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HindustanTimes Tue,02 Sep 2014
Don’t blame Raghuram Rajan for economic slowdown
Chanakya, Hindustan Times
February 01, 2014
First Published: 23:23 IST(1/2/2014)
Last Updated: 14:12 IST(2/2/2014)

Reserve Bank of India (RBI) governor Raghuram Rajan is realising how fickle the media and, by extension, public perceptions can be. When he was appointed chief central banker in September 2013, the media, which routinely described him as a ‘rock star’, decided he was ‘pro-growth’ — shorthand for someone who would listen to the industry clamour to cut interest rates to push a stuttering growth rate.

Five months, and three interest rate hikes later, the pundits, who still think he resembles a rock star, now describe him as someone ‘known for his strong monetarist approach and hawkish views of inflation’. Pardon me, but isn’t that how journalists were describing Rajan’s predecessor Duvvuri Subbarao when they were comparing him unfavourably with his successor?

The new peeve against Rajan: he raised interest rates last week, at a time when the economic situation is turning more benign than earlier and the inflation rate is showing signs of coming off its stubborn highs. The central bank, industry associations argued, was stifling growth. I’m sorry, but this line of argument strikes me as particularly disingenuous. I think Rajan had little choice but to raise rates, but more on that later. Let me first address the complaint that RBI policies are stifling growth. Are they? The answer to that is: no.

The government on Friday lowered its estimate for GDP growth in 2013-14 to 4.5%, from its earlier estimate of 5% — way below the 8% growth target set by the Planning Commission for the 2012-17 period.

The primary reason for this dismal rate of growth is the collapse of the investment cycle. The reasons for this collapse can be traced back to the political economy or, more specifically, at the intersection of politics, policy-making and the economy. The RBI and Rajan (or his predecessors) had nothing to do with any of them. So, to blame him for the slowdown, in my opinion, is patently unfair.

If you ask me, there are five primary reasons for the collapse of the investment cycle and all of them go back a few years.

The first was the 2G scam. A brief recap will be in order: then telecom minister A Raja allegedly flouted norms and allotted scarce spectrum to some telecom companies at less than their fair market value. The Comptroller and Auditor General (CAG) estimated that this arbitrary allocation may have cost the government revenues of up to Rs. 1.76 lakh crore.

With charges of corruption flying thick and fast, administrators stopped taking decisions that could lead to charges of corruption later. This was the beginning of the policy paralysis that brought all but the most routine decision making to a standstill.

When, on February 2, 2012, the Supreme Court, hearing cases relating to alleged illegalities relating to 2G allocation, struck down the licences of eight telecom operators across 122 circles, it effectively wrote off investments worth more than $8 billion by Indian and foreign telecom companies. Global investors, till then in thrall of the Indian growth story, began to have second thoughts about the safety of their investments here.

Then, the environment ministry suddenly decided to don the garb of an ecological activist. Investments worth several hundred thousand crore were held up by the ministry.

In the midst of all this, the government decided to slap a $2-billion tax notice on Vodafone. Vodafone sued the government and won a favourable verdict from the Supreme Court. The government, for reasons that still aren’t totally clear, decided to amend the relevant tax laws with retrospective effect to force Vodafone to pay up. Efforts are now on to settle the case out of court but the damage has been done.

By changing laws with retrospective effect after losing a legal battle in the SC, the government sent out the message that policies could be changed arbitrarily. Skittish foreign investors began to turn positively wary.

Then came Coalgate, the alleged scam in allocating coal blocks for captive consumption by steel, power and other companies. As a result, India, a coal surplus country, has to import $20 billion worth of coal. This contributed to the worsening current account deficit last year and the consequent devaluation of the rupee against the dollar.
 
And finally, a series of civil society agitations against corruption in high places and a near breakdown of relations between the ruling party and the principal Opposition amid a crippling economic slowdown accentuated the atmosphere of gloom that, unfortunately, became a self-fulfilling prophecy.

See? There was nothing the RBI or Rajan could have done about any of the above factors. And cutting rates would hardly have convinced investors to return when they weren’t totally convinced their investments were safe. Now, to return to why Rajan had to raise rates. Consumer Price Index inflation, though down from previous months, is hovering at near double digits, still too high for comfort. Then, core inflation, though still relatively low, is rising. In order to keep consumer price inflation under control, Rajan had to raise rates.

The other question is: how long will the media continue to believe that Rajan is a rock star? Ah! That’s a million dollar question.


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