The 2008 crisis could have been controlled, had the world listened to this man. He had written a working paper in 2005, ‘Has financial development made world riskier?’, which warned about this potential financial risk.
Rajan has written books such as Saving from capitalists, Fault lines, which have gained accolades from economists from around the world. He has an experience of working in some of the highest positions in IMF, Indian government and is a professor of finance at Chicago Booth school.
In the recent weeks, he has come under attack by some distinguished members of BJP, and other far-right ideologists. His departure is surely not the best thing that is happening to Indian economy. But, in this three year tenure, Rajan brought in the macro economic factors under control and set forth an enviable tenure.
When Rajan took on the post of the RBI governor in 2013, the whole world was in anticipation. The retail inflation was close to double digits and there was chronic inflation damaging the economy. The currency rates were highly unstable against the US dollar. This was accompanied by high inrerest rates, and it affected the middle and lower income classes the most. The oil prices were soaring high upto 70rs per barrel and the inflation was above 10%.
But Rajan adopted policies that stabilised the situation. Amidst the pressures from the government, RBI increased the interest rates twice in the initial years. They wanted a lower interest rate to increase the growth rate. But, Rajan made inflation a priority and brought it down from 10.89% in 2013 to 5.4% in 2016. It also went down to 3.7% in between. The lower crude oil prices also helped to achieve the lower inflation rate. The lending rates have gone down to 6.5% as a result. He also adopted the CPI(consumer price index) against the WPI(wholesale price index)as the indicator for inflation.
The major challenge has been the bad loans recovery in the banking sector. The banks underreported the magnitude of bad debts so when Rajan stepped into the office , he asked the banks not to treat the restructured loans as performing assets. So, he had a challenge of dealing with non performing assets. Indian banks are having more than 110 billion USD of corporate stressed debt, which is holding back fresh loans and hampering economic recovery. He also stressed the need to clear their balance sheets and put stressed projects back on track.
He turned smartphones into banks with Unified Payments Interface(UTI) through which one can make payments. All a person needs is IFSC code(the 11 digit code used by the RBI to identify all the Bank branches), bank account number and branch.
The reserves are at an all time high at 383 billion USD as of june 2016. It is about 30% stronger than when Dr Subbarao left.
During his tenure, the RBI sanctioned license to two universal banks and gave ‘in-principle’ license to eleven payments banks( these are being setup by Reliance, Vodafone and other entities).
Rajan fought against crony capitalism. Crony capitalism is a term used when the business people get benefits because of their political connections. Rajan has decided to cut down exposure to their most dubious borrowers, even at cost of bringing out non-performing loans. As the economy is growing at close to 8%, it can absorb such shocks.
“Those who benefitted from crony banking and the existing system will definitely criticize Raghuram Rajan. Under him, they were deprived of their undeserved benefits,” says Professor Krishnamurthy Subramanian of the Indian School of Business.
It is sad to see him going back to the academia, but nevertheless, whatever he has done to Indian economy is worth appreciating. He is indeed the best RBI governor that India could have got. His vision, courage and expertise is something that India will miss.