On Thursday, Bharatiya Janata Party (BJP) leader and Rajya Sabha member Subramanian Swamy levelled fresh allegations against the Reserve Bank of India (RBI) governor Raghuram Rajan, demanding that the latter be sacked. In a fresh letter to Prime Minister Narendra Modi, Swamy accused Rajan of compromising national security interests by using an unsecured University of Chicago email id for sending "confidential and sensitive financial information to various people around the world" and of hurting small and medium enterprises by raising interest rates.
Swamy's fresh salvo comes even as BJP president Amit Shah has distanced the party from the controversy. “The party stand is spelt out by me," Shah reportedly told journalists, in what is being seen as a snub to Swamy.
The industry, too, it appears, is not on Swamy's side. In a poll conducted by The Economic Times newspaper earlier this month, 90% of respondents from among top industry executives, wanted Rajan to get an additional term at the RBI; none wanted him sacked.
Interestingly, in a separate development on Thursday, Rajan warned that a sharp slowdown in China could threaten the global economy. Rajan spoke of bad loans in the Chinese banking system and of “weaknesses in the shadow banking system” as likely causes that could negatively impact South Asian economies such as India. In fact, this warning is eerily reminiscent of 2005, when Rajan had predicted the global economic crisis of 2008.
Swamy's motives notwithstanding, and irrespective of whether his party supports the intrepid leader on this issue, it would be good to briefly analyse whether his principal charges against Rajan hold any water.
In his first letter to Prime Minister Modi earlier this month, Swamy had argued that fighting inflation with higher interest rates is erroneous. As this critique points out, Turkey has been trying to fight inflation by reducing interest rates, but that has not helped. In fact, ever since he took office, Rajan has cut interest rates by 150 basis points (bps), but opinion is divided on whether he should have gone lower still.
Having said that, inflation has certainly come down. When he took office in 2013, the Consumer Price Index (CPI) was 9.52%, while the Wholesale Price (WPI) Index was 6.1%. The corresponding figures for April stood at 5.39% and 0.34%.
Swamy has further said that Rajan should have considered the trend in wholesale and not retail prices – precisely where the Congress-led United Progressive Alliance regime headed by the Oxford educated Manmohan Singh had perhaps erred, resulting in double digit inflation.