RBI Governor Rajan’s Fight Against Crony Capitalism

Luigi Zingales at ProMarket:

RBI Governor Rajan’s Fight Against Crony Capitalism: In any country in the world, a central banker who has managed to reduce inflation from 11 percent to 5 percent while simultaneously enabling an increase in growth from 5 percent to 8 percent in just three years would have a guaranteed reconfirmation. Not in India. The Governor of India’s Central Bank, Raghuram Rajan, much admired by the international press, is under heavy attack in his country. ...

Why such anger? With his work, Rajan is fighting not only inflation, but also the inefficiency of the banking system, burdened by bad loans. The Indian banking system is mainly in public hands and was used to finance crony capitalism, which has held the country back for too many years. ...  

As Governor, Rajan has rightly decided to force the banks to cut down exposure to their most dubious borrowers, even at the cost of bringing out non-performing loans. ...

Though it was the right thing, this policy has produced collateral damage: banks’ share prices were affected, and even more affected were those Indian oligarchs who had enjoyed easy credit. They are the ones fueling dissent, because Rajan has dared to publicly criticize the behavior of some of them. ...

Despite these attacks, public opinion is strongly on Rajan’s side. ... Rajan, ... is the dream of the new India: young, competent, and reached the top of the Indian central bank because of his skill, not because of his political alignment. ...

By late August, Indian Prime Minister Narendra Modi will have to decide whether to reconfirm him. This decision is the litmus test for change in India. On one hand is the young India, competent and meritocratic, that is conquering the world with its software and products, on the other hand is the India of the great political and economic dynasties, who established their power on political connections, if not directly on corruption, and that use a false sense of national identity to protect their declining power. It’s up to Modi to choose.