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Updated: September 14, 2013 01:26 IST

Clinging to a discredited dogma

David Pais
Comment (46)   ·   print   ·   T  T  

The new RBI governor should be wary of replicating the Anglophone model which has spread so much devastation across the world

Raghuram Rajan’s opening statement on taking office as governor of Reserve Bank of India left no room for doubt. He intends to open up the capital account and replicate the United States financial system in India with all its bells and whistles. Given recent global economic and financial history, this is a shockingly disastrous set of objectives to be setting. That Mr. Rajan would do so even as the Indian economy is being buffeted by the vagaries of the global financial system is noteworthy. It suggests that as governor, he will not so much be setting out policy but dogma. By clinging to the thoroughly discredited dogma that “arm’s length” financial markets always know best, Mr. Rajan risks putting the RBI on the wrong side of economic history.

‘Casino banking’

To be clear, this is not an argument against markets, nor is it an argument against finance. We need finance to provide as much credit as possible to every productive nook and cranny of the Indian economy in much the same way as banks in America financed a massive increase in output after World War II and as the German banking system continues to fund its mittelstand of small and medium enterprises. What we don’t need, however, is the ‘casino banking’ which was developed first in the Anglophone countries in the early 1980s and has since spread around the world causing so much devastation in its wake and which Mr. Rajan seems hell-bent on replicating in India.

Reading our English-language press over the last few weeks, one could easily be forgiven for thinking that the last 15 years of global financial and economic history simply didn’t happen. Latin America’s assorted tequila crises apparently didn’t happen, nor did the East Asian crisis in 1997-98 which soon pulled in Russia, Brazil and Turkey, nor did Argentina in 2001. All these of course were labelled as crises of ‘crony capitalism’ as the ‘natives in their grass skirts’ didn’t know how to run a financial system. But then Lehman Bros. went bankrupt and we soon saw that the U.S. and other ‘advanced’ economy emperors whom we previously believed to be fully clothed in their pinstripe suits were actually stark naked and didn’t know how to run a financial system either.

There is simply no getting away from the fact that the Anglophone model of running a financial system is broken. As former Fed chairman Greenspan admitted in a rare moment of unguarded honesty, “the entire intellectual edifice has collapsed.” The Anglophone model is based on increased debt creation and financial intensification both of which are facilitated by ‘light touch’ regulation. Before too long the financial industry starts to run amok. It soon runs out of productive outlets for its debt and ends up creating a real estate bubble instead. Inevitably, the bubble bursts, the banking system becomes insolvent and the taxpayer is left to pick up the pieces in a shattered economy. We’ve seen this happen time and again from Japan in 1989 (from which it has still not managed to extricate itself) to all the crises mentioned above and many more which haven’t.

It’s the same movie with the same ending.

Indonesian example

Indonesia in 1997-98 should serve as a cautionary example to India because of its similar size, ethnic diversity, etc. Indonesia had a budget surplus, a trade surplus, relatively low inflation, high GDP growth and, by virtually every measure, was in the pink of economic health before its financial crisis in mid-1997. The year after that, Indonesia’s GDP growth was -18% (yes, that’s minus!). It led to riots in the capital, Jakarta, and ultimately the overthrow of the government and a political revolution. There was also a huge upsurge in secessionist violence in Aceh (where thousands died) and ethnic cleansing and ultimately independence for East Timor.

Yet this is the road we have been glibly going down. The Indian economy has all the hallmarks of one afflicted with the Anglophone disease — a current account deficit caused by too much domestic debt issuance (the media focus on exports and imports and the exchange rate is superficially misleading), an inability to fund the current account as foreign inflows prove fickle, an economy overly dependent on real estate and construction, rising inequality amidst a growth slow-down and, most importantly, an economic governing class which has run out of ideas. At least in America there is a degree of awareness that the system is in large part broken which is why it’s presumed new central bank governor Larry Summers is being publicly hauled over the coals for his role in maintaining ‘light touch’ regulation in the run-up to the U.S. financial crisis. In India, we are bizarrely lauding Mr. Rajan for seeking to institute the very same ‘light touch’ regulation even as regulators in the U.S. and around the world are scratching their heads trying to figure out how to get back to a position India is currently in right now.

We need to stop believing two myths. Firstly, we need to stop believing the myth that central bank governors can ‘fine tune’ an economy by waving their interest rate magic wand. The reality is that our true economic prospects are determined on the supply side, by cartels operating at sabzi mandis, by infrastructure bottlenecks and most importantly by our education system. But understanding the supply side requires our policymakers and commentariat to roll up their sleeves and get their hands dirty, something which those safely ensconced in Delhi have been hitherto unwilling to do. Instead they prefer trotting out the same tired old airy prognostications about aggregate demand and macro imbalances which are invariably ex-poste rationalisations rather than accurate ex-ante analysis.

Secondly, we need to stop believing the myth that a more developed economy requires an intensification of financial industry products and gimmicks. From a banking perspective, all we need is an efficient payments system and an equally efficient credit delivery system. All the other supposed productivity or innovation is actually just smoke and mirrors which either redistributes gains and losses within finance (to no benefit to the rest of us) or is parasitic on the rest of the real economy. Finance is only the distributive agent and deserves nowhere near the outsized rewards it has been awarding itself.

Prior to the collapse of Lehman, crises in emerging markets were blamed on ‘crony capitalism’ and other such supposed cultural defects. Now that the rogue elephant that is the global financial system has devastated all the ‘advanced’ economies as well, it is time to fundamentally re-think our approach to finance. Mr. Rajan’s seeming refusal to do so does not augur well for the stability of our financial markets and economy.

(The writer has worked for Morgan Stanley and Citigroup in London and is now based in Delhi)

More In: Lead | Opinion

For a change RBI Governor Rajan (a bureaucrat) makes more sense than a
private citizen David Pais (who has experience in the private
industry, the author of this article).
All that the normal citizen can say to the government is "Give us us
free" - yes, this freedom includes freedom to seek higher returns, and
yes, freedom to be cheated - but not freedom from prosecution for
those who cheat. We cannot prevent crime. It has never worked. We can
only prosecute criminals.
Should banks innovate financial products and thereby fail, then let
them fail. People who invest / deposit with such institutions will
make mistakes and learn from them. Ordinary people are far smarter
than the so called "intellectuals" like David Pais give them credit
for. Just allow freedom to exist, persist. Lets not protect and cocoon
the ordinary citizen with false promises.

from:  MarutanRay
Posted on: Sep 16, 2013 at 19:00 IST

David Pais would probably make a good fiction writer. What he says about Raghuram
Rajan or Mr. Rajan's intentions is entirely the work of his active imagination. Mr. Pais is equally wrong in saying that central bankers can't impact the course of an economy. But beyond that, he is right in observing that dealing with India's real
problems, such as infrastructure, education system, is critical to our future and that the role of banking industry should be limited to efficient allocation of credit and a good payment system and Finance does not deserve outsized rewards. Well
functioning capital markets are critical to efficient allocation of capital with in an economy. There will always be those who are prepared to risk a lot to make a lot. As long as these risk takers use their own money, without any implicit or explicit public subsidy of any kind, to make big gains within a strong regulatory regime that should not be a cause for alarm.

from:  virendra gupta
Posted on: Sep 16, 2013 at 07:01 IST

An excellent analysis at the right time. Congratulations Hindu. Indian financial sector at the moment require turning the page and learning lessons and not opening new books and new regulations to follow them. Performance of banks during the last eight years of financial inclusion effort should unfold enough lessons to the RBI: the commercial bank window and the Business Correspondent doors to financial inclusion have not taken closer to the goals set. It is not bank branches alone that are now being looked at as much as those that deliver. This would require infrastructure and technology that would enable existing grassroots institutions perform with accountability, responsibility and autonomy that is bound by a sound regulation.

from:  B. Yerram Raju
Posted on: Sep 15, 2013 at 17:48 IST

I agree with the caution sounded in your editorial on Dr Raghuraman's views on Indian financial market(s). The instances of downturn which you have noted from different parts of the world can be ascribed to the blind following of examples and practices from countries like US, UK by emerging and developing countries, with the consequent downturns. To some extent this follows from the increasing globalization of economy and particularly the financial markets which tend to defy all overseeing. Many countries including those in SEA realized that to remain even static, countries need to increase their exports continuously. While it is very easy to increase imports, increasing exports is very difficult with consequent problems of foreign exchange imbalance and lowering of local currencies. The present downfall of Rupee has been stopped by some financial acrobatics but a permanent solution is possible only with strong economy. Let mature concerns prevail.

from:  Vasant Moharir
Posted on: Sep 15, 2013 at 14:21 IST

An excellent article. Clearing the supply side constraints, as in Sabzi Mandi, the cartels, the
distribution of natural resources in equitable manner and all those, require that you roll up
your sleeves and dirt your hands - easier said than done. It is difficult with the politics and
politicians of today, panting for easy money to feather their nests and fund the next
election. Financial innovations are all smoke & mirror; they redistribute gains or losses
within finance or are parasitic on real economy. Nuggets of wisdom. Efficient payment
system, efficient & equitable credit delivery system what banking should be all about.
Bankers should mobilise resources, lend to business, industries - big and small and earn
their bread the hard way.

from:  Farooque Shahab
Posted on: Sep 15, 2013 at 11:50 IST

The author sounds emotional with baseless and misleading remarks. He should have
first read Fault Lines. First, Dr Rajan never said the capital account will be opened. He
was exploring how to reduce USD dependence by paying for imports in rupees which
may lead to semi-externalisation. Rupee will come back through our exports or as FII
and FDI. New ideas must be debated constructively. Second, 'arms length' implies
competition, transparency and market prices. Better than crony capitalism. What is
wrong with that? You are contradicting yourself. Third, when did Rajan or RBI favour
'casino banking'?. Fourth, emerging market crises highlighted were due to refusal to
reform internally; not because of 'Anglophone' model. Fifth, Rajan does not favour
light touch regulation. Why are you mixing up with what Summers said? Fifth, high
domestic debt causes inflation, not necessarily high CAD. Sixth, Rajan never ran the
US Fed. Stop ascribing wrong motives. Once again read 'Fault Lines'.

from:  k chandra
Posted on: Sep 15, 2013 at 09:51 IST

Great article

Very good research, government and governer of RBI must consider this opinion.

from:  Makarand
Posted on: Sep 15, 2013 at 08:09 IST

A very sensible article. Fraud hides in complexity. It may be worth noting that the US Congress in 1911...yes 1911! cited Wall Street gimmicks like distributed debt bonds based on real estate as being a fancy form of gambling. The banned them. Then they pop up again in recent years relabeled as CDOs. They nearly destroyed the world economy. I agree that any strategy for long term stability should be based on a simple and efficient system of credit and payments. But as for controlling supply side, if inflation is too high, it is not in the purview of government to tell consumers to stop buying or producers to stop making things to sell. Adjusting central bank interest rates really is the only means, other than ramping up, slowing down or stopping government purchases and projects. What other tools does a government have to ensure a stable currency and manage inflation? Regulation is needed to reduce undue risk to innocents and tax payer as moral hazard continues to fail due to greed.

from:  Ed Hayden
Posted on: Sep 15, 2013 at 03:14 IST

The author has some strange ideas about Dr Rajan's policies. Dr Rajan
has never for once advocated gutting the regulators and giving the
financial institutions a free hand to do as they like.
The discredited Western financial model failed because it never was
much of a model in the first place. For example the so-called
"derivative market" was in its heyday regulated no better than
"demolition derby drivers" according to an article in WSJ.
But Mr Rajan has never suggested such an approach. He has said the
markets must be regulated, sure, but not to the extent that it kills
the markets completely. He welcomes and looks forward to enabling
innovation but he will ensure that innovation stays within sustainable
and practical limits.

from:  Aritra Gupta
Posted on: Sep 15, 2013 at 01:30 IST

A brilliant analysis of the issue on hand. Congrats to Pais for cautioning on too much innovation in financial markets. The new governor, willing to learn from criticism, will take into account the relevant issues raised by him in future policy formulations. While liberal branch licensing is desirable, unregulated licensing is harmful in the long run. For eliminating supply side bottlenecks availability of adequate and timely credit to priority sectors particularly agricultural and MSME sectors. It needs progressive reforms in the norms and methods of lending and recovery. The concept of 'development banking' has gone in post-liberalization era. The development banks as specialized investment banks can strengthen manufacturing sector. RBI should evolve a strategy to revitalize development banks including SFCs. Though direct comparison with Indonesian experience based on parameters may not be relevant, it's lessons are relevant. Native intelligence of RBI built over time holds the key.

from:  Dhanasekaran T
Posted on: Sep 15, 2013 at 01:06 IST

Despite taking so much detours, the author is finally summing it up - CAPITALISM IS ALWAYS CRONY by nature. It may be shocking to know that a lot of the economists who support unregulated market capitalism are literally receiving monetary benefits from bit private corporates under the guise of "sponsored projects" for cooking up theories, which the authors themselves knew, were wrong. That free market capitalism will lead to growth is a theory funded by corporates because it benefits them. And such a system is even more detriment to the existence of the masses. It is reasonable to doubt that one such economist has been parachuted to the top of India's economic system. BTW, it is completely wrong to claim that Rajan was the first one to caution about America's infamous bubbles. Nobel Laureate Paul Krugman, for instance, has been warning about it in his columns (which were published in The Hindu for a long period prior to it) almost half a decade before the 2008.

from:  Janarddan
Posted on: Sep 14, 2013 at 23:23 IST

A real eye opener..!
Thanks to the author, I got my sanity back.
RBI's measures really seems sugar coated, more inclined towards Dalal street rather than forward thinking about the future of this country.

from:  Sreenivasa
Posted on: Sep 14, 2013 at 23:03 IST

I have read the book - fault lines by raghuram rajan. Going by the book,
raghuram rajan fully aware of crisis in japan and INDONESIAN examples
cited here.The column written here is built on speculation and has gone
too far ahead it.
Give him the time , let him come out with his first monetary review.

from:  madhavan
Posted on: Sep 14, 2013 at 22:45 IST

Dear friends let us not jump the gun. Allow time and space to the.new Guv. As for the author Godknows his role in the US banking crisis as a senior banker.

from:  K S Rajasekar
Posted on: Sep 14, 2013 at 20:42 IST

US-worshipping Mr Rajan should realise what is good for the American psyche, American
banking, business and politics are unsuitable for us in India. Unlike theirs, our economy is
based on prices of petrol and onions, we have a class/caste system, our blue collars don't
blend with white collars. Our currency is hardly a creation with the help of Saudi Arabia and
OPEC, so we are addicted to the US dollar for dependence on oil imports.
We need to find other ways ( e.g. currency swap agreements with independent nations ) to
fix our own monetary system. Until then, only one money-lending "Zionist family" will benefit,
not India.

from:  Rajan Mahadevan
Posted on: Sep 14, 2013 at 19:18 IST

Its high time some one with good sense insists upon our RBI to
maintain the balance of forces which were maintaining our Country's
Banking system in tact - which prevented the meltdown witnessed in all
other economies of Brazil, Indonesia & South east asia etc. Lets be
more conservative like the Britons who have insisted and ensured that
they dont play to others tunes but to their own good being.

Lets all work together for this ultimate goal of stability over Fast
Development.

from:  Venkatramani
Posted on: Sep 14, 2013 at 17:23 IST

Very well said. India does NOT need to imitate and ape the western model of the financial sector. Ever since the much talked about "financial innovation" began in the 1990s, the western financial institutions have hardly been successful in carrying out efficient allocation of financial resources.

As long as the RBI can prevent "financial gimmicks" that rely on creating more debt-based investment opportunities, our economy will not be exposed to Ponzi schemes.

At the same time, I must accept that Governor Rajan has correctly identified in extending efficient payment systems to rural India and also make sure that the MSME sector is paid on time (where the Indian industrial giants intentionally delay payments for entirely selfish ends).

from:  Viswa Ghosh
Posted on: Sep 14, 2013 at 16:54 IST

A closer look at the governor's IMF stint, would make his current direction obvious!

from:  S.Ezhil
Posted on: Sep 14, 2013 at 15:21 IST

An excellent piece; it is refreshing to see Hindu publish such a wonderful article at a time when an economics newspaper is devoting space for opinions that one would expect to see in the entertainment media.

from:  n ravi
Posted on: Sep 14, 2013 at 14:34 IST

An excellent analysis on the fallacy of following pre-2008 American financial model of new products designed by a bright MBA in USA and every one knows what happened. But the most surprising thing is that paradoxically Raghu Rajan seemed to have 'predicted' the American crisis, and then why he himself is trying to implement the same things here.

from:  MVJRao
Posted on: Sep 14, 2013 at 14:09 IST

Mr. Raghuram was the first to predict the 2008 crisis. USA's financial crisis was driven by
sheer speculation against the backdrop of anaemic economic growth, driven by jobs moving
overseas and the years of deficits which was spent in wagering wars. India is not in such a
situation. Its demographics and needs are such that growth will be largely based on
creating value - whether it is a house or a vehicle or goods. Nor is India's situation to SE
Asia in 1997_99. The dynamics is much more skewed around domestic issues rather
overseas trade.

India's current volatility is largely based on growing current account deficits, a shrinking
growth story because the supply sidecwas not managed and a ballooning deficit. Raghuram
knows that addressing the situation involves both fiscal policies and managing expectations.

Mr. Raghuram has started well. Can we give him some space.

from:  Anand
Posted on: Sep 14, 2013 at 13:35 IST

At a time when the country's economy is in doldrums, rate of GDP
growth is racing beyond assessment, FIIs packing off from the country,
steady drain in exchange reserves, CAD going up and rupee getting
weaker every day, every citizen eyes on the new incumbent at RBI for
getting some solace to remedy the situation. As argued by the author,
adoption of Casino banking method in India could de-stabilise the
fundamentals and principles of Indian banking ethos. The fall out of
Lehman Brothers, crisis of City Bank is still green in everybody's
memory. Indian Bank's lending and recovery mechanism needs a massive
re-orientation. Agriculture and Small Sector Industries are in dire
needs of financial assistance and the philip to shine better. Export
oriented units need repeated stimuli to withstand vagaries of
economical pressure. Tuning the interest rates periodically alone will
never bring the required results unless it is followed by measures to
increase the output on supply side.

from:  BASKARAN R V
Posted on: Sep 14, 2013 at 13:31 IST

The article seems like a rant without a sure target. The closest to a point being made that I could decipher was that we should not have a light touch regulation. But that hardly seems to be what Rajan has ever said or implied. Neither are "arms length" financial markets by definition light tough regulated. Next, the example of Indonesia and its comparision with India seems ridiculous. Indonesia had trade surplus, an export dependent economy and low inflation; India today has a current account deficit, high inflation and an economy that is largely driven by local markets. I can see no point of comparision. Methinks that Indonesia's problems were too high a dependence on exports; India's are too low amount of exports - both need to be more balanced. As far as the crises of 2008 is concerned, India has not exactly been spared either; the real estate bubble is much worse in India than in US; it just hasn't burst yet - partly because of liquidity injection in India and the world.

from:  Nirmesh Mehta
Posted on: Sep 14, 2013 at 13:06 IST

The new RBI governor lacks experience and knowledge. The credentials being touted are IIT, IIM, and Phd, and that he warned of 2007 financial crisis.
If Mr. Rajan has capability to predict crisis, he did not use it in the last one year since he was appointed as CEA.

I hope that the internal working of RBI is such that it does not allow governor to act on his own ignoring the sound advice of the others.

Mr. Rajan is simply toeing the govt line and another independent institution is at a risk of losing its autonomy.

from:  Abhinav
Posted on: Sep 14, 2013 at 12:52 IST

The article is sound in its prognosis and persuasion. Upon reading the
Governor's first 'salvo', I find it well-meaning and warning of his
hope-filled dynamism. Yet, the aims of the article and the Governor's
ideas and wishlist have to bear with the drag of govt. policies and
the disarray the policies suffer because of political expediencies.
Pitted against the RBI's vast powers and potential for policy-framing
is the inertia policy-working endures against an uninspiring political
leadership, perched upon an unimaginative bureaucracy. For all his
wishful words about financial infrastructure, what matters is the
realisation that it takes two to tango. And if it isnt a
synchronised tango, the results are a jarring tune and innocent but
painful stamping on the feet. Raghuram Rajan must know this
possibility well. In 2005, he hummed a cautionary tune, but instead of
dancing to it, the dancers dashed towards him to denounce it; only to
dither and be ditched.

from:  Devraj Sambasivan
Posted on: Sep 14, 2013 at 12:42 IST

The basic structural corrections in the
management of the economy is the point. Domestic Debt is humungously
large that the revenue side is not going to be able to keep up with
interest servicing let alone debt-servicing. When 'faced off' with
the data on Tax Exempted, it is even funny that we have such a
situation. It is like a landlord allowing the tenant to live off his
borrowed income while refusing to pay the rent!!! If this is absurd
at the individual level, why dont we see public consternation at the
national level? The answer lies at the doorsteps of our Media. They
either avoid such articles like the one here by David Pais - even
worse, attack the author than the content, if some do get to be
printed. The Hindu should be commended.

from:  S K Iyer
Posted on: Sep 14, 2013 at 12:11 IST

The policies suggested by writer were the once responsible for shielding India from 2008 financial crisis and credit goes to Former Gov. Y V Reddy. The need of hour is to make financial system more transparent, fast and increase creadit availability without bringing opaque and ambigous products in the system.

from:  Ajay Kumar Yadav
Posted on: Sep 14, 2013 at 12:05 IST

It is well said. Yes, 'The Model' has failed in several respects.
India's banking and financial sector regulation as also the capital
account management are rooted basically in conservatism and risk
aversion. That has by and large insulated the system from extreme
shocks--domestic or external. This home grown approach needs to be
strengthened and may perhaps be relaxed to the extent feasible without
increasing systemic risks. If the fiscal house is in order, many
problems will automatically wither away. The so called supply side
requires this reform.

Monetary policy in India has no particular anchor--is it money,
interest rate or exchange rate or inflation expectations? Inflation
has many faces now--wholesale, consumer, rural and urban to list a
few. Therefore, the present multiple indicator approach serves the
policy makers well enabling them to be flexible in their approach. It
also enables combining prudential policies with traditional monetary
instruments for financial stability.

from:  K.Kanagasabapathy
Posted on: Sep 14, 2013 at 11:36 IST

I totally agree with the author.Mr.Ragu should be thinking of policy customized to Indian economy instead of blindly following a route which has been proven to be dangerous.

from:  Selvarajan
Posted on: Sep 14, 2013 at 11:21 IST

It is true that instead of opening up capital account, the focus should be on removing the supply constraints in the economy. The author, however, should have explained as to how CAD is caused by too much domestic debt issuance.

from:  sandip pathak
Posted on: Sep 14, 2013 at 11:17 IST

Nice analysis, pointing out to a glaringly obvious fact. After congratulating Dr. Y. V. Reddy for shielding India from derivatives, it seems that the new governor is using the minicrisis as the window of opportunity to push dubious financial products in. We seem to be in a hurry to usher in whatever will please the Rating agencies fastest. We saw that Rating agencies' worth is questionable, during the crash of the AAA products during the 2008 crisis.

The government should retain inflation, introducing measures to control the retail prices. This seems to be a way of achieving growth while containing inflation.

We also need more accurate financial analyses so that we do not fall into comfortable narrative fallacies. It's nice that the author explicitly brings out the cultural condescension in the west about the East's supposed shortfalls in economics.

from:  Satyadev
Posted on: Sep 14, 2013 at 10:48 IST

as the history says CASINO BANKING has not been successful across the
world and they have faced global as well as regional economic crisis
so it better to think and analyse the new monetary policy deeply and
should take lession from past. At the same time there is a saying
that "risk is the first step of any gain" so we will have to rightly
point out both aspects of the policy. our final aim is to strengthen
the our economy(Indian economy). so in my opinion we should go for
experiment keeping all the constraint aspects. And if we talk about
current account deficit and rupees depreciation then alone monetary
policy can't be responsible so there is a need to look upon our
FISCAL POLICY also. Because to some extent both monetary policy and
fiscal policy are dependent upon each other. keep both policy in mind
we should go forward.......

from:  prashant kumar
Posted on: Sep 14, 2013 at 10:24 IST

Thank you so much for publishing some real truth. i have lived overseas
for 20 years and fully agree with views herein . Only i could not have
worded so well. PC, Montek and Rajan (all heavily influenced by American
thinking) may devastate Indian economy in couple of years. India must
not adopt consumption led growth funded by borrowings. India must grow
based on high savings and investment into productive capacity for
sustainable growth.

from:  Atma Gandhi
Posted on: Sep 14, 2013 at 10:18 IST

Dr. Raghuram Rajan might have a bias towards a particular set of
financial and economic theories. His bias was clear in the Financial
Services report of the committee he had headed for the Planning
Commission. That Committee wanted the RBI to have a single-point
agenda of inflation management. It also recommended the warehouse
receipt system to deepen the financial extension, and suggested that
foreign banks be allowed to buy rural/agro assets from other banks but
without the credit risk. The dangers and risks of Indian agro
commodities have been brutally exposed in the NSEL crisis. Indian
banks suffer a lot from corporate bad debts. Apart from usual project
risk, government pressure etc there are also the inability and
complicity of the PSU banks' investment banking operations and the
urge to keep big clients happy. The RBI should immediately stop
deposit-taking commercial banks from investment banking activities.
Scrapping of the Glass-Steagall Act was the start of the 2007 crisis.

from:  P. Datta
Posted on: Sep 14, 2013 at 10:17 IST

It is true that by just varying the interest rates, central bank cant do much to address the problems like inflation but as far as the question of policies of Mr Raghuram Rajan is concerned,one thing that is sure is that he is smart enough to understand the impact of his policies as he had correctly predicted the global recession of 2008. Infact he himself was against the no regulation policy in financial markets. Hence despite the limited options available, we are hopeful that the new governor of RBI will improve the current state of Indian economy.

from:  ANCHAL GUPTA
Posted on: Sep 14, 2013 at 10:09 IST

Brilliantly put ! Kudos to Hindu for publishing this ! As David argues so coherently the
fundamental function of financial sector is to tap household savings and lend to productive
sectors of the domestic market.. All else is smoke and mirrors.. If our system is collapsing
now, it is because of excessive debt to households (for consumable puchase), and
unproductive lending to industries which dont boost national productivity or GDP.. The need
of the hour is to keep things simple in the financial sector.. And instead focus our energies on
improving supply side.. Thank you David for coherently putting together such an impressive
argument on this !

from:  Gajamani G
Posted on: Sep 14, 2013 at 08:34 IST

Even The Hindu's normally discrening readers would fully appreciate this only when they can explain their fascination with real estate, gold & financial markets. In effect, calling into question, the quality of the very education that lets them onto this article in the first place. How delicious, an irony!

from:  Mahadevan Sundarraj
Posted on: Sep 14, 2013 at 08:10 IST

As a well educated, albeit an economics layman, I find it extremely surprising and equally disturbing that the sheer logic and supporting historical fact presented by David Pais, in this article, is not obvious to our RBI Governor. It is as if the RBI Governor has to pursue his (!) policies come what may, in lieu of what, only the IMF can answer.

from:  Ramamoorthy Srinath
Posted on: Sep 14, 2013 at 06:15 IST

Brilliant! We don't need the 'crony capitalism' of the West, especially, America. We seem to ape U.S. mindlessly without much relevance to the unique culture and character of our nation. There are many things we can learn from U.S, but we seem to be lured only by those practices there that had brought misery to Americans themselves and those that failed to ignite growth. If India had sustained during the last decade or so, a part at least, could be due to the caution we had always exercised. We need more infrastructure, education, and health in a corruption free environment.

from:  T N Neelakantan
Posted on: Sep 14, 2013 at 06:06 IST

Raghu will do well to read this piece and have a chat with David. As an investment banker who lived through all of the financial debacles of the developing world that David lists, I can say David makes significant sense. Thank you David for holding the mirror.

from:  Srya P Sethi
Posted on: Sep 14, 2013 at 05:38 IST

Excellent article!!! We need people who understand India's financial culture bottom up , to lead our financial institutions, rather than someone who propagates the failed western economic templates and lead India to Abyss.

from:  Venkat
Posted on: Sep 14, 2013 at 04:58 IST

This is the correct caution sounded at the right time! Light touch regulation which the
governor wants to usher in may include lower CRR and SLR , loosening the traditional
lending norms such as debt-equity ratio,loan to value ratio etc . The result will be enhanced
debt creation and consumers and corporates themselves will be willing participants.The
capital adequacy touted by banks and NBFCs is based on their own internal risk weigthed
assets and classification of NPAs .It will be encouraged because what will be of interest
will be the size of the balance sheet. WIll there be relaxation by the regulators in regard to
role of NBFCs ? They finance some economic activities especially huge truck financing
with linkages with banks both by way of getting credit limits and passing to them bundled
hypothecated accounts. Any snapping of just one link in this bubble will lead to financial
crisis. Rating agencies, paid by the assesses and obliged to the latter will go easy.

from:  Subramania thiagarajan
Posted on: Sep 14, 2013 at 04:16 IST

If indeed Raghuraman Rajan is the handpicked maiden of the Western powers to open up our capital account inviting devastation in its wake , his appointment and his approval by P Chidambaram is understandable.

The author has made excellent references to food cartels in grains and vegetables. As is well known and often said " The Congress government means inflation" - prices of everything will go up.

Despite his best efforts Raghuraman Rajan will not succeed in opening up our capital account. For one, the Congress and Chidambaram will not return to power in 2014. The second reason is that we still have patriots who will prove to be a stumbling block - both in the bureaucracy and the press !

from:  Saurabh Sharma
Posted on: Sep 14, 2013 at 03:44 IST

A well researched article.

from:  V. Sethuraman
Posted on: Sep 14, 2013 at 03:08 IST

A sobering article that all Indian policy makers need to take
heed of. India was one of the few countries that escaped the
worst effects of the global financial crisis, thanks mainly to
strong regulation of financial markets by the RBI. This fact has
been recognized the world over. India certainly can do without
the "smoke and mirrors" economy of many western nations, where
low to middle class jobs have flown to China, the rich get
richer, and the poor get poorer. Such a type of economy cannot
last long, perhaps another 10 years, by which the countries in
question are going to experience devastating socio-economic
shocks.

from:  CS Venkat
Posted on: Sep 14, 2013 at 02:18 IST

If the author has worked for Morgan Stanley and Citigroup he should know better. The collapse of 2008 was brought about by the housing bubble (senior tranches held by banks turned to junk when housing failures broke the correlation model), and banks financing such assets on their balance sheets using short term credit which became scarce. This was mostly due to government requiring banks to provide subprime mortgages. I am sure the new Governor knows it and will not repeat it.

from:  Sankar
Posted on: Sep 14, 2013 at 02:10 IST
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