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| Raghuram Rajan: the challenge facing India's Ben Bernanke | Raghuram Rajan: the challenge facing India's Ben Bernanke |
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| It used to be, back in the time of dinosaurs and woolly mammoths, that central bankers just had to have a few solid ideas about interest rates and inflation. Those days are long over. Now, you need a crisis manager, even if there's no imminent economic crisis – because the assumption is that one will be coming, eventually. Economic crises are now the norm rather than the exception. | It used to be, back in the time of dinosaurs and woolly mammoths, that central bankers just had to have a few solid ideas about interest rates and inflation. Those days are long over. Now, you need a crisis manager, even if there's no imminent economic crisis – because the assumption is that one will be coming, eventually. Economic crises are now the norm rather than the exception. |
| So it is with Raghuram Rajan, the new governor of India's central bank. Rajan already has one oracular crisis prediction to his credit: in 2005, he threw a wet blanket on Alan Greenspan's pro-free enterprise party in Jackson Hole by suggesting that the new generation of sophisticated financial products would hurt the US economy as long as bankers and traders didn't have to suffer the consequences of their losses. | So it is with Raghuram Rajan, the new governor of India's central bank. Rajan already has one oracular crisis prediction to his credit: in 2005, he threw a wet blanket on Alan Greenspan's pro-free enterprise party in Jackson Hole by suggesting that the new generation of sophisticated financial products would hurt the US economy as long as bankers and traders didn't have to suffer the consequences of their losses. |
| Now, of course, such a pronouncement is Delphic, but back then, it was grounds for excommunication from the economic priesthood. Rajan was derided as "an antimarket Luddite, wistful for old days of regulation", according to the Wall Street Journal. | Now, of course, such a pronouncement is Delphic, but back then, it was grounds for excommunication from the economic priesthood. Rajan was derided as "an antimarket Luddite, wistful for old days of regulation", according to the Wall Street Journal. |
| The crisis reaper has methodically come for every major economy in the past five years, and now it is India's turn. Rajan, the newly named head of India's central bank, has become the man who has to save the country's plunging currency, the rupee. The rupee has fallen 17% in the past six months, raising fears about inflation, and more importantly, about economic growth. | The crisis reaper has methodically come for every major economy in the past five years, and now it is India's turn. Rajan, the newly named head of India's central bank, has become the man who has to save the country's plunging currency, the rupee. The rupee has fallen 17% in the past six months, raising fears about inflation, and more importantly, about economic growth. |
| Rajan has chosen to fit himself into the mold of his US counterpart, Fed Chairman Ben Bernanke. India's problems – primarily, a huge federal deficit – are not completely dissimilar to the ones the US was facing until recently, although India has a lot less slack. The intrinsic strength of the US economy offers some room for indulging sloppy fiscal policy. India, as a much younger nation, bears a harsher burden of proof that it belongs in the big leagues. | Rajan has chosen to fit himself into the mold of his US counterpart, Fed Chairman Ben Bernanke. India's problems – primarily, a huge federal deficit – are not completely dissimilar to the ones the US was facing until recently, although India has a lot less slack. The intrinsic strength of the US economy offers some room for indulging sloppy fiscal policy. India, as a much younger nation, bears a harsher burden of proof that it belongs in the big leagues. |
| India's government debt has reached about 66% of its GDP – a percentage so scandalously high that other countries in its economic class don't even come close. Indonesia's debt, for instance, is about 24% of its GDP, according to analysis from Moody's. Turkey's debt-to-GDP stands at 34% and the Philippines at 43%; compared to these, India is in the stratosphere. | India's government debt has reached about 66% of its GDP – a percentage so scandalously high that other countries in its economic class don't even come close. Indonesia's debt, for instance, is about 24% of its GDP, according to analysis from Moody's. Turkey's debt-to-GDP stands at 34% and the Philippines at 43%; compared to these, India is in the stratosphere. |
| It's only going to get worse: Moody's points out that "India's lower house of parliament, Lok Sabha, passed the Food Security Bill, which will subsidize food grains for 75% of India's rural population and 50% of the country's urban population." While that may serve the very relevant purpose of avoiding starvation, it will come at a great cost to the already-indebted government. | It's only going to get worse: Moody's points out that "India's lower house of parliament, Lok Sabha, passed the Food Security Bill, which will subsidize food grains for 75% of India's rural population and 50% of the country's urban population." While that may serve the very relevant purpose of avoiding starvation, it will come at a great cost to the already-indebted government. |
| What's India's central banker to do? | What's India's central banker to do? |
| Thanks to Ben Bernanke, we know the script: pour in stimulus, as fast as possible. Rajan is Bernanke disciple; Rajan's answer to the sharp slide of the rupee is, as Bernanke's was back in 2009, to open up the central bank's lending windows to free up the flow of money and welcome back foreign investors. | Thanks to Ben Bernanke, we know the script: pour in stimulus, as fast as possible. Rajan is Bernanke disciple; Rajan's answer to the sharp slide of the rupee is, as Bernanke's was back in 2009, to open up the central bank's lending windows to free up the flow of money and welcome back foreign investors. |
| What's ironic is that Rajan's and Bernanke's fates as economic policy-makers are tied up in other ways, reaching back years. Kurt Vonnegut, in his novel Cat's Cradle, wrote of the fictional religion Bokonism, which required of its adherents only belief. Vonnegut theorized that groups of people – dubbed a "karass" – would end up working toward a common purpose, unknown to themselves or each other, finding their lives intertwined without any knowledge of the goal they were working towards in common. The world's central bankers have become this karass, meeting and separating and meeting again to solve the quandary of economic crises – without knowing, really, what they are doing, or how it will end. | What's ironic is that Rajan's and Bernanke's fates as economic policy-makers are tied up in other ways, reaching back years. Kurt Vonnegut, in his novel Cat's Cradle, wrote of the fictional religion Bokonism, which required of its adherents only belief. Vonnegut theorized that groups of people – dubbed a "karass" – would end up working toward a common purpose, unknown to themselves or each other, finding their lives intertwined without any knowledge of the goal they were working towards in common. The world's central bankers have become this karass, meeting and separating and meeting again to solve the quandary of economic crises – without knowing, really, what they are doing, or how it will end. |
| The common threads are there. One paradox Rajan faces as the "Bernanke of India" is that it was Bernanke's relentless stimulus in the US from 2009 to 2012 that contributed to Rajan's current quandary of the falling rupee. As Wells Fargo strategist Sean Lynch noted this week, Bernanke's flood of money into the US financial system pushed interest rates down, forcing rich investors to look far afield for investments that would return some money. Many of them chose to put their money in India – which was a boon for the rupee and Indian trade balances. | The common threads are there. One paradox Rajan faces as the "Bernanke of India" is that it was Bernanke's relentless stimulus in the US from 2009 to 2012 that contributed to Rajan's current quandary of the falling rupee. As Wells Fargo strategist Sean Lynch noted this week, Bernanke's flood of money into the US financial system pushed interest rates down, forcing rich investors to look far afield for investments that would return some money. Many of them chose to put their money in India – which was a boon for the rupee and Indian trade balances. |
| That was great when times were good and the stimulus was flowing. Over the past few months, however, the talk in the US has turned to cutting down on stimulus. Investors have been looking at returning their money to the US – which has hurt India. Rajan needs to lure that money back and keep it in India. Barclays predicts that Rajan's new plans for stimulus could bring back $10bn to Indian foreign-exchange inflows. | That was great when times were good and the stimulus was flowing. Over the past few months, however, the talk in the US has turned to cutting down on stimulus. Investors have been looking at returning their money to the US – which has hurt India. Rajan needs to lure that money back and keep it in India. Barclays predicts that Rajan's new plans for stimulus could bring back $10bn to Indian foreign-exchange inflows. |
| Will it work? Rajan, in some ways, has a harder job than Bernanke. Bernanke just had to convince US investors to go along with his stimulus. Rajan has to stem a burgeoning global investment trend and lure foreign money. | Will it work? Rajan, in some ways, has a harder job than Bernanke. Bernanke just had to convince US investors to go along with his stimulus. Rajan has to stem a burgeoning global investment trend and lure foreign money. |
| This is only Rajan's first week on on the job. As with Bernanke, it may be many more weeks, even years, before we really see what he's made of. | This is only Rajan's first week on on the job. As with Bernanke, it may be many more weeks, even years, before we really see what he's made of. |