After much speculation over next RBI Governor , It is going to be Dr. Raghuram Rajan. Post-speculation, the commentary would focus on checklist for Dr. Rajan. Given the state of the economy, he would have plenty of advice to ponder upon. My blog hit a high yesterday with people looking for all kinds of info on Rajan and somehow coming to my blog.
Though, his appointment has never been a surprise. Market participants in Mumbai always speculated that the reason to make Dr. Rajan as the Chief Economic Adviser is to give him some policy experience before he can take over as RBI Governor. It was already in the making. I never used to believe these stories earlier but it is amazing how they come true. The efficiency market hypothesis which says markets know everything may not work for pricing of markets but does for these policy appointments. Even in case of Dr Gokarn people knew beforehand that he would be out as Delhi did not like his inflation stance and it was right as well.
There were not many choices anyway. There were just two – Dr Arvind Mayaram and Dr. Rajan. Comparing the two is like apples and oranges. Reading a few columns, people say there could not have been a better choice. I am not too sure.
The reason is is not questioning Dr Rajan’s candidature. He is a top global economist and the best we could get. By agreeing to serve the current government he is putting his super-star status into a q-mark.
The reason is the nature of appointment. It is a tragedy that we do not look beyond Fin Min guys for RBI Governor’s post. The economics does not change but the vantage point of economic reasoning changes significantly. There is a fundamental difference between serving the finance ministry and then heading for the central bank.
One saw Dr Subbarao grapple with similar problems. Initially, people thought he was too much of a FinMin guiy and markets were not convinced. It took a while for him to show he means business and is an inflation hawk as all central bank governors are expected to be.
Rajan is stepping in RBI when Indian growth story has become a q-mark. Whether we can grow by 10% the sentiment has shifted to can we grow at 5%. All the macros have reversed and clearly there are plenty of visible domestic challenges. In Subba’s case the challenges were a shocker for the world economy as a whole.
Now, at FinMin the focus is always on growth. Inflation is always a central bank problem and as a result there are these trade-offs and war of words between the finmin and the govt. Dr. Rajan belonged to that camp. He has said quite a few times that he hopes RBI cuts rates. Now as a RBI guy how do you quickly change the statements.
In his recent Proj Syndicate column, Dr Rajan asked Why growth slowed (and did not cite high fiscal deficit as a reason)? He should now be asking why inflation has remained stubborn? And here I am talking about CPI..At Finmin the worry is only on the expected growth, whereas at RBI it is about the expected inflation.
So the transition from a Finmin econ to a RBI one is pretty dramatic and not really needed. Moreover, if this is what Dr Rajan wanted had in mind, he should not have really agreed to serve the Finance Ministry. he was brought under huge fanfare even then. It was known that Subba would go in Sep-13. Why create confusions?
So overall, it is a mixed bag really. It would have been far better if he was brought in just to be a RBI Guv and not CEA. But that would have meant he would have come as a policy novice. To say he has enough policy level experience by working for just one year (it is not even one as he formally joined in Dec-12) is simply a crazy explanation. There should not be a disconnect between the two positions but practically there always is.
The Government should simply scrap this ad-hoc selection process. It should be open and transparent like they try for CEA position. The selection criteria and objective should be clearly specified so that there is no scope for politicisation of the appointment process.
I was reviewing the checklists people has for Dr Subbarao. The focus then was checking inflation and financial sector reforms. Yes just then Dr Rajan had tabled his report on financial sector reforms and argues for opening up of India’s financial sector. No body imagined what would transpire just 10 days later as Lehman broke and rest is history. The report was quickly buried and all attention focused on the excesses of financial sector. It will be interesting to get Dr. Rajan’s views on the topic now. Will he quote Keynes by saying: “When the facts change, I change my mind. What do you do, sir?”
Another thing he said in his famous report was that RBI should be an inflation targeter. It will be interesting to see whether he walks the talk on this issue. If he does, his bosses in Delhi will clearly not be happy (if we go in for UPA-3). I do not really expect much from him. Econs realise it is much easier to prescribe policies than follow/adopt them. Moreover, with current governance and a politicised apointment, finance ministry will continue to call the shots.
Interesting times ahead for Dr. Rajan. The proof of the pudding will now be in eating it.
Interestingly, no one is asking this q- Who would FinMin choose as its next CEA? And what would be the tenure of this CEA . Till elections? Or will FinMin not burden the Treasury and choose to present the ES himself.
On a more serious note, I was just discussing with people around on the paucity of good macroecons in the country. After the likes of Rangarajans/Kelkars etc., there have hardly been any home-grown macro names around. This itself is a pity as we only see the older gen names in all the committees/panels. Or that I am missing the names of some future policy wonks? The transition to the younger gen does not look good and resembles Aus/Ind cricket team…
It will be even more interesting and encouraging to see a good macroecon trained in Indian varsity system …Will just give people like me some hope and encouragement…:-)