Sometime ago I had asked a highly reputed economist advising the Modi government what he thought of a piquant observation made by Sanjay Subrahmanyam, one of India’s foremost historians, that the government was more easily able to accept globally trained economists but not historians or sociologists who mostly reject the culturally fixed views of the Sangh parivar. The foreign trained economist reflected on the matter for a few seconds before responding, “It is not necessary that we economists endorse all the policies of the government, whether UPA or NDA. For instance, I strongly feel the government must structurally move away from a pro-business policy framework to a genuinely pro-market one where the benefits are more evenly spread. This is a continuing problem with the Indian policy regime”. Put simply, India’s economic policies are often tailored to benefit big business houses in the name of “development and employment creation.”

The economist in question had expressed this opinion to Prime Minister Narendra Modi too but probably did not see much change on the ground. The reason I am recounting this story is because it has a lot to do with the way RBI governor Raghuram Rajan has chosen to leave his job even before hearing from the government about a possible extension for another two years – something all RBI governors have got since 1991. Rajan completes three years at the helm of the central bank on September 6 and has expressed his desire to go back to teaching economics at Chicago University. His decision will disappoint the global investing community at large as he was seen as a big stabilising influence on monetary policy and financial market functioning in India.

Rajan too has strongly believed that for sustained growth, India must move away from a big business-oriented policy framework to a much more broad based, pro-market one. His first public remarks against entrenched big business interests came around end-2014 when he said many business houses in India enjoyed “riskless capitalism”; in good times they enjoy profits and in bad times they are bailed out by the banks. Incidentally, such remarks had directly targeted some of the most indebted corporate groups whose names were listed by reputed independent research institutions as defaulting on loans. Credit Suisse India had regularly been putting out the names of the top ten business groups that owed about Rs 7.5 lakh crore to the banks and nearly 50% of this was close to default status as per private credit rating agencies.

Rajan had begun to turn the heat on some of these powerful business houses, including the controversial Essar Group, Vedanta, Jindal Steel, Anil Ambani-led companies, Adani Group, JP Associates, GMR, GVK, Lanco and Bhushan Steel. Many of these entities had already got their loans restructured – a euphemism for postponement of interest and principal repayment — during the UPA regimes, especially after the global economic slowdown deepened post 2012. But how long could the banks postpone receiving interest and principal back from the companies without declaring them bad loans? This problem is still to be resolved except that PSU banks have begun to make heavy provisions against these loans over the past six months and have shown huge losses in their books. Rajan also instructed the banks to tighten the screws on the big business houses that had not repaid interest and principal for a considerable period. The banks, which had been lax for some years, suddenly started pressuring these groups to sell their profitable assets to pay back the debt on projects that had not taken off, especially in the infrastructure sectors. So Essar, with a total loan exposure of over Rs 1.15 lakh crore, has been negotiating to sell its profitable refinery project to pay back its debt in steel and power, while the Anil Ambani group and JP Associates have sold some businesses to pay back their massive loans

In the past, Essar, politically connected to both national parties, never felt compelled to sell its assets to pay back loans. In 1999-2000, at the peak of the downcycle in business after the Asian financial crises, Essar had nearly defaulted on its debt obligations. But it managed to retain all its assets and ride through the downcycle, of course with some help from the banks and their political masters. This does not seem to be happening now as, under Rajan’s supervision, the PSU banks have been quite emboldened and have refused to even meet some of these promoters to negotiate deals. Modi has supported this upto a point. But when the pain exceeds a certain limit, these businesses begin to forcefully encash their IOUs for past political funding.

One has recently heard murmurs from senior ministers like Nitin Gadkari that the CBI, Central Vigilance Commission and judiciary cannot run the administration. Gadkari has also said banks will have to be more pragmatic about dealing with bad loans. This too is a euphemism for adopting a softer policy on loan defaults by big business houses. When Rajan made a caustic remark against Vijay Mallya’s lavish display of wealth, some official ventriloquists in New Delhi tried to counter the RBI governor by saying personal lifestyle should not be dragged into business dealings. Last fortnight Rajan retorted that personal lifestyle must certainly be commented on if the promoter has given personal guarantees against the bank loans. The public has a claim on the promoter’s personal wealth in such situations.

Obviously, Rajan’s attitude has not gone down well with the big business interests, which have run a subterranean campaign against him. Some powerful ideological advisors of the Sangh parivar have also been carrying out a strong campaign against Rajan’s policies for over a year. The campaign was couched in politically correct terms as the need for lower interest rates for small businesses but clearly there were multiple agendas at work. It must also be noted that prominent industrialists running their business well with modest debt from banks have supported Rajan fully and endorsed a second term for him.

Some of the business groups in Credit Suisse’s top indebted companies’ list are also known to have strong historical links with the RSS leadership. Rajan may not have fully understood the complex nexus between business and politics when the Centre encouraged him to nominally go after the big loan defaulters. Politicians in Delhi are known to run with the hare and hunt with the hounds.

Modi too tries to project himself as a crusader against crony capitalism, but the circumstances surrounding Rajan’s exit shows that entrenched interests have struck back successfully. In public perception, the Modi government appears more and more compromised now. How else does one explain no action being taken on the elaborate investigative findings of the economic enforcement agencies, which have reported massive over-invoicing of power equipment imports by the very top business groups that are struggling to pay back bank loans? By unduly inflating the value of imports, these companies have reportedly diverted excess bank funds out of the country, and put them away in tax havens in Dubai and the British Virgin Islands. This is a classic case of funds diversion and qualifies to be described formally as wilful default if these companies are unable to pay back their bank loans. Will Modi ever take action on these reports? With someone like Rajan supervising banks at such a critical juncture, the political class might have even felt a bit uncomfortable and insecure. So it was best to send Rajan back to Chicago with a thank you note. Rajan must realise it is not so easy, after all, to rescue capitalism from capitalists in real life.