September 15, 2017 / 3:16 AM / in a year

BREAKINGVIEWS-Review: India’s rock star governor reclaims stage

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, Sept 15 (Reuters Breakingviews) - Rock star economist Raghuram Rajan has broken a year of self-imposed silence in talking about India. In three years as governor of the country’s central bank, he brought a heightened credibility to the institution before he was effectively hounded out of office by his right-wing critics. Rajan’s truncated reflections in his new book, “I Do What I Do”, suggest the academic has been scarred by the experience of serving his country.

One apparent objective of the book, which combines past speeches with colourful fresh annotations, is to place on record Rajan’s limited involvement with Prime Minister Narendra Modi’s unorthodox decision to ban high-value banknotes. The surprise decision was announced in November 2016, barely two months after Rajan had stepped down.

Matter-of-factly, the former governor says his advice in February of that year was that the short-term risks of trying to flush black money out of circulation outweighed any potential long-term benefits. Modi ignored the recommendation and India paid the price; economic growth slowed to 5.7 percent in the most recent quarter.

Rajan almost certainly believes the so-called “demonetization” exercise was a waste of time. He refers to a comment he made in 2014 that “black money hoarders find ways to divide their hoard into many smaller pieces”. His hunch was proved correct: New Delhi revealed last month that 99 percent of the now-defunct notes had been deposited into banks since the ban – undermining an expectation that tax avoiders stockpiling illicit cash would be easily caught out.

Rajan steers clear of the still-raging debate about whether the move undermined the independence of the Reserve Bank of India. However, he argues that it is a governor’s responsibility to offer an independent technocratic perspective that could keep a nation from straying into economic distress. This message appears to be intended for his successor at the RBI. The publicity-shy Urjit Patel has been relatively silent on the merits of Modi’s cash call, though he may have protested in private.

The University of Chicago professor is more candid about the state of India’s banking system. He acknowledges slow progress under his watch in getting lenders to recognize their soured loans, which now amount to around $150 billion. And he argues in favour of a direct injection of cash from New Delhi, the majority owner of banks that account for almost 70 percent of total assets. He warns that governance will only improve after a bailout if ministers stop interfering. In the absence of any political will to privatize banks, Rajan explains he did what he could to shake up the system, for example by liberalizing the issuance of new bank licences.

Yet the book’s overwhelming tone is one of struggle. From the moment he arrived at the RBI’s head office in Mumbai, Rajan wrestled with his suspicion that investment bankers were trying to make a quick buck by betting against the rupee. He agreed to roll out a foreign currency deposit scheme for Indians living overseas – a move that eventually attracted $26 billion of inflows, helped to stabilize the currency, and earned him his “rock star” moniker.

Elsewhere, Rajan admits to wondering if a constant “misinterpretation” of speeches delivered throughout his tenure was the deliberate work of vested interests. That was probably true, especially when his campaign to tackle inflation irked the powerful business lobby which benefits from negative real interest rates. But Rajan also used his position to advance moral arguments. Given India’s hungry 24/7 news media, it was naïve not to expect a backlash from Modi’s avid supporters.

Speeches about the importance of tolerance at a time of rising nationalism were bound to be interpreted as a direct challenge to the government. After two difficult years in the job, Rajan reveals he finally decided it was more important to win the respect of his teenage son than do New Delhi’s bidding. And so he continued to stir up controversy. Unsurprisingly, there was no offer from the government to extend his term to five years, as is typical for the post.

Rajan’s book leaves the reader to do a lot of the heavy lifting; joining the dots between what he said as governor and what he might think now. That will disappoint admirers of his previous book, “Fault Lines”, a powerful account of the global economy’s flaws. “I Do What I Do” is also short on the juicy details about struggles with politicians that pepper memoirs penned by his predecessors.

Rajan’s unwillingness to offer any direct assessment of the RBI since his departure, and the inclusion of an anecdote about being asked when he will return to work for the country, suggest the 54-year-old is still coming to terms with his experience. But he isn’t yet ready to leave the stage.

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- “I Do What I Do” by Raghuram Rajan was published on Sept. 4 by Harper Collins. Rajan was governor of the Reserve Bank of India from 2013 to 2016.

- For previous columns by the author, Reuters customers can click on

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