The University of Chicago, from where Reserve Bank of India (RBI) governor Raghuram Rajan has been on leave for three years, has warned through a blog that the decision of the “highly regarded central banker” to leave his job in September this year following “attack by politicians” is likely to “reverberate throughout India’s political system and financial sector”.
Pointing out that Rajan will return to his position as professor at the University of Chicago, the blog, sponsored by the Stigler Center at the University of Chicago Booth School of Business, credits him managing for managing “nearly halve the inflation rate and restore stability to the Indian economy.”
The warning follows a two strongly worded articles on the blog site, promarket.org, by the university’s top experts Luigi Zingales and Guy Rolnik.
Zingales, in his blog titled “RBI Governor Rajan’s Fight Against Crony Capitalism”, says, “In any country in the world, a central banker who has managed to reduce inflation from 11 percent to 5 percent while simultaneously enabling an increase in growth from 5 percent to 8 percent in just three years would have a guaranteed reconfirmation. Not in India.”
Pointing out that the “Governor of India’s Central Bank, Raghuram Rajan, much admired by the international press, is under heavy attack in his country”, Zingales says, “The charges against him are absurd”, referring to Subramaniam Swamy’s phrase that Rajan is ‘mentally not fully Indian’.
Zingales says, Rajan has fought “not only inflation, but also the inefficiency of the banking system, burdened by bad loans”, pointing out how the the Indian banking system is “mainly in public hands and was used to finance crony capitalism, which has held the country back for too many years.”
“As Governor, Rajan has rightly decided to force the banks to cut down exposure to their most dubious borrowers, even at the cost of bringing out non-performing loans”, says Zingales, adding, “With the country growing at 8 percent, these losses can be easily absorbed by the banking system.”
“Though it was the right thing, this policy has produced collateral damage: banks’ share prices were affected, and even more affected were those Indian oligarchs who had enjoyed easy credit”, Zingales says, adding, “They are the ones fueling dissent, because Rajan has dared to publicly criticize the behavior of some of them.”
By way of an example, Zingales says, “In January, while at Davos, Rajan reprimanded Vijay Mallya, owner of the corrupt Kingfisher airline, who had sumptuously celebrated his 60th birthday despite his debt of 922 million euros to 17 banks.”
In a separate article titled “The Attacks on RBI Governor Raghuram Rajan: Lessons from Stanley Fischer as a Central Banker”, the other senior expert Guy Rolnik compares Rajan with Fischer, Israel’s former governor of the Bank of Israel, saying, “Fischer found himself under attack from some of the most powerful political players in Israel, including the local media.”
Fischer, says Rolnik, was under attack because he exposed how one percent of the businesses receive an inordinate amount of the loans in Israel, which meant that a lot of other businesses that could have been successful didn’t receive loans.
Fischer won in the battle seven years ago, says Rolnik, reducing the exposure to large loans given to a few powerful business groups, leading to the introduction of reforms, ultimately reducing “these groups’ political power”, adding, the cleanup tried by Rajan reminds one of what Fischer did in Israel.
Rajan “has been under attack in the last few months” in the same way as Fischer from “politician and economist Subramanian Swamy”, says Rolnik, adding, Rajan has tried to deal “with crony banking in India” almost on similar lines.
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