The maverick in Subramanian Swamy has been a great positive in our politics. With characteristic audacity, Swamy has taken on “untouchables” (e.g. Atal Behari Vajpayee, Sonia Gandhi), destroyed carefully constructed myths and demolished undeserved reputations. He has articulated forcefully and brilliantly the Hindu position on issues ranging from the Ram temple to terrorism.

For once, however, he seems to have erred in the choice of his target. His tirade against the Reserve Bank of India’s Governor Dr. Raghuram Rajan, has more sound and less light.

Thanks to Swamy’s broadsides against Rajan, the question of granting the latter another term in office has become a subject of heated public debate. Rajan’s term ends in early September. No decision as yet has been taken about giving him extension or choosing his successor.

According to Swamy, there is no question of giving Rajan another term; indeed, he should be removed forthwith from office. This is because the dear money policy Rajan has been following in the name of fighting inflation has inflicted enormous damage on the economy. Needlessly elevated interest rates have crippled industry with high capital cost, discouraged investment and hindered creation of employment, output and incomes.

Farmers, afflicted by two successive droughts, have been driven to suicide by the heavy burden of debt. With companies unable to service bank loans at double-digit real interest rates, the non-performing assets of banks have soared to unprecedented levels, wiping out their profits and threatening their viability. The aggregate effect of Rajan’s policies has been to dampen economic recovery and weaken the banking sector.

Swamy’s fusillade against Rajan has been applauded by many Hindu nationalists. We are told that the government should overcome its fascination for foreign-bred, foreign-trained and foreign-brainwashed promoters of exotic prescriptions, and appoint in critical positions out-of-the-box thinkers rooted in the country’s ethos, who would be in tune with the country’s imperatives.

On the other side, finance minister Arun Jaitley has decried attacks on Rajan. Some prominent industrialists have cast aside their usual reticence and come out openly in Rajan’s support. ASSOCHAM has urged politicians to avoid comments on the issue, whereas the Prime Minister has said that this issue should not be of interest to the media.

What is the reality? Rajan’s predecessor Dr. Subbarao obstinately followed the dear money policy to control inflation and Rajan has continued to tread the same path. He has linked the monetary policy, especially the change in the key interest rates, to inflation.

A strong lobby of industrialists, bankers and speculators is highly active to canvass for lower interest rates which it says are essential to promote investment, create jobs, raise output and speed up growth. It argues high interest rates have crippled industry, discouraged investment and choked growth. India should take a cue from advanced economies which have pressed interest rates down to zero and resorted to quantitative easing (practically, printing money out of thin air) to resuscitate their economies.

Dr. Rajan has given no quarter to this lobby. He has maintained that the first and foremost objective of monetary policy is not growth but inflation control. Growth is optimized by keeping inflation within agreed limits. He has brought down interest rates, but far less than the expectations of industry and markets. He says that banks have not fully passed on the benefits of the rate cuts to the customers and, in any case, the mechanism for transmission of rates changes to the rest of the economy is weak. A lax monetary policy in these circumstances can only fuel inflation rather than spur growth. International economic and financial conditions are not conducive to a stronger economic performance by India.

Meanwhile, Rajan has done something which has made his critics see red. For long, RBI used to base its monetary policy on wholesale price index (WPI) inflation, which is important for industry. The WPI-based inflation which remained below zero for 17 months edged up above it last month. So, looking at WPI inflation, there has been a strong case for cutting rates.

However, Rajan has changed the basis of monetary policy to consumer price index (CPI) inflation. Since CPI-based inflation has been rising in recent months and rules near the limit set by RBI, there is little chance of a rate cut in the near future.

What is more galling for Rajan’s critics is that his approach to monetary policy issues has been written into the law. The Monetary Policy Framework Agreement signed between the centre and RBI in February 2015 adopted inflation targeting as the objective of monetary policy. In last budget, the Reserve Bank of India Act 1934 was amended to the same effect.

The reality is that the ability of monetary policy to accelerate investment, employment, output and growth is highly limited. Lower interest rates are not a guarantee for high growth. Even in the advanced economies with much more efficient systems for transmission of interest rate changes, growth has remained elusive and economic recovery fragile despite quantitative easing and near-zero interest rates. The extra money found its way to speculation in oil, gold and real estate rather than productive investment. A quantitative easing in India is a recipe for hyperinflation. 

According to the critics, artificially elevated interest rates have proved damaging not just for industry, but also for the banking sector. Tormented by slow demand, low prices of finished goods and high capital costs, companies have been unable to service their loans. The dud loans of banks, euphemistically called non-performing assets, have assumed alarming proportions, eroding profitability of banks and threatening their viability.

The fact is that Rajan has only exposed the real condition of Indian banks before the public. He has brought out what was so far pushed under the carpet, raising hopes of a real and durable cleanup. Indeed, shares of some banks firmed up after they put up a poor show precisely on hopes of future improvement.

To be sure, RBI policies on interest rates, exchange rate and recognition of NPAs are not above criticism. Besides Subramanian Swamy, Rajan has many critics whose expertise and neutrality are beyond doubt. Interpretation of the same set of facts provides room for healthy difference of opinion.

The point is that Rajan cannot be accused of incompetence, carelessness or cussedness. While the credit for taming inflation must go to the crash in international commodity prices and global slowdown, Rajan has stabilized the rupee, made monetary policy transparent and predictable, took many initiatives in the financial sector and placed the system on a sound footing. His presence at RBI has been a source of assurance for the markets. His competence has been acclaimed around the world.