Raghuram Rajan's exit policy: It's back to academics

There will be no second term for Raghuram Rajan, the Reserve Bank of India (RBI) governor who led radical reforms to correct stresses in the banking system, combated inflation ahead of growth, halted a plunging rupee and lifted India out of the ‘Fragile Five’ in his own style that was spun out of a global stature that he had built over the years.

For a man who was uncompromising in many ways, the end was written on the wall much before he went public with a letter to the RBI employees on Saturday that he would “return to academia” when his term as Governor ends on 4 September 2016. Rajan was consumed by frictions that he had with the Narendra Modi-led BJP government on several issues. Focussing on putting in place safe processes that would take care of sticky loans, he also had several business houses and bankers who wanted him out of the RBI house.

Rajan wanted to pursue a second term. Though he kept this desire of his well guarded, the fact is that he is letting go of his boots when his mission is still half-remaining. Tired of conflicts and uncertain whether he would be allowed to run independently in his second innings, he decided to go back to his first love: academia.

He speaks of his unaccomplished task in an indirect way. “While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term,” he writes in the letter.

Remember, he is no ordinary RBI Governor. He is also a man who cannot be bogged down. “My name is Rajan and I do what I do”, is how he prefers to speak when he is attacked.

So, you wonder whether it was  crony capitalist or the bankers or the government or all of them put together that vitiated the atmosphere for Rajan to say in the end that enough is enough.  In a one page release to his employees he wrote, “While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.”

Rajan’s love for the country remains even as he leaves. “I will, of course, always be available to serve my country when needed,” he writes in the letter.

You can read it between the lines or in the line itself that Rajan wanted to see through his reform measures. But the hostile environment created by a section of the ruling BJP government led by Subramanium Swamy made it impossible to continue beyond September  2016. Whether the government would have given him an extension or not, it was clear that differences would have made the going tough for the Governor who listens to his inner voice.

 In his speeches, Rajan has gone beyond  monetary policy to advice the government, corporates, and the bankers to see reason in their action. He exhorted companies to pay back their dues to the banks, he asked the banks to own up the bad debt, and he asked the government in no uncertain terms to be tolerant and reasonable.

Arun Jaitley Finance Minister said, Dr.Raghuram Rajan has announced his intention to go back to academics at the end of his current assignment. The government appreciates the the good work done by him and respects  his decision. A decision on his successor would be announced shortly.”’

For a man as outspoken as Rajan, it is easy to digest that the ruling NDA alliance would not have him bat for a second innings. What made matters somewhat worse is that Rajan was brought in by Chidambaram. Also, while the new government wanted growth to be the top agenda, Rajan saw to it that inflation came as the lead priority

Rajan credits himself and his team at RBI to having rescued India not only from the ‘Fragile Five”  but also helping it become one of the fastest-growing economies in the world. When he took office in 2013, the rupee was falling and touched a record low of 68.80 in August. He not just brought it back to Rs 63 to 64 levels, but also build the forex reserves to a new high of $360 billion.

In his letter he adds, “ I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”.

Arundhati Bhattacharya, chairman SBI said in a statement, "Dr. Rajan is a person of very high caliber, who has built ably on the reputation of our Central Bank and given it a very large measure of credibility.”

In a speech to the IIT Delhi alumini last year, he said: “ But as you go out in the world, remember our tradition of debate in an environment of respect and tolerance. By upholding it, by fighting for it, you will be repaying your teachers in this great institution, and your parents who worked so hard to send you here. And you will be doing our country a great patriotic service.”

“”Today, I feel proud that we at the Reserve Bank have delivered on all the proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.”

When Modi spoke of ‘Make in India’, he was one of the few people to give a rider saying that an export-led growth is not what the economy should focus on as global demand may be muted. Recently, in response to a  query from a foreign journalist, he likened India’s growth to the “one-eyed King in the land of the blind”. Many in the ruling establishment took objection to his comment.

Talking about his achievements at the helm of affairs at RBI, he added: “We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR). The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization. “

For the first time in the history, many banks started reporting record losses as the AQR exercise initiated by Rajan forced them to own up their actual stress on their books. Instead of window dressing, banks were forced to classify the stressed and weak loan accounts as NPAs. This resulted in gross NPAs of the banking system to go up to Rs 4.50 lakh crore, and losses of a bunch of public sector banks touched a record Rs 20,000 crore.

It is easy to speculate but hard to conclude that top executives of several leading banks also gunned for his exit.

Corporates also wanted the RBI to ease interest rates further. Sitting on a huge mountain of debt, they also did not want banks to act tough.

 Rajan on  Saturday signed off his letter saying,  ”I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three-year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. “

“’While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term”’ Rajan added.

Even as Rajan’s innings comes to an end amid controversies, the message is loud and clear: the new RBI boss will have to conclude the clean-up task and lay out elaborate processes that the predecessor had initiated in order to build a healthy ecosystem to support India’s high growth.