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Economy Sep 27, 2012

Raghu Rajan unplugged: Good economics makes good politics

By Venky Vembu

The intersection of politics and economics is a barren, uninhabited land. Ivory-tower economists, entrenched in their certitude and the efficacy of their textbook theories, typically make recommendations that don't adequately factor in the real world in which they must pass muster.

On the other hand, the political class, which believes only in catering to the lowest common denominator of bust-the-bank populism, typically cares not one whit for the dire economic consequences of their actions.

Worse, a certain anti-intellectual arrogance is discernible in the comments of elected leaders like Mamata Banerjee, who claim, on the strength of the fact that they have been elected to power, that unelected leaders-and she meant Prime Minister Manmohan Singh-had no moral authority to frame economic policy on, for instance, FDI in retail or even hike diesel prices to bring runaway subsidies under control.

"My job as a chief economic adviser is to tell the government very clearly what I think economics says". Reuters

When it comes to reckless populism, of course, there is plenty of blame to go around-from the Congress to the BJP to itinerant parties like the Trinamool Congress, all of whose leaders hide behind the faade of defending the aam aadmi from the vagaries of the marketplace.

In that enterprise, or so goes their thoughtless argument, it's okay to build mountains of subsidies and debt. In reasoning thus, they appear blissfully unaware of the economic consequences of their actions.

In a flurry of media interviews on Wednesday, Raghuram Rajan, the chief economic adviser in the Finance Ministry, stepped into the no man's land of the political economy, and spoke up in defence of doing the right things in the economic space-for all the right reasons in the political domain.

"My job as a chief economic adviser," he told Business Standard, "is to tell the government very clearly what I think economics says. And when it is at odds substantially with politics, my job is to emphasise economics. The decision will ultimately have some political elements to it."

More specifically, Rajan framed the discourse over the recent hike in diesel prices against the backdrop of the political economy to call the bluff of those, like Mamata Banerjee and others, who argue that the hike hurts the interests of the aam aadmi.

Rajan told Livemint: "For people who say don't raise diesel prices because you are hurting the common man, you have to respond that you don't want to hurt the common man, but if we don't get our budget deficit in order and keep borrowing from outside, we could hurt the common man even more by a full-fledged financial crisis."

The primary responsibility for having run up sky-high debt and subsidies, of course, lies with the Congress, but to the extent that today, at a time when the UPA government has bestirred itself from its slumber and begun to make feeble efforts to address that mounting crisis, the entire Opposition is intent on blocking it means that the blame must be more widely shared.

What none of the parties are willing to concede is that, as former BJP minister Arun Shourie observed the other day, good economics makes for good politics. If parties offer good governance, which rests on good economics, there's a fair bet that all but the most partisan opposition voters will be enthused - and extend political support.

But Rajan's capacity to continue to speak truth to power, in the way that he says his job responsibility requires him to do, will be on test before long. As Firstpost had observed earlier, for all the articulation of support from Congress leaders, including Sonia Gandhi, for the recent policy measures aimed at cutting subsidies and stimulating economic growth, sections of the party are already beginning to get anxious about the saleability of these policies to the voters, come election time.

And they can't wait to get back to the big-spending social welfare projects that they believe will return them to power. There is evidently no willingness to acknowledge that it was precisely such big-ticket public spending on ill-conceived projects that ran up the subsidies in the first place.

As economist Bibek Debroy too points out, "If I am to look at this recent flurry of reforms, do I detect recognition that public expenditure was wrong? I am sorry to state, I don't. Instead, the suggestion seems to be that we need high growth so that more public expenditure becomes possible... That's the reason I am not convinced the government is going to use this crisis as an opportunity, as it did in 1991."

Raghu Rajan may well speak up then as now and decry unsound economic policies , but when the ruling dispensation remains unconvinced that good economics makes for good politics too, and equates yet more unabashed spending as the way to buy popular appeal on the cheap, the limits of his persuasive powers as economic adviser will be severely tested.

by Venky Vembu

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