Subramaniam Swamy's tirade against Governor Raghuram Rajan just does not make sense....or does it ?

I have long held  Subramaniam Swamy in high esteem for his zeal in tackling high corruption in public life ...from the Gandhis to Jayalalitha and everyone else in between. However, his tirade last evening on Governor Rajan was nothing short of simply shocking !

I find it intriguing that a highly intelligent and knowledgeable person like him should make such basic errors in his letter to the PM whilst interpreting elementary economic theory . It is almost laughable. For example, the only country to follow his advice to fight inflation with lower interest rates was Turkey with disastrous consequences ! He, of course, carefully ignores that fiscal mismanagement is equally to blame, perhaps much more in supply side inflation,as has been the case in India. Or the specious argument that bad loans in banks have doubled in his period which completely disregards the exemplary work done by RBI in flushing out bad debts hidden by banks over the past decade....and the difference between the two ! Or the tenuous link between  low interest rates and growth whilst overlooking factors like a weak demand environment, sluggish global economy and fundamentals like labour reforms, inability of banks to lend, etc. There are many others which have been widely covered in the media.

As I reflected on this with the happenings in my own professional life in India it suddenly struck me that this is not about Swamy's  idiosyncracies or economics at all....neither it is about the suggestion that Rajan is a UPA appointee or that he is "mentally not an Indian". This is intrinsically about a deep seated dislike in the Indian psyche for professionals who are unbending in their pursuit of their statutory responsibilities and who have the courage of conviction to stand up against the powers that be or indeed against the  high decibel, "noisy" opinion of the illiterate or compromised majority.

This may be a good point to recount, dispassionately, what Rajan has achieved in his 3 year term. No one needs to be reminded of the macro situation he inherited in 2013 with runaway inflation, huge twin deficits and a sinking currency....reflected in total despondency in the business environment, impending downgrades from international rating agencies and the stock markets in shambles. It was his single minded focus to battle inflation, quite correctly at the retail level rather than Swamy's prescription of targeting it at the wholesale level being followed earlier by Subba Rao, pressurise both the governments of the day to manage the fiscal side imbalances and use of innovative means to manage liquidity which restored confidence in India and stabilise the currency and the markets.  India's economy was clearly at the crossroads. There have been very few RBI governors in the past which had faced this unique scenario termed trilemma, in which inflation along with currency needs management of enormous proportion without throttling down growth, which was then at 4.4%, even further. This was far from the projected growth of 8%-9% visualized in 12th plan document. In this scenario, it was his determination to push back and consistently work with successive governments and stubborn bureaucrats, often by holding his own with both the Finance Ministers, that resulted in the RBI and the finance ministry working together to clean up the economic mess and now having a written agreement that inflation targeting is the RBI's responsibility :  setting the national discourse on the way to prudent macro management of the economy, including FRBM, by an effective division of responsibilities between the Government and an independent RBI. In all fairness the NDA government must be complimented for its focus on working with the RBI and taking sincere, effective steps in reducing the fiscal deficit, correcting supply side constraints and strengthening the macros, albeit helped by lower commodity prices. India's macros today are a pride of the world.... growth at 7%, inflation getting under control, surplus on the twin accounts, a stable rupee and a highly resilient stock market. Surely the progress should be evident to all !

Secondly, it was the RBI's determination that resulted in the AQR ( asset quality review ) initiative....which finally flushed out all the doubtful debts hidden for years in dodgy bank balance sheets. This has never happened in  India and potentially can lead to a literal metamorphosis of the mindset prevalent in Indian banking system. This is akin to cleaning up the balance sheet in a corporate context. I had introduced BSR ( balance sheet reviews ), and compulsory provisioning of debts beyond a certain period, in two companies to flush out hidden sins in the balance sheet and put back pressure on the operating teams to deliver a balanced performance in the interest of strengthening the internals of the company before being entitled to incentives driven purely by revenue growth....a practice I had learnt from my days in MNCs such as Digital and Xerox in the early nineties. However, in Indian promoter driven companies implementation of such sound financial practices had a completely different outcome.....the opposition I had to face from across the organisation gave me insights into how entrenched interests ( including the promoters in listed entities ) viciously  hit back and needed to be tackled in what is largely fighting a lonely battle in the interests of the small, mute minority shareholder in our context. What Rajan has achieved on the national scale is just precisely this.....and if this is allowed to be institutionalized in our banking system over the next few years, Indian banking's core malaise would have been addressed. The country and the small depositor will thank Rajan and the RBI for having the courage to go thru with this.

Being professional, having the courage of conviction to speak one's mind and the ability to stand your own comes at a heavy personal cost in  most operating environments in India.....an odd Narayan Murthy driven Infosys notwithstanding. That is what I suspect Rajan is facing at the moment from the deeply entrenched interests in our system. Swamy is just the arrow.... the bow is elsewhere. However, I am hopeful that the Prime Minister will once again take the right decision in this matter in the larger interest of the country....like he has demonstrated in  stopping crony capitalism, eliminating corruption in North Block, etc.

I am sure he recognises that Rajan is the best thing which has happened to India in a long, long time.... and, like himself, needs more time to carry on his unfinished agenda of rebuilding the nation in his own way.

 (PRABAL BASU ROY)

A Sloan Fellow from the London Business School and a Chartered Accountant, the writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies.