Dropping the pilot

When the respected international economist Raghuram Rajan was appointed in 2013 to run the Reserve Bank of India, there was widespread excitement that at last India was addressing the problems of its financial sector while getting real about the wider economic challenge facing the country. International investors were particularly eager to see what Rajan would do by way of reform. Three years on and Rajan has announced he is quitting this September. Is this now cause for despair, to believe that the business-focused reforms promised by Prime Minister Narendra Modi are about to go into reverse? Maybe that was why an announcement was also made this week that the restrictions on foreign ownership of Indian businesses and the minimum quota of Indian inputs required for retail and manufacturing are to be relaxed. Yet even this sop to international investors was less than it seemed. The restrictions are for a limited period only, after which the international investment community will face uncertainty over the future shape of the rules. Rajan was the first to say that this is no way to run a free-market economy.  But then India felt itself vulnerable in the face of the globalization which saw huge multinational corporations buying up businesses and brands around the world. These corporate giants had incomes larger than many states and protected them through a range of accounting maneuvers that lodged most of their profits in low-tax offshore centers. The thinking was that India’s emergence as an economic giant could be managed best with a degree of protection for its indigenous entrepreneurs. Rajan’s view was that only by facing the full force of international competition would Indian business become fitter and leaner. This led him into conflict with members of India’s billionaire corporate elite.  There are those that believe that there is an “Indian way” which Rajan rejected. He was accused of being a foreigner in his attitudes. His view was that the monetary policy, which was his main concern at the RBI, would not be enough without the widespread reforms to the banking sector, tax collection and budgetary controls as well as fundamental changes to the laws, particularly on labor and land acquisition. He also wanted to see an end to opaque and cumbersome regulations which did not provide a level playing field for either local or international entrepreneurs but did create endless opportunities for bribery and corruption. Rajan took the RBI job because Modi had come to power on the back of solemn election pledges to undertake all of these reforms. Modi had the mandate to push them through and Rajan expected to be riding monetary shotgun to India’s most far-reaching reformer. It has not worked out that way, though the fact that at one point Rajan seemed prepared to serve a further two years suggests that he felt that there was still a chance that real changes could come about. Some may see Rajan's departure as a rejection of any extensive reform and a return to the “Indian way”. There are those who argue that this approach is slowly succeeding and foreign investors will still arrive, but on India’s terms. This remains to be seen.