Reportage

Line of Credit

By Mark Bergen | 1 October 2013
HARIKRISHNA KATRAGADDA FOR THE CARAVAN

|I|

WHEN THE RUPEE STRUCK 60, the lines tethering Mint Road to North Block drew taut. Relations between the Reserve Bank of India (RBI), in Mumbai, and the Ministry of Finance have rarely been without friction, but as the currency fell past a dramatic threshold against the dollar at the end of June, they were frantic and heated. The government in Delhi, already under siege from all sides, faced a new barrage of public criticism as the plummeting rupee touched new lows almost every day.

Six weeks earlier, the US Federal Reserve chairman Ben Bernanke announced that his bank’s third round of quantitative easing, an unorthodox tactic to stimulate the American economy, would soon wind down. Investors who had poured into emerging market nations for juicier yields now started to flee en masse. The retreat stung currencies from Turkey to Brazil, but India was particularly exposed, with a current-account deficit fresh off a record high and increasingly dependent on short-term foreign investment.

With the currency commanding unprecedented attention and talk of another 1991 growing louder, Delhi took action. According to several people working with the finance ministry, RBI officials were summoned to North Block with unusual frequency—and on 15 July, the central bank intervened.

The RBI initiated a series of dramatic measures to drain liquidity from the market and defend the battered rupee. The moves were abrupt, haphazard, and ineffectual: as the central bank fumbled from strategy to strategy over the following month, the rupee kept tumbling.

Close observers of the Indian economy have many disagreements—over why growth stalled, who is to blame, and what must be done—but here they reached a consensus. A chorus of former officials, economists and investors told me that the RBI had been strong-armed by a politically anxious finance ministry. The liquidity moves came as an utter surprise to the Technical Advisory Committee (TAC), a seven-member body that counsels the central bank, two of its members said. The bank’s public statements were sporadic and clumsy, uncharacteristic of the then RBI governor, Duvvuri Subbarao—solid evidence, one person with close knowledge of the RBI told me, that its hand had been forced by the government.

In Indian financial circles, where the RBI was seen as the sole government institution whose credibility had remained intact, the feckless moves that began in July signaled that its credibility was unravelling.

If those exaggerated anxieties have since been reversed, the turnaround began on 6 August, when the flailing government surprised its fiercest critics by naming Raghuram Govind Rajan as the next head of the central bank. Rajan, a distinguished professor at the University of Chicago’s Booth School of Business, had been hailed as “the oracle of the financial crisis” for his prescient warnings three years before the 2008 collapse. He had spent the past year as the government’s chief economic advisor, a post that many presumed was a brief stopover on his way to Mint Road.

But his appointment was not a fait accompli. While the names of other candidates were floated in the media, the deepening sense of crisis may have given the final push to Rajan’s installation, diminishing doubts that had been aired over his relative lack of bureaucratic experience and his short time in India. When he took charge on 4 September, announcing his arrival with a confident and sweeping inaugural speech, markets gushed. Stocks sprung up and the rupee recovered 10 percent of its value in a week. Headlines proclaimed a “Rajan rally” and analysts marveled at the power of “the Rajan effect”.

Officially, the private sector praised his promise of clarity and consistency in the central bank’s decisions. Unofficially, as one former bank analyst wrote in an email, many were “thirsting for an adult” in government. Confidence in the Indian economy, which had drooped to toxic lows, was partially resuscitated—and the credit was placed squarely on the shoulders of a man who decidedly does not want it there. A vocal critic of the extraordinary stimulus measures undertaken by central banks like the US Federal Reserve, Rajan’s defining intellectual trait is an insistent pragmatism. One suspects that nobody distrusts the power of “the Rajan effect” more than Rajan himself.

On the day of his appointment, a dreary Tuesday in August, he met the press inside North Block and gave a short, solemn statement. The government and the RBI, he said, did not have a “magic wand to make the problems disappear instantaneously”. He left without taking questions.

BY THE TIME I MET RAJAN at the RBI’s offices in Mumbai on 13 September, he was an unlikely celebrity. His modest disavowal of the “magic wand” had been forgotten by the media, and Rajan had become “The Guv”. The overheated market for speculation about Rajan’s superhuman powers peaked earlier that morning, when the Economic Times published a column by Shobhaa De crowning the handsome RBI governor India’s newest sex symbol. (“The guy’s put ‘sex’ back into the limp Sensex,” De wrote. “His chiseled features are as sharp as his brain.”)

We met in the RBI visitor lounge, an angular room on the 18th floor of the bank’s headquarters, whose windows offered a sweeping view of south Mumbai; Rajan’s own office, across the hall, peers over the rest of the city and the sea. Rajan—Raghu to anyone who shakes his hand—sat in front of a wall of small portraits of the governors before him. The painting of his predecessor, Subbarao, had yet to be completed.

When Rajan took over nine days earlier, he immediately introduced measures that many credited with undoing the damage wrought during Subbarao’s last months on the job. The “Rajan rally” made good copy, but he was characteristically cautious in describing his shift in direction: when I asked if the policies introduced in July and August had been reversed, he replied they had merely been “fine-tuned”.

In conversation, Rajan is direct but distinctly professorial. His answers come in complete paragraphs, typically prefaced by “I think” or “My sense is”. Asked about his rapturous reception in the press, he deflected toward the more comfortable territory of economic theory. “We must remember that sentiment is important, whatever the cause for the sentiment,” he said. “Markets are not impersonal. There are people making decisions. How they think, how they form expectations, is important.”

But he was aware that he was still in the midst of a honeymoon. “There’s only so long that expectations can carry you before translating into reality,” he told me. Rajan has long been a sceptic of the true reach of central bankers, and while he didn’t address them directly, he attempted to defer the oversized expectations that met his arrival. “What I can do is offer some stability to the currency,” he said, quickly adding, “And I mean stability not just in external value, but the domestic value of the currency, which means inflation.”

A week after our meeting, in his first monetary policy statement, Rajan defied market expectations and raised the nation’s central interest rate, citing the threat of continued inflation. At the same time, the new governor lowered the marginal standing facility, the rate of last-resort lending for banks, which the RBI had abruptly raised on 15 July as part of its inept rupee defence.

Though analysts naturally differed as to the wisdom of Rajan’s first big decision, on paper he had cemented his stature as an independent reformer. He had stood down industry, which was clamouring for rate cuts, and likely disappointed Finance Minister P Chidambaram, who is widely believed to have been the fiercest lobbyist for lower rates over the past year. It looked as though he had deemed the RBI’s earlier liquidity measures unwise, and moved to reverse them.

For those familiar with Rajan’s views, his first move should not have come as a surprise. His wariness of inflation is well-documented, as is his cynicism about central bank efforts to juice growth with loose monetary policy.

Among close observers of the RBI, the more important questions concerned his willingness to defy pressure from Delhi and restore clarity to the central bank’s objectives. Since his appointment in August, speculation has swirled around his role in the RBI’s clumsy July manoeuvres. If the government had forced the bank’s hand, as many insiders insisted, had its chief economic advisor gone along?

Rajan arrived in Delhi in August 2012 with a reputation for voicing dissent and an enviable aptitude for predicting financial disaster before it struck. “He always speaks his mind in meetings,” one of the economists on his staff at the finance ministry told me. “He’s very evident, and people know it.” Yet there is no concrete evidence that Rajan, who spoke to Chidambaram on a near-daily basis, raised alarm bells in July.

Ashima Goyal, a TAC member who called the sudden liquidity measures “overkill”, told me she believes Rajan supported them inside the finance ministry. “He was very strong in supporting the need to defend the rupee,” Goyal said. At a university event in Delhi, shortly after the decisions, she approached Rajan and raised concerns that a similar defence undertaken by the RBI in 1998 had suppressed growth. “He seemed to think that the liquidity movement was necessary.”

In public appearances, Rajan toed the ministry’s line: during a brief television interview on 26 July, he endorsed the policies as necessary but temporary efforts to stabilise the rupee, with “minimal damage” to growth. “He’s a pretty orthodox chap,” said Jahangir Aziz, an economist with JP Morgan, which backed the RBI’s decision. “He likes to finish doing things inside the box before moving outside the box.”

Ajay Shah, a former finance ministry economist who has known Rajan for more than a decade, saw the July moves as a disaster orchestrated by the government, a glaring sign of the RBI’s lack of autonomy. “The last six months of macro and finance policies are the biggest blunders in Indian history,” Shah told me in August. “I don’t know where Raghu stood.”

Others who know Rajan believe he was personally opposed to the decisions, and his advice behind closed doors was ignored. They saw his public comments as a necessity for anyone working inside the government, rather than an omen of his compromised independence.

When I asked Rajan about his stance on the July moves, he was tactful but evasive. “Without being more specific than needed,” he began, “the finance ministry and RBI have been discussing a lot of things over the last year. And I’d say there’s been substantial amount of understanding and cooperation. Not necessarily agreement on everything, but certainly understanding on everything that is done. You can debate for a long time where would we be without it—would we in a better place or a worse place.”

He added, with a chuckle: “I don’t think it’s the appropriate time to have that debate.”

His reticence during our interview was carefully calibrated. By mid July, he was likely aware of the decision to come a month later, an appointment he almost certainly expected when he arrived in Delhi a year earlier. Though he was a frequent critic of the government’s economic and financial policies before his return to India, Rajan is, above all, a pragmatic and politically savvy economist.

But the debate he would prefer not to have—at least in public—is unlikely to vanish. When he took charge of the central bank on 4 September, India was mired in its worst monetary situation in recent memory, and debate about the RBI’s role had reached an apex. The spectre of 1991 lingered over the government. Although India’s foreign reserves had grown considerably since the days of its worst balance of payments crisis, chatter persisted that the country might need to turn to the International Monetary Fund, where Rajan once served as chief economist.

The “Rajan rally” dispelled the worst of these fears, but distrust of the government’s ability to manage the economy remains strong. For all the native pride at his return, Rajan remains an outsider, a figure of Davos rather than Delhi. Yet for over a decade, he has quietly worked with the government, advising the country’s economic decision-makers.

Among the youngest in a close-knit generation of Indian economists who have found tremendous success abroad, he has now come back to assume a position he has long sought, to which he brings an embrace of capitalism far outside the Indian mainstream. In the two paramount debates in international economics about the crisis of 2008—what caused it, and what to do in its wake—Rajan has been a controversial central character. And he is now cast as the saviour of the Indian economy, a burden he is determined not to carry.

|II|

IN OCTOBER 1955, India’s first chief economic advisor, JJ Anjaria, hosted a dinner party for an American guest. The economist Milton Friedman was visiting Delhi from the University of Chicago, sent by the US president, Dwight Eisenhower, to assess and advise the eight-year-old nation. Friedman, whose tenure in Chicago would last another two decades, was already closely associated with the ideology for which he and the university would later become synonymous: a love of free enterprise and disdain for government regulation.

After three weeks in Delhi, Friedman drafted a memorandum on the Indian economy that fit his reputation. It scolded the government for its heavy hand in industry, rigid controls on the private sector, and erratic monetary policies. When Anjaria invited him over, Friedman met “some eight of the eighteen or nineteen” economists working on the government’s second Five-Year Plan, he recalled in his 1999 autobiography. None of them agreed with his recommendations.

The story of India’s subsequent economic trajectory is a familiar one: decades of woeful growth, held down by the License-Permit-Quota Raj, until a balance of payments crisis in 1991 forced the curtain to lift. Two decades of robust expansion followed, until the slowdown that began in 2011.

But this well-worn narrative is incomplete. For its first 15 years after Independence, India’s rate of growth was on par with other newly created agricultural nations. The economic malaise arrived around the start of Indira Gandhi’s prime ministership, along with her nationalisation of industry and consolidation of power. But it ended, and rapid growth began, when she returned to office a decade before 1991.

“Starting around 1980, the Indian economy became a veritable dynamo,” Rajan said in a 2006 speech in Mumbai. “Despite the inevitable unfavourable comparisons with China, very few countries have grown so fast for such a prolonged period of time, or reduced poverty so sharply.” Arvind Subramanian, a friend and frequent collaborator of Rajan’s, wrote a landmark paper in 2005 with the Harvard economist Dani Rodrik, which traced India’s total factor productivity, a metric of growth. It accelerated 2.1 percent faster than the average country for two decades after 1980, after lagging nearly a percent behind the rest from 1960 to 1980.

As Rajan put it in his 2006 speech, echoing the conclusions reached by Subramanian and Rodrik, the spurt came when “government attitudes toward the economy” shifted under Indira and then Rajiv, with “pro-business reforms” that signaled a more favourable atmosphere for private industry.

The “pro-competition” reforms of 1991, to use Rajan’s phrase, dramatically opened the economy, building on the smaller steps taken a decade earlier. But the failure to follow through with “second generation” reforms after the Congress-led United Progressive Alliance (UPA) came to power in 2004 eventually caught up with India in the wake of the global economic crisis.

“For a few years [after 2004] the momentum created by previous reforms, together with strong global growth, carried India forward,” Rajan wrote last summer. Politicians concluded that additional reforms were unnecessary and politically radioactive. While the UPA’s re-election in 2009 cemented what Rajan dubbed a “lurch toward populism”, government came to be seen as “a source of sporadic handouts rather than of reliable public services”.

Among economists, at least, this broad diagnosis evokes little disagreement. The more contentious issues have to do with who bears the blame for the complacency that preceded the slowdown, and how much the government’s policies since 2010 have exacerbated it.

Few commentators have positive words for Pranab Mukherjee’s tenure as finance minister, which began in 2009 and seemed to mark the nadir of the shift toward populism. A consummate Congressman who had long been the government’s reliable political firefighter, Mukherjee has been blamed for doing too few of the right things to push forward reforms, doing too many of the wrong things after growth began to slide, and generally failing to hold the line against surging deficits. DK Mittal, who was the financial services secretary in the ministry, put it more charitably than most: “He was busy with other things.”

“He was not focused on the economy,” said Ila Patnaik, a professor at the National Institute of Public Finance and Policy. “He was a politician, and not really an active finance minister.” By her reckoning, Mukherjee came into office as a bubble was set to burst. Driven by an influx of foreign capital, growth accelerated too quickly. And the government, with its eye on the 2009 Lok Sabha elections, refused to slow spending and waited too long to raise interest rates or pull back its stimulus after the financial crisis. “The economy was overheating,” she said. “Ten percent growth was faster than what the economy could take.”

The contrary view holds that double-digit growth would have continued had the government not snuffed it out. Surjit Bhalla, a loquacious, contrarian economist and investment manager, does not buy the bubble theory. By the end of 2009, as the crisis loomed, retail inflation was touching 15 percent, and the RBI, which had begun to cut rates after the collapse of Lehmann Brothers in September 2008, decided to reverse course. From March 2010 until October 2011, the RBI hiked the repo rate 13 times by a total 375 basis points, among the fastest inclines on record.

In Bhalla’s view, they completely misread the numbers and misdiagnosed the underlying cause of inflation, which he blames on a sharp rise in agricultural procurement prices orchestrated by Congress president Sonia Gandhi’s National Advisory Council. In a 2011 study, Bhalla argued that a 10 percent hike in procurement prices, timed to benefit farmers before the 2009 elections, led to a three percent rise in consumer inflation.

“What did the RBI do?” Bhalla bellowed. “They said, ‘Oh my god! There’s excess demand, the economy is overheating!’ It was nonsensical.”

As inflation soared, the then chief economic advisor, Arvind Virmani, felt much like Milton Friedman once did. Back in 2006, when growth was still near 10 percent, Virmani had authored a Planning Commission report warning that it risked hitting a plateau unless immediate reforms arrived. Three years later, in his final economic survey as chief economic advisor, Virmani issued a further caution, in softer language—requisite for government documents, he assured me—on the need to contain the fiscal deficit while growth was still underway. The budget deficit, which had been targeted at 2.5 percent of GDP in February 2008, hit 8.2 percent a year later.

“Growth couldn’t be taken for granted,” Virmani told me when we met in Delhi. “But they ignored the warnings on the slowdown.” While things still looked good, Virmani said, clear signs of imminent trouble were entirely missed.

While Rajan has written that the boom was not “an aberration”—contrary to the bubble theory—he does not seem to agree with those who believe the economy was humming along in good health until the government spoiled the party. “Strong growth tests economic institutions’ ability to cope,” Rajan wrote in April, “and India’s were found lacking.” His own speeches and columns have emphasised the structural deficiencies in the Indian economy that were not repaired while growth was still booming, and badly exposed when it slowed down. As he said in a 2009 interview, referring to the crisis in America, “It’s at the point when people say there’s no problem that in fact all the problems are building up.”

“We kept patting ourselves on the back that eight percent growth was our birthright,” said Pratap Bhanu Mehta, the president of the Centre for Policy Research in Delhi. “All the bodies that should have been thinking objectively did not do that in the lead up to the crisis.”

A minor awakening arrived last September, when Chidambaram called in the emeritus economist Vijay Kelkar, who penned the first government report to spell out the dire fiscal situation. That same month, the finance ministry announced its “big bang”: further liberalisation of foreign direct investment and plans to reduce costly diesel subsidies. But the economists I spoke to were distinctly unimpressed. As a slice of GDP, foreign direct investment inflows are less than two percent.

Ashok Desai, who was chief economic advisor in Manmohan Singh’s finance ministry during the 1991 crisis, scoffed at the government’s belated moves. Over the past two decades, Desai told me, “the word ‘reforms’ became a sort of holy term,” drained of its significance by politicians eager to claim its mantle. “Everyone used it without meaning it.”

On 14 April last year, a small gathering was held in Delhi to celebrate the re-release of a book of essays honouring Desai’s finance minister. Rajan stepped to the podium, began with brief words of praise for Manmohan Singh, and then swiftly bore down on the failures of his government. New reforms had been held back by “an unholy coalition” between “the connected” and the Congress, Rajan declared, in what one observer described as “a near tongue-lashing” of the prime minister. “We need to become paranoid again, as we were in the early 1990s,” Rajan concluded.

Four months later, he became the next Chicago economist summoned to Delhi.

|III|

IN 1966, three years after his third child, Raghuram, was born in Bhopal, R Govindarajan was posted to Indonesia. A failed coup the previous year had sparked off a frenzy of violence, which targeted communist supporters of the Indonesian president Sukarno and claimed more than half a million lives. “I remember the sound of machine guns in the evenings,” Rajan told me. “My mother bore the brunt of the uncertainties. You had soldiers with a lot of authority moving around. It wasn’t clear that they would respect diplomatic immunity.”

Profiles of Rajan invariably describe him as the son of an Indian diplomat, whose further assignments took the family to Sri Lanka and Belgium. Growing up, Rajan assumed his father worked for the Ministry of External Affairs. But Govindarajan, who topped his 1953 Indian Police Service batch, was an officer in the Intelligence Bureau (IB); he would have been dispatched to Indonesia as a spy, not a diplomat.

When the IB was split to create a separate external intelligence agency in 1968, Govindarajan became one of the original “Kaoboys”—the first men to join the new Research and Analysis Wing (R&AW) under the legendary spymaster RN Kao, for whom Rajan’s father was officer of staff, according to a former R&AW director.

When Rajan was seven, the Tamil Brahmin family moved to Sri Lanka. He recalled it as “a time of turmoil” in the country. “One of the years I was there, there was no school, so we played,” he said. Rajan’s younger brother, Mukund, was born in Chennai in 1968; he is now a top executive at Tata Sons, where he serves as brand custodian, chief ethics officer and spokesman. (Rajan’s older brother now works for a solar company in the US; his only sister is a French teacher in Delhi, married to an IAS officer.) After Sri Lanka, the family moved to Brussels, where the children attended a French school, and then returned to Delhi in 1974, eleven months before Indira Gandhi declared the Emergency.

In Rajan’s narrative of his own life, delivered in interviews, speeches and his own writing, his encounter with the dysfunctional Indian economy of the Emergency years plays a pivotal symbolic role. It’s a kind of origin myth for the economist he would later become: a champion of capitalism who is acutely aware of both the unintended consequences of government intervention and the risks of unregulated financial markets.

The Rajans were certainly not suffering: his father was a senior government employee, with income sufficient to buy a car but influence too weak to jump the waiting list. But the shortages of certain goods came as a shock: the children took turns each day searching for shops selling bread. “I went from seeing the supermarket filled and toys galore [in Brussels] to a country where you had to hunt for bread, and milk was a luxury,” Rajan told Businessweek in 2011.

As Rajan tells the story in his best-selling 2010 account of the global financial crisis, Fault Lines, Indira Gandhi’s puzzling policies turned him towards his eventual profession. “I thought there might be some grand design I did not understand,” Rajan wrote, “but the government’s policy clearly was not working, because India was still poor. I was determined to learn more, so I became interested in economics.”

But the young graduate first took a far more conventional route. Rajan went to the Indian Institute of Technology Delhi and studied electrical engineering, graduating in 1985 with the prestigious Director’s Gold Medal, awarded to the best all-round student. He did well academically, one classmate told me, but he was not “one of the nerds”. He was an avid quizzer, and a decent bowler. Anant Jhingran, who won the President’s Gold Medal, given to the top-ranked student, recalled that “many of us excelled in studies, but Raghu was by far the best all-rounder.”

According to one of Rajan’s close friends from the university, IIT was the first place where Rajan faced people who outperformed him academically. “Raghu thought he would be number one,” the friend said. “He ended up about 25th—not at all at the top of the class. That, for him, was a very sobering experience.”

IIT was also the stage for Rajan’s first lesson in Indian politics. He struggled with Hindi, a language he learnt only after arriving in Delhi. His classmates did not let this pass. “Of course we made fun,” Jhingran recalled, laughing. In his final year, Rajan contested elections to head the Student Affairs Council. At the time, the school was divided between English- and Hindi-speaking factions, Rajan’s friend told me. Rajan ran as the de facto English candidate, against a Hindi speaker, who defeated him. “He was very disenchanted about IIT after that,” his friend said.

But Rajan’s education in Indian politics continued after the election. The victor was revealed to have taken kickbacks from a school canteen supplier, and promptly ejected from office. Rajan’s friends urged him to run again, and he agreed—but only on the condition that no one contested against him, his friend recalled. In the end, another Hindi speaker challenged him anyway, but this time Rajan won.

After graduating, Rajan went on to the Indian Institute of Management Ahmedabad, where he earned another gold medal for his master’s work. As at IIT, he is remembered fondly there, as a congenial pupil and peer. Samir Barua, a retired dean who taught Rajan in an advanced mathematics course, told me he was “an extremely bright student”. At the time, the financial sector was contracting, and many students were contemplating careers in academia, which Barua considered a natural move for Rajan.

Barua’s expectations were not widely shared. “He was not a bookish kind of guy,” one of his IIM classmates told me in July. “I would never fathom him in this particular role. I thought he would be a corporate guy.”

For a brief time, Rajan was. After IIM, he joined Tata Adminstrative Services as a management trainee. In a 2006 talk at the Forum for Free Enterprise in Mumbai, Rajan related a telling anecdote from his brief time there—an episode that he claimed prompted his departure from Tata, and then from India:

A CEO of one of the group companies berated the engineers in the group of management trainees he was taking around, arguing that we had wasted the nation’s money by taking a precious engineering place and then departing to the ranks of management. While he was showing us around the factory, however, we noticed two elevators going up. We appeared to be waiting for the elevator on the left even though the elevator on the right was available. When asked why, he replied, “We are waiting for the management elevator, this one is for the engineers and workers.”

Rajan went on:

So despite all the rhetoric about socialism, government policies were of the few, by the few, and for the few. I have argued that this may have been unintended, but perhaps I am being charitable. Perhaps indeed the consequences were fully intended, but were cloaked in the rhetoric of social purpose, and the public confused with smoke and mirrors.

In the fall of 1987, he departed for a doctoral programme in management at the Massachusetts Institute of Technology’s Sloan School of Management.

BY THE TIME RAJAN WAS PREPARING to leave India, his father had ascended to the top ranks of R&AW. The agency’s director, SE Joshi, was set to retire in June 1987, and Govindarajan was in line to succeed him. But according to two published accounts, which were confirmed by a former R&AW chief, his ascent was suddenly derailed earlier that year by an unexpected development: the eruption of the Bofors scandal.

On 16 April, Swedish Radio aired its first report on the kickbacks paid by Bofors to Indian officials and politicians. Late that same night—after midnight, according to Prashant Bhushan’s book Bofors: The Selling of the Nation—Rajiv Gandhi summoned his IB chief and the acting director of R&AW, Govindarajan, to an urgent meeting at his house:

They were immediately ushered into the Prime Minister’s office. The Prime Minister was wide awake and quickly asked them what was happening. Govindarajan, who had just returned from out of town the previous night, was taken by surprise. He had no idea what the Prime Minister wanted to know.

As a result, Gandhi superseded Govindarajan and installed a more junior officer, AK Verma, as the R&AW chief. Govindarajan was instead made chairman of the government’s joint intelligence committee, where he remained until his retirement.

(In his memoir of the spy service, The Kaoboys of R&AW, the late B Raman provides a less detailed account of the same episode without naming Govindarajan, referring instead to an “officer of the Tamil Nadu cadre” who was superseded because Gandhi was annoyed that “he was unaware of the Bofors scandal when it broke out in the Swedish electronic media.”)

When I first mentioned his father’s career in R&AW, Rajan was taken aback; it seemed possible nobody had put the question to him before. (“He’s very uncomfortable talking about himself,” one of Rajan’s old friends told me.) He confirmed that his father had been in line to head the spy agency, but denied that the Bofors story had anything to do with Gandhi’s decision.

“My father’s experience in bureaucracy was a good one,” Rajan said, uncomfortably, when I asked if it had in any way influenced his decision to return to India. “But that didn’t—I didn’t join the bureaucracy. So it wasn’t what I wanted to do. I wanted to read, write, think.”

RAJAN COMPLETED HIS PHD at MIT the year that the Indian economy opened up, when he was only 28. His thesis, ‘Essays on Banking’, examined the particular nature of the relationship between banks and lenders at a time when broad deregulation had dramatically altered the banking sector in industrial nations. Deregulation was presumed to increase competition, and competition presumed to increase efficiency, Rajan wrote in the introduction. Each of the book’s three essays, however, considers a situation in which this might not be the case, due to the unique nature of the relationship between banks and creditors, which is more than merely transactional. By focusing on what he would later call “the plumbing underlying the industrial economy”, it was possible to understand why it was not always as frictionless as advertised—an insight that allowed him to see the dangers of risk accumulating on bank balance sheets before the financial crisis.

In one chapter, Rajan contemplated the repeal of a US law that mandated the separation of commercial and investment banking. The argument for increased competition would suggest that commercial banks should be allowed to compete with investment banks to underwrite corporate offerings. (Indeed, the US repealed the law in 1999, though some have argued it should be reinstated in the wake of the financial crisis.) Rajan’s analysis argued that while repealing the law appeared to increase competition, the naturally monopolistic character of banking relationships would make its actual impact ambiguous. The conclusion is not atypical for academia, but it would become a trademark of Rajan’s academic career, where his findings often landed as deeply informed scepticism: we just don’t know.

He settled in Chicago in 1991, where he became assistant professor of finance at the Booth School of Business. Rajan and his wife, Radhika, a fellow IIM-Ahmedabad graduate, socialised in Hyde Park, the university neighbourhood where they lived with their two children. The svelte Rajan ran along the lakeshore nearby and played squash with a typical competitiveness, his colleague and co-author Luigi Zingales told me. He did little else. “I don’t think he had a lot of excitement in his life, besides work and family,” Zingales said.

Rajan published regularly on arcane banking and finance topics and lent an occasional quote to the press, though rarely on issues involving India. He extended his reach in 2003, with the publication of his first book, Saving Capitalism from the Capitalists, co-authored with Zingales. Both an ode to competition and an indictment of the entrenched interests, business or political, that seek to stifle it, the book gained some traction among economists and policymakers. Bruce Bartlett, a conservative economist who worked under Ronald Reagan and George HW Bush, called it “one of the most powerful defences of the free market ever written.” But it was hardly a popular tract. “The book struck a chord with a lot of people in high places,” Zingales told me. “It was not read on airplanes.”

Among his fellow economists, Rajan’s reputation was steadily growing. His profile rose further in August 2003, when he was unexpectedly appointed as the chief economist at the IMF, the youngest person to occupy the post, and the first born in an emerging-market nation.

Rajan arrived at the IMF in the midst of an ongoing intellectual brawl. His predecessor, Kenneth Rogoff, had been engaged in a public spat with Joseph Stiglitz, the former chief economist at the World Bank. At the time, the IMF was recovering from a soiled reputation in the wake of the East Asian crisis a few years earlier. Stiglitz, a liberal macroeconomist and Nobel laureate, loudly criticised the IMF’s typical austerity recipe for developing countries—forcing deficit reductions, removing controls on capital inflows, and hiking interest rates. Rogoff shot back with a famously combative open letter to Stiglitz, but left his position soon thereafter.

Rajan brought a calming force. He kept the IMF’s austerity policies largely intact, without the drama. Joshua Felman, an Asia economist at the IMF, characterised his former colleague in similar terms to many others I interviewed. “He’s very approachable. He gets into debates, but it’s very hard not to like him,” Felman said.

In interviews, Rajan frequently harks back to his IMF tenure as a sign of his willingness to leave the comfortable confines of academia for the hurly-burly of public life. “I remember, when I went to the Fund,” he told me, “Gary Becker [a Nobel laureate and colleague of Rajan’s at Chicago] asked me, ‘Are you nuts?’ This time he was more complimentary. But I think the general sense in academia is ‘You must be crazy.’”

It was at the IMF that Rajan first showed his flair for subtle defiance. In 2005, he and Arvind Subramanian published a paper that bucked the conventional wisdom on the efficacy of foreign aid, which they concluded had an adverse impact on developing countries, hindering their competitiveness. “It came very close, in people’s eyes, to saying motherhood is wrong,” Felman recalled.

An economist who was then working in the Fund’s China division told me that the paper aired an unspoken understanding within the organisation about the deficiencies of foreign aid, but failed to provide an alternative way forward for rich lenders dealing with poorer countries. “You’re not telling me what the right thing is,” the economist said. “It did leave people hanging, worried about the silence.”

The following year, Rajan and Subramanian released another contrarian study, which could also be seen to have upturned a consensus without providing any replacement. It focused on capital controls, barriers to foreign investment inflows that Rajan had assailed in his first book with Zingales. This paper reached a radically different conclusion. Contrary to the orthodox view among economists—which informed the IMF’s austerity recipes—the paper found that non-industrial countries that opened themselves up to foreign capital typically grew slower than those that did not.

In his short time as RBI governor, Rajan has been lauded for his definitive stances, but conclusions like these are the hallmark of his intellectual positions, which often insist there is no one-size-fits-all theory to guide economic policy. Rather than certitude, his academic career has been defined by a blend of scepticism, pragmatism and caution, traits that will surely mark his tenure at Mint Road—and infuriate his inevitable critics.

|IV|

AT LEAST UNTIL A FEW WEEKS AGO—when Rajan gave his inaugural speech in Mumbai and woke up the next day to find his picture on the front page of nearly every newspaper in India—the defining moment of his career came in a small Wyoming resort town.

In August 2005, the US Federal Reserve gathered for its annual symposium in Jackson Hole. Alan Greenspan, who had been the Fed’s chairman for the previous 18 years, would be making his final appearance at the conference, which took on the character of a sentimental farewell tribute. The American economy was soaring, and Greenspan was its esteemed chieftain. Many of the financiers and economists in attendance attributed the era’s sustained global growth to the financial innovation ushered in by Greenspan’s policies. Four years earlier, the famed Watergate journalist Bob Woodward had penned a book-length portrait of the Fed chairman, simply titled Maestro.

And then Raghuram Rajan, the 42-year-old IMF chief economist, stood up and laid into the maestro’s work.

The paper that Rajan delivered was titled “Has Financial Development Made the World Riskier?” His answer was a decisive yes. Deregulation, competition, and new innovations like securitisation had created distorted incentives for bankers to take on excess risk in pursuit of short-term gains, Rajan argued, placing the entire economy at the mercy of a crisis. Three years later, the system imploded almost exactly as he had warned.

“I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions,” Rajan later wrote in Fault Lines. Larry Summers, the former US treasury secretary who was until recently the leading contender to fill Greenspan’s old seat, dismissed Rajan’s concerns as “slightly Luddite” and “largely misguided”. Donald Kohn, a Federal Reserve governor, was even harsher, chiding Rajan as woefully nostalgic.

At that point, Greenspan was “the king”, the Princeton economist Alan Blinder said in a 2009 interview. “So when you disagreed with Greenspan,” Blinder recalled, “you were up there on the foothills of Mount Olympus disagreeing with Zeus.”

Blinder was the only economist to publicly defend Rajan at the Fed symposium, remarking on the “unremitting attack he is getting here for not being a sufficiently good Chicago economist.” But after the crisis, when the anti-regulation views associated with the university’s economists came into disrepute, Rajan was the only one whose credibility remained undamaged.

The Jackson Hole episode neatly illustrates the difficulty of pinning down Rajan’s economic ideology. A champion of capitalism and free markets, he has also argued, as he did in Wyoming, for firmer regulation. Fault Lines, a treatise on the causes of the financial crisis, begins with a chapter focused on rising US income inequality—a concern associated with the American left, not the right. In Rajan’s diagnosis, risky economic policies were put in place by politicians attempting to compensate voters for their diminishing faith in social mobility. “Easy credit”, one of the book’s chief villains, becomes a way to reassure “those left behind by growth and technological progress”, but it introduces unsustainable levels of risk into the financial system. “If you read Fault Lines, it reads like an absolutely classic Marxist critique of capitalism,” Pratap Bhanu Mehta said.

But in the biggest post-crisis economic battle in the US, Rajan is entrenched firmly in the rightward camp. Because he sees easy credit—in the form of low interest rates and government efforts to make loans available to low-income homebuyers—as one of the chief culprits in the crisis, he has loudly opposed the Federal Reserve’s efforts to keep rates near zero and boost employment and growth with quantitative easing.

Rajan’s theory of the post-crisis recession holds that persistent unemployment is “structural”. In other words, the bubbles that inflated and then burst in certain sectors of the economy—including housing, construction and finance—will not return, and workers who lost their jobs need education and training to get new ones elsewhere.

The opposing camp holds that unemployment is “cyclical”, caused by a drop in consumer demand that could easily be rejuvenated by government spending if stingy politicians would allow it. The chief proponent of this view is Paul Krugman, the Princeton Nobel laureate and New York Times columnist who has repeatedly berated Rajan for his opposition to further stimulus and low interest rates during a time of high unemployment and stunted growth.

In July 2010, as the Federal Reserve prepared its second round of quantitative easing, Rajan wrote an op-ed in the Financial Times urging Bernanke to raise rates instead—lest the US repeat “the same monetary policies that led to disaster”. Liberal economists tore into Rajan: Krugman called the argument “depressing”, and argued “it would be an utter disaster for the economy”.

Neatly placing Rajan on the ideological map in India is not so simple. He stayed out of the fray in this summer’s exaggerated battle between Jagdish Bhagwati and Amartya Sen, and his views suggest sympathies with both sides of the rather oversimplified “growth versus welfare” debate. Rajan’s ideas are broadly in line with Bhagwati’s argument for growth as the main driver of development, and it’s hard to imagine him as an enthusiastic supporter of the UPA welfare measures that have been blamed for inflating deficits.

Yet he has couched many of his indictments of the Indian economy in Sen-like terms. In a 2008 speech in Mumbai called “Is There a Threat of Oligarchy in India?”, he pointed to the troubling number of billionaires whose fortunes were made by their control over land, resources and government licenses. He has repeatedly emphasised the need for government to provide better healthcare and education, two of Sen’s standbys—one could easily imagine the Bengali Nobelist saying that “our entire bureaucratic system of provision of public goods is biased against access by the poor,” as Rajan did in the same Mumbai speech.

This is the Rajan several in India want to see: the free market champion who rails against oligarchy. “In India, the defence of capitalism has become the defence of crony capitalism,” Mehta told me two days after Rajan’s RBI appointment. “Indian capitalism really needs to be saved from capitalists.”

RAJAN’S FIRST ENGAGEMENT with Indian economic policymaking came in the autumn of 1998, in the Boston apartment of his old IIT classmate Jayant Sinha. The newly appointed Bharatiya Janata Party (BJP) finance minister, Yashwant Sinha, was visiting his son in the midst of a US tour, and Jayant invited his friend Rajan to come from Chicago.

In Boston, the elder Sinha asked the young economist for ideas. Rajan gave him two major recommendations, according to Sinha’s 2007 memoir. The first was to ease the process for income tax filing to broaden the pathetic collection rates; the second was to boost home ownership. Sinha soon introduced a one-page filing form for taxpayers; in his next budget, he unfurled an increase in interest deductions on home mortgages.

Soon Rajan also began advising the RBI and the Securities and Exchange Board of India (SEBI). In 2002, Sinha invited Rajan to consult with the finance ministry. Ajay Shah, then an economist in North Block, told me that he worked with Rajan to craft two pieces of banking legislation.

Their partnership was interrupted when Rajan was offered the IMF job in 2003. But it was around when Rajan’s time at the IMF ended, in 2006, that he began to write more often about his own country. Two years later, he met Manmohan Singh in Neemrana, at an annual economic conference that Rajan had helped launch. After the collapse of Lehmann Brothers triggered the global crisis, Rajan was appointed an “honorary economic advisor” to the prime minister.

That job involved writing policy notes at Singh’s request. In 2010, the deputy chairman of the Planning Commission, Montek Singh Ahluwalia, assigned an economist to work part-time with Rajan on the notes. “That was the time when his intellectual ideas on India developed,” the economist, who went on to work for Rajan at the finance ministry, told me.

Shortly after Rajan met Manmohan Singh in Neemrana, Ahluwalia drafted him to head a government committee on financial sector reforms. The resulting 200-page report, ‘A Hundred Small Steps’, was broad in scope yet detailed in directives. “It was much more suave and polished” than an earlier effort on the same subject that had failed to gain traction, said Ajay Shah, who worked on both reports. It captured the style Rajan has taken within institutions: bold yet pragmatic. The financial press praised the report for targeting small experiments beneath legislative concern—what the report called “low-hanging fruit”—over familiar but implausible reforms. It also contained a recommendation that became freshly relevant when Rajan became RBI governor. Monetary policy, the report said, should have a “clearly-defined primary objective”: taming inflation.

As Rajan’s involvement in Indian economic policy slowly deepened, he began to speak out more acidly on the country’s failings. The Indian edition of Fault Lines features an entire additional chapter on the country, in which Rajan pillories the government for its cosiness with the “rich” and “powerful”. In April 2012, the same month that he lambasted the UPA government’s policies before an audience that included the prime minister, Rajan deployed even stronger language in a graduation address at the Indian School of Business in Hyderabad. In India, he lamented, “We keep repeating failed experiment after failed experiment.”

Though Rajan’s growing body of speeches and writings on India provides a useful summary of his insights into the country’s economic and political issues, there are several key subjects he has rarely if ever addressed. There are few references in his writing to the rising fiscal deficit, which he had warned of in 2004 while at the IMF. As an economist who has specialised in banking and finance, one might have also expected more commentary from Rajan on the increasingly dangerous expansion of bad loans on the books of Indian banks.

Throughout much of this time, Rajan was sending missives to Raisina Hill. What went unsaid in his public writing may have crept into private statements. When I asked Rajan about his memos to Singh, he was characteristically discreet about their contents, though his remarks suggested a deepening appreciation of the political challenges facing Indian policymakers. The memos were “primarily updates on what was going on in the world economy,” Rajan told me. “There were some India-specific suggestions. But of course, from the outside, it’s harder to see the constraints,” he said. “I don’t think the recommendations changed substantially in some time, partly because I think it was difficult to get a lot done here.”

Rajan has not divulged the moment when he decided to come to India, where difficulty persisted, and leave the confines of academic stardom: after the publication of Fault Lines, he was in high demand on the speaking circuit— earning about $40,000 per appearance.

“I don’t want to make it sound as grandiose as giving back,” he told me when I asked what prompted his return. “The way I think about it, if I woke up at age 65 and saw either a very successful country or a very unsuccessful country, either way I would have tremendous regret in not having played a part—either for the good or preventing the bad.”

|V|

ON 14 APRIL, Chidambaram set off for a weeklong trip across the Atlantic. His companion, and the broker for many of his meetings, was his chief economic advisor. It was the final leg in an international tour for Chidambaram, which included several public appearances and a quiet but determined effort to court foreign investors, touting a turnaround in the Indian investment climate.

Rajan’s central role on the tour provided another example of his global reputation, the trait many suspect was the prime motivation for his recruitment. “What you get with him, for free, is this international image,” an economist who worked under Rajan in the finance ministry told me. “We were all aware of that.”

Before Rajan’s appointment as RBI governor was announced, several people close to him told me that had he not received the job, he would have swiftly packed his bags and returned to Chicago. His stint as chief economic advisor was merely “a stop-gap before heading to the RBI”, said the economist Laveesh Bhandari, who heads the research firm Indicus Analytics. As an outsider, Rajan needed to tally some experience in the Indian bureaucracy to help overcome any resistance to his appointment.

“He had wanted to come back to India, clearly, for a much longer amount of time,” Aziz, the JP Morgan economist, told me. “But there are very few openings in India where Rajan can fit in, given who he is, given his stature.”

Rajan’s staff at the finance ministry described him as both an unrelenting workhorse and an effective manager, who welcomed their ideas and invited them to meet the cast of luminaries parading through his office, like Nouriel Roubini, another prophet of the financial crisis, and the New York Times columnist Thomas Friedman.

Inside the ministry, Rajan was more pragmatist than renegade. “There was this expectation in the media that he was Chicago style, and would come in and blast UPA’s leftist policies,” one of his economists told me. “That’s not how he worked.”

The chief economic advisor’s main task is to produce the government’s annual survey. Rajan’s is a foreboding document that pleads for “urgent steps” to reduce government spending and subsidies and lays out a few recommendations—labour law repeals, vocational training, formal apprenticeships—to direct Indians from agriculture to services and skilled manufacturing jobs. It predicts a dire future if further reforms don’t arrive soon.

Several people with knowledge of the finance ministry’s workings told me that Rajan carried considerable influence in North Block, and was more actively involved in internal decisions than prior chief economic advisors. But that degree of involvement did not guarantee his advice led to action.

“His impact is very marginal, simply because the government itself is not functioning,” Bhandari told me in July. Mittal, the retired finance ministry secretary, told me that “it was not possible to say he has a very large influence on the government.” His tenure wasn’t long enough, and his international stature had a consequence: according to Mittal, Rajan spent roughly half his time outside India. (That included teaching a course on corporate finance back in Chicago.) “But he’s a very bright and very nice man,” Mittal added quickly. “No question about that.”

Rajan’s staffers preferred to describe his lack of sweeping influence inside the ministry as a sign of tactical savvy. “He picks his battles inside,” one of the economists who worked for Rajan told me. “He had a good relationship with Chidambaram.”

One battle that Rajan picked, and presumably lost, involved the government’s Food Security Bill. From his academic work, it is clear that Rajan is inclined to support direct cash transfers rather than subsidies, and his concerns about the rising fiscal deficit surely angled him against the programme. “I know for a fact that Rajan was upset about the Food Security Bill,” the economist Swaminathan Aiyar told me.

If so, his displeasure took typical Rajan form: an affront through academic rigour. His office asked the Bharti Institute of Public Policy in Hyderabad to conduct a thorough study of food distribution. When I spoke to Prachi Mishra, a senior economist in the office of the chief economic advisor, she avoided Aiyar’s strong language about Rajan’s views, but admitted that she worked closely with Rajan to review the food bill. Her study of the measure, whose findings she published in the Economic Times, argued that the government had ignored the non-subsidy costs of setting up and implementing the programme, and therefore underestimated its price tag by at least Rs 1.43 lakh crore (Rs 1.43 trillion) over three years.

The economists who worked under Rajan insisted that the finance ministry welcomed all ideas, and on particular policies, like the food security bill, would let grievances be fully aired. But although it remains open to dissent, the ministry, like the UPA itself, dawdles along through consensus.

If Rajan ever became angry with this reality, his staffers claimed they never saw it. “I’m sure he’s had his moments of extreme frustrations,” one told me. “Look, he’s come from a completely different world to this jungle.”

Rajan used a softer metaphor to describe his time in Delhi. “Government is a big ship,” he told me. “Not every part of government flows in the same direction.” When I asked him for concrete examples, he declined to provide them. “There are places where we take a long time coming to a decision,” he said. “Sometimes that’s because consensus-building takes time; sometimes it’s just because that’s not on the front burner. And sometimes it’s just plain sloth. To that extent, we want to eliminate the sloth.”

IN THE DAYS AFTER WE MET, Rajan looked very much like a man fighting sloth, or at least complacency. On 18 September, Bernanke startled the world by delaying the “taper” of quantitative easing. It was a gift to the Indian economy, but two days later, Rajan declined to accept it and raised interest rates.

That decision swung stocks in the opposite direction of his first RBI speech. The original “Rajan rally”, Rajan surely knows, was powered by personality and luck. Many of the details in the agenda he laid out were not new; they had long been in the works at the RBI. Rajan had merely packaged them together, but his decision to prioritise these plans, combined with his vaunted reputation, drove expectations that they could be realised. He also happened to arrive at the moment when the threat of American military action in Syria faded, calming market jitters across the world.

“Many of those measures have been taken to try to boost confidence in the system,” the former RBI governor Bimal Jalan told me. “They are not long-term steps. But they give the country time to take measures it needs to take.”

The financial press cheered Rajan’s first outing, yet the Mumbai investor class took a wait-and-see stance. Two days after his big speech, Rajan’s office quietly released a two paragraph statement announcing that a $15 billion credit line swap with the Bank of Japan, unfurled last December, would extend by $35 billion. “This is a more meaningful development than the speech he gave,” said Ritika Mankar Mukherjee, an economist with Ambit Capital. “It tells you how well-planned and systematic he is.”

It also reveals a calculated cooperation with Delhi, which was needed to stamp the swap deal. Of the five prior RBI governors since 1991, the only one to have a thoroughly cordial relationship with his finance minister was C Rangarajan, who served alongside Manmohan Singh.

I failed to find anyone who would describe Rajan as uncongenial. He has a strong working relationship with the Congress party’s economic leaders. Should the BJP come to power, Rajan may rely on the support of Yashwant Sinha, one of the party’s leading economic figures. But in all my interviews, not a single person suggested that Rajan would be subservient to Delhi.

Rajan is now heading a behemoth bureaucracy that elicits a wide range of appraisals. As juggler of growth and inflation, some analysts judge it among the world’s best, as The Economist did last year. Several Indian economists regard it as the worst. Many people consider it to be one of India’s most efficient bureaucracies, though a few others take the opposite view.

“It’s a bit like the Soviet Union,” said Shah, a vociferous critic of the central bank. “Everyone has to say nice things, or it will all fall apart.” When we spoke in July, he wondered why his former research partner would want the governorship. “It’s a crown of thorns,” Shah told me. “If someone offered it to me on a platter, I would say no.”

A Seshan, a former officer-in-charge at the bank’s economic analysis wing, told me in an email that the pressures on the RBI from Delhi, both “overt and covert”, have substantially escalated in recent years. In a study released last month by the Bank of Korea, two economists assessed the autonomy of 90 central banks, and judged the RBI to be the world’s least independent.

When I asked Rajan about the study, he acknowledged that the “explicit structure” of the bank might support that conclusion—the governor is appointed, and can be easily fired, by politicians in Delhi. But Rajan argued this view overlooked more implicit arrangements that prove the RBI governor commands respect and independence. “The finance ministry will keep proposing their way of looking at things in the economy,” he said. “But the central banker has the decision of whether he or she accepts them.”

“I don’t think the differences [with the government] are as large as they are played out in the press,” Rajan continued. “But if they are, that does reflect a great amount of independence. If the central bank was under the thumb of the finance ministry, there would be no differences.”

Rajan’s first break with Delhi, his decision to raise interest rates, has already come under heavy scrutiny. Yet monetary policy is only a slim portion of his job. Much of the Indian economy churns outside the control of formal interest rates, and the central banker’s role in regulating the banking and finance sector likely has a more significant effect on the large informal economy.

For some financial observers, this is disconcerting—they doubt Rajan’s ability, as a bureaucratic outsider, to steer and challenge India’s stodgy scheduled banks. For Rajan, the academic tenured on his banking expertise, this gamut of control is the central allure of the RBI governorship.

One of Rajan’s initial proposals in this arena faces considerable hurdles. In July, three industrial houses—Aditya Birla, Reliance Capital and Tata Sons—applied for new bank licenses that the RBI had recently made available. Chidambaram strongly backs letting them in, while Subbarao and the RBI have stood opposed. Rajan, with his concerns about India’s tilt toward oligarchy, is widely considered to share his predecessor’s stance. His maiden speech introduced plans for “on-tap” licensing, a process that, in essence, allows small banks to cut the line for licenses. It will, one RBI veteran said, bring immense resistance from Mumbai’s most powerful corporate houses.

It will also be the first major test of how Rajan handles his relationship with the finance ministry. His outsider status has earned praise internationally, but his lack of “intensive India experience” is a severe handicap, said Bhandari of Indicus Analytics. “You need people who you can pick up the phone and call,” he told me. “You need those sort of relationships.”

ON 23 JUNE, Rajan was away from Delhi, delivering a lecture on “unconventional monetary policy after the crisis” at the Bank of International Settlement in Basel.

The talk was trademark Rajan. It focused on a “debt-fuelled crisis” driven by easy credit that had been doled out by “short-sighted” politicians, and it ended with nothing more definitive than a question mark:

The bottom line is that unconventional monetary policies that move away from repairing markets or institutions to changing prices and inflationary expectations seem to be a step into the dark.

By this point, it was an open secret that Rajan was a leading contender to head the RBI: his staff would hold back laughs at his public appearances when the media invariably asked Rajan about the job, and he invariably refused to comment. In the days after his appointment, one of his staff economists bemoaned the “hero-worshipping” under way, which unfairly put the burden of restoring the economy on a man who cannot do it alone.

Perhaps Rajan anticipated this. In hindsight, his Basel speech reads as a prescient prediction, personal defence and, maybe, apology. He ended with a lengthier exposition on the “magic wand” he would soon deny possessing:

When the central banker offers himself as the only game in town, in an environment where politicians only have choices between the bad and the worse, he becomes the only game in town. Everyone cedes the stage to the central banker, who cannot admit that his tools are untried and of unknown efficacy. The central banker has to be confident, and will constantly refer to the many bullets he still has even if he has very few. But that very public confidence traps him because the public wants to know why he is not doing more.

Central banks took their “step into the dark”, Rajan said, out of “hubris”—a word he had used five years earlier in Mumbai as a warning of what might bring India to her knees. In Basel, Rajan asked if this same hubris had also convinced central bankers they possessed a “Midas touch”. His answer went unsaid, but it was definitive.   

Mark Bergen is a journalist living in Bangalore.

|I|

WHEN THE RUPEE STRUCK 60, the lines tethering Mint Road to North Block drew taut. Relations between the Reserve Bank of India (RBI), in Mumbai, and the Ministry of Finance have rarely been without friction, but as the currency fell past a dramatic threshold against the dollar at the end of June, they were frantic and heated. The government in Delhi, already under siege from all sides, faced a new barrage of public criticism as the plummeting rupee touched new lows almost every day.

Six weeks earlier, the US Federal Reserve chairman Ben Bernanke announced that his bank’s third round of quantitative easing, an unorthodox tactic to stimulate the American economy, would soon wind down. Investors who had poured into emerging market nations for juicier yields now started to flee en masse. The retreat stung currencies from Turkey to Brazil, but India was particularly exposed, with a current-account deficit fresh off a record high and increasingly dependent on short-term foreign investment.

With the currency commanding unprecedented attention and talk of another 1991 growing louder, Delhi took action. According to several people working with the finance ministry, RBI officials were summoned to North Block with unusual frequency—and on 15 July, the central bank intervened.

The RBI initiated a series of dramatic measures to drain liquidity from the market and defend the battered rupee. The moves were abrupt, haphazard, and ineffectual: as the central bank fumbled from strategy to strategy over the following month, the rupee kept tumbling.

Close observers of the Indian economy have many disagreements—over why growth stalled, who is to blame, and what must be done—but here they reached a consensus. A chorus of former officials, economists and investors told me that the RBI had been strong-armed by a politically anxious finance ministry. The liquidity moves came as an utter surprise to the Technical Advisory Committee (TAC), a seven-member body that counsels the central bank, two of its members said. The bank’s public statements were sporadic and clumsy, uncharacteristic of the then RBI governor, Duvvuri Subbarao—solid evidence, one person with close knowledge of the RBI told me, that its hand had been forced by the government.

In Indian financial circles, where the RBI was seen as the sole government institution whose credibility had remained intact, the feckless moves that began in July signaled that its credibility was unravelling.

If those exaggerated anxieties have since been reversed, the turnaround began on 6 August, when the flailing government surprised its fiercest critics by naming Raghuram Govind Rajan as the next head of the central bank. Rajan, a distinguished professor at the University of Chicago’s Booth School of Business, had been hailed as “the oracle of the financial crisis” for his prescient warnings three years before the 2008 collapse. He had spent the past year as the government’s chief economic advisor, a post that many presumed was a brief stopover on his way to Mint Road.

But his appointment was not a fait accompli. While the names of other candidates were floated in the media, the deepening sense of crisis may have given the final push to Rajan’s installation, diminishing doubts that had been aired over his relative lack of bureaucratic experience and his short time in India. When he took charge on 4 September, announcing his arrival with a confident and sweeping inaugural speech, markets gushed. Stocks sprung up and the rupee recovered 10 percent of its value in a week. Headlines proclaimed a “Rajan rally” and analysts marveled at the power of “the Rajan effect”.

Officially, the private sector praised his promise of clarity and consistency in the central bank’s decisions. Unofficially, as one former bank analyst wrote in an email, many were “thirsting for an adult” in government. Confidence in the Indian economy, which had drooped to toxic lows, was partially resuscitated—and the credit was placed squarely on the shoulders of a man who decidedly does not want it there. A vocal critic of the extraordinary stimulus measures undertaken by central banks like the US Federal Reserve, Rajan’s defining intellectual trait is an insistent pragmatism. One suspects that nobody distrusts the power of “the Rajan effect” more than Rajan himself.

On the day of his appointment, a dreary Tuesday in August, he met the press inside North Block and gave a short, solemn statement. The government and the RBI, he said, did not have a “magic wand to make the problems disappear instantaneously”. He left without taking questions.

BY THE TIME I MET RAJAN at the RBI’s offices in Mumbai on 13 September, he was an unlikely celebrity. His modest disavowal of the “magic wand” had been forgotten by the media, and Rajan had become “The Guv”. The overheated market for speculation about Rajan’s superhuman powers peaked earlier that morning, when the Economic Times published a column by Shobhaa De crowning the handsome RBI governor India’s newest sex symbol. (“The guy’s put ‘sex’ back into the limp Sensex,” De wrote. “His chiseled features are as sharp as his brain.”)

We met in the RBI visitor lounge, an angular room on the 18th floor of the bank’s headquarters, whose windows offered a sweeping view of south Mumbai; Rajan’s own office, across the hall, peers over the rest of the city and the sea. Rajan—Raghu to anyone who shakes his hand—sat in front of a wall of small portraits of the governors before him. The painting of his predecessor, Subbarao, had yet to be completed.

When Rajan took over nine days earlier, he immediately introduced measures that many credited with undoing the damage wrought during Subbarao’s last months on the job. The “Rajan rally” made good copy, but he was characteristically cautious in describing his shift in direction: when I asked if the policies introduced in July and August had been reversed, he replied they had merely been “fine-tuned”.

In conversation, Rajan is direct but distinctly professorial. His answers come in complete paragraphs, typically prefaced by “I think” or “My sense is”. Asked about his rapturous reception in the press, he deflected toward the more comfortable territory of economic theory. “We must remember that sentiment is important, whatever the cause for the sentiment,” he said. “Markets are not impersonal. There are people making decisions. How they think, how they form expectations, is important.”

But he was aware that he was still in the midst of a honeymoon. “There’s only so long that expectations can carry you before translating into reality,” he told me. Rajan has long been a sceptic of the true reach of central bankers, and while he didn’t address them directly, he attempted to defer the oversized expectations that met his arrival. “What I can do is offer some stability to the currency,” he said, quickly adding, “And I mean stability not just in external value, but the domestic value of the currency, which means inflation.”

A week after our meeting, in his first monetary policy statement, Rajan defied market expectations and raised the nation’s central interest rate, citing the threat of continued inflation. At the same time, the new governor lowered the marginal standing facility, the rate of last-resort lending for banks, which the RBI had abruptly raised on 15 July as part of its inept rupee defence.

Though analysts naturally differed as to the wisdom of Rajan’s first big decision, on paper he had cemented his stature as an independent reformer. He had stood down industry, which was clamouring for rate cuts, and likely disappointed Finance Minister P Chidambaram, who is widely believed to have been the fiercest lobbyist for lower rates over the past year. It looked as though he had deemed the RBI’s earlier liquidity measures unwise, and moved to reverse them.

READER'S COMMENTS [16]

Excellent article. Thank you. Also, we'll researched, unlike so many articles on the man.

The article is good and detailed as always from caravan. But i don't find any connection to the cover title... "Raghuram Rajan knows he can't save you".....

Seems like a champion capitalist with a marxist heart... Good for our country... ! :) and Gosh! he had said that foreign capital will pose a problem for developing nations long back! our politicians were in deep slumber then well paid by the MNCs !

Several interesting points in this well researched article: 1. India's PM is not as weak as it seems. Rajan "lambasts him" and he is brought in as an economic advisor. My theory is that the PM wants to destroy the UPA/Congress from within. 2. It is good that Rajan has as an engineering background. He will be driven by data and facts rather than ideology. 3. Very surprising to read that RBI was rated as one of the least independent banks. Though given the grip of the IAS on the country, it is not unexpected.

Very well research article! My heartiest congratulations to the writer Mr. Mark Bergen!

That made for an awesome read. Having followed him closely from just a bit before his Jackson Hole speech, I have been amazed at the blazing trail of his economic work - and the context within which it places Rajan in this new appointment. And he is just pushing 50! Only Caravan could have pulled this nuanced piece off. Great work.

Another Chicago school IMF economist brought in to ruin the Indian economy by handing it over to the world of finance. How nice. This profile of him made him out to be some sort of genius crusader; he is not. Rajan is another neo-liberal IMF stooge.

Please grow up and have a look at the world around you. I also doubt whether you've read the entirety of this article

An extremely detailed article. But wish everything was not "told me", some could have been "said" or "communicated to me" or "explained".

The amount of reporting packed into the profile is quite commendable. Although -- and this is not the writer's fault -- the length of the profile calls for quite a bit of stamina, which I'm not certain most readers have these days. After all Rajan has just started the job. The length makes it impossible for the piece to meander at times. But a great effort, nonetheless. Thanks for serving this up!

Good piece on the trajectory of the Governor all the way from IIT to the Reserve Bank. The best part is that the article manages to capture the dilemma that central bankers are face with all the time. To be or not to be is the question!

well researched piece...the first indepth one i have read on Rajan. and oh, the family history is interesting too. but what, only one photograph? now that's disappointing :-)

Oh yes, please by all means use this forum to assert your version of feminism or femdom or whatever you call it. Couldn't stop yourself from mentioning his looks could you. Shobha De.

Expected more from the piece. Some incisive insights, some hard hitting write up that made me check the Caravan with great interest. One of the few times I have been disappointed by you

Why mention only that the sister was married to an IAS officer? What, being a French teacher in Delhi isn't good enough? Quite shoddy.

And that was your take-away from this article?

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