The Modi Administration and Economic Policymaking: Why Raghuram Rajan's Departure Was Justified
It is a common question posed by many observers: if the Modi administration is truly doing a good job, why did they not want Raghuram Rajan to stay at the Reserve Bank of India (RBI)? The answer lies not just in political ideologies, but in the stark differences between the economic expertise of policymakers and that of economists like Rajan.
The Role of Political Leaders in Economic Policymaking
PM Narendra Modi, along with his right-hand men Amit Shah and Union Finance Minister Nirmala Sitharaman, have played a pivotal role in shaping economic policy in India. Their strong inclination towards non-expert decision-making can often lead to misalignments with the principles advocated by economic experts.
For the benefit of the masses and the larger national interest, political leaders must sometimes make difficult decisions that are not economically ideal, but are necessary for sustainable growth and development. This was evident in the implementation of moves such as demonetization (Notebandi) in 2016 and the introduction of Goods and Services Tax (GST) in 2017, both of which were announced and implemented with the intention of addressing long-standing economic issues.
The Expertise of Economists vs. Political Leaders
Economists like Raghuram Rajan, Urjit Patel, Manmohan Singh, and Abhijit Banerjee bring a wealth of knowledge and a broader perspective to economic governance. However, their expertise does not always align with the priorities of political leaders who, in the absence of robust economic expertise, may make decisions based on political considerations or populist measures. Rajan's presence at the RBI under the BJP government was seen as a symbolic defiance of such priorities, leading to his unceremonious departure.
Likewise, Rajan's opposition to policies like demonetization, which he believed could have negative economic impacts, highlights the differences in viewpoint that exist between expert economists and political leaders. The decision to implement such measures, informed by non-expert political beliefs rather than rigorous economic analyses, was a misstep that proved costly for India's economy.
The Limitations of Non-Economic Leaders
Modi and his team, due to their lack of deep expertise in economics, have often struggled to understand the complexities of economic policies. Their beliefs, shaped by common convictions and biases, may not always align with empirical evidence or expert advice. The outcome of such decisions, as seen in the case of demonetization, often leads to economic chaos and loss of public trust.
In comparison, experts like Manmohan Singh, who have a deeper understanding of economic policy, can provide more balanced and informed guidance. Singh's opposition to demonetization and his more nuanced approach to economic issues are a testament to the expertise required in economic policymaking. Singh would, for instance, prefer solutions that are more sustainable and less prone to economic instability, such as gradual reforms and careful fiscal planning.
The Role of Past and Future Economic Advisors
It is crucial to recognize that economic advisors, like Raghuram Rajan, often provide a counterbalance to the expertise of political leaders. This ensures that the economic decisions made by the government are informed and holistic. When there is a divergence in opinion, it is the responsibility of the government to consider the recommendations of economic experts, even if it means going against popular beliefs or short-term gains.
The past actions of Manmohan Singh, who prioritized responsible and sustainable economic policies, serve as a reminder of what effective economic leadership entails. His approach, marked by careful planning and a focus on long-term development, stands in stark contrast to the impulsive and politically motivated decisions made by the current administration.
Ultimately, the role of economic advisors is to ensure that policy decisions are not driven by political whims but by a commitment to the well-being and prosperity of the nation. While political leaders can steer the macroeconomic course, the input from expert economists is essential to navigate the complexities of economic challenges.