#SwamyVsRajan: Political Battles of Raghuram Rajan and Subramanian Swamy

A war of words has been going on between India’s RBI Chief, Raghuram Rajan and Dr. Subramanian Swamy, a top economic, legal and political mind.

Just for context, let us understand their backgrounds.

Raghuram Rajan: is an IIT-D undergrad in Electrical Engg, MBA from IIM-A, PhD from MIT Sloan and was a Professor of Finance at the University of Chicago’s Booth School of Business from 1991 to 2013.  He was the youngest Chief Economist at the IMF from 2003 to 2007.  A stellar bio indeed.

Dr. Subramanian Swamy: has Masters in Math from University of Delhi, Masters in Statistics from Indian Statistical Institute, Kolkatta; PhD in Economics from Harvard under Nobel Laureate Simon Kuznets.  It is said had he not moved to politics, he may have earned the Nobel for economics.  However, subsequently, he taught economics at Harvard from 1965-1969.  He was the Professor of Mathematical Economics at IIT, Delhi from 1969 to 1991.

Needless to say, both Rajan and Swamy have stellar economics backgrounds and know what they are saying.  So what gives?  What is it that is fueling their battle?

In one word – politics.

Unfortunately, in this case, both are to blame.  Why?  Because their debate isn’t about economics at all.  But politics.  While the first salvo was fired by Raghuram Rajan on the current establishment with his speeches that clearly overstepped his brief; Dr. Swamy’s letter to Modi is too tenuous when it comes to solid reasons to throw Dr. Rajan out.

Traditionally, and for important reasons of collective responsibility of the executive and not the bureaucracy, Reserve Bank of India has been autonomous in its decision making and non-political.  Ideally, the Government should not intefere with the Monerary policy and RBI should not be second-guessing on the politics and overall economics, commerce related policies of the Government.

For example, for years now, many organizations have clearly and openly misused the Foreign Exchange Management Act, 1999 (FEMA) and done work to destabilize not just the polity but also the economy of India.  And even though Raghuram Rajan was at the helm since September 2013 and one of the goals of RBI Governor is to manage the goals of FEMA in order to facilitate the trade and payments to enable the forex market for Rupee; nothing was done to bring these NGOs to book.  One can understand that because it would be stepping into the politics of the past government.

Other main functions of the RBI are:

• regulator and supervisor of the financial system and prescribes broad parameters of banking operations
• issue and exchanges currency notes and coins and destroys the same when they are not fit for circulation
• central bank where commercial banks are account holders and can deposit money.  RBI maintains banking accounts of all scheduled banks
• control the credit through the CRR, bank rate and open market operations

Broadly speaking, RBI manages the whole banking and monetary system.  The Ministry of Finance is responsible for the Fiscal direction and policy.  Many a times, there have been conflicts between the direction of the Fiscal policy and the monetary policy that the Finance Ministry may want for the country and how the RBI Governor pursues it in reality.  But it is rare, if ever, that the RBI Governor steps into the domain of Fiscal policy to advise – or worse criticize and second-guess – the Government of the day on what Fiscal policy it should follow.

Rajan’s Activist Stance: Overstepping the Role or Political agenda?

While delivering the 4th C.D. Deshmukh Memorial Lecture on January 29th, 2016, Dr. Rajan made the following observations:

The consolidated fiscal deficit of the states and centre in India is by far the largest among countries we like to compare ourselves with; presently only Brazil, a country in difficulty, rivals us on this measure.  So we actually expanded the aggregate deficit in the last calendar year.  With UDAY, the scheme to revive state power distribution companies, coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the centre to adjust more. (Source)

Here, as the RBI governor he was talking on the schemes that the current Government was undertaking for a certain overall economic and growth direction.  Overall Fiscal and the Economic policies are the prerogative of the Government of the day and not in RBI Governor’s brief to influence.  As an authoritative figure in the economic arena within and outside the country, the remarks of an RBI governor can not only become an embarrassment to the executive but also give ammunition to the Opposition to stall the government’s work further.  It is neither fair nor warranted.

Most importantly, history tells us that no two economists have ever agreed and no economist has always been right.  Specifically when it comes to how a democratically elected leader uses his ways – both political and otherwise – to ensure an economic outcome, economists usually fail in their predictions.  I still remember how some of the top economists in the US criticized Obama for his policies at the height of the economic doom after the Banking collapse.  Yet, today US finds itself on very sound footing and the memory of that time looks from a very distant past.

Therefore, just as Dr. Rajan is a brilliant economist, there are several others who have extremely good insights as well who have worked with the Government to fashion its economic policies and fiscal direction.  This has been done keeping several imperatives in mind – including political, geo-strategic, national security and overall global dynamics.  No economic policy is ever created with only economics as the bedrock.  If it was ever done so, nothing would have ever moved.  The fall of Soviet Union or the handling of Mid-east by the US was never in any calculation of the top economists, yet those events had completely transformational impact on the economy of the country and the world.

That is one reason why RBI Governors should stay away from critiquing the policies and economic/fiscal direction of the government.  If they have to advise, it should be behind closed doors and NOT in public!  A rule that Dr. Rajan flouted.  Flouted because he has done that time and again.

At the height of the Intolerance drama that was going on in India which was clearly politically motivated, Dr. Rajan entered the fray with his own advisory to the Government on how to conduct itself and also suggesting why it was ok to challenge and second-guess those in power.  By asking for “challenge to all authority and tradition” – the reference and nuance was obvious.

India’s tradition of debate and an open spirit of enquiry is critical for its economic progress. Economic growth through new ideas and production methods is what our professors and alumni contribute to the nation. The first essential is to foster competition in the marketplace for ideas. This means encouraging challenge to all authority and tradition. What this rules out is anyone imposing a particular view or ideology because of their power.  Tolerance means not being so insecure about one’s ideas that one cannot subject them to challenge — it implies a degree of detachment that is absolutely necessary for mature debate… Finally, respect requires that in the rare case when an idea is tightly associated with a group’s core personality, we are extra careful about challenging it.  A quick resort to bans will chill all debate as everyone will be anguished by ideas they dislike. It is far better to improve the environment for ideas through tolerance and mutual respect.  Groups should not be looking for slights any and everywhere, so that too much is seen as offensive; the theory of confirmation bias in psychology suggests that once one starts looking for insults, one can find them everywhere, even in the most innocuous statements. Excessive political correctness stifles progress as much as excessive licence and disrespect. (Source)

This kind of political activism was completely unbecoming of the head of a autonomous and central organization that needs to be in tune with the Government of the day for best decisions on economics.

Dr. Rajan’s advisories on other Government policies are:

Make-in-India: I am not advocating export pessimism here – India has been extremely successful at carving out its own areas of comparative advantage, and will continue to do so. Instead, I am counselling against an export led strategy that involves subsidizing exporters with cheap inputs as well as an undervalued exchange rate, simply because it is unlikely to be as effective at this juncture. I am also cautioning against picking a particular sector such as manufacturing for encouragement, simply because it has worked well for China. India is different, and developing at a different time, and we should be agnostic about what will work. (In the Bharat Ram Memorial Lecture)

Jan Dhan: When we roll out the (Jan Dhan) scheme, we have to make sure it does not go off the track. The target is universality, not just speed and numbers… The system is going to be a waste if what we do generates a whole set of duplicate accounts. It is going to be a waste if you do not have full coverage. It is going to be a waste if those accounts are not used, they open and they languish. Many of the persons who are coming into the system are coming for the first time, so if we don’t make a good first impression, they will stay out. Let us ensure it works. (At FICCI banking conference)

One wonders if he was so active in his activism when the scams and plunder of national assets were occurring in the previous government when he was at the helm?  For, the level of plunder of national economic assets that happened in the 10 year rule of the UPA, was unprecedented.  That was the time to provide homilies to the government of the day on what it needed to stay away from!  But that never happened.  This opens up Dr. Rajan to the charge of being a politically biased or at least of undertaking activism that is clearly beyond his brief!  He has no business to be where he has put himself in and needs – his brilliance notwithstanding – to confine himself to the dictates of the role he is in.  If he has any thoughts and analysis that he thinks needs to be factored in the governmen’s policies, it should be shared privately.  Not publicly.

Dr. Swamy’s Political Activism

Dr. Swamy is by far one of the most intelligent person to have entered the Indian political arena.  He is not only the top brain in his area of study – economics and statistics – but also a man of action.  He is a maverick and has done things as per his own ways and ethics.  Many a times, these ways didn’t work out well for India.  His bringing down of the Vajpayee government and propping the Chandrasekhar Government is one prime example.  But no one can doubt his nationalism – his own variety albeit – and his brilliance.

Given his own stellar credentials and achievements in life, one doubts if he is angling to take Dr. Rajan’s job.  He is far beyond that right now in his career.  His criticism in a letter to the Prime Minister is a pure political play.  While there could be a debate on point # 1 in pure economic terms – and there are always two camps on this issue around the world of economics – and #2 (Sharia Banking) needs further discussion and investigation to see if this is being actioned with full involvement of the executive, the points #3, 4, and 6 are personal in nature.  #5 is the only one which makes sense – but has been discussed incorrectly.

While Dr. Swamy may have his own reasons for his political salvo against Dr. Rajan, one cannot appreciate his public directives and letters to PM Modi.  These letters assume that the PM is unaware of these things and worse, by making these allegations (and advisories) public – he is putting Narendra Modi in a dock.  If he does what Dr. Swamy is saying, then quite obviously he isn’t independent; and if he doesn’t, then Dr. Swamy gets publicly slighted.  Both aren’t good alternatives.  Almost the same way that Dr. Rajan has tried to play his hand with the PM!

Admittedly, both the guys – Rajan and Swamy – are brilliant in their own right.  But their activism is bad taste.  Personally, I do not endorse what both are doing at all.  The PM has had a history of working with people who were his adversories ideologically and intellectually, and yet been able to deliver given his overall governance framework.  He probably wants to do the same with Dr. Rajan.  In fact, I have seen that PM Modi loves to engage with people who have different views because it helps him craft his policies better.  So, Dr. Rajan’s political activism notwithstanding, he will – in my view – persist with him until the end of his term in September this year.  Post that, it will be time to bring in someone else.  As for the media which is clamoring for another term for Dr. Rajan – given their delight at political battles – they have no business to advise what the PM should or should not do.  They can comment on it along their political and personal agendas.  But that is all to that!