EVAL­U­AT­ING RA­JAN

No mat­ter what the cri­te­ria, in­fla­tion has dropped by a large mag­ni­tude dur­ing Raghu­ram Ra­jan’s ten­ure as Governor

The Financial Express - - FRONT PAGE - Surjit S Bhalla

No mat­ter what the cri­te­ria, in­fla­tion has dropped by a large mag­ni­tude dur­ing Raghu­ram Ra­jan’s ten­ure as Governor

Governor Raghu­ram Ra­jan presided over his last mone­tary pol­icy meet­ing on Au­gust 9. He demits office on Septem­ber 5, three years af­ter he as­sumed con­trol over In­dian mone­tary pol­icy. There will be, and there should be, sev­eral ar­ti­cles ex­am­in­ing his per­for­mance as RBI Governor. This is my first.

And in this first eval­u­a­tion, I will ex­am­ine his per­for­mance in sta­bil­is­ing In­dia’s macro-econ­omy. Pos­si­bly, the most im­por­tant func­tion of any mone­tary au­thor­ity is con­trol over in­fla­tion, so crit­i­cal a func­tion that In­dia has legally adopted the sys­tem of in­fla­tion­tar­get­ing. In the fu­ture, if in­fla­tion de­vi­ates from the tar­get, RBI will have to re­port to Par­lia­ment as to the rea­sons why it has missed the tar­get, and what re­me­dial pol­icy it was adopt­ing.

In­fla­tion con­trol had func­tioned very well with­out in­fla­tion-tar­get­ing in In­dia. It is now con­ve­niently for­got­ten (es­pe­cially by the UPA govern­ment) that ru­ral in­fla­tion (rep­re­sented by CPI for agri­cul­tural la­bor­ers) reg­is­tered an an­nual rate of only 4.2% be­tween June 1996 and May 2004. The end-points rep­re­sent the de­par­ture of the Congress-led govern­ment and the in­stal­la­tion of three dif­fer­ent nonCongress prime min­is­ters. Dur­ing the same time pe­riod, ur­ban in­fla­tion (rep­re­sented by CPI for in­dus­trial work­ers) reg­is­tered an av­er­age rate of 5.8%. A sim­ple av­er­age of the two yields a 5% av­er­age in­fla­tion.

Then along came the UPA govern­ment and with them, the quest for 273 seats in Par­lia­ment. What is the link? The be­lief that the ru­ral vote could be bought via large in­creases in the min­i­mum sup­port prices (MSPs) for ma­jor crops like rice, wheat and sugar. Hence, in a time-pe­riod (June 2006 to May 2014) when the me­dian de­vel­op­ing coun­try in­fla­tion stayed con­stant at around 5%, ru­ral in­fla­tion gal­loped to an av­er­age of 8.6% per an­num, and ur­ban in­fla­tion at 8.2%!

In Septem­ber 2013, CPI in­fla­tion (here­after, the in­fla­tion fig­ures re­fer to the joint ur­ban and ru­ral CPI se­ries) was 10.5% and Ra­jan had a Vol­ck­eresque task ahead of him, i.e., elim­i­nat­ing gen­er­alised in­fla­tion from the sys­tem and bring the sys­tem back to the pre-UPA nor­mal, i.e., low over­all in­fla­tion with oc­ca­sional spikes in in­di­vid­ual items like onions or pulses, etc.

Me­dian de­vel­op­ing coun­try in­fla­tion has de­clined from 5.1% in 2013 to around 3.5% at present. So, the en­abling in­ter­na­tional en­vi­ron­ment has been pos­i­tive for de­clines in in­fla­tion. How­ever, since Septem­ber 2013, the price of im­ported crude oil dropped from R6,700 a barrel to R3,290 a barrel (as of June 2016); but, the In­dian con­sumer hasn’t seen much of the de­cline. The CPI in­dex for petrol re­duced from 112 to 95— just a 17% de­cline. Note that the price of pulses (with a near iden­ti­cal im­por­tance in the CPI as petrol) dur­ing this pe­riod in­creased from 106 to 174—a 64% in­crease. In other words, to point to the oil price de­cline as a ma­jor, or even a mi­nor con­trib­u­tor, to the CPI de­cline in In­dia un­der Ra­jan is to make an er­ror of mam­moth UPA (or IMF?!) pro­por­tions.

To be sure, in­ter­na­tional com­mod­ity prices have also weak­ened dur­ing Ra­jan’s ten­ure, but what has hap­pened to com­mod­ity prices in In­dia is cur­rently be­ing re­searched by me (and I am sure sev­eral oth­ers).

How well Ra­jan has done in re­duc­ing in­fla­tion in In­dia is shown in the ac­com­pa­ny­ing graphic for seven cat­e­gories All items of con­sump­tion. The reader (or pol­i­cy­maker) can choose her yard­stick. The third col­umn of the ta­ble is the year-onyear (y-o-y) in­fla­tion in Septem­ber 2013; the fourth col­umn is the y-o-y in­fla­tion in June 2016 (latest data avail­able). The fifth col­umn is the de­cline in per­cent. For ex­am­ple, over­all in­fla­tion in June 2016 was 5.7% com­pared to the start­ing point of 10.5%, i.e. rep­re­sent­ing a de­cline of 45.7%.Sum­mary of the re­sults: No mat­ter what the cri­te­ria, in­fla­tion has dropped, and dropped by a large mag­ni­tude be­tween Septem­ber 2013 and June 2016. Fur­ther, the de­cline is con­stant across the ma­jor groups and close to half the in­fla­tion level recorded in Septem­ber 2013. Over­all in­fla­tion— almost halved, or a re­duc­tion from 10.5% to 5.7%. Sim­i­lar halv­ing in the volatile cat­e­gory of fruits, pulses, and veg­eta­bles (FPV). What about food ex­clud­ing FPV? To­day, this “high in­fla­tion” cat­e­gory is in­flat­ing at just 4.9%. Core in­fla­tion, or in­fla­tion ex­clud­ing food and fuel? Just 4.5%—a large re­duc­tion from 7.8% in Septem­ber 2013. Fi­nally, I re­port an in­fla­tion num­ber for 88.7% of all goods in the CPI, i.e., all goods minus the price in­elas­tic and price volatile per­ish­ables, FPV. Some­what sur­pris­ingly, this broad­est mea­sure of in­fla­tion re­ports a 4.5% value—the same as the pop­u­lar core in­dex of in­fla­tion.

Thus, no mat­ter how one looks at the fig­ures, Ra­jan’s record in re­duc­ing in­fla­tion­has­been­spec­tac­u­lar.Tobesure,this re­duc­tion was pos­si­ble be­cause of the “beau­ti­ful friend­ship” (see Casablanca) that evolved be­tween RBI (Ra­jan), the min­istry of fi­nance (Jait­ley) and prime min­is­ter Modi. It was a friend­ship that many thought was “per­ma­nent” and could not be brought down—ex­cept, trag­i­cally, by dirty pol­i­tics.

But the in­fla­tion buck stops with Governor Ra­jan. While the govern­ment de­serves some credit, the fact re­mains that this ex­tra­or­di­nary in­fla­tion de­cline ob­served in In­dia would not have been pos­si­ble with­out Ra­jan’s lead­er­ship and his (cor­rect) sin­gle­minded ob­ses­sion with re­turn­ing in­fla­tion to nor­mal in In­dia. As the graphic shows, even food ex­clud­ing FPV has an in­fla­tion rate of only 4.5%. FPV in­fla­tion is likely to de­cline postOc­to­ber, when the mon­soon ef­fects on per­ish­ables' prices will be­gin to more than trickle in. If FPV in­fla­tion for a few months is zero (let alone neg­a­tive), over­all head­line in­fla­tion will reg­is­ter 4%, not the 5.7% ob­served at present.

That will mean that in­fla­tion un­der Ra­jan is one-third the level he in­her­ited, and one-third at a very re­spectable level of 4%. The fi­nan­cial world had won­dered whether it will ever see the likes of Vol­cker again—he re­duced US CPI in­fla­tion from 13.5% in 1980 to 6.2% in 1982 and 4.4% in 1984. What did help Vol­cker enor­mously was the de­cline in the price of crude oil—25%, from about $40 a barrel in May 1980 to about $30 a barrel some three to four years later. This lux­ury, as doc­u­mented above, was not avail­able to Ra­jan. The in­ter­na­tional oil price de­cline was taxed in In­dia, a cor­rect pol­icy and one fully sup­ported by Ra­jan.

Ra­jan will go back to the world of ideashav­in­gleft­themacro-econ­o­my­ina very sound con­di­tion. Thank you, Ra­jan—In­dia will miss you, and your ideas. The au­thor is con­tribut­ing ed­i­tor, The Fi­nan­cial Ex­press and se­nior In­dia an­a­lyst, The Ob­ser­va­tory Group, a New York-based macro pol­icy ad­vi­sory group. Twit­ter: @sur­jitb­halla

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