[With Mr. Modi preparing for contentious
local elections, some observers have said the government did not want Mr. Rajan
to stay because it needed a looser monetary policy to bolster growth. India has
the fastest-growing large economy in the world, at an annual rate of 7.1
percent for the most recent quarter, but that is still far slower than the rate
of a decade ago and not fast enough to create jobs for the more than one
million people who enter the work force each month. Mr. Modi won election in
2014 promising economic growth and jobs.]
By Geeta Anand
 |
|
Raghuram G. Rajan, who
ended his three-year term as governor of the Reserve Bank
of India on Sunday with a
warning about worldwide low interest rates.
Credit Atul Loke for The
New York Times
|
MUMBAI,
India — Three years before
the 2008 global financial crisis, an Indian economist named Raghuram G. Rajan
presciently warned a skeptical audience of top economic thinkers that excessive
risk threatened the entire global financial system.
As Mr. Rajan stepped down on Sunday as
India’s top central banker, following intense criticism at home, he offered a
new warning: Low interest rates globally could distort markets and would be
difficult to abandon.
Countries around the world, including the
United States and Europe, have kept interest rates low as a way to encourage
growth. But countries could become “trapped” by fear that when they eventually
raised rates, they “would see growth slow down,” he said.
Low interest rates should not be a substitute
for “other instruments of policy” and “various kinds of reforms” that are
needed to encourage growth, Mr. Rajan said in a recent interview with The New
York Times. “Often when monetary policy is really easy, it becomes the residual
policy of choice,” he said, when deeper reforms are needed.
His warning comes at a time when the world’s
central banks appear to be at a loss about how to get global growth moving
again. A growing number of voices say that low rates are not doing the job and
that governments must take other, more politically difficult steps to
reinvigorate growth.
The warning by Mr. Rajan, now 53, came as he
stepped down from a position that had helped make him something of a rock star
— albeit a controversial one — in India. He disputed the view that his tight
monetary policies had cost him the support of the government, and he said that
his departure was based on his inability to reach an agreement with the
government on serving longer but not serving another full three-year term.
Mr. Rajan is a celebrity in a country where
taxi drivers and vegetable sellers are as likely as business owners and bankers
to be immersed in debate on the local economy. A blunt speaker who has laid out
the case for tighter monetary policies in more than 30 public speeches over the
last three years, he was called “the Ranbir Kapoor of banking,” a reference to
a Bollywood superstar, by one of the country’s longest-running columnists.
Mr. Rajan, whose term expired on Sunday, is
credited with helping stabilize the Indian economy. It was fighting
double-digit inflation, a weakening of its currency and a plunging stock market
when he took the job in 2013.
But he also leaves bruised after a barrage of
public attacks from the political base of conservatives and small-business
interests of India’s governing Bharatiya Janata Party. They complained that he
choked business by keeping interest rates high and requiring banks to clean up
bad debts, which made credit expensive and hard to come by.
The attacks turned vicious and personal in
the weeks before Mr. Rajan announced in June that he would not continue for a
second term, with a B.J.P. lawmaker declaring that Mr. Rajan was “mentally not
fully Indian,” in part because he holds a United States green card, allowing
him to work and live there. Narendra Modi, India’s prime minister, later
denounced the attacks, but only after Mr. Rajan said he was leaving the job.
With Mr. Modi preparing for contentious local
elections, some observers have said the government did not want Mr. Rajan to
stay because it needed a looser monetary policy to bolster growth. India has
the fastest-growing large economy in the world, at an annual rate of 7.1
percent for the most recent quarter, but that is still far slower than the rate
of a decade ago and not fast enough to create jobs for the more than one
million people who enter the work force each month. Mr. Modi won election in
2014 promising economic growth and jobs.
Mr. Rajan, leaning back in his chair and
laughing at times during the interview, disputed that claim.
“I don’t think it’s fair to say that it’s
because of tight policy that the government wanted to move on,” he said.
He cited the government’s move after he
announced his departure to set a low inflation target of 4 percent for the next
five years. He said his successor, Urjit Patel, a central bank deputy governor
who takes over this week, played an important role in setting the country’s
tough inflation targets.
Mr. Modi has said little in public about Mr.
Rajan’s departure except to defend him as “someone who loves his country” and
“will continue to serve it.” Mr. Modi’s spokesman declined in a telephone
interview on Sunday to explain why Mr. Rajan was leaving, other than to say:
“There is a tenure and the tenure has ended. Why should the prime minister of
India even be brought into this discussion?”
Mr. Rajan said his tight monetary policy had
helped bring India’s rate of inflation — currently about 6 percent — down to
the upper end of the government’s target range. “I think we’ve done exactly
what was needed,” he said. Mr. Rajan said the central bank should continue to
prioritize low inflation.
He said he hoped the country would finish
“the process of bank cleanup which is underway.” Under Mr. Rajan, India’s
banks, after decades of loose lending to corporations, had to own up to bad
debts. The restriction was intended to shore up the long-term stability of
banks, but in the short term it has reduced the pace of lending to businesses.
In discussing the Indian economy in the
interview, Mr. Rajan offered a less-than-ringing endorsement of the
government’s emphasis on manufacturing in India — what the prime minister has
called his Make in India campaign.
Mr. Rajan said he did not support the view of
critics that it was too late in world economic history for India to become a
manufacturing hub. But he also said that he would not focus exclusively on
manufacturing as the solution to joblessness.
If India improves infrastructure and reduces
government regulations, manufacturing might take off in a big way, but it
“could also be services. It could be value-added agriculture also.”
Although China’s economy has overshadowed
India’s in recent decades, Mr. Rajan said he was still a believer in democracy
as the better system to create long-term growth.
“India’s strengths to some extent comes also
from its democracy,” he said. “Things can get bad in India, but not beyond a
certain point, because the democratic process asserts itself. And we have a
change in government.”
Mr. Rajan, who served as chief economist of
the International Monetary Fund from 2003 to 2006, will return to his longtime
job as a professor at the University of Chicago’s business school.
He grew momentarily wistful when comparing
the job of central bank governor with his past positions, which were more
advisory.
“So better to be a doer than an adviser. Of
course being an adviser sometimes has effects, important effects, but you don’t
see it as much immediately. Here you can see what you’re doing and in the years
to come.”