Is this a case of a reformer making too many political enemies?

Raghuram Rajan’s announcement ahead of time that he would step down in September as governor of the Reserve Bank of India, the country’s central bank, was greeted with widespread disbelief. 

Mr Rajan has been one of the most ardent reformers in the country’s history and was engaged in some important tasks such as cleaning up the balance sheets of public sector banks. But as with all reformers he has ruffled feathers and the political pressures may have been too much, forcing his resignation.

When Mr Rajan began his mandate in 2013, the rupee was in freefall. In 2015, it was one of the few emerging market currencies that held up as investors got jittery waiting for the US Federal Reserve to hike interest rates. Mr Rajan’s decision to turn the RBI into an inflation-targeting central bank was key to normalising India’s economic environment.

With inflation at bay and the currency in check, India was also starting to see FDI flows increase. According to fDi Markets, FDI capital expenditure grew from $23.8bn in 2014 to $62.9bn in 2015.

But internal political tussles with the ruling Bharatiya Janata Party allegedly pushed Mr Rajan to return to academia, rather than stay for a second term as do most Indian central bank governors.

It is worrying that an emerging market that has appointed a much-needed competent, hands-on official is unable to retain such talent. And if Mr Rajan really decided to leave due to political antagonism, then the reasons for his departure will be exactly what keeps many developing countries stuck in the ‘developing’ category. 

India has made a lot of progress over the past few years, but it has much to do. Revitalising India’s institutions and economy is a long-term task. This means central bank governors must be allowed to work unhindered by politics.

Mr Rajan’s reforms were about growth and stability as well as changing the mind-set of local political and business institutions. All of this requires time.

For India to ditch the ‘developing’ label, it needs to build credibility into its institutions. And to do so, reform and a long-term vision are essential. What completely reverses this process is to oppose those who bring reform and long-term vision to the table.

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