Why A Sailor Should Be A Seaman : The “Mental Nationality Of An RBI Governor”



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?

Disclaimer: This article was written originally in May 2016, so some data points may be outdated

The Mentally Indian

And yet, Mr. Subramanian Swamy, that “stormy petrel of Indian Politics” would want the Governor of the RBI to be “mentally Indian”, a qualification that seemingly, only he 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, where other naysayers are not invited?

Don’t get me wrong…..there is no bigger fan of Narendra Modi’s The Phenomenon (NMTP) than me. For the past 3 years, I have argued that NMTP is not the same as Narendra Modi The Individual (NMTI).

NMTP is about people with character, and without personal motivations, coming into public life, to deliver a public service. It includes Narendra Modi, Raghuram Rajan….even the misdirected Arvind Kejriwal!!! This is opposed to The Congress Way, which was (culturally) about bringing together people with the common objective of accumulating power and using it for personal ends (i.e. money, the perpetuation of power, and the use of it to occupy the heights of the Indian economy). Ancillary to The Congress Way was crony capitalism, vote bank politics, scams, and the loot-sharing politics of scams……the hidden motivation behind virtually every Govt decision was the desire to generate loot and share it with the cronies who would return the favor with votes.

NMTP is about taking painful, long-term decisions that are REALLY in the public interest…..following disinflationary economic policies is one of them. They are politically expensive because you take away the bottle of hooch (expansionary Money Supply) from the baby (populace, the voting masses) and give him a hangover which improves his health and gives him character. Character (something alien to Mr. Swamy’s publicity-seeking campaigns) is what defines & DIFFERENTIATES NMTP. When the Modi Govt held back the savings from the oil bonanza to bring down the Fiscal Deficit, it ensured that the gains were distributed among the larger populace. Simultaneously, it held back MSP increases to lower food inflation, shifting from revenue subsidies to capital subsidies…..VGF for solar is a big one. All this took character, and guts to snatch the pacifier from the farmer and give power back to him in the form of lower input costs, better infrastructure, and resulting higher productivity, which creates a win-win all around.

Your name, Mr. Prime Minister, IS CARRIED ON BOTH, Narendra Modi The Individual (NMTI) and Narendra Modi The Phenomenon (NMTP), but I am calling upon you to defend the latter, even at the expense of the former. PLEASE DEFEND THE ENTRY OF GOOD, HONEST, INTELLIGENT PEOPLE INTO PUBLIC LIFE……and protect them from the wanton attacks of those vested interests who want to see India regress to the feudalism of the Congress.

The Fiscal Policy

The same character that you (and therefore, your Govt) has shown in Fiscal Policy, has been shown in Monetary Policy…….these are trade-offs, which are opinions, and can always be justified from both sides. 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 your respect for it, not your opprobrium. After all, you have displayed the same character in many of your decisions, even in the face of political adversity.

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 people were 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.

Dr. Swamy seems to have a problem with the ‘Green Card’ that Rajan chose to renew, which gives him a right to work in the same country where Dr. Swamy got his Ph.D., his early work experience….. and his wife ( This piece of plastic will ensure that Dr. Rajan will stay relevant to the world economy, and is likely to get an even higher job description (Central Banker of China/ Germany/US? Central Banker to the World, i.e. Director at the IMF?) should India choose to look away from his offering. Many have rated him the best in the world at his job, the same way that YOU have been rated the best Prime Minister in the business……should you not find each other across the room?!

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%?

It betrays an ignorance of Economics (his Ph.D. from Harvard, under Simon Kuznets notwithstanding) that Dr.Swamy would try and second-guess a path taken SUCCESSFULLY through a minefield called the Global Economy (2013-16), which has brought India from the (status of) worst of the Big Emerging Markets (BEMs) to the best, MOST STABLE investment prospect in the world today, all in 3 years. Bulls and bears alike, there is not a financial commentator in the world, who does not agree that the Modi-Rajan combine has been good for India.

What makes Dr. Swamy think that the policies pursued so far, will continue, especially if they become unsuitable? Would he be so ‘linear’ in evaluating the past disruptive policies that Dr. Rajan has already shown himself capable of…….and would he not be able to credit Dr. Rajan with the same ability that he has shown in the past, to see round corners, anticipate them and take preventive/ corrective action. I mean, in simple economics, if growth were to drop, wouldn’t real Interest Rates come down?

In his next term, Dr. Rajan will make 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? Only a Modi-Rajan Govt…!!!
  • Be the protector of (the value of) the Re, bolstering its reputation as a 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), can best be 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 will be ‘inconvenient’ during the coming bull market and the ensuing credit bubble. But that is a reason to keep him because he will ensure that the coming party does not end with broken heads (and necks). He might close 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 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……try replacing Dr. Rajan with Dr. Swamy, as a one-month experiment!!!
  • When you ask for low real Interest Rates, Dr. Swamy, you 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: take off your brake, or speed up the accelerator. Didn’t Mr. Kuznets tell you, Dr. Swamy, that 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 will help 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, and heaven knows, Rajan is the right man to have around you when you need disruptive thinking. This is only a promise, not a fact… having Albert Einstein on your team in a Chemistry Project…..kuch to karega!!!

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. That is the character shown by our current Prime Minister, who might yet make the right choice.

Lastly, if you think Rajan needs to be ‘punished’ for speaking out of turn on (political) matters like Intolerance, etc……… punish him……make him a Rajya Sabha MP, and then take him onto your Politico-Economic bodies, to drive YOUR thinking on the country’s transformation. He may not like the job, but being “mentally Indian”, he will still do it!!!

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Dr Yatin Shinde

Career Guru

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