Does somebody want Raghuram Rajan gone, and is that somebody using various proxies to attack him?

By | May 21, 2016

Politicians and bureaucrats rarely like to hear candid opinions, and it seems being candid in various fora could be the reason Mr. Raghuram Rajan has been catching a lot of flak lately. It may also be the reason he gets removed from his position as the 23rd Governor of RBI. It also looks like somebody does not want Rajan’s tenure as the RBI Governor to be extended for the second term. That “somebody” or a cabal of “somebodies” probably want(s) to send Rajan packing, and they are using various proxies to stoke the fire of dissension between the ruling party apparatchiks and Rajan. One of the voices that has been critical of Rajan lately is the BJP MP from Rajya Sabha, Mr. Subramaniam Swamy.


Before continuing any further and discussing the recent clamour for Mr. Raghuram Rajan’s removal, let me issue a disclaimer about this blog postWe at Omygdala dislike all politicians and political parties equally. It doesn’t matter if it is Congress or BJP or AAP or JDU or JD or CPI or TMC or any other local or national political party. They are mostly corrupt, they are mostly the same… two sides of the same coin. “Polytick-cians” are only in it for themselves and nobody else. The political world is filled with notorious reprobates. Hence, I am not trying to make a statement on behalf of a particular political party. My allegiance is only to the Constitution of India, and not to any political party. This opinion is mine and mine only.

We at Omygdala are also not big fans of central bankers and the God-like status they enjoy. Their policies often distort the market and lead to boom and bust cycles. They remain unaffected in their ivory towers, but the common men are destroyed by their actions. Hence, we have no love lost for them, too!

I am writing this blog post because whatever happens in the highest echelons of power affect common folks the most. When “big dogs” fight, there is always collateral damage. The elites rarely get hurt, only the plebes get slaughtered.


“Truth is a treason in an empire of lies”*

Raghuram Rajan

Raghuram Rajan. Image source

Rajan could be unpopular with a few folks in the government because he had the audacity to be truthy, which ruffled the feathers of our thin-skin overlords. And you never piss off the thin-skin overlords with your truthiness, because they are supreme, all intelligent and beyond reproach. By the by, no political party wants to hear the truth—not BJP, not Congress, not the Left, not the right, not the center or the slightly off-center. Matter of fact, many people of this country do not want to hear the truth; they want to hear lies, that’s why they elect politicians, or as we call them “polytick-cians”.

Now, why might “somebody” or the “somebodies” want Rajan removed. Well,  Rajan has courted controversies with his various comments and observations. He was politically incorrect for the “polytick-cians”. Politicians want sycophants, bootlickers, toadies, lackeys, and adulators. Anybody who has the mental acumen to think for himself/herself is an enemy to them and their system, and will incur their wrath. Rajan’s disagreements with the government are well-known and documented.

Differences on Public Debt Management Agency

This was one of the issues where Rajan had some differences with the finance minister, Mr. Arun Jaitley. He and the finance minister jousted on the latter’s plan to strip RBI of its power to regulate government bonds by setting up a separate Public Debt Management Agency (PDMA). Then, suddenly, Jaitley took a U-turn and dropped the proposal from the 2015 Finance Bill. Rajan, incidentally, is not against that proposal. He believes doing it hurriedly is fraught with risks, and it seems the government realizes it, too. He also believes that the PDMA should be independent of both RBI and the government.

India Replacing China as the Engine of Global Growth

Finance minister Arun Jaitley had opined that with China’s economy slowing down India can become the engine of global growth. Rajan felt otherwise and stated that India has a long road ahead before it can overtake China. He stated, “India is one-fourth to one-fifth of China’s size. Even if we can overtake China in terms of growth rates, the magnitude of the effect will be far smaller for a long time to come.

GDP Calculation

This was another issue that stoked some controversy after Mr. Rajan opined on this matter. The new government changed the GDP calculation methodology from the one based on factor cost to one based on Gross Value Add (GVA). While delivering a convocation address at Indira Gandhi Institute of Development Research, Mr. Rajan mentioned that, “There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth.” He further mentioned, “If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off.”  He, however, took back his words the very next day while delivering a lecture at C D Deshmukh Memorial. In that event, he mentioned, “It was not anything about new GDP numbers or the way GDP is calculated. I think it’s broadly correct.” A few people attributed his change of stance to a hidden nudge from somebody in the government.

Make for India instead of Make in India

In Rajan’s opinion, an export oriented economic policy may not work for India in a slowing global economy. He felt we need to work on stimulating a strong domestic demand and build all sectors of the economy, not just manufacturing. Competing with China, which has such a headstart on India, may not be easy as it seems.  He does not disagree with the prime minister’s “Make in India” policy, he just believes in wholesome economic growth.

Affordable Housing

Rajan had ruffled the delicate feathers of Confederation of Real Estate Developers’ Association of India (CREDAI) by asking to cut their prices. While speaking at the second SBI economics and banking conference in Mumbai, Rajan mentioned, “I do believe that if real estate developers who are sitting on unsold stocks bring down prices, that will be a very great help to the sector because once there is a sense that prices have stabilised, more people will be willing to buy.” This resulted in a terse response from CREDAI, “While we respect the RBI governors concern for kick starting the real estate sector, it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large. The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers. A rate cut in the home loans is the need of the hour to relive the home buyer (sic) of the huge burden of mounting EMIs. Industry on its part is eager to focus on execution and supply of good quality housing stock to enable the governments (sic) ambition of housing for all by 2022. But at the same time, we seek the guidance and cooperation from statuary (sic) and legislative bodies to be able to positively work towards Prime Minister Narendra Modi’s vision.

Overburdening the Central Bank

In an exclusive interview to the BBC, Rajan warned that continued intervention by the central banks may cause “more harm than good“. He was worried about the intense pressure on the central bank to cut rates in a high inflationary environment and observed, “Don’t keep asking us to do more because at some point we get into territory where the consequences may be more bad than good if we actually act.” He also suggested that we should consider tackling economic problems with painful reforms than with cheap money.

“…One-eyed king…”

While visiting the US to attend the Spring Meetings of the World Bank and the IMF and the G20 Meeting of Finance Ministers and Central Bank Governors, Rajan gave an interview to MarketWatch. He was asked to reveal his “secret sauce” that had resulted in India being a “bright spot” in the global economic landscape. In his response, Rajan mentioned, “I think we have still to get to a place where we feel satisfied. We have this saying — ‘In the land of the blind, the one-eyed man is king’. We are a little bit that way.” This comment caused a lot of consternation among various ministers of the current government.

What is Rajan’s street cred?

It is clear to many that Rajan may not be having the best working relationship with Jaitley and both of them may not see eye-to-eye on many economic policy matters. Swamy and a few other politicians may not have a favourable view of Rajan, but he was one of the six economists who predicted the catastrophic global economic crisis of 2008-2009. Rajan was prescient in his prediction of the global financial crisis three years before it actually happened. In August 27, 2005, at an annual economic symposium in Jackson Hole, Wyoming, Rajan presented a paper, titled Has Financial Development Made the World Riskier? In the paper, Rajan argued that the use of certain financial products such as Credit Default Swaps (CDS), Collateral Debt Obligations (CDOs), Mortgage Backed Securities (MBS) have made the financial system riskier and this could eventually lead to a devastating economic meltdown. Incidentally, at that year’s symposium, they were honoring Alan Greenspan, who was at that time considered the superstar in the world of economics. Whatever Greenspan said and did were considered sermons of God and anybody not agreeing with him was considered a heretic. You can very well imagine what the reaction was from the sycophants of Greenspan, when Rajan delivered that address at the symposium, and many of them attacked him viciously for questioning superstar Greenspan. This is what the former US Treasury Secretary, Lawrence Summers,  had to say about Rajan’s observations, “the basic, slightly lead-eyed premise of [the] paper to be misguided.” Misguided indeed, as about three years after that, most of Rajan’s predictions ended up being true.

Just recently, Rajan again ruffled feathers of the central bankes of the rich nations by speaking against quantitative easing and “helicopter money“. Delivering a lecture at the London School of Economics, he observed that the rich nations and their central banks are running out of ammunitions to stimulate their economies. He stated that they “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations, so there’s always something up their sleeves.” He also observed that central banks funnelling money directly to it citizens—an idea first conceptualized by Milton Friedman and termed “Helicopter money drop”was not likely to work. He wondered, “Is the advent of helicopter money going to result in everybody going out and spending as though there is no tomorrow when they get a cheque? Or are they going to ask, ‘What kind of world are we in when the central bank prints money and throws it out of the window?’

Now, does Rajan’s street cred make him competent to be the RBI governor? Maybe yes and maybe no? It is akin to asking if a member of the Rajya Sabha, who is a lawyer by profession, is competent to be the Finance Minister of the country? Maybe yes and maybe no. Nobody asked our opinion on these matters. Nobody raised an alarm on their appointment. We never have a say on who gets assigned what role. Hindsight is always 20/20, and it is easy say, “I knew the decision to choose Rajan would be a horrible one; look at how he has wrecked our economy.” Predicting or approximating an outcome is always difficult. Even superstar Greenspan was humbled by the events of 2008 and admitted that, “I was wrong…” Let history judge them both, as history will judge Greenspan, Bernanke, Draghi, Kuroda, Abe, and the rest of the anointed ones.

Some people are also asking the question whether Rajan was the best candidate for the job. My question to them is, “who in your opinion would have been the best person for this job?” Don’t just ask a closed-ended question and leave it at that. If you are questioning Rajan’s capabilities, then, you surely must have a person in your mind who would have done a better job than Rajan. List the names of individuals, who would have been better than Rajan in that role and mention “why”.

In this country, we have many people in positions of power, who may or may not be deserving of that role. But they are there, we the plebes have no say in it. We have a scion of the Gandhi dynasty, who is as clueless as a nonagenarian with a smartphone, occupying the position of the VP of INC, not by virtue of any merit, but by virtue of a family name. We had the wife of a corrupt politician being anointed as the Chief Minister of a state, overnight, not by virtue of any merit, but because the corrupt politician had an arrest warrant against him. We have politicians getting re-elected not on any merit, but by the virtue of the amount of free s*** they can disburse before the election. We have faux leaders, false prophets and insouciant worker bees.

Swamy’s complaint

Subramaniam Swamy in his letter to Prime Minister Mr. Narendra Modi mentions the following:

  • “The RBI governor is wilfully and deliberately wrecking the Indian economy.” He goes on to add, “In my opinion, RBI governor is not appropriate for the country. I don’t want to speak much about him. He has hiked interest rates in the garb of controlling inflation that has damaged the country.”

This is so strange, as only last month RBI had cut the rate to 6.5%, a five year low. So, why is Swamy saying, “He has hiked interest rates in the garb of controlling inflation that has damaged the country.” unless he is being deliberately disingenuous. If a chart would be better for him to discern a trend, then, he can find one here or here or here or here. If I am not mistaken, after Rajan had assumed office on September 04 2013, there were only two rate hikes. Since then and till date, there has only been rate cuts, no rate increases. Could Mr. Swamy clarify his statement about increasing interest rates?

In his letter to the Mr. Modi, Swamy also mentions the following.

  • “Moreover he [Rajan] is in this country on a Green Card provided by the US government and therefore mentally not fully Indian. Otherwise why would he renew his Green Card as RBI governor by making the mandatory annual visit to the US to keep the Green Card current?”

This is a fallacious argument and a cheap shot. There are better arguments to be made. It is akin to an argument made by George Bush, “You are either with us, or with the terrorists,” which effectively means there are no other possibilities. Just because somebody has a green card does not mean that person is “mentally not fully Indian.” Furthermore, you don’t need a Green Card to come to India, a green card authorizes a person to live and work in the US permanently. It enables freedom of movement and provides a person with the ability to travel outside the US and back without the risk of being denied entry by USCIS. You need a passport and a visa to come to India, and as far as I know Rajan is still an Indian citizen.

Anyway what is the big deal if Rajan has a green card and had gone back to the US to keep it “alive”. There are thousand of Indians who do just that. Does that make them any less Indian or “mentally not fully Indian”? Does Mr. Swamy know that people of Indian origin, who have settled in Guyana, Suriname, Trinidad and Tobago, other Caribbean nations and Mauritius celebrate a holiday called the Indian Arrival Day? I have met many of them, and some of them love India more than many Indians. They are extremely proud of their Indian heritage. I guess Swamy should write to them asking not to celebrate India and Indian Arrival Day, because, since they are not Indian citizens, they are “mentally not fully Indian”. By the way, how does Swamy know Rajan is “mentally not fully Indian”? Has Rajan told that to Swamy personally, or can Swamy read minds?

Okay, let’s for a moment accept the argument that holding a green card makes you “mentally not fully Indian”, then, is it not a slap in the face of hundreds and thousands of Indian in the US and other countries, who support Prime Minister Narendra Modi in his endeavor to transform India. Therefore, Swamy should write to all NRIs, PIOs and green card holders to stop supporting the Prime Minister because they are “mentally not fully Indian.” In addition, he should ask the government to stop and ban the Pravasi Bharatiya Divas, which celebrates the contribution of overseas Indians to India’s development, because all of them must be “mentally not fully Indian”. Finally, he should ask all the “mentally not fully Indians” to step remitting dollars, pounds and euros to India, as they are “mentally not fully Indians.” Are you now able to see the ridiculousness of the argument made by Swamy?

Questions for Mr. Swamy

  1. Okay, let’s assume that you are right that Rajan has a done a terrible job and needs to be fired. In that case, just don’t identify a problem and not recommend a solutions. Therefore, who in your opinion would be the right person for that job? You are an economist; hence, are you interested in that position?
  2. What is the ideal interest rate for the country? You are an economist yourself, you can surely recommend a number. Is it 1%, 4%, 5%, NIRP or ZIRP?
  3. I thought that India is growing at close to 7.5%, and here you are hinting that Rajan’s policies are “wrecking the Indian economy” and have “damaged the country”. Can both be true? Either India is growing at close to 8% and everything is coming up roses, or the GDP numbers are fake and the economy is in trouble? Which is it?
  4. Is your rant about Rajan more to do with the stock market rather than the economy? As they say, the stock market drives the economy, and the market has been struggling and has been very volatile, lately. Day traders have been taken to the cleaners. Have you lost money in the stock market, which has made you cantankerous?
  5. Do you think Rajan should embark on QE and buy bad loans from stressed institutions? How about “helicopter money drop”, are you in support of that?
  6. You either believe in free markets or you don’t. Do you believe businesses should survive on their own merit or should they be bailed out by the government when the economy flounders, just like Ben Bernanke did in the US? If they are struggling now, is it their problem or the problem with the central bank not reducing rates? Why aren’t the top executives of those companies being held accountable for the pain they are experiencing now? Afterall, everything happened based on their directives, right?
  7. Do you think that the banks should have been judicious while underwriting loans that are now non-performing? Nobody held a gun to their head and made them write the loans, right? Did Rajan or the RBI force them to write those loans? If not, why is RBI being blamed? Furthermore, why aren’t the head honchos of the PSU banks not being fired for allowing poor underwriting standards and poor risk management? Is it because they are government servants, and their job is “guaranteed”?

Questions for Crony-Capitalists and QE addicts

Quite a few people have come out in support of Swamy and his comments about Rajan. Some of them are even asking for RBI to do QE and buy the bad loans from the books of the struggling institutions. I have a few questions for those crony-capitalists.

  1. So, do you all believe in privatized gains and socialized losses? Is that why you are clamouring for QE and purchasing of bad loans from the stressed institutions? You want to live your high life, while you want the plebes to be slave to the system, right?
  2. Do you realize that there is no free lunch? Do you realize that, as Margaret Thatcher had mentioned, “The problem with socialism is that you eventually run out of other people’s money“? Who do you think will be left holding those bad loans, while the PSU banks and other institutions go back to their old ways? It will be the tax payers. Doesn’t that bother you?
  3. Is your angst against Rajan is mostly because the market has been trending sideways for 2 years? It hasn’t gone anywhere for the last two years or so. Sensex is where it was in 2014. All buy-and-hold guys are very despondent and are weeping silent tears. Now, you all are getting antsy because all those promises of double-digit returns are in trouble. All you crony-capitalists and QE addicts now want the rupee to be devalued further, so that you all can enjoy some nominal gains in the stock market, correct?
  4. QE will increase the money supply and devalue Indian rupee further. Against the dollar, in the last five years, the Indian rupee has depreciated almost 50%. Since start of Mr. Modi’s government, the rupee has depreciated 13%. How much further do you want the Indian rupee to fall and our purchasing power eroded?
  5. Wouldn’t the increase in money supply, due to QE, without a corresponding rise in the rate of real output cause inflation? Wouldn’t high inflation lead the RBI to hike rates? And, wouldn’t that lead us back to the original problem of high rates and high borrowing costs, which you are harping about?
  6. Wouldn’t easy money or cheap money lead to risky investment and speculative behavior in the stock market? And, wouldn’t that lead to a massive bubble, like the housing bubble or the dot-com bubble in the US? Have you forgotten what happened to the global economy when the bubbles burst? Do you forget so easily? Is your greed so absolute?
  7. Inflation is a hidden tax for the common people. We already have to make do with so many cesses, surcharges, levies, duties, etc; hence, how much more do you want us to be taxed?
  8. Haven’t you learned anything from the failed QE experiment of US Fed, ECB, BOE and the BOJ? Here are the results of those experiments.
    • St. Louis Fed official: No evidence QE boosted economy (CNBC)
    • Fed’s balance sheet (FRED)
    • US GDP has been near the stall speed of 2.0%, since the latter half of 2010.
    • US Unemployment rate (BLS)
    • US Participation rate (BLS)
    • UK QE has failed (BBC)
    • UK economy near stalling (The Telegraph)
    • UK industry fall back into recession (The Guardian)
    • BOJ Balance sheet (JMA)
    • Japan GDP (JMA)
    • NIRP in Japan (The Telegraph)
    • Japan dodges recession (JT)
    • Abenomics failing (JT)
    • Nikkei is back to where it was in 2007. Go QE! Go NIRP! Go ZIRP (Yahoo)

Final Word

Before ending this blog post, we would like to petition the powers that be (TPTB). We know that you control our lives. Your decisions can make or break everything we have worked for our entire life. With a stroke of a pen, you can take away our years of hard work. Here are our requests to you.

  • QE does not work. It did not work when tried. Look at US, UK, Japan and Europe to see the results of the experiment. Don’t even think of doing QE in India.
  • Don’t destroy the lives of the plebes any further. We are already reeling under the debilitating effects of a depreciating rupee and stealth inflation. Both these things will not affect you, because you are insulated from the realities we have to face. Don’t destroy whatever little we plebes earn from bank deposits and various other saving schemes, by lowering the interest to favour big banks, big institutions and big speculators.
  • Savers and senior citizens will get hurt the most, if you cut rates. The cannot afford to take the risk of investing in the stock market. Don’t destroy their future by reducing rates.
  • Please know that low, zero or negative rates, will force people into gold, which will make your gold monetization scheme ever more unpopular.
  • Because of your profligate ways, the Indian rupee, which was almost at parity with the US dollar in 1948 is now trading at close to 67 rupees to a dollar. If you don’t mend your ways soon, it will probably go to 100 rupees to a dollar. A falling rupee makes all common folks poorer. Yes, it will not affect you, because you are most probably hedged, but our lives will be destroyed. Mend your ways!
  • Cheap money will only lead to more speculation. Real estate is a bubble waiting to burst. Hear it from the trenches. To get rich overnight, many people bought multiple properties around the country. Their budget is stretched to the limit. One bad life event and their payments will stop. The result will be NPAs galore. Don’t make the money any cheaper. Humans are greedy; we want more, more and more. Making borrowing cheaper will only enable more people and companies to join the bandwagon of speculation. You are going to set them up for failure. Be careful with your power to rewrite the rules!
  • Yes, the party is over. Now, swallow the bitter pill and head back to reality.

*—a quote by George Orwell

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