In three days’ time Urjit Patel will take up his post as the Reserve Bank of India’s new governor. He was previously deputy governor, and his promotion – which had been mooted as influenced by Modi’s old-boys network (Urjit is a Gujurati Patel) – is probably no such thing, as Patel is the eighth deputy governor to be promoted to boss of the RBI. It is a tradition.
What is a more interesting speculation, to me, is what we can expect in terms of continuity considering the nature of the pressures involved in Rajuram Rajan’s recent departure (notice I don’t say ‘which caused’ or ‘that led to’ his departure). The big pressure was of course the call, fronted noisily by Subramanian Swamy, to lower interest rates, loosen the credit spigot and let the good times roll like they did in China: India could even win the race for the biggest GDP! The problem with that is that you very quickly have a bubble economy fuelled by debt that leaves real productivity growth way behind: never trust GDP to tell the truth about the value of an economy – it can often be the equivalent of pointless ‘busy work’. Ballooning debt allows speculators to make a fortune and hollows out the economy and the future of a country: the GDP figure on its own will applaud this (on the way up, that is …).
As China analyst Michael Pettis says, all accelerated growth must be paid for by some sector, and it is usually the domestic one – households and consumers – who suffer over time as public and commercial debts are inflated away at their expense.
That’s why I grew to like Rajan, because he refused to allow that to occur and instead concentrated on reducing inflation (with the help of the collapsing price of oil) while firming up the rupee. This helped ordinary people more than those such as Swamy and all his rich friends. And boy, did they get angry.
The bubble argument – the free credit argument, the globalising argument – that a rising tide lifts all boats, is currently under growing scrutiny, although Sir James Goldsmith understood the humbug of its extreme version way back in 1994. A plague of financial locusts (different to real investors) swarming across the globe, consuming cities and nations in search of ever cheaper meals, is not in the interests of the majority, or indeed the long-term interests of anybody.
OK, rant over: the point is whether Urjit Patel is strong enough to hold the line against Swamy et al. in the way Rajan did … until he left. The more subtle argument used by the locusts for freeing up credit and lowering interest rates is that the banks are hampered or even crippled by the bad loans they are carrying, and therefore cannot extend credit to the economy to get it really moving as fast as it could or should. True. But if you bail out the bad banks you soon find yourself in the same death cycle that the West now finds itself in. Eventually you must lower interest rates to zero and still nothing happens. Demand is dead. The economy won’t grow. Of course not – there is too much debt. Ultimately nothing will be achieved by printing unearned money except more debt.
Rajan, supported by Modi (although not by any means everyone in the government or business community), decided to make India attractive to investors – foreign ones if not Indians. That way real money comes in, sound investments rather than speculations are made, and slowly but surely the Indian economy grows. Meanwhile the reckless borrowers and cronies of the Congress period of government are starved of free money. Well, good – and don’t make it sound as if India and the poor would be better off if the debts run up by the Congress cronies were alleviated or forgiven. Let them pay the vigorish and be left behind by the new, honestly growing economy.
Perhaps Urjit Patel with his Gujarati background could prove important in the sense of camaraderie he might share with Modi when the pressure is on. From what I have seen Patel is of the same mind as Rajan. At first he looked like a time-serving bureaucrat, but on closer inspection he is far more interesting: PhD from Yale, MPhil from Oxford, but his first degree was at London University. I am sure it would have said if he was hanging out with all the Marxists at the LSE (only joking!), so let’s assume it was University College.
One thing that might be to the advantage of Urjit Patel is that he lacks the media appetite Rajan suffered from to excess. If he can resist the temptation to start making opinionated pronouncements – if he can see that needlessly sticking his head above the parapet as Rajan liked to do will only make him a target – then this ‘hawk’ might just be sound. If he isn’t, then as I’ve said before, I fear for India as it stands at this economic fork in the road.