Interpreting Raghuram G Rajan
Raghuram G Rajan created more news as Governor of the Reserve Bank of India than his predecessors and his international standing as an academic (as Professor of Finance at the University of Chicago) as well as his personal flamboyance (partly his choice of suits and neckties) may have contributed since he followed the same prudent path charted by governors like YV Reddy and D Subba Rao, focusing largely on containing inflation. But he also differed from them in being exceptionally articulate and he came out in 2017 with a popular book on various economic issues (including the acts of the RBI under him) with the title ‘I Do What I Do’, suggesting a degree of personal vanity, which its introduction then tries to make light of. Rajan is, politically, an important figure because he managed the RBI in two different regimes,
sympathy for which practically demarcates the political space. ‘Left’ and ‘right’ are terms loosely used in political debates today and Rajan has become a darling of the ‘left’ although he is a follower of Milton Friedman, the hard-line free market economist. But he had some visible differences with the NDA regime, and being perceived as ‘opposed to Modi’ is tantamount to being ‘leftist’ to a large portion of the liberal intelligentsia.
I Do What I Do is in different parts and Rajan explains clearly his logic for not lowering the policy interest rate despite the clamour of the industry. The general belief is that lower interest rates increase demand since people are tempted to borrow to consume which leads to higher growth, although if inflation is high the same spending fetches less. Inflation leads people to buy goods because of the expectation that prices will go even higher and this leads to an association made between inflation and growth. But Rajan points out that when people get used to higher inflation rates, trusting in inflation for growth could lead to an upward spiralling of prices which could be hazardous. He therefore favours low and steady inflation rates to keep demand stable instead of focusing overly on growth. The shock treatment to lower inflation used in the US in 1981 would likely do enormous damage and the process of keeping inflation in check over the long term is the best.
Rajan states his position clearly and one could presume that although it was not publicly articulated, the earlier governors used the same logic of not lowering interest rates; one recollects that in 2012 there was an open rift between P Chidambaram the UPA finance minister and RBI Governor D Subba Rao, the Finance Minister pressurizing the RBI to reduce rates but the RBI Governor refusing to budge. Raghuram Rajan was Chief Economic Advisor at that time and may have been taken to be with the government, but he acted differently when he became Governor of the Reserve Bank of India himself.
I Do What I Do is essentially a collection of speeches knit together by a narrative and it is the sections dealing with political ideas that are most interesting in that we get a sense of Rajan’s political standpoint and allows us to inquire into what they mean specifically, i.e.: their relevance to the Indian context. As a beginning Rajan cites Francis Fukuyama on the three pillars needed to foster political freedoms and economic success: a strong government, rule of law and democratic accountability. Rajan then goes on to add another pillar to Fukuyama’s above three which is a ‘free market’.
Beginning with ‘strong government’ I gather that Rajan actually means a ‘strong state’ from this statement: “a strong government is also one that provides an effective and fair administration through clean, motivated, and competent administrators who can deliver good governance.” To elaborate on the difference, a government is the political administration of a country or state. A state is the geographically demarcated entity that has a distinct fiscal system, constitution, and is sovereign and independent from other states, as recognized by them. It is the space where a government can exercise its powers through policy changes/formulations. A government composed of a coalition of parties - as in Germany today - could be weak since a coalition usually has political disagreements but that in no way impinges upon the strength of the state. India has had a succession of strong governments (Mrs Gandhi’s, AB Vajpayee’s and UPA No. 2) but the state has progressively weakened, as evidenced in the administrative lacunae and failure to implement the law impartially. People with power have found it easy to circumvent the law though, nominally, all are equal before it.
Fukuyama’s second pillar, ‘rule of law’ is culturally bound and provides a basic stable code of conduct that should not be violated by either government or the citizenry. The state’s actions are constrained by a widely understood code of moral and righteous behaviour, enforced by religious, cultural, or judicial authority and largely bound by religious beliefs and social conventions; the notion of dharma, for instance, could broadly be regarded as the traditional code by with righteous behaviour is judged in India. The third pillar, ‘democratic accountability’, means that the government has to be popularly accepted, the people having the right to throw out unpopular, corrupt or incompetent leaders.
Before going on to look at how Fukuyama’s three pillars translate in the Indian context it is pertinent to look at the fourth pillar erected by Rajan which pertains to the free market. In elaborating upon it Rajan asks why, since unlike democracy which treats individuals equally, each one having a vote, and the free market (contrarily) empowers consumers based on how much money they have and their wherewithal, the average voter in a democracy does not vote to dispossess the rich and powerful. The answer offered is that the voter sees the rich as having come out of a transparent market and their wealth as owing to they being better managers; if (sometimes) the property rights of the rich do not get widespread support in emerging markets it is because they are seen as having acquired their wealth dishonestly.
The overall effectiveness of the four pillars in India rests on India being a democracy – Rajan affirms that India took to democracy as a ‘duck takes to water’ and compares the country to others where democracy has not been as successful. But here is what he says about the meaning of democracy: “A vibrant, accountable democracy does not only imply that people cast their vote freely every five years. It requires the full mix of a raucous investigative press, public debate uninhibited by political correctness, many political parties representing varied constituencies, and a variety of non-governmental organizations organizing and representing interests.”
Since so much of Rajan’s argument depends on India being a true democracy, the question to be put here is this: while all people have votes and there is an unfettered press, is there public debate in India in which representatives of all classes participate? Where there is lack of a free debate, the tendency is to look at the state and blame it for inhibiting debate. But India is different; the level playing field implied by ‘public debate’ is inhibited by the ancient social structures corresponding to hierarchy. Only a small educated class participates in public debates, even as it pretends to represent ‘opinion’.
Once doubt is admitted over India being a true democracy in which public debate happens we find many of Rajan’s other suppositions collapsing as well. Since ‘rule of law’ is equated with dharma and dharma is itself a relativistic system in which right/wrong are related in some way to vocation/birth it may not be compatible with a truly democratic system in which all people are equal before the law. (‘All people are equal before God’, on the other hand, translates very well into democratic values.)
Further, Rajan relies on Fukuyama and offers this argument: “The caste system led to division of labour, which ensured that entire populations could never be devoted totally to the war effort. So through much of history, war was never as harsh, or military competition between states as fierce, as in China. As a result, the historical pressure for Indian states to develop strong governments that intruded into every facet of society was muted. At the same time, however, the codes of just behaviour for rulers emanating from ancient Indian scriptures served to constrain any arbitrary exercise of power by Indian rulers. India, therefore, had weaker government, constrained further by rule of law.” This may be true but ‘rule of law’ that functions well in hierarchical society may be incompatible with democratic values. If this argument is extended, the growing weakness of the state in the past few decades could be attributed to the ‘small pressure upon the Indian state to intrude into every facet of society.’
The more one reads Rajan the more does one feel that his political diagnosis does not take India’s specificities into account. Even his explanation for why voters do not dispossess the rich and powerful seems out of place. It could simply be that dharma or ‘rule of law’ in India promotes a tendency not to intrude. Dharma appeals more to inner conviction than to external manifestations, which might have led to more ‘intrusions’.
Raghuram Rajan as Governor of RBI followed a path not very different from that of his predecessors but one still wonders if someone with his kind of credentials (and association with an international agency like the IMF) is the right choice to head India’s central bank since it is imperative that India’s financial autonomy should not be compromised. Rajan had earlier authored a paper arguing that failed states should invite outsiders/foreigners who have been holding positions in multilateral agencies (UN, IMF, aid agencies etc.) to rule, indicating that the autonomy of a nation is less central to him than its management.
Whatever the truth in the matter, someone like Rajan with an academic background in the West but with a small understanding of India would tend to advocate ‘universalist’ economic principles without taking local issues into account. As an instance, he (like Montek Singh Ahluwalia, also formerly of the IMF) advocates cash transfers instead of strengthening public services. Rajan dismisses the refrain that the poor will drink away the money transferred into their accounts and argues that they could build capabilities through education and healthcare. ‘Drink’ could be overestimated bogey but one wonders if a study has been made to ascertain if the poor are not paying for unnecessary medical treatment or low quality private education, with no possibility of their exploitation coming to light. The poor are socially lower placed than doctors and teachers, which means that they may not be able to make the demands that a middle-class consumer would. These are issues a local might understand but perhaps not someone from Chicago or Harvard. If public services are not delivered the poor could go to a political representative but not if private enterprise is the culprit.