Thank God, RBI exists!

Dr. Duvvuri Subbarao, the recently retired RBI Governor, made a number of interesting points in his last official public speech, titled ‘Five years of leading the Reserve Bank – Looking ahead by looking back’. Many of us would have heard him or read his speech, which is available on the web as “Tenth Nani A. Palkhivala Memorial Lecture” –

Dr.Subbarao is a 1972 batch Indian Administrative Service (IAS) officer of Andhra Pradesh cadre. In 2008, he was appointed the 22nd Governor of Reserve Bank of India and his term was to end in September 2011. But breaking from tradition, the Prime Minister’s Office extended his term by two years until 4th September 2013.

The debate on “monetary policy” managed by Central bank vs. “fiscal policy” managed by Governments of the day is not a new phenomenon the world-over. The two institutions agree to disagree but more or less work together and RBI is perceived to have transparency and independence. Needless to say, this is considered as a healthy debate which is desired as a balancing act in any economy.

But what is strikingly different in India of 2013 is that inorder to strike a balance between Growth and Inflation; the former RBI Governor Dr.Subbarao has been battling against the sentiments of stock markets, analysts and foreign investors demanding interest rate reductions and has been quite eloquent in defending policy matters of RBI vs. Government. Also, he stood firm not to be swayed by the blitz of media opinion and had almost bailed out the UPA government from deeper crisis. Yet, he was under attack from the UPA Government for all the sins of their own creation!

Admittedly, the RBI as an institution has been working independently of the successive governments throughout its history, except in 1958 when Rama Rau resigned after differences with the then finance minister TTK. But the growing discontent between the present UPA government and RBI is indicating a dangerous path ahead to the institutions of Constitution that are facing existential crisis like in the Emergency of 1975-1977.


The CBI, CAG, CVC, Army, Parliament, Federalism, Election Commission, Courts, Print Media and Social Media were all abused by UPA and the most recent being Journalism, which now requires education qualification matching ManishTiwari !!

Dr. Subbarao had been dealing with a phase (2008-2013) that is seen to be the worst era of government’s financial mismanagement after 1991 crisis, which is why it becomes important to know his views on the present economic scenario.

NDA having inherited a sinking economy in 1998 started off with a bang by conducting the second nuclear test of India (only after 1974 with a gap of 24 years!) and challenged the world. The loud explosions of Pokhran in Rajasthan etched in our memory had addressed the most important aspect of security and aroused the Nation’s spirit of self-reliance daring a variety of sanctions from US and the world including Japan. Followed then was Kargil war with Pakistan in 1999. Despite all this, NDA took the economy to the greater heights and built a strong international diplomacy against many hostile countries and finally exited on a resounding note by leaving a legacy of a strong economy in 2004 with 8.1% GDP.

In Oct’ 2012, taking on the RBI’s reluctance to reduce the interest rates to boost investor sentiments and spur growth, the Finance minister Chidambaram said, “Growth is as much a challenge as Inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone”.

Chidambaram’s comments rely on the economic theory, which says, there cannot be Growth without Inflation. Also as finance minister, he used to call himself as a “lucky finance minister” because of the good timing that he joined in 2004-2008.

The UPA started off as a true Capitalist (rather crony capitalist) with endless scam after scam and finally ending on a Socialism note by introducing food security, land security and such other vote security bills as we approach the elections in 2014.

First, the country was subjected to Hyperinflation and then to Stagflation, all in the name of ‘global’ reasons and left the economy in turmoil at 4.5% GDP in 2013. The investor confidence reached very low despite opening up for 100% FDI and such liberal measures. The state of Fiscal Deficit (FD) and Current Account Deficit (CAD) and Rupee Depreciation have all become well-known to even those who do not understand economics, thanks to UPA. In summary, Chidambaram reminded us the darker days of 1991.

Dr. C.Rangarajan, former RBI governor had also declared that Indian economy is facing stagflation.

Stagflation is a situation to describe a high inflation rate, which slows the economic growth rate and high unemployment. Stagflation is costly and difficult to eradicate once it begins.

Hyperinflation occurs when a country experiences very high accelerating rates of inflation (higher price levels) causing the population to minimize their holdings of money. As a result, the currency quickly loses real value, as it happened in 2013.  Usually it occurs in war situations and their aftermath, socio-political upheavals that make it difficult for governments to tax the population because of sharp decrease in tax revenue.

Chidambaram achieved all this hands down, but neither by wars nor with natural calamities. The agriculture contribution to GDP dropped from 26% in 1998 to 13% in 2012. A point to be mentioned here quoting from a Nobel laureate and a Professor of Economics at Columbia University, Joseph Stiglitz, “Indian farmers are better than scientists”.

In conclusion, the UPA was on a strong wicket when started, but yet scored high on the run-rate of scams and inflation.

May be Chidambaram was ‘lucky’ as he described in the past, but definitely not the Nation as it proved in 2013. We do not need empirical evidence to prove how bad the UPA regime is, after seeing them running from pillar to post to come up with “patch-works” like fuel control from 8 AM to 8 PM, pleading middle-class and Hindu temples to sell / pledge their wealth for Gold Bonds, etc.

In his response, the former RBI Governor Dr. Subbarao said, “People who are worried about economic growth are typically quite articulate, that they have a platform to express their concerns. I have sympathy with that view (that high interest rates were hurting growth). I am not saying that’s an invalid criticism. But I just want to say that their voice is heard, but people who are hurt by inflation — the large majority of the poor — their voice is not heard”.

Few salient points from the speech of Dr.Subbarao:

1) A final thought on this issue of autonomy and accountability. There has been a lot of media coverage on policy differences between the government and the Reserve Bank. Gerard Schroeder, the former German Chancellor, once said, “I am often frustrated by the Bundesbank. But thank God, it exists. I do hope Finance Minister Chidambaram will one day say, “I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.

2) Quoting Nani Palkhivala’s famous statement, “Dharma lives in the hearts of public men; when it dies, no constitution, no law, no amendment can save it”, Dr.Subbarao said, “If I can extend that thought a little, a nation prospers only if its public institutions are guided by Dharma. The Reserve Bank of India tops the list of India’s public institutions that are guided by Dharma and Dharma alone”.

3) “The third lesson we learnt is that even in a multi-nation crisis, governments and central banks have to adapt their response to domestic conditions. There is typically pressure on every country to copy the crisis response of other countries, especially of advanced economies (AEs). For example, AEs were forced to resort to quantitative easing (QE) to loosen monetary conditions, raise inflation expectations and lower real interest rates. Was there any need for emerging market (EM) central banks to do so? I believe there wasn’t because they had sufficient conventional ammunition left”.

4) “I do not agree with the argument that the Reserve Bank failed to control inflation but only ended up stifling growth. WPI inflation has come down from double digits to around 5 per cent; core inflation has declined to around 2 per cent. Yes, growth has moderated, but to attribute all of that moderation to tight monetary policy would be inaccurate, unfair, and importantly, misleading as a policy lesson. India’s economic activity slowed owing to a host of supply side constraints and governance issues, clearly beyond the purview of the Reserve Bank.

5) “Then the euro zone debt crisis forced the ECB to bend and stretch its mandate to bail out sovereigns, in essence implying that a central bank committed to financial stability could not ignore sovereign debt sustainability. Put differently, the fundamentalist view of a central bank with a single-minded objective (price stability), and a single instrument (short-term interest rate) is being reassessed across the world. The jury is still out, but a consensus is building around the view that central banks now need to balance price stability, financial stability and sovereign debt sustainability. How this is to be achieved is the big question”.

The Reserve Bank of India as an institution is well-known for integrity, independence and professionalism. But after all, institutions are run by individuals. It is important to recognize the role of a Deputy Governor of RBI as one ray of hope for the institution.

The newly appointed RBI Governor, Raghuram Rajan (a personal choice of P. Chidambaram as some would say) is former Chief Economic Advisor to the Government of India and also a naturalized US citizen (Indian American) who swears allegiance to the United States. Many have questioned his appointment on these grounds. He comes with a strong academic background having graduated from IIT, Delhi in Electrical engineering, PGDBA from IIM, Ahmedabad and had also gained working experience from the close quarters of Ministry of Finance under Chidambaram as Chief Economic Adviser, as a Chief economist at the IMF from 2003 to 2007, as author of books and comes with many other distinguishing accolades.

However, many doubt whether he can continue to maintain that great tradition transparency and independence of RBI or fall victim to the pressures of pink press, Dalal Street (or even Wall Street!) and fall in-line with populist policies of exiting UPA government? He said, “I don’t want Facebook likes but do the right things”.

There were positive signals from the markets on the day when he delivered his first speech as RBI Governor. Many wondered to know what made the big difference on a single day! Hence, it will be interesting to watch the much awaited announcement of the new Governor’s maiden “monetary policy” on 20th September 2013.

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