Mumbai: A year after he batted for an independent central bank in his last speech as Reserve Bank of India (RBI) governor, Raghuram Rajan’s new book reiterated that point and called for more clarity on the rank of the governor.
“There is a danger in keeping the position ill-defined, because the constant effort of the bureaucracy is to whittle down its power. This is not a recent phenomenon…the RBI risks becoming dangerously weakened as successive governments and finance ministers misunderstand its role," he wrote in I Do What I Do.
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The book, a compilation of his speeches and essays, is not a tell-all memoir like that of his immediate predecessor Duvvuri Subbarao or a behind-the-scenes account of policymaking at RBI like the one written by Yaga Venugopal Reddy, who was governor from 2003 to 2008. However, the introductions for some of the essays and the postscripts offer a window to Rajan’s thinking and explains the rationale behind some of his decisions.
“The mistake on all sides is to treat the RBI governor as just another bureaucrat. If the governor takes this mistaken view, he ends up being subservient to the central and state governments and not offering an independent technocratic perspective that could keep the nation from straying into economic distress," Rajan wrote. At another place, he writes that if the government takes the mistaken view that RBI governor is just another bureaucrat, it will be “displeased when it sees the governor deviating from the usually deferential behaviour of bureaucrats and it will strive to cut him down to size. This does not serve the country either."
Rajan is not the first governor who has weighed in on the need for central bank autonomy. The debate was stoked in the immediate aftermath of the government invalidating high-value currency on 8 November. In January, Reddy had said RBI had mistakenly been equated with other regulators even while it has fundamentally different functions. His predecessor Bimal Jalan too had said he “hope(d) the government would give attention to" RBI autonomy.
In the book, Rajan also wrote that during his term as governor, RBI was not asked to make a decision on demonetisation, although he had cautioned the government that short-term costs would outweigh long-term benefits, as a Mint on Sunday piece reported.
Rajan also wrote on two other issues central to banking sector discussions today—the Rs10 trillion bad loan problem in India and the competitiveness of public sector banks.
On the first topic, he wrote that this was an area “where we made the least progress, despite the involvement of the best and the brightest in the RBI".
“The need for action on everyone’s part is as urgent as ever, though the instruments to effect that action have grown," he wrote. “The operational effectiveness of these (changes such as bankruptcy code) needs to be tracked, and further amendments enacted if necessary until we have a resolution system that works in a rapid, fair and transparent way."
At a time when the government has instituted a new mechanism to fast-track the merger of state-owned banks, Rajan wrote that “the governance of public sector banks can be improved only when the government distances itself fully from the banks".
He said he would measure progress here by simple yardstick: when the department of financial services (which oversees public sector financial firms) is closed down and its banking functions taken over by bank boards and the Banks Board Bureau.