Rajan’s salutary bequest to the Indian economy

The rock star central banker, Dr Raghuram G Rajan, will be succeeded by an equally competent economist, Dr Urjit Patel, on September 4, 2016. The unfinished beneficial bequest of Rajan’s works and pioneering initiatives are undoubtedly in a safe pair of deft hands. It is to Rajan’s credit that he spoke candidly and loudly in the conviction for the distinct improvement of the banking system for which he remained the regulator for three years.

Rajan’s handling of the aftermath of the taper tantrum (a reference to the premature withdrawal of the ultra low interest policy of the US Federal Reserve in the summer of 2013) when the Rupee plunged to its lowest point with a flight of foreign capital to compound the economy’s vulnerability was widely extolled as he restored the balance-of-payments situation to normality within a few weeks. From then on, Rajan traversed the anti-inflation track with spunk even as the exasperated trade and industry, with overzealous members of the ruling party such as Dr Subramanian Swamy. A cool and unfazed Rajan seldom lowered his guard, bringing the wholesale price index inflation into the negative territory and the consumer price index (CPI), the widely used barometer for price-rise impact, to less than six per cent from the double digit levels. Besides, he also signed a memorandum of understanding with the Finance Ministry for inflation-targeting monetary policy in February 2015. The concept of inflation target — a nominal anchor in central bank lingo — was first favoured by the high-powered Committee on Financial Sector Reform headed by Raghuram Rajan in 2008. With inflation widely construed as the cruellest form of taxation on the poorest, an institutional framework to keep inflation volatility on a tight leash is what the aam aadmi longs for. 

The most prominent effect of Rajan’s three-year tenure in the apex bank was the measures he had set in motion to clean up the Aegean stable of bad bank loan portfolio that threatens the larger financial stability of the economy. He went hammer and tongue against the systemic weakness of balance sheet troubles of many a public sector bank, instituting by now the familiar Asset Quality Review (AQR). This way Rajan puts the onus on the banks to classify loans that were detected during AQR as bad loans and duly make provisions to reflect the real value of the loan even as it shows the warts in their end-quarter balance sheets. The NPAs identified by RBI on account of AQR exercise as on end-March 2015 was Rs1,21,686 crore. In a written reply in Rajya Sabha on August 2, the Minister of State for Finance, Mr Santosh Kumar Gangwar, said the gross NPAs of PSBs as on March 31, 2016, stood at Rs4,76,816 crore. This reflects the sinister hold of the NPAs and the need for ‘surgical action’ to get rid of them.

Considering the fact that in sectors such as infrastructure (power and roads), steel and textiles, the incidence of NPAs is both troublesome and worrisome, Mr Patel has his priorities cut out in following and consolidating the measures Rajan undertook to clean up the banking sector.

The author is a freelance journalist based in Delhi