Needed: A new relationship contract between RBI and govt
Two current books, one by former Reserve Bank of India (RBI) governor, Urjit Patel, and the latter by former RBI deputy governor, Viral Acharya, have relit the debate on central bank autonomy in India. Further, Patel and Acharya resigned from their respective posts before their terms ended. Also, Acharya had put up on table and further claimed that both paid the price for resisting undue interference from the Union finance ministry.
As of information, the tussle amid India’s treasury and its central bank is as old as the central bank itself. The idea of an independent central bank for India “on a level of authority with the treasury" was first written out by one of the greatest economists of the world, John Maynard Keynes, during the British Raj. Moreover, Keynes’ proposal was put down by the Bank of England chief, Montagu Norman, who proclaimed “a Hindoo marriage" amid the Bank of England (the dominant spouse) and RBI (the subservient wife).
“Norman’s graphic simile is… expressive of the RBI’s real status after its creation," wrote the former RBI economist Anand Chandavarkar in a 2005 Economic and Political Weekly article. Amongst the pioneering economists who built up RBI’s research prowess in the post-independence era, Chandavarkar considered RBI to have been under liberty during the British Raj than in independent India. For RBI assumed quasi-fiscal mandates in order to satisfy plan targets set by the powerful Planning Commission, it became an “emasculated fiscal agency", in his words.
Throughout the lines of history, the Union government has deployed three levers to control the RBI. The first lever, nonetheless, is the colonial-era RBI Act, which gives sweeping powers to the government. Apparently, Section 30 of the RBI Act for instance, permits the government to “supersede" the RBI central board. Section 58 circumscribes the powers of the central board to make regulations only with the “previous sanction" of the central government. Section 7 (1) says that the Union government can “from time to time give such directions to the (central) bank as it may, after consultation with the governor of the bank, considered necessary in the public interest."
As a matter of routine these provisions aren’t invoked, but can be used when required. When pacing towards the end, the end of Patel’s tenure in 2018, it was section 7 that was invoked to make RBItoe the finance ministry's line on a range of contentious issues.
As the story rolls, the second lever of control lies in the choice of governors and deputy governors to run RBI. Since the moment of independence, seven out of every ten RBI governors have been former finance ministry officials, an analysis of RBI’s annual reports shows. Some such as Y.V. Reddy joined as deputy governors before becoming governor. Others such as D. Subbarao or Raghuram Rajan as of direct contact were appointed as governors after their stints at the finance ministry.
Also, 62% of RBI’s top management, over the past three decades — governors and deputy governors — have been outsiders. All were witnessed as men. Three women who made it as deputy governors during this period - K.J. Udeshi, Usha Thorat and Shyamala Gopinath - were all insiders. The last and, apparently, the only time an insider paced up the top post was when M. Narasimham, a contemporary of Chandavarkar, became the governor in 1977.
The share of RBI governors from North Block has been higher in the post-liberalization era. Patel was one of the rare exceptions, who except for a brief stint as a consultant, did not spend much time in North Block before becoming RBI governor. The lack of any finance ministry veteran in RBI’s top rungs during Patel’s tenure could have accentuated the ministry-RBI tussle. Unsurprisingly, the government turned to Shaktikanta Das, a finance ministry veteran, to take charge of RBI after Patel’s resignation.
Nonetheless, Patel himself has been a beneficiary of the RBI-ministry tussle. At a time when tensions between the then governor, Subbarao and the then finance minister, P. Chidambaram were at their height, his appointment as the deputy governor arrived. Moreover, as of fact, Chidambaram believed that even the outsiders sent to RBI had become hostage to the RBI technocrats and wanted to bring in ‘fresh thinking’ in the institution, wrote Subbarao in his memoirs. So instead of extending the term of Subir Gokarn, as recommended by Subbarao, Chidambaram appointed Patel, a known critic of Subbarao’s policies, as deputy governor.
Now, the third lever of government control is placed in the composition and staffing of RBI’s central board, RBI’s highest decision-making body. The central board is designed to consist of 21 members, under the RBI Act,: the governor and four deputy governors [under Sec 8(1)a], four directors from the four regional boards of the RBI [under Sec 8(1)b] who are elected by their respective local board members, 10 directors nominated by the Union government who are normally experts in their respective fields [under Sec 8(1)c], and two government appointed officials (usually from the finance ministry) [under Sec 8(1)d].
The government can ensure by not filling up board positions, that the ex-officio members hold sway over the board, as was exactly the case during demonetisation, when RBI’s central board was at its weakest level in the lines of history.
The minutes of that fortunate board meeting held on 8th November 2016 inclines that the board members were not convinced about the government’s economic logic behind the decision to demonetize high-value notes. But, in spite of their reservations, government officials seem to have persuaded others to approve the plan. It is tempting to question whether the outcome would have been different if the board were staffed with more independent members.
Also, as the information blends in thin air, some of the board vacancies were subsequently satisfied but the appointments lured controversy because of the political background of the appointees: S. Gurumurthy and Satish Marathe. Both have been associated with affiliates of the ruling Bharatiya Janata Party (BJP) for long years. Also, political appointments have been common in RBI’s regional boards but less so in the central board. Furthermore, the previous political appointees were Rajeev Gowda of the Congress in 2012, Gopala Ramanujam, the co-founder of the Indian National Trade Union Congress (INTUC) in 1994, and Erasu Ayyapu Reddy of the Telugu Desam Party in 1993.
Apparently, Union government appointees to the board tend to be academics, bureaucrats (or former bureaucrats), industrialists, and finance professionals. The share of bureaucrats has elevated in the past couple of years even as the share of academics has stagnated.
RBI’s central board, in the 1990s, was relatively balanced in terms of the professional expertise of its board members. Between 2000 and 2010, industrialists and corporate professionals dominated the board. Moreover, their share declined in the 2010-2015 period as the strength of the board fell, and it came to be dominated largely by ex-officio members. The share of women on the board has also steadily declined over the past two decades.
Central board staffing while began receiving some attention of late, the high number of vacancies in the local or regional boards often elude attention. The northern board, over the past five years, has been a void for three years, while others have had a maximum of two members.
There have been no representatives, for some regions whatsoever, on the central board, and this means board decisions may not have fully factored in their regional implications. And as Chandavarkar argued, the impact of monetary policy and regulations can be vastly varying in different regions, which are at different stages of development.
Additionally, Chandavarkar had advocated a high-powered commission to assist legislate a ‘constitutionally independent federal’ RBI. And the last time the role and functioning of RBI was thoroughly judged threadbare was in 1931, when the Indian Central Banking Inquiry Committee was set up to help establish a central bank. That report and the RBI Act of 1934 continues to influence how RBI functions in the twenty-first century.
As we pace toward the proximity of the centenary of that inquiry committee report, it is perhaps time to re-examine the functioning and autonomy of RBI once again.
Hence, this is the first of a two-part series on the Reserve Bank of India.