Half-Politician: Raghuram Rajan’s Punditry On Economics Can’t Be Taken Seriously Anymore As It Lacks Intellectual Honesty

Recently, some left-leaning commentators who are also Congress sympathisers have drawn parallels between former Prime Minister Manmohan Singh and ex-RBI governor Raghuram Rajan. Some of them are salivating at the prospect of Rajan becoming Rahul Gandhi’s Finance Minister in future.

Rajan has already graced the posts of Chief Economic Adviser and the RBI governor, both also held in the past by Manmohan Singh. Maybe, the Finance Ministry is next.

Only time will tell if Rajan will follow in Singh’s footsteps but his punditry on economics in general and Modinomics in particular has increasingly become more and more political especially in the last few years. When he was at the helm of affairs in RBI, he maintained strategic silence over the disastrous economic policies of previous UPA government while packing a punch when it came to criticising economic policies of the Modi government.

When Rajan realised that his prospects of getting an extension at the central bank may have dwindled ( any popular government is unlikely to be amused with a highly voluble central banker), he announced in advance that he won’t be seeking a second term as RBI governor. Though Rajan has been closely associated with the Congress ecosystem since 2008, his closeness with the party’s inner circle seems to have only flourished since he left Mint Street for University Of Chicago to resume his duties as a professor in 2016.

Rajan started his academic career from the university’s Booth School of Business in 1991. As far as economics is concerned, Rajan has generally identified with Austrian school which the University of Chicago has also championed intellectually (though with departure on methodology ). His books ‘Saving Capitalism from Capitalists’ and ‘Faultlines’ are testament to that. Even when he was appointed as Chief Economist at the International Monetary Fund, he didn’t break free from the neoliberal orthodoxy that ruled that institution. This at a time when several economists were challenging that orthodoxy.

Of course, this hasn’t stopped him from sounding alarm bells about rising risks in the capitalist societies and the dangers of ignoring those who are being left behind and standing up to those who are the beneficiaries of the system so that they don’t hijack it. His general warnings about rising risks a few years before the 2008 financial crisis are now advertised as prophecies for the said event.

But it’s not because he had a better crystal ball than others. It’s just that he got lucky. In fact, if one trolls through speeches of any economist worth his or her salt, it’s not that difficult to find some bureaucratic language which can be retrospectively interpreted as a doomsday prediction.

Nevertheless, Rajan, like a true follower of Austrian school, has supported austerity measures over stimulus. He has voiced his support for fiscal consolidation rather than expanding deficits. He has been a fiscal hawk not an irresponsible dove.

Interestingly, Narendra Modi’s economic policies are on similar lines. His government has been repeatedly criticised, even by his well-wishers, that too much fiscal fundamentalism will cause him serious damage. But in the last six years, Modi has shown exemplary discipline on the fiscal front. Even during elections, he has shown great restraint in not giving into populist impulses which is an easy way to win votes and even drive short term economic growth.

Compare this to what the Congress government did between 2004-11. It launched stimulus after stimulus worth lakhs of crores. In its 10 year rule, the UPA gave out Rs 8.4 lakh crore in petro-goods subsidies. There was so much irresponsible spending that the Fiscal Responsibility and Budget Management Act had to be reformulated thrice — in 2004, 2008, and in 2012. In 2006, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme was launched which boosted incomes and thus spending power.

Post 2008 crisis, the UPA offered a tax stimulus worth Rs 1.8 lakh crore over three years. A national farm loan waiver in 2008, costing over Rs 60,000 crore, was launched just before the elections. On top of it all, the less said about the liberal loan regime the better. Lakhs of crores of loans were given to friendly businesses which turned into NPAs, causing huge stress in the banking system so much so that investment in the last six years has come to a grinding halt with banks not willing to loan and businesses not ready to take risks. Ultimately, the growth has suffered.

Now, if Rajan was intellectually honest, he would naturally be an ally of the Modi government and its economic policies and highly critical of the UPA and the mindset which inclines towards irresponsible spending leading to high borrowings and deficits.

But no. Rajan does exactly the opposite.

In the US he writes articles stating that “The West Can’t Borrow and Spend Its Way to Recovery” but in India, he advises Rahul Gandhi’s Congress in devising schemes like Minimum Income Guarantee Scheme which would cost Rs 3.6 lakh crore per year ballooning the deficit and reducing years of hard work in achieving fiscal consolidation to dirt.

In the richer west which has much higher spending power, he criticises the ever-increasing welfare state as unsustainable, In poor India, he bats for expanding it.

In the United States, he recommends supply-side reforms but in India, he calls for a demand-side boost.

For years, he has been saying that there is an urgent need to amend labour laws. Now, when a number of state governments are finally delivering on that front, he says that ‘they should not be done with the stroke of a government pen’ and that ‘such steps needed wider consultation otherwise they could provoke protests on the streets’ as if any significant changes to these laws can be achieved without protests from the unions.

In a conversation with Rahul Gandhi recently, he recommended giving a modest Rs 65,000 as cash transfer to the poor to tide over the Covid-19 crisis. Even if we strip the Rs 20 lakh crore economic package announced by the Modi government to the barebones by excluding liquidity and credit gurantee measures, the cash transfers to the poor and vulnerable almost amounts to the number Rajan guesstimated. Rs 30,000 crore DBT to Jan Dhan women beneficiaries and Rs 15,000 crore DBT to farmers, that alone accounts for Rs 45,000 crore cash transfer. How much pain can another Rs 20,000 crore cash transfer alleviate?

Rajan says that giving food alone isn’t sufficient to migrant workers and that more money needs to be given to them in the form of DBT. But the government has only Jan Dhan accounts as a way to transfer money. And it is already giving Rs 1500 to 20 crore women at a cost of Rs 30,000 crore.

If the rest 20 crore Jan Dhan accounts are also given the same amount, this will cost another Rs 30,000 crore and the total amount will be equal to what Rajan has recommended as DBT to the poor. But will that suffice? Absolutely not. Rs 500 per month is not much help. So, either Rajan should raise his target of DBT from Rs 65,000 crore to thrice that amount to make it meaningful or not criticise the government for not doing enough. He can’t have his cake and eat it too.

But Rajan has to do all this to play the half-politician that he has become.

Take for instance Rajan’s criticism of the measures announced by the government to help Micro, Small and Medium Enterprises (MSMEs) reeling under the impact of coronavirus pandemic . In an interview to a digital portal, Rajan flags MSMEs sector as one of the most indebted sectors, and adds that loans would only add to their indebtedness. In reality, the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS), is a classic example of Modi government’s penchant for fiscal conservatism as it seeks to target only viable firms already plugged in to the formal credit system.

In the same interview, Rajan seems to have little to offer by way of any meaningful critique on the series of agriculture reforms unveiled as part of the economic package other than some tepid take on scope of Essential Commodities Act.

On Union government’s decision to attach conditions for permitting states to increase their borrowing caps from three to five per cent, Rajan again revels in banalities suggesting that centre must follow nudge and encourage with model laws but must not dictate. Rajan surely cannot be unaware of the fact that so far, the Modi government had been prodding the states to reforms in areas as diverse as agriculture (APMC/Contract farming), labour laws, power sector reforms via ‘Model laws’ only but without any great success.

If he was only speaking as an economist that he was before he decided to be Next Manmohan Singh in waiting, he would be saying something similar to what Ruchir Sharma, Morgan Stanley’s emerging markets investment strategist, said in an interview recently:

“As far as the fiscal space of the Indian government is concerned, the global fiscal stimulus at the moment is about 4 percent of GDP. In emerging markets, it has been much less (about half). In India, it has been just over 1 percent of GDP. India does not have the kind of fiscal room for more. We came into this situation with a large fiscal deficit. We cannot get out of this by printing money to stimulate the economy. India’s public debt as a share of its economy is over 70 percent and could get as high as 80 percent by next year. Research shows when debt is of that level, borrowing costs rise very sharply. Across the world interest rates have fallen. In India’s case that has not happened. If we print more money we could have a serious loss of confidence.”

But Rajan isn’t an economist anymore. He is half-politician. And his punditry on economics cannot be taken seriously.