Rejoinder to S.Gurumurthy's article ; the exit that was inevitable dated 22nd June,2016 in the newindianexpress.com on Dr.Raghuram Rajan.

Dear friends,

I just thought of sharing with you my rejoinder to the article by S.Gurumurthy on Dr.Raghu Ram Rajan.Pl. first read the article of S.Gurumurthy and then my rejoinder.
Regards,
B.N.V.Parthasarathi.09885064644.

I just happened to read the article by S.Gurumurthy :The exit that was inevitable yesterday. I felt many issues that were presented in the article were not giving the true and fair picture. Hence I sent my rejoinder to his article to Indianexpress.com yesterday where his original article was published on 22 nd June, 2016. As I was expecting they have not displayed my rejoinder in their web page. I have sent my rejoinder to Gurumurthy to his personal mail today with the following remarks:


Dear Mr.Gurumurthy,
I read your article and sent the following rejoinder to Indian Express yesterday.They have not displayed my rejoinder in the internet in their page indianexpress.com where your original article appears. I am sure they would have certainly forwarded my rejoinder to you. Nevertheless I just thought of sharing this with you. I just made an attempt to give the rejoinder in an objective manner confining to the issues you have mentioned in your article , without going into the people or personalities involved.  Trust this is taken in the right spirit by you which is also my intention.
With regards,
B.N.V.Parthasarathi.Mobile- 09885064644.E Mail- [email protected],
I am sending the link to his article as well as my rejoinder as under. Pl. kindly note that I do not intend to raise any confrontation but only interested in an objective analysis of the issues involved without commenting personally against the people concerned. People may come and go but our country's growth story will continue  like the river Ganges that continues to flow ......
Rajan: The exit that was inevitable

Dear Sir, This is a rejoinder to the article Rajan: The exit that was inevitable By S GurumurthyPublished: 22nd June 2016 06:06 AM. I hope you will publish this . Appointment and reappointment of RBI governor is purely an administrative decision as rightly said by Gurumurthy, quoting the Prime Minister and nobody questions the same.  Yet this has become an issue in press and media in the case of Raghuram Rajan only because of Dr.Subramanyam Swami who made certain personal allegations against the RBI Governer Dr.Rajan. Gurumurthy conveniently omits this fact and tries to project as if the media has created this issue of whether Rajan will get extension or not. It is a fact that but for Dr.Swamy’s tirade against Dr.Rajan  press and media never gave any importance to the extension of the term of Dr.Rajan because it is essentially a prerogative of the government and it is purely a routine affair. Dr.Swamy’s tirade only added salt and pepper to make this routine issue spicy and naturally press and media added their own flavor to make it news worthy.As per the RBI Act, sec. 8. The RBI Governor is appointed by the government and his term will be not exceeding 5 years.TENURE OF RBI Governors:Dr. Raghu Ram Rajan  ( 4.9.20013 to 4.9.2016)  appointed during Dr.Man Mohan Singh government .Dr. D. Subbarao
September 5, 2008 to September 4, 2011     (Prime Minister Man Mohan Singh 2004-14) 
September 5, 2011 to September 4, 2013 Dr.Y.V.Reddy
September 6, 2003 to September 5, 2008.Dr.Reddy served as Deputy Governor and got elevated as Governor during Vajpayee government. (Vajpayee was Prime Minister during 19 March 1998 to 22 May 2004)

From the above data one can clearly understand that  Mr.R.N.Malhotra , Dr. Bimal Jalan and Dr. Y.V.Reddy were initially appointed for full five years time. Dr.Rangarajan and Dr.Subba Rao were initially appointed for three years and subsequently got extension for another two years.  Interestingly Dr.Bimal Jalan ,though was appointed by I.K.Gujral for his full term he worked with the government headed by Vajpayee for  major portion of his tenure.  Similarly Dr.Y.V.Reddy , though was appointed by Vajpayee for 5 years he worked with the government headed by Dr. Man Mohan Singh for larger part of his tenure.Going by the above precedents one can conclude that the statement of Gurumurthy in his article -“Under the law, the full term of an RBI Governor is five years. But the UPA appointed Rajan only for three years. That is, it gave him only a 60 per cent rating.”- is not factually correct. One can make a safe assumption that Dr.Rajan would have got his extension in normal course for another term of two years and the recent announcement of Dr.Rajan’s that he is not willing to seek extension would not have arisen but for the tirade of Dr.Swami, since Dr.Rajan was enjoying the confidence of the Prime Minister and Finance Minsiter on record. The statement of Gurumurthy “Reddy prevented reckless lending by Indian banks and avoided the crisis. Rajan wrote against cheap money, Reddy acted against it — both when the whole world was celebrating cheap money.” is half truth. Dr.Reddy anticipated the bubble of NPAs and swiftly acted to nip it in the bud by advising the banks to prune down their exposure to sensitive segments like- real estate, capital markets and others. Whereas Dr. Rajan has been already saddled with the burden of NPAs when he assumed the office and therefore he had to ensure that credit was not cheaper in order to not only protect the bottom lines of the banks against the mounting NPAs but more importantly to restrict the flow of credit to unproductive activities. In other words, Dr.Rajan has taken over the reins as RBI Governor when the quality of lending has already started slipping down, whereas Dr.Reddy had the opportunity of preventing the incidence of NPAs.Gurumurthy’s statement, ‘Rajan, who had spent his whole life after postgraduation in US, missed interior India like Ludhiana, Bhatala, Rajkot, Jamnagar, Baroda, Morvi or Coimbatore, Tirupur, Namakkal, Karur, Sivakasi down south where business entrepreneurship has grown as a communitarian movement, almost disconnected from the formal banking — read monetary — system.’ leads to an inference that Dr.Rajan is not familiar or conversant with the non formal banking practices in semi urban places like the ones mentioned above. What Gurumurthy conveniently forgets is that Dr. Rajan was born in Bhopal, a town that fits the criteria of the towns mentioned by him like- Ludhiana, Coimbatore, Baroda in his article and spent his life till his post graduation in Delhi and Mumbai that are very much part of India and not abroad. For the head of country’s central banking what is required is the ability to look at the bigger picture of the country’s economy and its issues vis-a-vis the global developments and its impact on the country’s economy. Of course, having a deeper insight on various sectors of the country’s economy and connectivity with the grass root levels will be an added advantage but lack of such deeper insight cannot be treated as a major disqualification to head the central bank of the country lest it will result in missing the wood for the trees. It is like saying that the captain of a cricket team is not qualified unless he is a bowler, a batsman, a fielder and a wicket keeper all rolled into one. This will only remain as a utopian dream. Further assuming that people who head our country’s central bank, though may have in depth knowledge about the banking practices (both formal and non formal) across the country if they are not familiar with the global economy and its dynamics will they fit the bill to become Governors of RBI in the liberalized economy where the impact of global trade and global economy is highly significant? Therefore, Dr.Rajan’s wide global exposure should only be an added advantage but not a burden on his shoulders to carry on the role of RBI Governor.   Gurumurthy talks about the derivative losses incurred by Tiruppur exporters in 2009 ( when Dr.Rajan was not the governor of RBI) and says this is not on Rajan’s radar. However, the fact is that consequent to the episodes in Tiruppur RBI had imposed fine on 19 banks for violating the guidelines on derivative products and the documentation guidelines for derivatives have been made more stringent as well as more transparent. Gurumurthy speaks about, “This unorganised part of Indian economy would not figure in the financial media which is hooked to the stock market as the measuring rod of the Indian economy.”His statement is true no doubt but the solution to this problem is not so simple which Gurumurthy also must be aware of. Data from the unorganized sector is not easily available at the press of the button unlike in the case of organized sector. Unorganized sector majorly operates on cash transactions and resorts to borrowings from money lenders. Banking sector is hesitant to lend money to the unorganized sector mainly due to reasons like- non availability of comprehensive financial statements, large volume of business operations not getting reflected in the books of accounts as they are routed through cash transactions, lack of manpower in banks and other infrastructure to extend the reach of banking to the unorganized sector. Moreover the bank money / currency ratio is India is 0.66 as compared to UK ( 19.54), Newzealand ( 7.44), Japan ( 5.91), China ( 4.80), Euro area ( 4.65), Australia ( 4.44), Singapore ( 4.37), South Korea (2.58), USA ( 1.17). This indicates that the Indian financial system still operates more on currency rather than on bank money. The penetration of banking into interior villages and to unorganized part the country’s economy is not aggressive all said and done. Bottlenecks in basic infrastructure are the main speed breakers to total financial inclusion and for that RBI cannot be blamed as it is to be mainly addressed by the government. Therefore, the geographical reach of the  fruits of monetary policy of RBI are obviously constrained by the limitations of financial inclusion. This is not an overnight phenomena and least of all the blame for that should not be attributed to Dr.Rajan who assumed the role of RBI Governor just three years ago.    Mudra Bank: NBFC-MFIs who have a lions’ share in micro lending (more than 90%), are currently registered and under regulation by the RBI. However, MFIs  ( Non- Governmental Organisations) registered under various state society acts are not regulated by anyone. Though the parliamentary standing committee of finance mooted the idea of a single regulator for Micro Finance sector the RBI has expressed its reservations to take up the regulatory role of non corporate MFIs as they are large in number and also scattered across the length and breadth of the country. Therefore, in 2012 the Centre introduced the Microfinance Institutions (Development and Regulation) Bill 2012 to address the above issues, but the Bill lapsed in 2015 and a new version is yet to see the light of the day. While NABARD and SIDBI act as refinancing agencies with respect to agri lending and MSME credit respectively the creation of Mudra Bank in 2015 by the central government added one more refinancing institution in this segment. If one looks at the micro finance sector in India which landed into crisis in 2010 the primary reasons for the crisis are either multiple regulators or absence of a single regulator to effectively monitor the functioning of the players in this sector. Without addressing this basic issue as the government has brought in Mudra Bank into the picture in haste this only resulted into putting the cart before the horse. Instead the government should have strengthened the existing refinancing institutions in the micro finance sector like- NABARD and SIDBI and introduce an effective regulatory mechanism to monitor the micro finance which would have been more purposeful. Therefore, if Mudra is in limbo as claimed by Gurumurthy, it is the government’s fault but not of RBI.No doubt the fiscal deficit has come down from 6.5% in 2010 to 4.10% in 2015. However, the main reasons for the decline of fiscal deficit are down fall in global crude oil prices and gold.                                          2009-10    2010-11   2011-12  2012-13  2013-14The bank credit growth    16.9%       21.5%       17%       14.1%     15%( vide https://planningcommission.nic.in/data/datatable/data_2312/DatabookDec2014%201.pdf).                                                               1990        2000    2010     2014Domestic credit by banking sectorIn India (% of GDP)                                51.4%     51.4%   73%   74.8%One can notice that the quantum of the bank credit has certainly grown during 2009-10 to 2013-14 but the bank credit growth as % of GDP has come down. One of the reasons for the decline in the bank credit growth is that the stressed assets have increased from 5.7% in 2008 to 10.2% in 2013. (Source:https://www.pwc.in/assets/pdfs/publications/2014/growing-npas-in-banks.pdf).                              FY  2010      2011     2012     2013     2014   2015GDP growth              8.4%          8.4%     6.5%    4.5%    4.9%   7.24%% of GrossNPAs                         2.4%          2.5%   2.9%    3.2%    4.2%   4.45%                                          2011     2012     2013     2014   2015India’s inflation          8.9%    9.3%    10.9%  6.4%  5.88%(Source: data.worldbank.org/indicator/FP.CPI.TOTL.ZG). While the GDP is growing and the inflation as well as fiscal deficit are under control one may wonder why the bank credit growth rate is declining. The answer is obvious –(i) mounting NPAs of banking sector that has led to risk aversion of banks in lending.(ii) global economy still under recession and not fully on the path to recovery. This can be judged from the fact that India’s exports have been declining during the last few years. (from $. 310.50 bn in 2014-15 to $. 261.10 bn in 2015-16).Therefore, the ball is in the government’s court and not with RBI. It is time for the government to pay attention on unlocking the supply side bottlenecks and the government has rightly taken up few measures like- addressing the issues in power generation, improving the basic infrastructure like road connectivity to improve the efficiency in the mobility of all economic resources, reduce the red tape in bureaucracy to propel the momentum of growth in the economy. Monetary policy and fiscal policy are after all like two sides of the same coin and they have supplement and be in sync with each other. While the current government has bequeathed the legacy of policy paralysis from the earlier government, let us not forget that RBI is equally struggling with the impact of the same policy paralysis in the form of mounting nonperforming assets.    As of March 18, currency in circulation in Asia’s third largest economy was higher by 15% compared to a year ago—the highest annual increase since fiscal 2011—according to data from the Reserve Bank of India (RBI). The press has quoted Dr. Rajan estimates that around Rs60,000 crore ($9 billion) of extra cash was in circulation around the country. Therefore, Gurumurthy is right when he says that there is an unprecedented rise in cash holdings. One reason for this could be the recent elections to the states of Assam, Kerala, Tamil Nadu, West Bengal, and Puducherry. Yet another reason for this spurt in currency circulation could be due to the rumour that currency notes of higher denominations are soon going to be redundant, as being claimed in few quarters.  Election commission has seized Rs.570 Crs in May, 2016 during the recent elections in Tamilnadu and the source of these funds and the culprits behind this are yet to be ascertained. Gurumurthy in his article while referring to the huge currency circulation in the country says, “These distortions were occurring under the very nose of Rajan. But he overlooked them, because he had never handled economies where banks do not control the entire monetary system.”  Yes these distortions were certainly occurring under the very nose of  Rajan and he overlooked them because he had certainly not handled economies where banks not only do not but also cannot control the entire monetary system where instances like that of Tamilnadu take place ,because it comes under the domain of the government and the judiciary!!! B.N.V.Parthasarathi,Senior Ex- Banker.Mobile- 09885064644.E Mail- [email protected].Hyderabad.    23.6.2016.