RBI History Mirrors 1991 Crisis and Reforms
The Reserve Bank of India and the Academic Foundation deserve the readers' thanks for bringing out the latest volume of RBI History in two volumes. The earlier histories were fat and unwieldy single tomes.
The RBI is one of the few central banks to have documented its institutional history. The book under review is the fourth volume of the History of RBI and relates to the 16-year period 1981-1997. During this period RBI had six Governors for different terms -- Dr I G Patel, Dr Manmohan Singh, A Ghosh, R N alhotra, S Venkitaramanan and Dr C Rangarajan.
To recapitulate, there have been three volumes of History. The First volume relates to the period 1935 to 1951 and deals with the steps taken to create a Central Bank for India and is an account of the birth of the Reserve Bank which started functioning from April 1, 1935. It narrates the hurdles faced by the Government and the Bank during the Second World War and the initial years of Independence. The Second volume relates to the next 16 years from 1951 to 1967 when an era of planned development was ushered in. The period 1967 to 1981, yet another slot of 16 years covered in the Third volume, deals with a matter of paramount significance in Indian economic history -- the nationalisation of 14 banks in 1969. The period was notable as banking spread in the country; the 1971 withdrawal of the Bretton Woods system put all countries in a quandary and co-ordination between Government and the RBI assumed great importance.
The period of the Fourth volume under review --1981-1997 is one of the most challenging period for our economy. The volume takes us through the difficult times when the RBI and Government had to battle with unprecedented strains on the external payments position. Government embarked on a wide-ranging programme of economic reforms that defined a marked re-orientation of the philosophy of economic management of the country. This volume was prepared under the guidance of an Advisory Committee headed by Dr Bimal Jalan, former Governor.
The volume under review is in two parts - - Part A and Part B, to be treated as a continuous narration. Part A tackles the movement from an era of restrictions to one which witnessed progressive liberalization. What stood out during this period was an expansionary fiscal policy dovetailed by automatic monetization of budgetary deficits that inevitably imposed a constraint on monetary policy. Efficiency of the banking system was impaired by heavy regulation. A full-fledged balance of payment crisis overtook the country in 1991 aided and abetted by domestic macroeconomic imbalances together with deteriorating external conditions. This led to the inauguration of far reaching changes both in the economy and in central banking.
Part B is a story of reforms. It recounts the initiation of structural and financial sector reforms; fiscal changes of a corrective nature and phasing out of automatic monetisation. Steps were taken to develop government securities market and ensure strong integration of money, securities and foreign exchange markets. Also covered is the change in banking leading to liberalization and improvement in credit delivery. Like a miasma the Securities Scam cast an ugly spell on the banking system and eventually resulted in better control measures. The payments and settlement systems were also strengthened by innovative measures.
The year 1991 represented a major shift in economic and financial policies following the balance of payments crisis. Using this as base, the sequence of events cov- ered in this volume is covered in two distinct phases. The first phase covering the period 1981-1989 marked as 'Consolidation and Early Liberalisation'. The second, covering 1989-1997 is designated: 'Crisis and Reforms'.
Developments during the 1980s in the areas of monetary management, banking and financial institutions, external sector, rural credit and supervisory practices are succinctly covered. The 1980s was an inward looking, planned and administered era, though several attempts were made at liberalising some segments of the economy. During this decade India encountered enormous uncertainties. Fiscal dominance acted as a constraint to manoeuvrability of monetary policy implementation. Attempts were made at creating a systematic institutional infrastructure for rural credit with the establishment of NABARD in 1982. Steps were taken to develop financial markets particularly the money market since the mid-1980s.
The second part of the volume portrays how at the turn of the 1990s, the country grappled with several uncertainties such as fragile economic circumstances and political unease that called for firm policy actions. India faced an unprecedented BoP crisis in 1991. On fiscal front, a challenge confronted the economy. The need of the hour was fiscal correction, monetary stability, inflation control and regaining competitiveness.
The economic reforms of 1991 were implemented in a gradual and cautious manner and enabled India to gain credibility internationally. Devaluation of the rupee in 1991 gave a fillip to exports. This combined with wide-ranging liberalisation efforts in various sectors helped restore macroeconomic balance in the economy. The Reserve Bank gained greater space for monetary operations after the agreement with the Government in 1994 to phase out the issue of ad hoc Treasury Bills and discontinue automatic monetisation of deficit effective April 1, 1997.
The book is not only a historical account of the history of the central bank but throws a flood of light on the country's economic programmes and policies during the relevant period. The two volumes are extremely well produced with an attractive layout and kudos are due to the copublishers, the Academic Foundation. (This volume was prepared under the guidance of an Advisory Committee headed by Dr Bimal Jalan, former Governor. He was assisted by Dr Subir Gokarn, Dr Rakesh Mohan, Dr A Vasudevan, Dr Amitava Bose, Dr Dilip Nachane. Deepak Mohanty, Executive Director, RBI, closely monitored preparation of the volume).