Modi’s Economic Failings Dim India’s $5 Trillion Dream
William Pesek
I write about economics, markets and policymaking throughout Asia.
Sep 30, 2020
It’s been a truly dreadful year for a global central banking community that long took independence from political meddling for granted.
From Jerome Powell in Washington to Haruhiko Kuroda in Tokyo, officials have been drawn more and more into doing the bidding of underperforming leaders. Yet even by these standards, the power grab at
Reserve Bank of India is both breathtaking and dangerous. The government has effectively refused to staff the RBI amid a global crisis, forcing the central bank to postpone this week’s key policy meeting.
Since 2014, Prime Minister Narendra Modi has made no secret of his desire to pull the RBI directly into his sphere of influence. When he first took power, the RBI was being run by the respected Raghuram Rajan—and run well.
Rajan’s claim to fame was an event-rich stint as chief economist of the International Monetary Fund in Washington from 2003 to 2007. There, he was one of the only economists anywhere to identify, and credibly warn of, the Lehman Brothers-killing subprime crisis to come.
In 2013, he returned Mumbai to helm the RBI just as the “taper tantrum” was upending
emerging markets. Rajan acted forcefully to tame inflation, steady the rupee and stabilize the banking system. His calm and transparent efforts reassured credit-rating companies tempted to slap a “junk” label on India.
Modi arrived in 2014 and took a disliking to Rajan’s independent streak. And his unwillingness to play ATM to a new government anxious to hasten economic growth. By September 2016, Rajan found himself back in the private sector as Modi searched for a more compliant RBI head.
Enter Urjit Patel, who also wasn’t quite liberal enough with the rupee-printing press. Patel was gone by December 2018, replaced by Shaktikanta Das. Since then, Das has proven to be far more willing to do Modi’s monetary bidding, slashing borrowing costs early and often.
Perhaps even Das isn’t proving himself to be sufficiently accommodating in Modi’s eyes. The desperation in New Delhi is understandable on some level. Indian growth plunged 23.9% in the second quarter, easily among the worst in Asia. Covid-19 is also devastating the economy. With more than
6.2 million cases, India is second only to America.
Yet a recession-causing pandemic is no time to be suffocating India’s most globally-respected institution.
Earlier this week, the RBI found itself three policymakers short to hold a scheduled meeting on the interest rate outlook. The government failed to appoint replacements for monetary decision makers whose terms expired, injecting fresh uncertainty into Asia’s third-biggest economy.
It smacks of “reckless neglect” at the very worst possible moment, says economist Vishnu Varathan of Mizuho Bank. Yet it’s also emblematic of the how the promise of Modinomics dims more and more each passing year.
Modi rode to national office on the strength of his years running the western Gujarat state, one of India’s most advanced economic regions. As prime minister, he’s been unable to manage an economy veering into trouble. Gone are the days of hoping to morph India into a thriving
$5 trillion by 2025, the target date of China’s own attempt at tech domination.
Nowadays, conversations focus on whether
India could be the first member of the BRICs grouping—Brazil, Russia, India, China—to get downgraded to junk status. With consumption, exports, private investment and other key growth engines sputtering, it’s not clear how Modi plans to stabilize the economy. Given New Delhi’s debt load, India will be hard-pressed to spend its way back to steady growth.
That, not surprisingly, puts the onus on the RBI to do more to jolt business and household demand. Only, it can’t. Modi’s mishandling of the economy has left the RBI understaffed and global investors wondering what gives.
The RBI does have room to ease further. Its benchmark rate is 4%. One problem: inflation is currently
trending above the 2% to 6% target. More stimulus might be inadvisable. Even so, the RBI could indeed act to pump more rupees into a wobbly economy. Well, if not for its staffing crisis.
Is Modi’s party slow-walking nominating new policymakers to further undermine RBI? It’s anyone’s guess. But why Modi’s India would think now is the time to be hobbling its most vital outwardly facing institution is beyond comprehension.
Narendra Modi left India's central bank understaffed and global investors wondering what gives.
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