Raghuram Rajan: Good choice as RBI governor but expect no miracles

The government has done well to choose Raghuram Rajan as the next RBI governor, and to have announced that decision well in advance of September 4, when the incumbent, D Subbarao will step down.

Rajan is a renowned economist and understands the working of the financial system in a way the world has come to respect, after he foresaw the financial crisis of 2008 and had the courage to say so in advance, drawing a lot of flak from those who had been gorging on the excesses that produced the crisis.

His appointment is unlikely to change the short-term policy stance of the RBI but would help drive reform and modernisation of India’s stunted financial sector.

Inflation, driven by mismanagement of food stocks by a brain-dead food ministry, and investment stalled by shaken investor confidence, elusive clearances and tolerance of droll lethargy on the part of those in charge of large public sector infrastructure projects are outside the ambit of the RBI and its policy mix. So is cutting wasteful subsidies to rein in the fiscal deficit, which drives up the current account deficit and weakens the rupee.

It would be unfair to expect Rajan’s presence at the RBI to immediately push up the growth rate or the rupee’s exchange rate.

Where Rajan can make a huge difference is to financial inclusion and financial sector modernisation and reform, including more holistic regulation in line and actively liaising with global governance initiatives.

He can licence many more banks, take advantage of the electronic banking infrastructure put in place by the Unique Identity project, combine it with deployment of mobile technologies to extend the reach of formal finance to all.

He can help overhaul regulation, segmented, incomplete and without institutionalised macroprudential guidance at present. Rajan’s appointment is good news.