EN­SUR­ING AC­COUNT­ABIL­ITY

Assocham Bulletin - - NEWS -

TIede sign of re cap­i­tal is at ion process is crit­i­cal for any econ­omy. Know­ing the im­por­tance of this process well, gov­ern­ment of In­dia is al­ready in the process of ex­plor­ing more op­tions in this re­gard, said Dr. Y.V.Reddy, FormerGover­nor, Re­serve Bank of In­dia, while de­liv­er­ing the 20th JRD Tata Me­mo­rial Lec­ture.

While speak­ing on "Fu­ture of Cen­tral Bank­ing in In­dia", Dr. Reddy said 'Many ar­gue that RBI is the cre­ation of the gov­ern­ment and accountable to gov­ern­ment. Hence, too much of in­de­pen­dence can­not be­jus­ti­fied. There is a ba­sic phi­los­o­phy be­hind the ar­range­ment of cen­tral bank to be the guardian of money and fi­nance. The idea isto con­vin­cepeo­ple that they can have trust in money and fi­nance ir­re­spec­tive of po­lit­i­cal changes since an in­de­pen­dent in­sti­tu­tion, namely, cen­tral • bank, has been en­trusted with such mat­ters.

Fur­ther, the gov­ern­ment has spend­ing author­ity and, there­fore, it wants to con­vin­cepeo­ple that cre­at­ing money is be­ing han­dled by an­other in­sti­tu­tion. In other words, a cen­tral bank is an in­sti­tu­tion cre­ated by the gov­ern­ment for its 0wn pur­poses.

The gov­ern­ment would like to con­vince peo­ple that cen­tral bank­ing is in­de­pen­dent but would like the cen­tral bank to do what it wants. Cen­tral bank has to con­vince the peo­ple that it is in­de­pen­dent if it wants to be ef­fec­tive.

For most of the 1980s, there was a quan­tum jump in growth, thanks to early in­dus­trial and trade Iib­er­al­ize­tion­mea­sures and some fi­nan­cial mar­ket re­forms. RBI be­came con­cerned with higher fis­cal deficits and large bor­row­ing pro­gramme fi­nanced through mon­e­ti­za­tion. To­wards the end of the 1980s, short term ex­ter­nal fi­nanc­ing also in­creased. Thecol­lapse­oftheUSSRadded to the im­bal­ance in ex­ter­nal sec­tor.

RBIne­go­ti­ated the tran­si­tionof ru­pee­tradea­gree­men­twith­Rus­sia.

Added to po­lit­i­cal uncer­tain­ties, the Gulf cri­sis trig­gered high oil prices fur­ther tight­en­ing the bal­ance of pay­ments sit­u­a­tion. NRI de­posits and re­mit­tances were ad­versely af­fected.

RBI re­peat­edly w"arned the gov­ern­ment about the pos­si­ble cri­sis be­cause of large deficits in fis­cal and ex­ter­nal sec­tors. The po­lit­i­cal in­sta­bil­ity dur­ing this pe­riod of do­mes­tic vul­ner­a­bil­i­ties cou­pled with gulf cri­sis led to the bal­ance of pay­ments cri­sis in early 1991.

The RBI­suc­cess­fully avoided hy­per in­fla­tion and also en­sured that bank­ing sys­tem re­tained the con­fi­denceof the peo­ple at large. Part of the credit should go to Gov­ern­ment be­cause the po­lit­i­cal pres­sures in a func­tion­ing democ­racy helped con­tain in­fla­tion. Fur­ther, pub­lic sec­tor bank­ing it­self pro­vided the nec­es­sary com­fort to peo­ple at large. The bal­ance of pay­ments was on a dif­fer­ent foot­ing. RBI con­veyed its con­cerns as the sit­u­a­tion was de­te­ri­o­rat­ing and warned the Gov­ern­ment of im­pend­ing pay­ments cri­sis.

The RBIbe­came the first line of de­fence as the stress in bal­ance of pay­ments be­came acute in 1991. How­ever, man­age­ment of a full-blown cri­sis re­quired the to­tal in­volve­ment of the gov­ern­ment. De­spite po­lit­i­cal uncer­tain­ties, the gov­ern­ment took the ad­vice of the RBIand strongly sup­ported its emer­gency ac­tions in both fi­nan­cial and ex­ter­nal sec­tors, said Dr. Reddy.

It cul­mi­nated in us­ing gold be­long­ing to the gov­ern­ment and pledg­ing the gold be­long­ing to the RBI to save the coun­try from loss of rep­u­ta­tion and de­fault­ing from meet­ing ex­ter­nal pay­ments. Ne­go­ti­a­tions with the International Mone­tary Fund were held in or­der to ob­tain the sup­port in cli­mate of po­lit­i­cal un­cer­tainty. The RBI and the Gov­ern­ment drew upon their pro­fes­sional skills and clout both within and out­side the coun­try to de­vice strate­gies and ac­tions. The apo­lit­i­cal stature of RBI­won the sup­port of the full spec­trum of po­lit­i­cal lead­er­ship.

There is a ba­sic phi­los­o­phy be­hind the ar­range­ment of cen­tral bank to be the guardian of money and fi­nance. The idea is to con­vince peo­ple that they can have trust in money and fi­nance ir­re­spec­tive of po­lit­i­cal changes since an in­de­pen­dent in­sti­tu­tion, namely, cen­tral bank, has been en­trusted with such mat­ters.

Or. Y. V Reddy, For­mer Gov­er­nor, Re­serve Bank of In­dia ad­dress­ing the au­di­ence. Mr. San­deep Ja­jo­dia, Pres­i­dent, AS­SOCHAM wel­com­ing Or. Y. V Reddy, For­mer Gov­er­nor, Re­serve Bank of In­dia.

Dr. Y V Reddy, For­mer Gov­er­nor, Re­serve Bank of In­dia re­leas­ing the Spe­cial Com­mem­o­ra­tive Pub­li­ca­tion on IR.D. Tata along with Mr. San­deep Ja­jo­dia, Pres­i­dent and Mr. D. S. Rawat, Sec­re­tary Gen­eral, AS­SOCHAM.

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