What Rajan says makes sense
Former Reserve Bank of India governor Raghuram Govind Rajan continues to occupy prominent place in public and media discourse even though he exited from the Mint Street way back in September 2016 There seems to be a valid reason for this Rajan belongs to a rare breed of economists A gold medalist in Electrical Engineering from IIT Delhi, he also did MBA from IIM Ahmedabad before completing PhD
Former Reserve Bank of India governor Raghuram Govind Rajan continues to occupy prominent place in public and media discourse even though he exited from the Mint Street way back in September 2016. There seems to be a valid reason for this. Rajan belongs to a rare breed of economists. A gold medalist in Electrical Engineering from IIT Delhi, he also did MBA from IIM Ahmedabad before completing PhD from Massachusetts Institute of Technology (MIT), US.
It's not quite often that we find a noted economist with engineering and management degrees from the world's foremost institutions. Moreover, he hit global fame for predicting 2008 global recession and subprime crisis in US, which haunted global economies for several years. Perhaps, that's reason why his words carry more weight than any other ex-governer of RBI.
Described as 'Rockstar Rajan' during his heydays as RBI chief, the Bhopal, Madhya Pradesh-born economist of Tamilian origin on Monday cautioned in a television interview that any attempt by the Modi government to dip into reserves of RBI would be detrimental to the economy as the move would lead to downgrading of the apex bank's credit rating. His statement assumes significance in the wake of reports that the current dispensation at Centre is eyeing a significant chunk of reserves of RBI to boost 'economic growth' ahead of 2019 General Elections.
Currently, RBI has total reserves of Rs 9.7 lakh crore. Of this, the contingency fund stands at Rs 2.3 lakh crore, but it can't be touched. That leaves Rs 7.4 lakh crore. If the apex bank part ways with even 50 per cent of Rs 7.4 lakh crore, the central government will have a massive Rs 3.7 lakh crore at its disposal to announce freebies and sops before the country goes to polls. If reports are to be believed, massive loan waiver for farmers across the country is also on the cards to blunt similar assurance by Congress, BJP's principal rival. Such a step obviously requires large resources. That's reason why the BJP government's unprecedented move has attained political hue.
RBI now enjoys excellent 'AAA' credit rating while India as a country is rated 'Baa', a grade just above junk status. Any downgrade in RBI's rating will increase borrowing costs for the apex bank. That's not a good sign because, as Rajan pointed, India needs to undertake several international transactions that need high credit rating. Global rating agency S&P also observed that 'sustained and intense' pressure on RBI could undermine the country's long-term financial stability. It is the second global rating agency after Fitch to accord 'credit negative' to the recent developments at RBI.
In this backdrop, it's better for the economy if the Modi government doesn’t use RBI reserves for populist schemes. The government should find other alternatives to mobilise resources if it wants to go for loan waiver for famers and take up other populist measures to win over hearts of voters in 2019 elections. But the trillion-rupee question is whether the government will heed to Rajan's advice and take its eyes off RBI's war chest!