''I tend to look at the job of RBI Governor as a not very stern monetarist, but as someone who has to lend his support to a system.''
A large number of economists, political pundits, business leaders and journalists are pre-occupied with unravelling the mind of the new Governor of Reserve Bank of India Raghuram Rajan. He is different from all the previous Governors, who have either been economists or bureaucrats. Here you have a person who has not only global experience but also a “systems” perspective. You need to read his extremely readable two books to note that he brings in a historical, management and economic grounding to his job. Added to this is his effective communication style, honed through his considerable teaching experience at Chicago.
I got a clue to his approach in a speech he gave on August 3 at Chennai, a few days before the announcement on his appointment as RBI Governor. In the Kuruvilla Jacob Memorial Oration that he gave, he referred to the use of multiple management tools that Dr. Kuruvilla Jacob used in the management of affairs at Madras Christian College School, and he compared that with the approach of RBI. One day in the 1950s, Dr. Jacob chanced upon students “bunking” classes, and they confessed to him truthfully that they were going to a movie theatre. Dr. Jacob allowed them to go to the cinema hall, as they were truthful. However, when they came to school the next day, they had to go through the mandatory punishment in the morning assembly. Here was a headmaster, according to Rajan, who used two instruments to deal with the issue. He appreciated their truthfulness, and allowed them the freedom. At the same time, he applied the rules. While telling this story, Dr. Rajan compared this with the constraint of RBI, which has only one instrument — that of interest rate — to tackle the situation. Dr. Rajan has now shown, in his initial address, that RBI also has multiple instruments. Of course, I did not realise all this as he spoke that day on the topic of “higher education”. But now, the picture emerges.
I have been a manager, and, therefore, I tend to look at the job of RBI Governor as a not very stern monetarist, but as someone who has to lend his support to a system. I see the following as his challenges:
(1) Should the Finance Minister walk alone? Ministry of Finance and the RBI are part of a system to get the economy operate on a sound footing. As a body which needs to respond to political demands, the Finance Ministry has to pander to populist sentiments. Also, we have to realise that currently the economic wheels are moving slowly. In this situation, should the RBI only exhort the government to get its act together, or should it work together to get the economy going? I do not mean that the RBI has to sacrifice its autonomy, and, on the contrary, it should stoutly defend it. However, how do the RBI and the Ministry of Finance develop a co-ordinated approach, where growth impetus will not wait to be given only wh0en the government completely reforms itself? This is a challenging task, and the RBI has to act responsibly — not just do the bidding of the government. Dr. Rajan has the skills to work together.
(2) Can the financial system be made stronger? Dr. Rajan has an excellent track record on this, as his book ‘Fault Lines’ shows. Regulators have to work together to ensure discipline and controls in the financial systems. However, there have been excesses, and that has shown itself in the high leverage that many large corporates have. Therefore, there is a need for a period of adjustment, and it should not result in condoning the excesses. Dr. Rajan, the economist, has the credentials to bring a realistic approach to this issue.
(3) How do we release the animal spirit in the industry? The need of the hour is growth and bridging of current account deficit. Both of these require investments and dynamism. Corporate managers have to be relieved of the stresses of the recent past — policy paralysis, high inflation and volatile currency. Some of this are within the control of RBI, but much of it are outside.
There has to be well-calibrated moves, together with the government. Articulation of the path ahead and assurances that we will continue that path are signals that need to be given to business leaders and investors in India and overseas. There has to be intervention if currency has to become less volatile, and speculator activities have to be ruthlessly curbed. This requires a high level of communication. Dr. Rajan has the systems’ perspective, and is highly articulate and persuasive.
The task before Dr. Rajan is huge, and he requires time. Going by his past record, he will not walk alone, and he will be clearly understood. We wish him well, and we need him to deliver.
The author is former CFO of Tata Consultancy Services