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The Sitharaghuraman show: Dear FM, economy needs corrective action, not blame game

​​The bottomline is that we need to move on. Postmortems serve no purpose. They result in a blame-game.

ET CONTRIBUTORS|
Updated: Oct 19, 2019, 09.13 AM IST
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Unfortunately, Sitharaman’s spirited response has only added fuel to the fire. Her choice of words — banks having had the ‘worst phase’ under the combination of Manmohan Singh and Rajan — is only likely to lead to further controversy.
By: Mythili Bhusnurmath

Former RBI governor Raghuram Rajan has a rare knack for wading into controversy, whether in office or out of it. Appointed by the UPA government, he repeatedly took potshots at the successor NDA government while still at the helm of the central bank. And has continued to do so after returning to academics at the University of Chicago, Booth School of Business, in the US.



Rewind to the years when Raghuram Rajan was RBI governor. The Narendra Modi government — somewhat surprisingly, though rightly — opted to continue with the time-honoured tradition of treating the appointment of RBI governor as apolitical. Y V Reddy, for instance, was appointed by the Atal Bihari Vajpayee government, but remainedin office and completed his full term even though the Vajpayee government was voted out of office.

Part of the reason was that RBI governors, in keeping with the tradition of central bank heads the world over, stuck to their esoteric domain of monetary policy, and didn’t stray into areas that were clearly the domain of the executive. Rajan upturned that apple cart. Many of his comments had political overtones and were beyond the remit of RBI governor.

His criticism of the ‘Make in India’ scheme was a case in point. As private citizens, you or I may not share GoI’s enthusiasm for its schemes and are free to air our views. But the RBI governor is nota private citizen. Look no further than to the example of US Federal Reserve chairman Jerome Powell, who has maintained his silence, despite the insults heaped on him by President Donald Trump, including calling him a ‘bonehead’.

Agreed, Trump is hardly an example to emulate. But the fact is the NDA government, particularly late finance minister Arun Jaitley, showed extraordinary maturity in not responding to Rajan’s many provocations. At his lecture in honour of the late D D Kosambi in Goa in February 2015, he made apointed statement that ‘strong governments may not move in the right direction’ and referred to the Nazi government under Hitler.

If, indeed, Rajan felt so strongly about GoI’s policies — of which he was undoubtedly a part of as RBI governor — propriety demanded that he step down — and then criticise to his heart’s content. Rajan, however, chose not to do that. He completed his term (not without courting further controversy), and after his return to academics in 2016, has remained a frequent critic of GoI’s policies, especially in the runup to the 2019 elections.

His latest attack in his speech at Brown University, is par for the course. Unfortunately, Nirmala Sitharaman’s spirited response has only added fuel to the fire. Her choice of words — banks having had the ‘worst phase’ under the combination of Prime Minister Manmohan Singh and Rajan — is only likely to lead to further controversy.

It was a bad time and the then-government and RBI must take their share of blame. But worst phase? Banks, especially public sector banks (PSBs), have long been at the receiving end of successive governments’ penchant to use them as instrument to achieve social ends.

There is no doubt that RBI under Rajan, and subsequently under Urjit Patel, made a number of mistakes (call them ‘errors of judgement’, if you will). Yes, the asset quality review initiated by Rajan was both warranted and long overdue. It exposed the weak underbelly of Indian banking. But, in the process, RBI missed the wood for the trees.

One, it kept monetary policy much too tight for much too long. Two, it did not give banks, especially PSBs, time to make the necessary provisions for their non-performing assets (NPAs).

Three, it compelled banks to mechanically refer all defaulting borrowers to the Insolvency and Bankruptcy Code (IBC), rather than exercise their commercial judgement.

Consequently, liquidation became the first, rather than last, option for bad loans. Four, RBI failed to look beyond NPAs to try and understand why they arose in the first instance — in response to then-FM P Chidambaram’s exhorting PSBs to lend aggressively to infrastructure, when it was clearly inadvisable, given their inherent asset-liability mismatch and lack of experience in such lending.

The net result was banks virtually stopped lending. The slack was taken up by non-banking financial companies (NBFCs) — lending by NBFCs almost doubled. This should have alerted RBI. But it failed to pick up the warning signals in time. We are now living with the consequences.

In an oblique admission of past missteps, Rajan admits “present troubles can be traced to legacy problems that haven’t been resolved as yet”. Indeed.

The bottomline is that we need to move on. Postmortems serve no purpose if they are only going to result in a blame-game. They are useful only if, and when, they result in corrective action. Today, that corrective action is the need of the hour.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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