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After Rajan's departure, focus must be on unfinished tasks

By BS Bureau
June 27, 2016 10:36 IST
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While Raghuram Rajan's departure under these circumstances is a pity, it would be wrong to conclude that the RBI or the economy cannot do without him.

Raghuram Rajan's statement on Saturday that he will be returning to academia after his current term as governor of the Reserve Bank of India (RBI) expires is disappointing. 

While a two-year extension for the RBI governor is not automatic, and the government is within its rights to decide whether or not Mr Rajan deserves that extension, there were many good reasons for ensuring stability at this point.

But the specific consequences of Mr Rajan's departure are not the main point.

What is most unfortunate is that an economist with a fine international reputation, and one who has brought about a lot of change in the years he has been in charge of one of India's most critical institutions, has been driven to this step by what is, in effect, a shameful public campaign against him - a campaign that was not condemned or held back by those in positions of power.

Mr Rajan's message to RBI employees where he announced his departure is a model of clarity, as is typical of his public statements.

The message makes it quite obvious that Mr Rajan would have preferred to stay on for some time.

He references the achievements of the RBI over the previous three years, as well as those aspects of the agenda that are incomplete - and mentions that he was open to staying on and completing it.

However, "after due reflection and consultation with the government", he says he has decided to leave.

He had been put in an increasingly uncomfortable situation because of some prominent voices, including leaders of the ruling Bharatiya Janata Party, attacking him personally.

The party did not speak out or silence these leaders, which led many - including perhaps Mr Rajan - to conclude that they spoke with the tacit approval of the heads of the party and the government.

It is possible that the "consultation with the government" he mentions failed to reassure him that such was not the case.

There were also concerns that the task of looking for the next governor would be entrusted by the government to a selection committee, bringing it on a par with posts such as the head of the securities regulator - though the exact role of the search panel continues to remain unclear in this case.

But it was certainly noted that the members of the committee did not have any experience of the RBI - which was not a good sign. 

While Mr Rajan's departure under these circumstances is a pity, it would be wrong to conclude that the RBI or the economy cannot do without him.

He was, of course, the best man for the job now, but equally true is the fact that the country has many competent people around to oversee the central bank and the remaining tasks before it.

What the government must ensure is that its choice of the next governor is better than some of the recent appointments it made in different areas.

The incomplete tasks that Mr Rajan lays out in his message - seeing through the formation of the new monetary policy committee and continuing the clean-up of banks' balance sheets - are vitally important structural transformations.

The next governor, therefore, must not push financial sector problems under the carpet and gloss over the challenges of resolving the problem of stressed assets of banks.

Mr Rajan's successor must also persist with necessary steps to keep inflation under control and develop an active and well-functioning bond market so that companies and the government can borrow more affordably.

Photograph: Reuters

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BS Bureau in New Delhi
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