Raghuram Govinda Rajan will succeed Mr. Duvvuri Subbarao as the 23rd Governor of the RBI – the Reserve Bank of India. After two bureaucrats – Mr. Y.V.Reddy and Mr. D. Subbarao – at the helm, the RBI’s mantle of responsibility now passes onto an economist, the last such appointment being that of Mr. Bimal Jalan from 1997 to 2003. His appointment has been received with much optimism and many are of the opinion that Rajan succeed in putting the economy back on tracks. Rajan also shares a common factor with our current Prime Minister, Dr. Manmohan Singh: both of them becoming the RBI Governor at an age of 50 years. Here is a brief look at our Governor designate and his credentials:
Profile of Raghuram Rajan Image Credit : Economictimes.com
Raghuram Rajan was born in Bhopal in the year 1963. His father was an IPS officer in the intelligence wing and would often be posted overseas. Thus, he would spend a considerable part of his childhood in places like Sri Lanka, Indonesia, and Belgium. He returned to India in 1974 and completed his schooling in Delhi. Graduating in Electrical Engineering from IIT Delhi in 1985, he obtained his Post Graduate Diploma in Business Administration at IIM Ahmedabad in the year 1987. He was a gold medalist both in IIT Delhi and IIM Ahmedabad as well. Thereafter he went to Massachusetts Institute of Technology in 1991 and obtained his Ph.D. in Management for his thesis titled “Essays on Banking”.
Rajan then joined as a professor of Finance at University of Chicago’s Booth School of Business. He was then appointed the youngest-ever Economic Counselor and Director of Research at the International Monetary Fund (IMF) from October 2003 to December 2006.
In January 2003, Rajan was awarded the inaugural Fischer Black Prize by the American Finance Association. This prize is awarded every two years to the financial economist making the most significant contribution to the theory and practice of finance under the age of 40.
In November 2008, Rajan was appointed as an honorary Economic Advisor. Replacing Kaushik Basu, he was appointed as Chief Economic Advisor to the Ministry of Finance on 10th August, 2012. On August 6th,2013 it was announced that Rajan would be the next RBI Governor for a term of 3 years.
Rajan came in the bracket of few economists to predict the financial crisis in 2008-09. In 2005 he said that innovations had made the world of finance more dangerous. At that time his view was brushed aside by economists such as former US treasury secretary Lawrence Summers (now a front-runner for the top post at the Federal Reserve in the US), who called him a “Luddite”.
He had also rightly warned in 2010 that India’s “growth can never be taken for granted” and “self-delusion is the first step towards disaster.” As he readies himself to get into the shoes of Subbarao that caution seems prescient. India’s economy is in the doldrums and it faces the pre-liberalization era’s balance-of-payments scare. The Indian Rupee has fallen by almost 12% against the US Dollar in the past three months.
Rajan believes in liberalization, and yet this is an unenviable task. To stabilize the Rupee volatility the RBI recently introduced a slew of measures to suck liquidity out of the banking system which in turn raised short-term market interest rates. This may cause a credit crunch among firms and banks, as well as push GDP growth below the present 4-5% rate.
The RBI now must choose between strangling the economy and a currency slump. The RBI is a fine institution, but a stretched one – it runs everything from monetary policy to bank regulation and public-debt issuance. Its multiple goals of targeting stability, growth and low inflation created more problems than it solved and the onus is now on Rajan to resolve those contradictions.
Relative performance of the last four RBI Governors Image Credit : Mint Research
Only big-ticket government reforms would restore confidence among foreign and domestic investors in the longer run, but with the assembly elections round the corner in May 2014, that looks very unlikely. Meanwhile Rajan will have to deal with other problems: India’s state-run banks are sitting on a pile of bad debts and the RBI’s decision to allow India’s business houses to establish their own banks is also a concern.
He is a critic of cronyism but will have his task cut out to prevent licenses from going to well-connected tycoons. Rajan may have won the intellectual debate with his probable US counterpart Lawrence Summers, but navigating India’s bureaucracy and resisting the government will be a lot tougher. Rajan has the unpleasant task of leaning against the government to shield India’s central bank in an era when the integrity of almost every institution in India has been eroded.
Five challenges before Raghuram Rajan- Image Credit : Economictimes.com
The India story needs a fresh salesman whom investors would trust, and it has that in Raghuram Rajan. However, the flip side is that if he does not enjoy reasonable autonomy, he, unlike his predecessor, could choose an assignment anywhere. Be it the credit crisis, or India’s economic woes, Rajan had envisioned them years ahead, but he may well remember his predecessor’s words cast in stone that being the head of a central bank “is a lonely job”.
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