as good as he does if Laxman was missing from beside him…….foreign investors look at brake-and-accelerator together…..if the driver of the Indian economy is Modi, its Controller (of the value of returns) is Rajan.
  • At higher levels of growth, the debt cycle will come back. Keeping leverage under control, and taking back the bottle before the party is over, will ensure that the party does not end in a drunken brawl (read credit recession)…….no amount of knowledge of Economics has ever ensured that a country gets its right, it is only the character of the Central Bank Governor (remember Greenspan Vs Volcker) and his independence that ensures that a credit bubble is deflated with discipline.

Yes, I admit that Rajan would have been ‘inconvenient’ during the coming bull market and the ensuing credit bubble. But that was a reason to keep him because he would have ensured that the coming party did not end with broken heads (and necks). He might have closed the bar early, just as he is opening the fridge late….and that seems to be bothering the raring-to-go-at-the-bottle Dr. Swamy and his votaries.

  • When a person asks for low real interest rates, he is basically asking for booze (in the terms of the moralist ‘Austrians’), a little mood boost that creates a false bonhomie to get the party going. Corporate profits will be overstated, and misallocation of investments, ‘justified’ by low-interest rates, will be accelerated. Markets will rise, drunk on the cheap capital, ‘repressively’ acquired from India’s disciplined savers. Foreign savers will not be fooled, demanding immediate compensation in Bond yields, followed by a steeper Forward (Premium) Curve……I promise you, the Re, its credibility and the Forward Premium curve will shift structurally upward over the next year, and one of the reasons will be that India has sent out a message that India cannot bear (to hold) the forbearance that is needed to push stability before growth.
  • When the likes of Dr. Swamy ask for low real Interest Rates, they are asking for a wealth transfer from 120 bn savers (who save up to 32% of their income) to a million small and big businessmen. The businessmen will survive, I promise you, because widgets will still be made, they will just take more equity (which the markets will still give)…..but if you cheat the savers, they will hide their surpluses under their mattresses (in the form of gold), which will reduce liquidity and still drive up Interest Rates.
There are 2 ways to speed up a car

There are 2 ways to speed up a car: take off your brake, or speed up the accelerator. Debt-fuelled growth is inferior to harnessing “animal spirits” through private investment……so why not keep real interest rates high, give savers a break, and build confidence in potential investors that the value of their investment will not erode (inflationary expectations)? That will bring in foreign investment, harnessing overseas savings (FDI is twice the CAD just now, a historic high) into productive investment.

In Bank oversight, Rajan has a deep understanding of markets, which would have helped in finding the right price-discovery mechanisms to price money right and channel it to the right places. A lot of innovative models are needed for pricing and monitoring Public Investment.

Pursuing growth THROUGH stability is the only way, “Austrian” economics will tell you…..the last mistake Dr.Swamy made was to tell him to go back to Chicago…….he is not even from the Chicago School (Friedman’s Monetary School of Economics)   It takes time to show results, just like taking back the bottle of hooch, helps build character over the long run.

In every place where Rajan carried the burden, the new RBI Governor will have to fit into rather large shoes, just before an Olympic race, which seems to have already kicked off, thanks to Brexit. Given that he started it, why not give the job to Dr. Swamy?!



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