Tuesday, June 21, 2016

Rajan's Exit

So RBI Governor Prof Raghuram Rajan has announced his exit from the role, after alleged uncertainty over his renewal by the Modi govt for a 2nd term. He had been the recipient of significant criticism, including from this blog, over his decision to keep rates high for taming inflation, in addition to his occasional loose talk, such as when he spoke of the need for "tolerance" during the crucial Bihar elections, which was pounced upon by the opposition as a rebuke to the govt. In an era where the Supreme Court openly scorns parliament in the name of autonomy, there's no need to extend that trend to the RBI.

Many praised him for his efforts at price stability, including ordinary people who reported that for the first time interest from their bank deposits was outpacing inflation.



The problem was that taming inflation was being done at the cost of reduced economic growth and job creation. No matter where you live, the interests of savers and job-seekers are opposed. Savers like retirees want the economy to favor price stability and low inflation to preserve the value of their pensions and their savings, and don't care about a job market they've retired from. Meanwhile young job-seekers entering the job market want an economy that favors job creation so that they can enter into the workforce and get onto the economic ladder, and since they haven't accumulated any savings yet, they don't care as much about seeing that value eroded. An economy flush with jobs can help with their upward mobility and wage growth. Well, sorry to say, but the fact is that India's population is comprised of more young people than old, and as Mr Spock would say, "the needs of the many out-weigh the needs of the few." A growth environment allows for far more possibilities than a stagnant one.

Rajan reasonably pointed out that India would have less opportunity replicate the export-led rise of other powers, since the rise of China meant there was little room for another major exporting power. Also, there's the fact that the importing developed countries have learned to devalue their currencies through Quantitative Easing. Rajan called for "Make for India" rather than "Make in India". However, the wage disparity between India and developed countries means "Make in India" should at least be attempted, even if we have to plan for less than ideal results.

He also raised his voice against crony capitalism, whereby politically connected debtors have been effectively avoiding repayment of debts, thus saddling banks with bad debt they can't collect on. Whichever deadbeat fatcats are exerting leverage over their lenders through the political establishment, nationalists must not give them a free pass. The fatcat deadbeats must be named and shamed, until they are brought to book. No good will come of shielding the Mallyas and other crony capitalists who are gaining money by working political levers.

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