Advising RBI Governor Dr Raghuram Rajan
August
1, 2016
Advising
RBI Governor Dr Raghuram Rajan
This refers to the “Open
Letter to the Governor” (Economic Times, August 1) from Mythili Bhusnurmath.
Though time is not yet ripe to debate the kind of advice Dr Rajan may give to
his successor, or to himself, in the unlikely event of being forced to continue
beyond September 4, 2016, media having failed to force GOI to name next RBI
Governor much before the so called ‘Rexit’, there is a need to invent new
topics for discussion.
The fear that Dr Rajan
will embarrass his successor by giving unsolicited advice, through media, is
far-fetched. Last three years he has not taken his problems within the Reserve
bank of India or with GOI to the media. There is no denying that there may be
instances of GOI spokespersons, Finance Minister or politicians raising
controversial issues while speaking to media and Dr Rajan clarifying RBI’s
position while talking on such subjects.
Having said that, the
‘open letter’ undoubtedly is interesting reading.
M
G WARRIER, Mumbai
RBI Governor Dr Raghuram
Rajan*
M G WARRIER
Dr Rajan, as is
evident from his academic and professional record, is a fast learner and
capable of finding solutions to the toughest of economic and monetary problems.
His challenges lie in (a) how fast he will be able to ‘unlearn’ the IMF lessons
which were moduled with prosperity of the developed world in view and (b) how
quickly he will get convinced about the historic dual responsibility of RBI to
ensure distributive justice while supporting economic growth and reframe his
arguments to convince North Block that after all RBI has been on the right path
and what the central bank lacked was the support from GOI.
It has to be said to the credit of
GOI that, even if it was in self-interest, generally, compared to
other statutory bodies and PSUs, Reserve Bank of India has been getting a fair
deal in selection and timely appointment of its head. This time, the process
has been more transparent and all have accepted that among the candidates
considered, the most meritorious has been selected.
This should give considerable confidence to Dr Raghuram Rajan who takes over charge from Dr D Subbarao in the first week of September 2013. The only negative in the whole affair is, as on several occasions in the past, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As someone in the media already observed, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
Ideally, RBI Governor should have an average tenure of 5 to 10 years. If such a norm was followed, Dr Rajan would have been perhaps the 15th Governor of RBI. Now he is 23rd! All Governors who have stayed in office beyond 4 years have contributed to the strength of the central bank.
This should give considerable confidence to Dr Raghuram Rajan who takes over charge from Dr D Subbarao in the first week of September 2013. The only negative in the whole affair is, as on several occasions in the past, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual ‘cut & paste’ from previous appointment orders or because GOI thought, if friction between RBI and GOI persists, changing RBI Governor more often is a soft option. As someone in the media already observed, the flip side is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have.
Ideally, RBI Governor should have an average tenure of 5 to 10 years. If such a norm was followed, Dr Rajan would have been perhaps the 15th Governor of RBI. Now he is 23rd! All Governors who have stayed in office beyond 4 years have contributed to the strength of the central bank.
Dr Rajan, as is evident from his
academic and professional record, is a fast learner and capable of finding
solutions to the toughest of economic and monetary problems. His challenges lie
in (a) how fast he will be able to ‘unlearn’ the IMF lessons which followed a
syllabus with prosperity of the developed world in view and (b) how quickly he
will get convinced about the historic dual responsibility of RBI to ensure
distributive justice and supporting economic growth. He will have to reframe
his arguments to convince North Block that after all RBI has been on the right
path and what the central bank lacked was the support from GOI. If he succeeds
in this and take out RBI from the apron strings of finance ministry, RBI will
remember him as its savior.
Given the state of our economy and
the relationship issues between Finance Ministry and RBI that have
surfaced in the recent past the new RBI Governor’s job profile will
need much more than the normal requirements such as understanding economics,
monetary and financial issues, familiarity with the way the system works in
India in the international context. He should have the interest of the majority
of the country’s population which lives below the internationally accepted
poverty line (per day expenditure of $2) and should not being a good listener
and, should not hesitate to give the government his advice even if it is
disturbing to the government struggling to keep together an incoherent
coalition.
The new Governor will continue to be
confronted with observations like “RBI has traditionally
fought for status quo. India is at a juncture when more of the same policy
won't help” which mock at the reality and do not do justice
to RBI’s history. India’s central bank has all along done justice to its
mandated role and more often beyond that. The criticism emanates from
comparisons with central banks of developed countries which have their role
limited to certain aspects of monetary management. RBI since at least the dawn
of independence, has taken on itself the responsibilities relating to
institution building and credit deployment for various purposes depending on
priorities of the governments of the day, in addition to the central bank’s
core functions. The present focus on financial inclusion and taming inflation
which are incidentally in tune with the vision expressed by the
Governor-Designate Dr Rajan is consistent with the tradition maintained by RBI.
Once he gets a feel of the
constraints with which RBI has been having a tight rope walk in harmonizing the
monetary policy in the recent past with the unbridled fiscal policy guided by
pulls and pushes of a coalition government at the Centre, Rajan is unlikely to
toe the GOI line on fiscal deficit and Current account deficit
particularly that of the Finance Minister . As a corollary, Finance
Minister Chidambaram may not find an RBI Governor who will support his pet
project FSLRC ( Financial Sector Legislative Reforms Commission ) which has
produced a report aimed at making RBI a ‘department’ of the Finance
Ministry. Chidambaram who put his Secretary Dr D Subbarao as the Governor of
RBI hoping to have a submissive Governor found a different person in Subbarao
soon after he started functioning from Mint Road. In that context, perhaps,
Chidambaram is going to be ‘second time’ unlucky. I would like to quote from a
mail I received soon after appointment of Rajan was announced:
“Raghuram Rajan is well known for his
independent views and he was one of the economists who had predicted the Global
Financial Crisis . During the farewell function for Alain Greenspan in
2005 , Rajan delivered a controversial paper with the title “ Has
Financial Development Made the World Riskier?". Rajan predicted the
Global Financial Crisis. He argued that financial sector
managers were encouraged to take risks ( called tail risks ) that
generate severe adverse consequences with small probability but, in return,
offer generous compensation the rest of the time. He further argues that the
most important concern is whether banks will be able to provide liquidity to
financial markets This is exactly what happened . The US treasury
Secretary Lawrence Summers ( known for his arrogance) was on the dais
and he accused Rajan as a “ luddite “ ( a 19thcentury
expression for being a violent protester ) . Rajan was proved right . ….Rajan
has also clear positions on austerity measures and he is at loggerheads the
liberal Princeton economist Paul Krugman ( Nobel prize winner).”
FSLRC report inter alia makes the
following recommendations:
· The actual
functioning of the regulator should lie in three areas — regulation-making,
executive functions and administrative law functions.
· Any policy should
be made not just by the RBI Governor but by a council comprising Governor and
Deputy Governor from RBI and five more external members appointed by the
Government.
· The Government, in
consultation with the Governor, should give the Central Bank quantifiable,
measurable objectives; the RBI will need to state reasons why it has failed to
achieve the objectives and what remedial action it will take to achieve the
objectives.
· The government and
not the RBI should make rules with respect to capital inflows. This
recommendation is irrespective of whether the inflows are FDI, FII, Forex loans
or NRI deposits.
· The RBI will also
be the banking regulator but it won’t have any control over non-bank finance
companies (NBFCs).
· The Reserve Bank of
India should be responsible only for overseeing the banking industry and for
monetary policy, while the management of the government’s debt and of foreign
remittances (thus far under the exclusive domain of the RBI) should be directly
under the supervision of the government.
· With regard to
capital control, the Finance Ministry should make rules for inbound capital
flows, while the onus of making rules for outbound capital flows should rest
with the RBI.
As observed in the
earlier part of this article, Rajan is a fast learner. One hopes, during his
OSD(Officer on Special Duty) days in RBI from the second week of August, 2013,
he had occasion to glance the following books:
1. History
of the Reserve Bank of India Vol I
2. All India
Rural Credit Survey
3. Review of the
Indian Monetary System (Sukhmoy Chakrabarty)
4. Report of the
Committee on Financial Sector Reforms (Narasimham Committee)
These will give Dr Rajan a feel of
the role played by RBI since its inception in the evolution of the financial
system to meet the country-specific needs. A reading of these books will also
tell one why the cut and paste FSLRC report is not finding favour inside RBI.
&&&&&&&&&&&&&&&&&&&&
*Article published in
The Global ANALYST, September 2013. A slightly edited version appears @pages
60-64 of my 2014 book “Banking, Reforms & Corruption: Development Issues in
21st Century India”
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