{"id":250099,"date":"2015-08-18T17:03:09","date_gmt":"2015-08-18T11:33:09","guid":{"rendered":"http:\/\/www.tehelka.com\/?p=250099"},"modified":"2015-08-18T17:03:09","modified_gmt":"2015-08-18T11:33:09","slug":"on-the-warpath","status":"publish","type":"post","link":"https:\/\/tehelka.com\/on-the-warpath\/","title":{"rendered":"On the Warpath"},"content":{"rendered":"

\"Showdown
Showdown<\/strong> The feud between Raghuram Rajan (left) and Arun Jaitley has touched a new high<\/figcaption><\/figure>
\nIt was meant to be the final nail in the coffin of Raghuram Rajan, governor, Reserve Bank of India (RBI). But when his loyalists raved and ranted, Arun Jaitley, the finance minister who masterminded the move, gave in. Official sources contend that Rajan, as RBIgovernor, may indeed have a veto power in matters related to public debt. Earlier, Jaitley\u2019s plan was to form a separate Public Debt Management Agency (PDMA), which would clip RBI\u2019s wings and make it function as per consensus without giving any veto power to the rbi governor. In effect, Jaitley\u2019s wish was vetoed.
\nThis is not the first or the last time that a finance minister and a central banker were at loggerheads. India is not unique in the sense that it happened here. Globally, in times of economic crises, a showdown between an economic lord and a monetary master is almost inevitable. Not surprisingly, ever since the financial crisis of 2008, rbi governors and finance ministers have waged constant battles against each other. They have both criticised the other for India\u2019s economic ills.
\nMost people remember the constant fights that the former finance minister, P Chidambaram, had with the then rbi governors YV Reddy and D Subbarao, as also with Rajan, who was appointed during the upa-2 regime. However, the decibel levels of the current Jaitley-Rajan tussle seem to have peaked. A pink paper recently wrote that \u201cRaghuram Rajan seems to be under subtle but steady stack.\u201d It added that \u201cthe government\u2019s strategy seems to be to keep the central bank unsettled\u2026.\u201d Sources say that after a long time the actions of a hitherto-independent rbi were politicised.
\nGiven this scenario, it is apparent that although Jaitley may have lost the pdma battle against Rajan, the former will strive to win the war over the coming months. Before this government\u2019s tenure is over, the rbi\u2019s responsibilities will be less than what they were a year ago. The setting up of the pdma signals a move to take critical decision-making related to public debt and, of course, interest rates, away from the central bank. Rajan and his supporters will need to be continuously on their toes.
\nHowever, the crucial question is: why are Jaitley and Rajan on this warpath? It may also be asked whether the reasons why Chidambaram fought with Reddy were the same as now. Is this merely a matter of clashing egos and personalities or of practical politics and even-tempered economics? More importantly, in times of economic recession or slowdown, can good politics and good economics work in unison to seek common goals?
\nShooting for growth<\/strong>
\nPrime Minister Narendra Modi came to power on the twin promises of growth and development for all the sections and twin dreams of transparency and governance. Jaitley was the man he handpicked to deliver the goods. Despite several policy changes in the past 14 months, growth continues to languish. Although past figures and future estimates have scaled up, critics feel this was because of the change in the growth-calculating formula.
\nThe reality on the ground hasn\u2019t changed. Today, even industrialists such as hdfc\u2019s Deepak Parekh and Bajaj Group\u2019s Rahul Bajaj, as well as foreign ceos, criticise the government for its inability to kickstart investments and put the country on a high growth trajectory. Time is running out for Jaitley and Modi and it is time to deliver on their promises. A study by Bradley Turner found that the focus of the finance ministers globally is generally on \u201cgrowth rate of real gdp (Gross Domestic Product)\u201d.
\nIronically, the study\u2019s title was \u2018What causes finance ministers to get fired?\u2019 Coincidentally, in the recent past, there were recurrent rumours that Jaitley may lose his job if he can\u2019t achieve a higher growth rate by the end of this year. Fortunately for him, perhaps, the figures in the recent past were inconsistent \u2014 a month of good growth followed by a slide in core sectors followed by fears of monsoon failure followed by studies that the investment cycle may not pick up until 2016.
\nIn contrast, the main task of a central banker is to rein in inflation, or price rise. As TR Santhanakrishnan, chairman and ceo, Financial Technology Business said , it is to lower prices of commodities and, at the same time, initiate a policy that \u201csupports growth without triggering recession\u201d. This is an almost impossible task; it is something that few central bankers have achieved, especially in times of economic crises. Therefore, like Jaitley\u2019s, Rajan\u2019s hands are tied.
\nRajan maintains that low inflation is better than high growth, at least temporarily, to improve the lives of the people. The logic is that if people spend less to buy things, they will have more disposable income, which they can use to buy other goods. The interim result: it will trigger demand for goods which, in turn, will force businesspersons to produce more. As demand grows, companies will invest to increase production capacities. End result: high growth rates.
\nThe problem is that Jaitley wants quick results; he wants growth to happen in months. He feels that this is the best panacea for the people, who suffered under the upa-2 regime. Therefore, the finance minister wants the rbi to lower interest rates continuously, which will cajole companies and consumers to borrow more from the banks. The firms will use cheap money to invest in production capacities and the consumers to go on a shopping binge that will hike demand.
\nRajan refuses to tinker too much with the interest rates. Instead, he believes in a process that may be slow, but is robust. He fears that unless prices come down, India may fall into a vortex of high growth and high inflation, which may be more dangerous than one of slow growth and low inflation. It is obvious why there is a faceoff between Jaitley and Rajan. It is also clear why Jaitley wishes to take away the interest rate-setting powers of the rbi and shift it to the proposed PDMA.
\n
\n
\"Price
Price matters<\/strong> Soaring onion prices are causing a lot of discomfort for NDA-2<\/figcaption><\/figure>
\nShooting from other\u2019s shoulders<\/strong>
\nGlobal experiences during the recent financial crisis indicate that both the inflation- and interest rate-led strategies can fail. There is little clarity on what succeeds in which nation. Pablo Guidotti, an Argentinean professor, concluded that the central banks\u2019 strategy \u201cto solely focus on targeting inflation\u201d didn\u2019t work in many countries. An article in the New Zealand Herald concluded that \u201crecord low (interest) rates have not been as successful as expected in boosting growth and employment.\u201d
\nThe global crisis has also highlighted the twin mindsets of most finance ministers. On the one hand, they tend to hope and hype about the future. On the other, they expect their central bankers to provide the stimulus to kickstart growth through lower interest rates. Jim Rickards calls the former mindset akin to the \u2018rope-the-dope\u2019 technique invented by the legendary boxer, Mohammad Ali, who claimed that he could \u201cmove like a butterfly and sting like a bee.\u201d
\nIn \u2018rope-the-dope\u2019, Ali \u201cwould lean back on the ropes and absorb punishment from his opponent, even pretending to be weakened. Then he would bounce off the ropes, strike back and inflict a powerful combination of painful blows on his opponent\u201d. The beauty about this style was that it worked each time with almost every opponent that Ali faced.
\nThe same is true about finance ministers who, in times of crisis, continue to believe that \u2018weak growth\u2019 is \u201con the ropes\u201d, and the \u2018good times\u2019 are around the corner. They continuously project a rise in growth rates in the near future. That\u2019s why they push the central bankers for \u2018one more cut in interest rate\u2019 and \u2018one more dose of easy liquidity\u2019 which, they feel, will be enough to achieve higher growth rates.
\nHowever, events don\u2019t always turn out the finance ministers\u2019 way.
\nThe urge among finance ministers across the world to think positively is the one that forces them to lean heavily on their central bankers. As the article in the New Zealand Herald said, \u201cThese days rather than removing the punchbowl, central banks are increasingly expected by their governments to organise the party, spike the drinks and force attendees to partake to excess. Central bankers have become the ones wearing the paper hats and topping up the drinks\u2026.\u201d
\nIn a sense, this implies that the central bankers need to initiate concrete \u2018on-the-ground\u2019 actions that change the sentiments among investors, even as the finance ministers exaggerate the impact of their policies and promises. This is exactly what Jaitley expects from Rajan. He wants the latter to lower interest rates and ease liquidity so that more money will flow into the system. At the same time, Jaitley will announce new policies that will influence growth after a lag time. Thereby, the finance minister thinks he can start a never-ending growth-investment- development party.
\nShooting from the hip<\/strong>
\nIn an increasingly globalised world, where capital flows in and out of a country in nanoseconds, global investors are finicky and acquire a herd mentality. They rush in when they see a potential but rush out at the slightest signs of trouble.
\nAfter the 2008 crisis, the same become true of global credit rating agencies, which are quick to downgrade nations. Therefore, finance ministers are under pressure to show results in terms of growth and investments and, at the same time, stick to fiscal discipline. The finance ministers shift the onus on to their central bankers since they need to balance their budgets.
\nSince Rajan refused to play the growth game, Jaitley did announce in his last Budget that he will increase public spending to start a new investment cycle. But this is fraught with problems, as it can lead to high inflation. Everyone is aware of the politics of inflation which, if it persists for several years, can force the voters to root out existing regimes. Soaring onion prices have spelt trouble for several ruling political parties. So, Jaitley\u2019s first choice is to depend on Rajan\u2019s initiative to cut interest rates.
\n
\"Bone
Bone of contention<\/strong> The Centre wants interest rates to be lowered as it would encourage more borrowing from banks but the RBI does not share its enthusiasm<\/figcaption><\/figure>
\nThis is politically a win-win situation for the politicians. One, if the choice is interest rates, rather than public spending, the finance ministers can blame the central bankers if the strategy fails. But if it is successful, the former can easily take credit and gain political mileage. It is the central bankers who are on the back foot. They take the blame if they make the wrong choice or if things don\u2019t work out. They are unable to take the credit for the successes because critics allege that they should have done more.
\nA recent book by Pierre L Siklos went into the issue of \u2018conflicts and conflict resolution\u2019 between the finance ministers and central bankers. \u201cThe potential for conflict\u2026 suggests that disagreements about objectives, policies, or both, can emerge with far-reaching consequences. Again, statutory arrangements, politics and personalities all play a role in the likelihood of such conflicts surfacing,\u201d said the book. It added that historical examples of such conflicts suggested that they left \u201ca lasting impact on the extent of political pressures applied on central banks.\u201d
\nUnfortunately, the Jaitley-Rajan spat has all of the above ingredients. More importantly, its path seems to indicate that politics is likely to triumph over politics, i.e. politics is likely to dictate the decisions of the RBI in the near future. The proposed PDMA is an example because it transforms the role of the RBI as the only arbiter to judge on issues of public debt and interest rates. By forming a committee under PDMA, with representatives of the government and rbi, it pins hopes on a consensus approach. Even if Rajan gets a veto right in PDMA, he is likely to exercise it rarely.
\nOver the next few months, the tensions between Jaitley and Rajan are likely to increase, especially if growth does not manifest itself. In such a scenario, Rajan will have to go and rbi\u2019s powers will be further curtailed.
\nThis would be in keeping with global trends. A recent study by Mark Hallerberg and Joachim Wehner found that left-wing and centrist political parties \u201cappoint central bankers with more economics training\u201d while right-wing ones opt for those with experience in private financial industry.
\nThis is why Rajan, with his experience as a professor and stint at the International Monetary Fund, was appointed by upa-2. While his immediate predecessor Subbarao held several economic portfolios within the government, Reddy rose within the RBI\u2019s ranks. Obviously, Jaitley, who is part of a right-wing political party, wants a RBI governor who is pro-industry and comes from within the private sector. Only one with the latter mindset can serve as his right-hand man.
\neditor@tehelka.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

For years, finance ministers and central bankers have tussled with each other over money matters. But the war between Arun Jaitley and Raghuram Rajan has reached a point of no return.<\/p>\n","protected":false},"author":78,"featured_media":250100,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[56],"tags":[2879,453,7448,6605,1573,3080,913,9381],"_links":{"self":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250099"}],"collection":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/users\/78"}],"replies":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/comments?post=250099"}],"version-history":[{"count":0,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250099\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/"}],"wp:attachment":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/media?parent=250099"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/categories?post=250099"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/tags?post=250099"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}