Alan Greenspan, former US Federal Reserve chief and the man often regarded as the inspiration behind the binge lending by banks resulting in the post-2008 global economic meltdown, however, had a remarkably modest idea about his job, particularly his policy pronouncements at regular intervals that had repercussions worldwide. He said, “what I have learnt at Federal Reserve is a new language which is called ‘Fed-speak’. You soon learn to mumble with great incoherence”.
RBI Governor Raghuram Rajan, as a central banker, is what is known in banking parlance as hawkish and his disposition therefore is quite the opposite of Greenspan. But he seems to have acquired the Indian variant of Fed-speak with much éclat. Earlier this month, he cut repo rate by 0.25 per cent, or 25 basis points, seemingly against his wishes. It is bad if he hadn’t approved of it, for that exposes the pliability of someone entrusted with the institution which is custodian of the value of the national currency. It is equally bad if he was not altogether opposed to a small rate cut, the third in 2015, even though he kept “mumbling” about the inflationary clouds on the horizon, careful, perhaps, that his hawk image does not get dented.
That his words do not square with his actions is obvious. He harbours doubts about the authenticity of the new methods employed by the Central Statistical Office to measure growth. His misgivings are tell-tale in the following post-policy observation by him: “Even with 7.5 per cent growth numbers, there is some discussion on how much of it includes special factors, including excise taxes and subsidies. When you subtract that, growth does not look as strong as before”. It is undoubtedly a matter of concern if the headline growth numbers have resulted from some creative computing.
It is impossible to figure out why the RBI governor is increasingly putting himself in an adversarial role with the Central government publicly even though he couches his feelings in velvety words. “If I cut interest rates, it means I want to please the government. If I don’t cut interest rates, it is because I want to have a fight with the government. Why can’t you make up your mind?” he shot back at a questionnaire during his press meet. But his inner turmoil finds expression in a remark laced with sarcasm—“RBI is not a cheerleader. There are other people in the country who can play that role. Our job is to give people confidence in the value of the rupee, in prospects of inflation, and having established that confidence, create the longer-term framework for good decisions to be made”.
The top inflation manager of the country is evidently not in agreement with a single of the government’s future projections. Finance Minister Arun Jaitley has denied that there is any official prediction yet of a sub-normal monsoon. But Rajan is not convinced. Instead he has made his view on the subject profoundly enigmatic: “As you know there have been El Ninos in the past with reasonable rainfall. Poor rainfall has not (necessarily) led to a fall in production…” What is he saying? It confounds confusion. Returning to the issue of his perceptible doubt about growth, he wonders why we think the economy “needs great cuts” when it is growing at 7.5 per cent. It is a replay of his pet theme so far that left to himself he would possibly have not agreed on the cut. But he still keeps the escape hatch open. “In some sense it (recent rate cut) is a Goldilocks policy, just right given the current situation”.
Economics, as we know, is a bit like physics before Newton, with very few certainties, least of all outcomes that are universally applicable. Much of the economic expectations are shaped by collective hopes and fears of buyers and sellers, which in their turn are shaped by the central banker’s words. They are certainly not the Fed-speak Greenspan fancied them to be but are the rational fulcrum on which people’s expectations rest. It seems Rajan has taken Greenspan’s words seriously.
Ideally he should not. In fact he shot to stratospheric fame himself in 2005 when he presented, at a function celebrating Greenspan on the eve of the Fed chief’s retirement, that the recent financial developments had made the world riskier and “disaster might loom”. Sure it did, though celebrated economists of the day, including former US Treasury Secretary Lawrence Summers, had called his warnings “misguided”. The banking sector crisis in 2008 earned Rajan his reputation as doomsayer and is possibly the reason behind his familiar hawkish postures, now as RBI governor but even earlier as Chief Economic Advisor to the Union Government.
Of course the image he has acquired of being robustly risk-averse should help him in his future career, be it at home or abroad. With demographic changes in the rich world, and little restructuring in its most conservative part, notably southern Europe, it is likely that global economy in the near to mid-term future will need hard taskmasters like Rajan. But that does not necessarily mean that he should treat India as the laboratory for his views in the “austerity Vs stimulus” debate.
Rajan’s attitude gains added poignancy as Prime Minister Narendra Modi is currently leading the country through a series of structural reforms, be it in targeting subsidy and moving towards uniform indirect tax rates, the results of which can be visible only if there is no shortage of capital along the way. It may call for spending on, say, infrastructure being front-loaded, much as it happened in China of the 90’s. If, by a miracle, Rajan were China’s central banker at that time and could give its communist party his thumbs-down, maybe there would have been no rise of China to talk about. Nobody has doubted Rajan’s intellectual prowess, and his uncanny ability to smell risk, but India cannot afford to have a central banker who refuses to change his stance. Nor can Modi move ahead with reforms if capital remains sticky.