Relations between Central banks and political governments have never been easy anywhere. India is no exception.
Digging into the few decades since Independence, let me cite a few instances that highlight certain issues of autonomy and accountability that have cropped up time and again. I have chosen these examples, having been privy to these happenings. Since the fifties, the RBI had been pursuing an easy money policy, but with the emergence of inflationary expectations in the mid-sixties, it changed its stance and started hardening its monetary policy stance. In March 1968, the RBI was forced to do somersault. It reduced the bank rate by one percentage point at the behest of the then Finance Minister Morarji Desai, himself under pressure from trade and industry. The prevailing macroeconomic environment did not justify this step, but Governor Lakshmi Kant Jha meekly surrendered and the market was stunned at this blatant political interference.
Since the fifties, the RBI had been pursuing an easy money policy, but with the emergence of inflationary expectations in the mid-sixties, it changed its stance and started hardening its monetary policy stance.
In 1960, the sudden crash of the Kerala-based Palai Central Bank, a commercial bank, created such a political turmoil that the central government could not afford to remain passive; it engaged with the RBI deliberately and decisively to change radically the RBI’s supervisory approach to commercial banks. It put itself into the driving seat and initiated a series of legislative proposals, replacing, most importantly, the policy of voluntary merger (proceeding at a snail’s pace) by one of compulsory merger, leading to a complete change in the banking landscape, with the number of banks coming down from more than 500 to 92.
Passivity by government would have amounted to abdication of responsibility. We faced a similar predicament post-nationalisation of major banks in 1969.The RBI wanted to put the nationalised banks on the same pedestal as any other bank. This was completely unacceptable to government, considering that the number of borrowal accounts in the banking system had remained stagnant at one million or so over the entire decade of the sixties. Creditably, the RBI was won over slowly, persistently and persuasively; I have told this story elsewhere.
These illustrations point to three general observations. First, the progressive widening and deepening of the activities of the RBI in different sectors of the economy do affect the lives of millions. Debates about between the RBI and government are not matters that should remain confined between the two within closed walls. As different interest groups may be vitally affected by the policy instruments of the RBI, they would, quite naturally, do their best to influence the Central bank directly or through government. These groups may operate openly or, more dangerously, through subterranean channels. The persuasive culture by which such groups capture the government or the regulatory institutions is a matter of deep concern. Many political executives, imbued with a streak of authoritarianism rooted in arrogance of power, may, as the grapevine has it, engage in a confrontationist stance with the RBI. Nothing could be worse for a political government to try to undermine the integrity of its own institution.
Monopoly of interpretation and choice of instruments of intervention would always in an uncertain economy continue to matters of debate. We have to pay due regard to both autonomy and accountability. There has to be a forum within our democratic structure where the RBI is obligated to explain and defend its position.
Second, these occasional aberrations do often cloud the fact that relations between the RBI and government have stood the test of time. Be it in the era of planning, or for the task of diversifying the range of development institutions, or during the course of our recent transition to a market economy, the RBI and government have always worked in tandem. This process of interaction has gone on in an ambience of wise understanding. The unfortunate exception was the extraordinary situation during the Emergency in the mid-seventies. There were numerous cases of interference by the political class in the RBI’s appointments and administration and in its credit authorisation policies to the unholy benefit of large business houses. Thereby, the RBI was reduced, briefly, to a pliant institution, subservient to the elected gentry.
Third, the complex macroeconomic situation of today demands that we move beyond theoretical discussions about autonomy. In the nineteenth century, the well-defined rules of gold standard made the central bank the servant of the market, making it respond automatically to the inflow/outflow of gold. With the collapse of the gold standard and the academic controversies surrounding the role of money, the central bank has to have a clear mandate and simultaneously the necessary operational freedom to fulfil that mandate. We have moved in that direction, but even with the mandate being specified, we cannot necessarily assume that there would be consensus in circumstances when the mandate would have to be set aside for some time and different weights attached to different economic and monetary variables.
Monopoly of interpretation and choice of instruments of intervention would always in an uncertain economy continue to matters of debate. We have to pay due regard to both autonomy and accountability. There has to be a forum within our democratic structure where the RBI is obligated to explain and defend its position. Different countries have taken different routes and by and large each model is appropriately tuned to their specific contexts. The oft quoted US example is a good model to work upon. Presentation by the chairman of the Federal Reserve to the Congress makes for public exposure and transparency but does not take away the chairman’s autonomy.
We need an appropriate and structured forum to strike a balance between unrestrained autonomy and blatant political intervention. The focus of our debate should shift on what kind of forum we should have.
(The writer is former Secretary, Government of India, former Chairman of the State Bank of India, and the author of several books, among them ‘No Regrets’ and ‘Business & Polity’)