Economy
REXIT – An Alternate View
Discipline is not a natural trait amongst Indians. We do not like to be constrained by boundaries. We want to retain the freedom, for instance, to tell the Reserve Bank of India (RBI) Governor to reduce interest rates, even if we cannot distinguish cash reserve ratio (CRR) from euro currency. Heavens forbid if he chooses to ignore such a command.
 
One of the major criticisms against Dr Raghuram Rajan, the incumbent Governor of RBI has been his stubborn refusal to lower interest rates. While interest rates today are lower by 150 basis points (bps) compared to the time he took over, business and industry had always clamoured for lower interest rates. What Dr Rajan has done is to take away the personal element by introducing a data based, structured framework for determining interest rates. In a sense, fixing interest rates has become predictable and stable. As he has always maintained, business wants predictability more than low interest rates. 
 
RBI has been given a target to achieve, by the government – 4% inflation plus or minus 2% (range of 2% to 6%). How does one expect a reduction in interest rates, if inflation is currently touching 6%? As long as inflation is high, RBI needs to fight it ruthlessly. 
 
Some of us may remember Paul Volcker, the former chairman of US Fed, increasing the federal funds rate to as high as 20% in the late 70s and early 80s, in order to kill the monster of inflation forever. Growth in the US plummeted and even turned negative during that period. Since then, however, the US has never faced inflationary pressures. A short-term pain was essential for long-term gain.
 
Volcker was also called terrible names due to the impact of his anti- inflationary measures on growth rate. Today, he is a revered figure. Human beings are too concerned with the immediate future, without being concerned about the long-term negative impact of their actions or wishes. 
 
There are two other factors that are keeping interest rates high in India. The extent of non-performing assets (NPAs) in public sector banks (PSBs) implies that these lenders can no longer carry out their basic function of financing. Constituting 70% of the banking sector, this places a significant constraint on the overall lending ability of the Indian banking industry. Resolution of NPAs is critical to get the banking sector moving again and reducing interest rates. Dr Rajan has initiated the process to clean up banking balance sheets once and for all so that banks can commence their business without the overhang of bad debts.
 
Interest rates on government’s savings schemes are stubbornly high. About 8% plus tax-free returns are available on provident fund (PF) and other schemes of the government of India. Some of them have tax saving features too. That places a limit on reduction of interest rates by the RBI.
 
Supporters of the current government, miffed with the RBI, would do well to remember that fighting inflation is good politics, besides being good economics. Historically, hardly any government has lost elections due to lower growth rate; plenty of them have had to vacate office due to spiralling prices. 
 
There are many reasons why Dr Rajan is exceptional. I will speak about one of the least mentioned. His voice has been a consistently sane voice in an otherwise loud cacophony of meaningless clatter. Growth in the world over in the last few decades has been debt-induced. The crisis in 2008 was based on too much debt. Dr Rajan has been warning us, unsuccessfully it seems, against this debt-induced growth.
This has been his consistent stand over the years. 
 
He has also advocated coordinated efforts on the part of central bankers. Actions of one central bank have an impact on other economies also. We were witness in 2013 to the turmoil in emerging market economies, as a consequence of a slightly hawkish statement by Janet Yellen, ironically at the time Dr Rajan took charge as Governor of the RBI. Conflicting monetary policies of different central banks will render them ineffective. He has been exhorting central banks to take a global view and not be exclusively fixated only on their own countries. Not surprisingly, earlier this year, he was adjudged the best Central Banker in the world by the Financial Times group.
 
Not many people display the courage to consistently speak against popular beliefs of the time. To have the grasp of economic issues like Dr Rajan and the integrity to be true to those beliefs is a rare quality. Sadly, such qualities are not appreciated in this country. Despite the fact RBI as an institution will survive Rajan’s exit (Rexit), I am not sure it is a good idea to lose him. 
 
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)
 

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COMMENTS

J SUDHARSHAN

1 year ago

Hats off to Mr. Raghuram Rajan. Its great to read such an thought nice article thanks Sunil and ML

Ramesh Poapt

1 year ago

very well said, sunil/ML!

MG Warrier

1 year ago

Excellent analysis. People need to come out and speak out like this. The media is full of 'professionals' with constituency interests. Moneylife is doing a great service by allowing people with different views to express their views.

R Varadarajan

1 year ago

A well presented article. Well ! Discipline is the most disliked word among politicians in the country. Unfortunately, Dr Rajan failed to realise this.

Kumar Swamy

1 year ago

WPI is negative, small and medium industries are hurting because of high interest rates, their revenues are declining. Retirees want higher returns on their retirement funds, bank FDs, irrespective of inflation. So how can you balance all
these if one is adamant of sticking to a particular point of view. RBI governor needs to be more flexible, particularly given we are living in very interesting times - near-zero to negative interest rates in western countries and Japan.

vijay b joshi

1 year ago

Congratulations! for bringing transparency to a common man.
Congratulations! for bringing transparency to a common man.
How can we start a mass protest by millions of Indians to stop Rexit?

Gupta

1 year ago

Very well written. So true and alas, so sad!
The first line of this article is the fundamental problem of India, irrespective of what problem you discuss.

Sack Chief Economic Advisor Arvind Subramanian: Swamy
BJP leader Subramaniam Swamy on Wednesday targeted Chief Economic Advisor Arvind Subramanian and asked the government to “sack” him.
 
In a series of tweets, Swamy wrote, "Who said to US Cong on 13/3/13 the US should act against India to defend US Pharmaceuticals interests? Arvind Subramanian MoF (Ministry of Finance)!! Sack him!"
 
Subramanian had taken charge in October 2014 succeeding Raghuram Rajan.
 
In another tweet, the Bharatiya Janata Party (BJP) leader said, "Guess who encouraged Congress to become rigid on GST clauses? Jaitely's economic adviser Arvind Subramanian of Washington DC."
 
The Rajya Sabha MP also wondered why the core economic sectors could not perform in the two years rule of the Narendra Modi government and said: "Now PTs (Patriotic Tweeples) can understand why our core economic sectors could not perform last two years. Trojan horses galore in MoF/ Finance Institutions."
 
"Was AS (Arvind Subramanian) deposing before US Congress Committee against India as a US citizen or Indian? Does any PT know?"
 
Swamy had also criticised Rajan, accusing the RBI Governor of derailing the Indian economy by keeping the lending rates high.
 
Rajan has decided to return to academics at the end of his term in September. 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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COMMENTS

Bapoo Malcolm

1 year ago

By working FOR the nation; not against people. Swamy has little interest in the country. Only in self publicity. His own party, whichever it may be at that particular moment gives him a wide berth. When was the last time we saw something concrete from him? All he does is give speeches, the more provocative, the better. Just to keep in the public eye.

Nilesh KAMERKAR

1 year ago

Exposing those who have been working against Nation Interest is Nuisance value? How?

Bapoo Malcolm

1 year ago

Should read, ".... don't give a damn". Sorry.

Bapoo Malcolm

1 year ago

If there are enough sackings, they might be able to squeeze in Swamiji somewhere. At least, to get rid of his nuisance value. But must admit one thing. S S has graduated from picking on women and their kids, to men; no matter if the guys give a damn. Motormouth Swamiji, go back to teaching, please. Today's students can differentiate very well. You will cause no harm.

Bapoo Malcolm

1 year ago

Asked myself, 'Why not sack our Swamiji'? But then how does one sack a nobody?

Nilesh KAMERKAR

1 year ago

II Aum Arvindaay Swaha II

CA Parthiban

1 year ago

These are economics and it is not better to comment.

What Brexit could mean for India
Markets bracing for the Monday of the week of "Brexit", when Britain possibly exits from the European Union, will now, following the BSE Sensex fall of 400 points last week provoked by this possibility, now have to contend with the shock news of RBI Governor Raghuram Rajan's Saturday decision to step down when his term ends in September.
 
Rajan's bombshell, coming just ahead of the Brexit vote on June 23, could trigger volatility in the stock bond and currency markets.
 
In the letter to his colleagues on Saturday announcing that he was not seeking a second term and will return to academia when his tenure ends in September, Rajan made reference to the upcoming referendum in Britain.
 
"Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit," he said.
 
But the biggest risk to the key equity indices stems from Britain's possible exit from the EU. There might be far-reaching effects on global stock markets, as well as the international currencies, if Brexit materialises.
 
Besides, domestic investors will be concerned about the direct negative impact that some of the India-based companies and sectors that have investments and exposure to Britain will suffer.
 
The possible British exit will also lead to greater investments into less risky assets like gold and increase the overall outflows from the domestic equity markets.
 
"It is expected that the market would remain a little volatile due to the global events. Brexit is expected to heighten global volatility, thereby impacting capital flows at home," D.K. Aggarwal, Chairman and Managing Director, SMC Investments and Advisors, told IANS.
 
Minister of State for Finance Jayant Sinha has said the government is assessing the possible fallouts of Brexit.
 
Both Brexit and Rajan's decision not to seek a second term might flare up volatility in the Indian equity markets in the upcoming week.
 
Investors will also be concerned over an initial deficit in monsoon rains, fluctuations in rupee value and food prices.
 
According to market observers, come Monday, June 20, a dour mood is expected to engulf investors.
 
"The RBI Governor's exit news could prompt investors to recheck their bullish convictions," Anand James, Chief Market Strategist at Geojit BNP Paribas Financial Services, told IANS.
 
But the biggest risk to the key equity indices stems from the possible exit of Britain from the EU, with the decision subject to a referendum which will be conducted on June 23.
 
"India invests more in the UK than in the rest of Europe combined, emerging as the UK's third largest FDI investor. Access to European markets is therefore a key driver for Indian companies coming to the UK," said Chandrajit Banerjee, director general of Confederation of Indian Industry (CII).
 
"Anything that lessens this attractiveness may have a bearing on future investment decisions. It is important also to ensure continued border-free access to the rest of Europe for the many hundreds of existing Indian firms that have base in the UK," he added.
 
Britain ranks 12th in terms of India's bilateral trade with individual countries. It is also among just seven in 25 top countries with which India enjoys a trade surplus.
 
As per data with the Commerce and Industry Ministry, India's bilateral trade with Britain was worth $14.02 billion in 2015-16, out of which $8.83 billion was in exports and $5.19 was in imports. The trade balance thus was a positive $3,64 billion.
 
This apart, the country brief of India's Ministry of External Affairs says Britain is also the third largest investor in India after Mauritius and Singapore, with a cumulative inward flow of $22.56 billion between April 2000 and September 2015.
 
Likewise, India is also the third largest investor in Britain. Last year alone the value was estimated at 1.9 billion pounds (around $2.75 billion). "UK attracts more Indian investments than the rest of the EU altogether," says the brief.
 
A. Didar Singh, secretary general, of industry chamber Ficci has said: "We firmly believe that leaving the EU would create considerable uncertainty for Indian businesses engaged with UK and would possibly have an adverse impact on investment and movement of professionals to the UK."
 
Also, if Britain does leave the EU, it could lead to volatility in the pound, which would increase the risks for Indian businesses.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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