Photo: Bloomberg
Photo: Bloomberg

The Reserve Bank of India conundrum

Every RBI governor has been handpicked by the ruling regime assuming he is our man, but by the time they find their feet they cease to be an establishment man

In an interesting coincidence, the tell-all memoir—Who Moved My Interest Rate—of former Reserve Bank of India (RBI) governor Duvvuri Subbarao was published on the eve of the monsoon session of Parliament. The revelations are likely to test the fragile peace struck between the government and the opposition ahead of a crucial session.

At the least, it has revived the debate over the abrupt resignation of the incumbent, Raghuram Rajan, and stoked afresh wanton speculation about his likely successor; and of course, left the Congress red faced, with the memoir outing their sanctimonious stance articulated by former finance minister P. Chidambaram over the alleged delay in the award of an extension to Rajan. Because, as the memoir reveals what most said in sotto voce, the Congress-led United Progressive Alliance (UPA) similarly criticized and castigated Subbarao for the very same reason: failure to cut rates.

The key takeaway, going by the forever animated exchanges on television channels, social media and skewed commentaries in newspapers, is clearly about friction, structural in nature and sometimes acrimonious, between North Block and Mint Street. And given the recent penchant for binary conversations in the country, it is rapidly degenerating into an either-or debate: this would mean casting either institution as a villain/hero, depending on who is penning the script. Avoidable.

Actually, it is much more fundamental: the differences come from differing priorities between Delhi and Mint Street and not the objective—pushing for faster economic growth. And, this nugget is tucked away in Subbarao’s book, where he recalls his interactions with Prime Minister Manmohan Singh on the very same vexing issue. “In telling the inflation story to the prime minister, I would give him both the positive and negative sides of it. As an economist, he understood my arguments, but as a politician, he felt helpless. Most of the time, all I would get by way of a reply would be a wry smile."

However, unlike the PM, the finance ministers in the UPA regime, as Subbarao reveals, were anything but subtle. “There was constant and decidedly unhelpful friction between the ministry of finance, under both Pranab Mukherjee and later Chidambaram, and the Reserve Bank on what the government saw as Reserve Bank’s unduly hawkish stance on interest rates, totally unmindful of growth concerns."

This is precisely the nub of the problem. The politician, with an eye on a re-election, is desperate to push growth and hopefully create jobs—another matter in the UPA’s case that while their tenure saw high growth it did not generate commensurate jobs, inviting the sobriquet of “jobless growth". Consequently, the terms of the debate, to a large extent framed by commentators, is as a trade off between inflation and growth: one comes at the expense of the other.

Anyone with a rudimentary understanding of economics will agree that this is not the case. The trick to reframe the terms of this debate is to look at the desirable objective as sustainable growth. Growth can never be sustainable with high inflation. So yes, there can be a trade off in the short term, with attendant macroeconomic risks, but in the long term, growth is conceivable only if inflation is under control. Further, one thing to keep in mind is that there is no magic bullet to India’s macroeconomic problems, including inflation (as the cyclical surges in prices of onions and pulses reveal), which are mostly structural in nature and hence will take time to resolve.

Once we grasp this fundamental divergence in perception, it also clears the air about the role of the RBI governor. Every one of them has been handpicked by the ruling regime in Delhi on the presumption that he is “our man" and yet by the time they find their feet on Mint Street they have ceased to be an establishment man.

Recent history is sufficient evidence. While the run-ins with Rajan and Subbarao are in the spotlight, it was no different under Y.V. Reddy—who, like Subbarao, was a veteran bureaucrat with long association in various assignments with Singh.

Ask yourself why? It is clearly RBI the institution. It is packed with economists and technocrats who make their calls on cold macroeconomic logic. This is not to say that they cannot and haven’t made wrong calls on the macro economy in the past and will not do so in the future. The errors of judgement, as and when they happen, are not subjective in nature and playing to the galleries. They are genuine mistakes.

Keeping this in mind will help sift chaff from grain in an otherwise high decibel debate, which is already vitriolic. Ironically, the clue to exploring this line of thought is in Subbarao’s memoir, which, going by the debate in the media, may be remembered for its controversies rather than its fundamental insights of the public policy framework.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus

Comments are welcome at capitalcalculus@livemint.com.

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