Three months ago, when India’s new new poster-boy of economic reforms, Raghuram Rajan, took over as the new RBI Governor, the stock market, investors and critics jumped up in delight. It was not only because Rajan’s first speech hinted at overwhelming liberalization in the banking sector, and drastic changes in the mindset of the central bank. The excitement also stemmed from the politics of his appointment. The expectations among investors seemed legitimate.
 Four key policy makers – PM Manmohan Singh, FM P Chidambaram, Planning Commission’s Montek Singh Ahluwalia and RBI’s Rajan – were staunch reformers. After endless debates and differences in opinions between the FM and the previous RBI head, D Subbarao, everyone expected the ministry and central bank to act in sync. Rajan was close to Chidambaram, as well as to Singh and Ahluwalia. It was the perfect A-Team to pull India out of the trough.
 Unfortunately, the bonhomie among the quartet did not last more than a few weeks. In the recent past, Chidambaram and Rajan have sung different tunes; their vision has varied. Yet again, it seemed that the finance ministry and RBI drew contradictory conclusions about the state of the economy. The battle lines between two key players were clear on at least three issues related to interest rates, bad loans and business stimulus.
 First, let us consider the duo’s debates on interest rate. Like in the war of words between Chidambaram and Subbarao, Rajan has disagreed with the former. For the finance minister, tinkering with the interest rates alone cannot curb inflationary pressures in the economy. In fact, he believes that there are no easy and readymade answers to reduce retail prices, especially of vegetables, meat, fish and eggs. Inflation is a product of several macro and micro economic problems.
 Like Subbarao, Rajan feels that the only monetary tool a central bank has to slice through the inflation’s ugly head is interest rates. In fact, according to him, it is the only and best option. More important, the RBI Governor is convinced that unless prices are reduced, one cannot kick start growth. Therefore, in the Rajan scheme of things, wholesale inflation needs to come down from over 7% now to 5% before the central bank can shift its focus to economic growth rates.
 In the past two years, bad loans or non-performing assets (NPAs) have become a critical issue in the banking sector. Statistics indicate that banks have restructured loans worth Rs 325,000 crore, or 5.74% of overall banking credit; corporate debt restructuring has zoomed by 150% to Rs 270,000 crore. The total worth of distressed loans, which include NPAs, is estimated at Rs 550,000 crore. This situation is clearly unsustainable and rock many banks in the near future.
 What’s Chidambaram’s solution to this? He said that although banks need to recover their loans, they need to make a distinction between ‘willful defaulters’ and those promoters who are ‘genuinely affected by economic circumstances’. Thus, if some companies are unable to pay back their loans because their projects have been delayed, or their profitability have been hit, because of the slowdown, the banks should hand-hold them and support them. However, strict action, including the filing of police cases, should be taken against promoters, who deliberately default on loans.
 Rajan has said that banks should avoid ‘ever-greening’ of loans; they should not recast or restructure loans of companies, whose promoters have no ‘equity’ left. One can assume that the RBI wants to treat all NPAs or distressed loans the same way. As long as the promoters are unable to pay, or have not done so for some time, banks should take legal and other action against them. There is no difference between willful and other defaulters.
 One will have more clarity on Rajan’s thought process on NPAs once, as promised, the central bank issues fresh guidelines to the banks on how to deal with bad loans. But one should mention that Chidambaram’s statements have unsavory tones to them. Who will define willful defaulters.
 Over the past several months, the finance minister has urged the banks to provide special loan packages at concessional interest rates to specific sectors like automobiles and housing in a bid to facilitate growth. In some cases, the banks have obliged. This is more like a government stimulus, where the burden falls on the banks. India Inc has cheered Chidambaram’s proposal. 
 Although Rajan has not specifically criticized Chidambaram on this front, he has done it in a circuitous manner. In a recent speech, the RBI head said that there was no need to ‘target specific industries’ and an attempt should be made to ‘improve growth conditions for all the companies and sectors’. According to him, even the basic investment environment is improved, every industry, including the ones that have suffered the most, will automatically improve its performance. 
 In Rajan’s mind, a Chidambaram-like solution is akin to protectionism and a throwback to the license-permit-quota Raj. Slowly, Rajan, who was hailed by India Inc and foreign investors as the new messiah, is being seen as slightly anti-business. Even in cases, where Rajan was praised, like his idea to allow foreign banks to expand freely through Indian subsidiaries, some sheen was lost. A recent article concluded that RBI’s measure may not lead to more branches by several foreign banks because of the respective reciprocity clauses. Most nations, including developed ones, have strict restrictions on expansion by foreign banks in their countries. So, if Indian banks are not allowed to expand there, RBI cannot support foreign banks in India.
 In his first speech as the RBI Governor, Rajan announced that licences for new banks will be finalized by January 2014. Now, it seems that this process may be delayed by 2-3 months. Thus, another of his important reforms measures will be hit temporarily. On top of that, both Chidambaram insisted that the new banks should be different from existing plain-vanilla ones.
 The FM has added that the new banks should look at geographies, like the North East, and target minorities and exploited castes. Now, which applicant will wish to start a new bank to operate in areas where economic activity is subdued, or woo customers, whose financial status is questionable? Wouldn’t it make the new banks unviable, vulnerable and uncompetitive from Day One? Wouldn’t this negate Rajan’s idea to allow the entry of new banks? 

The author is a Delhi-based senior journalist and the author of several books including The Indian Consumer, a book on the middle class