Tuesday, June 21, 2016

A Look at Rexit

A day before Brexit, there has been a sharp drop in the number of shrill op-ed's and commentaries on "Rexit" - the exit of RBI Governer, Raghuram Rajan.

Reactions to Rexit have, by now, covered the entire spectrum of reactions and predictions, from the impending collapse of the Indian economy to 'good riddance'. As a man-on-the-street, I have been trying to understand why the governement decided not to extend Rajan's tenure, who, by all accounts seemed to be the perfect man for the job.

So far, the many opinions rationalizing Rajan's exit centred on a handful of points: The RBI governor was exceeding his brief; he was playing to the gallery by taking on the role of a public intellectual and a government functionary at the same time; He was not being senstive enough to the plight of rural India by refusing to lower the interest rates, etc..

Today I came across an entirely new angle presented by Gurumurty. According to him, Rajan, with his Western education did not sufficiently understand the importance of small towns, the unorganised sector. He illustrated this with two examples:

  • Morvi, Gujarat: The town produces 70 % of ceramics, 80% of CFL lamps, and the largest producer of clocks in India. It has the highest per-capita income in the country.
  • Tirupur, Tamil Nadu: Here, entrepreneurs with less than 10 years of formal education export more than USD 4 billion worth of knitwear garments.

According to Gurumurthy, towns like Morvi and Tirupur account for more than 58 million unfunded, unorganised businesses that needed a capital of INR 12 Lakh Crores (USD 184 billion). A new financial architecture called the Mudra Bank, to fund these unorganised businesses, has been stonewalled by Rajan at RBI citing regulatory arbitrage and systemic risk.

Obviously there is more to Mudra than meets the eye. Finance is certainly a problem for SMEs, especially for those located in rural areas where the going rate from local money lenders ranges from 30 to 120 percent. If RBI under Rajan was not too keen on having yet another banking/regulatory body (apart from NABARD, SIDBI and NHB) what were the arguments against it?


* Micro Units Development and Refinance Agency (MUDRA) - wiki - https://en.wikipedia.org/wiki/Micro_Units_Development_and_Refinance_Agency_Bank

* Mudra Bank - Genesis - http://www.mudra.org.in/AboutUs/Genesis

* Unnikrishnan, Dinesh (Firstpost, 2015) -- http://www.firstpost.com/business/mudra-bank-has-an-obvious-risk-of-endorsing-shadow-banks-2189251.html
- National Bank for Agriculture and Rural Development (Nabard), Small Industries Development Bank of India (Sidbi) and National Housing Bank (NHB)

* Gurumurty - http://linkis.com/newindianexpress.com/4AnuK
* Sanjay Baru - Interesting - http://m.firstpost.com/politics/the-numbers-rbi-governor-raghuram-rajan-did-not-get-2014-and-282-2846970.html
* Harish - http://indianexpress.com/article/explained/in-fact-where-raghuram-rajan-may-have-erred-in-policy-2865447/

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