A Reserve Bank of India Ex-Governor speaks out
A RBI Ex-Governor Speaks Out*
M
G WARRIER
Dr D Subbarao’s book “Who
Moved My Interest Rate-Leading the Reserve Bank of India Through Five Turbulent
Years” received more media attention, perhaps, because Reserve Bank of India
was already under limelight for right and wrong reasons. From September 2013,
leadership provided by Governor Dr Raghuram Rajan had increased the ‘Brand
Value’ of India’s central bank. Various circumstances including barbs by some
unbridled economist-turned politician and
an unhelpful North Block culminated in Dr Rajan’s announcement that he was
looking forward to returning to academia once the present tenure was completed.
RBI as an institution and its staff as a family, at least during the last two
decades, have been paying a price for the stand-off between officials in the
finance ministry and the finance minister on one side and the central bank on
the other side on policy issues. Viewed in this context, the highlights from Dr
Subbarao’s book, quoted so far in the media, do not come as surprise
revelations for RBI watchers. Still, Dr Subbarao deserves a special thanks for
putting together the thoughts of th e well-wishers of India, in a manner that
should pierce through the stubborn bureaucrats in the Finance Ministry and the
‘seasoned’ politicians who danced to their tunes during the period covered in
the book.
The fig-leaf that tried to cover shame and
give an impression to the outside world that the relationship between GOI and
RBI is unlikely to break, come what may, has been removed. The highlights also
explain why Dr Rajan is waiting for the end of the current term, to leave Mint
Road.
The overt attempt to
undermine RBI autonomy started with the appointment of the Financial Sector
Legislative Reforms Commission(FSLRC) by GOI and getting a report from an
obedient Commission on dotted lines. Instead of bothering much about reforms in
financial sector, FSLRC concentrated on clipping RBI’s wings. It even
recommended stripping of Governor’s designation. It has to be said to the
credit of Dr Rajan and his predecessor who staked their own career to defend
the causes dear to protect national interests by cogently arguing and getting
some of the irrational recommendations of FSLRC dropped or modified in public
interest.
The Reserve bank of India
Act, 1934 was the result of a couple of decades’ deliberations and the
institution has stood the test of time for eight decades now. Unless a
political decision converts RBI into a department of GOI, India’s central bank
has the resilience to rise to the occasion in trying times and if GOI is able
to ensure the kind of leadership the institution was fortunate to get so far in
coming years also, this institution will continue to play a prominent role in
India’s economic growth.
In an article written on
Dr Raghuram Rajan in August 2013, when his appointment as 23rd
Governor of RBI was announced, I had suggested Dr Rajan read History of RBI,
Volume I. My present suggestion for the prospective 24th Governor is
to own a copy of Dr Subbarao’s present book and get back to it whenever the
choice is between advice of conscience and the expectations of political
leadership or ‘veterans’ in the finance ministry.
S S Tarapore used to
write that RBI Governor and his deputies have constraints as their continuance
is at the sweet will of GOI. The finance ministry interference does not stop
with policy issues affecting economy, but percolate to minor HR-related wage
and pension matters governed by independent statutes and regulations. If
successive RBI Governors and their deputies are fighting for RBI autonomy and
falling, time is opportune for a review of GOI stance on the issue, to restore
the prestige of India’s central bank in national interest.
GOI continued to tease
RBI Governor and the central bank staff by asserting ownership rights after Dr
Subbarao left Mint Road also. Dr Raghuram Rajan has succinctly elucidated the
areas of friction between GOI and RBI in the chapter “Governor’s Overview” of the RBI Annual Report 2014-15. For
example:
Paragraph X.28, captioned “Superannuation Benefits” of the report,
quoted hereunder, is a tell-tale narrative which prompted S S Tarapore to make
the following observation in his column in the Hindu Business Line once:
“Has one ever heard of a borrower wanting to determine
the remuneration of the banker? Prime Minister Narendra Modi should break
government’s hegemony over the RBI.”
“Superannuation
benefits
In 2003, the Reserve Bank, with the approval of the
Central Board, had made some improvements in the monthly pension paid to
employees who retired prior to November 1, 1997. However, the government had
observed that the improvements in the pension scheme could not be effected
without suitably amending Regulation 2(2) of the RBI Pension Regulations, 1990
and requested the Reserve Bank for their withdrawal. In October 2008, these
improvements in monthly pension were withdrawn by the Central Board. This was,
however, challenged in the High Court of Judicature in Bombay, where the
Hon’ble High
Court set aside the Reserve Bank’s circular regarding
withdrawal of improvements. Since then, there has been persistent demand from
all the pensioners/retirees for improvements in pensions. However, the matter
remains unresolved till date, though the Reserve Bank and the Government are
fully engaged with the issue.”
The issue remains unresolved till date.
Dr Subbarao’s book has revived the debate on central
bank autonomy and in that context, the extent of acceptable tolerance level
when it comes to interference by GOI in mandated policy territories of RBI. One
argument articulated in an article by T T Ram Mohan (IIM, Ahmedabad) in his
article “Limits of autonomy” (The Hindu, July 18, 2016) is that GOI is
responsible to the people and outside bodies including Election Commission, RBI
and judiciary cannot take a stance different from the political leadership in
power. He even recalled the Election Commission’s fate as a result of Seshan’s
recalcitrant positions. Ram Mohan attributed, rightly, the addition of two more
members to the Election Commission to this. I differ with Ram Mohan when he brackets Dr Subbarao with T N Seshan and Vinod Rai who openly and
mercilessly took on political leadership without caring about their own career.
Here Subbarao stands out as one who ‘sacrificed’ others ( Dr Subbarao
attributes refusal of extension of tenure to two of his deputies-Usha Thorat
and Subir Gokarn to policy stances taken by RBI during his period which were at
variance with GOI expectations). Though now he reveals having fought RBI’s
case, perhaps he did not succeed in protecting RBI’s interests, as he was never
interested in risking his own self-interests. But that should not reduce the
gravity of the relationship issues between RBI and GOI flagged in his book, which
have by now almost reached a breaking point.
Even the worst
critiques will concede that RBI has been within its mandate to expect some
freedom in talking about Monetary Policy. Those having doubt are welcome to
read the Preamble of RBI Act, 1934. Of course, nothing prevents the political
leadership from amending the Preamble! On inflation, Dr Rajan has already
started worrying about that monster bordering the GOI prescription of the upper
limit of the band of four plus or minus two! That is proof enough to argue that
GOI need to listen to saner advice from RBI before allowing its spokespersons
to publicly express expectations of political leadership before every Monetary
Policy review. Options are getting limited. Either retain the institution of
RBI, or make the central bank another department of GOI. No, heavens are not
going to fall, in either case.
As regards the
criticism about the Ex-Governor’s stance on RBI autonomy, the general
perception is that RBI has been within its mandate to expect some freedom in
talking about Monetary Policy. Those having doubt are welcome to read the
Preamble of RBI Act, 1934. Of course, nothing prevents the political leadership
from amending the Preamble! That Dr Rajan has already started worrying about
the inflation monster bordering the GOI prescription of the upper limit of the
band of four plus or minus two, is evidence enough to prove that RBI’s
perceptions on inflation has been conservative.
*******************
(M G Warrier,
Ex-General Manager, RBI is author of the 2014 book “Banking, reforms &
Corruption: Development Issues in 21st Century India”)
*Article uploaded at AllbankingSolutions on August 2, 2016
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