The departure of Raghuram Rajan is a worrying sign for India

All too often, the stewards of ­India’s economy have been short of credibility. Politicians’ promises of economic reform are rarely fulfilled, bureaucrats’ assurances are widely disbelieved and even economic growth numbers have become objects of suspicion.

One institution and its leader had proven to be exceptions to this rule: the Reserve Bank of ­India and its governor, Raghuram Rajan.

That is why the government’s decision to push Mr Rajan out the door constitutes self-harm of monumental proportions. Mr Rajan broke the news of his departure in a letter to the central bank’s employees well in advance of the government’s announcement of any decision. His letter made clear that he felt unwelcome. Mr Rajan wrote that he was “open” to staying on, but following “consultations with the government”, had decided to leave.


Mr Rajan becomes the first RBI governor since India’s economic liberalisation began more than two decades ago not to serve an extended, five-year term. The decision to grant an additional two years to a governor serving a three-year term had become almost automatic.

Worse, the government, led by Narenda Modi, appears to have chosen to break this nascent (and healthy) tradition for the poorest of reasons: its unease with Mr Rajan’s independence.

Mr Rajan had discomfited the government on several occasions – most notably, when he delivered a widely shared speech arguing for freedom of expression and the tolerance of different ideas and beliefs. The address merely restated liberal principles and linked national progress to an open and diverse marketplace of ideas. But many in India’s Hindu nationalist ruling party took it as a direct ­affront.

The best-case scenario is worrying enough: that Mr Modi and his finance minister, Arun Jaitley, were upset about Mr Rajan’s hawkishness on interest rates and allowed him to be attacked, knowing they could then replace him with someone more malleable. If so, the RBI’s hard-won independence on monetary policy – preserved and strengthened by successive governors sparring with profligate politicians in New Delhi – has been undermined, perhaps fatally.

There are more worrying possibilities. Mr Rajan, as an economics professor, studied and wrote against crony capitalism. As RBI governor, he has been working diligently to clean up the balance sheets of Indian banks stressed by bad lending to politically influential tycoons. The effort provoked resistance, with the government warning that banks – 70 per cent of which are state-owned – were reluctant to bring bad loans into the open for fear that the original lending might invite criminal prosecution. While Mr Rajan did caution against a “witch hunt” targeting bankers who had done nothing wrong, this might have been viewed by the government as not enough of a compromise on his part. If so, India’s vital battle against cronyism and bad lending risks being watered down or abandoned.

And then there’s the hard-to-dismiss possibility that the government, in a larger effort, wants to install pliant economic managers across the board.

Even the prime minister’s admirers will admit that Mr Modi doesn’t encourage too much independent thought among his deputies.

When he came to power, he passed over many of the most accomplished economic managers in his party – such as the former finance minister Yashwant Sinha and the ex-privatisation minister Arun Shourie – for the finance portfolio. Mr Jaitley, who got it instead, is a lawyer, but more importantly someone who can be trusted not to speak out of turn. The outspoken Mr Rajan may simply have been too much of a maverick for comfort.

Either way, the apparent and unfortunate message is that within India’s government, commitment and loyalty is prized over competence.

Mihir Sharma is the author of ­Restart: The Last Chance for the Indian Economy, an excerpt from which can be read here

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