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Dear Professor Raghuram Rajan,
Congratulations on joining the crew of Indian policy makers as chief economic advisor (CEA). It is high time the ministry of finance (MoF) had a practical and realistic macro framework. But it is also important to realise that the Indian political ethos has a way of crippling economic talent, or at least making it succumb to its temperamental and detrimental views. This is especially true in the current setting where political objectives – or, as the Congress party calls them, “political compulsions” – continue to undermine the economic agenda.
Communicating with financial markets is alien to most Indian policy makers, simply because it is a relatively new experience and there is only on-the-job training available. Unless I am mistaken, this is the first time you are in an official and visible national government position. In the remainder of this letter, I want to humbly offer some suggestions, which, hopefully, will be mutually beneficial to you and to us in the trenches of financial markets. Interacting with financial markets can be as challenging as communicating with the opposite sex: calling a spade a spade is not always a win-win situation and dilly-dallying on an answer can be problematic.
First, unless you express them off the record among close friends, family and working colleagues, Raghuram Rajan has no “personal opinions” when you say anything in public. They become the views of India’s CEA, despite your better-known prior identity. In fact, an interesting litmus test for you would be whether you can remain as objectively critical in public as before about what ails India. I sincerely hope so, as the CEA is not a public relations officer, even if he has been sometimes reduced to that by some lesser-minded ministers. It is best to avoid unnecessary controversy. After all, there are good ways of saying bad things and bad ways of saying good things.
Second, it is important to appreciate what the CEA’s job is not. You don’t have to have a media sound bite after every month’s inflation data release. More importantly, it is certainly not necessary to offer only a positive spin on everything. Objectivity commands a premium. You might be able to trick the markets a few times, but sooner rather than later we will learn. Our expectations will then be adjusted accordingly to gauge whether you are worth spending time on. You are starting with a clean slate and have some brownie points in the bank. Please don’t squander them.
Third, less is more. There seems to be this irresistible urge among some Indian policy makers to say something all the time. More comments are not necessarily better or credibility enhancing if they increase the risk of verbal mishaps or create avoidable uncertainty. You of all the people will know and appreciate that financial markets are Pavlovian — they get conditioned depending on how you train them.
Fourth, please paint a realistic, or at least believable, picture. This serves two objectives. One, it shows that you are up to date, unless some other officials whose comments appeared as if they were taking about another economy. Solutions can only be found when the problem is acknowledged. Two, it avoids the unnecessary need to fabricate a virtual reality – as often appears in the ministry’s comments – that only increases the financial markets’ cynicism. It was particularly worrying that MoF personnel were caught off guard by the S&P’s downgrade of India’s sovereign credit outlook. Even more worrying was the unrealistic but strong official expectation of why India’s rating should be upgraded!
Fifth, everyone is an economist these days. But don’t expect what you say to always be reported as is by the media. A free press is an important hallmark of our democratic foundation. But that does not mean the press is always unbiased or high on due diligence. India has more business newspapers and business news channels than any other Asian country, but objectivity is missing from most of them. Factual reporting is very often contaminated with personal or institutional biases, while opinion pieces, even editorial comments at times, are factually incorrect.
I sometimes get the feeling that the pain of high inflation experienced by people bypasses some of the business newspaper columnists. They often come across as lobbying for businesses and just want lower interest rates. That is different from newspapers catering to the general population; they echo the concerns over unacceptably high inflation.
Sixth, Indian finance ministers cannot resist public comments about what the Reserve Bank of India (RBI) should and/or will do, even if they sometimes sound foolish. Perhaps taking a lead from them, several MoF officials mimic that approach, never mind that they cannot set their own fiscal house in order. I hope you’ll successful in bringing around a refreshing change in this respect. Financial markets are becoming more important, and the last thing one needs is an airing of differences in public or even an active undermining of the RBI.
Finally, India in recent years has favoured greater openness of the capital account of the balance of payments without adequate real sector reforms. This is a disaster waiting to happen; some pressure points of this disaster were visible last year, resulting in the collapse of the rupee. India is economically becoming more integrated with the rest of the world, but local politics is becoming more inward-looking.
Unless we are willing to live with huge detrimental swings in the exchange rate, the most sensitive of relative prices and more boom-bust cycles, the pace of capital account liberalisation should be calibrated to be in sync with the real sector. There are several benefits for liberalising the inflow of foreign capital, both portfolio and direct investment. But encouraging more volatile portfolio capital from a position of weakness of unsustainably large twin deficits, and an already unnerving dependence on fickle risk-driven capital inflow, is hardly the prudent thing to do.
Local politics and economic agenda are closely interlinked in every country. But India is a good example of one where most politicians spend their time doing more of what they should not be doing and less of what they should be doing. No one expects you to solve all of India’s problems, which have resulted in a combination of below-trend growth and above-trend inflation. But there is a constructive role in your new capacity that hopefully would reverse the unfortunate erosion of the stature of the post of CEA in recent years. Hopefully, you’ll also be successful in getting the politicians’ heads out of the sand. I wish you the very best.
The writer is senior economist, CLSA.
These views are personal