The Indian Express (Delhi Edition)
‘Discomfited, annoyed by demand that RBI should be a cheerleader for govt’
A TUSSLE between the government and the Reserve Bank of India is not something new. Turf wars between the two sides have played out for years as successive Governors sought to fiercely protecttheautonomyandindependence of the central bank.
Former Reserve Bank Governorduvvurisubbarao,who worked in both the government andtherbi,hassaid“thereislittle understanding and sensitivity withinthegovernmentontheimportance of central bank autonomy”. The government put pressureonthereservebankforlower interest rates and higher growth estimates during the tenures of P Chidambaram and Pranab Mukherjee as Finance Ministers, which was resisted by the RBI, Subbarao said in his latest book.
Difference on policy priorities
Withdifferencesbetweenhim and the Finance Ministry surfacingonseveraloccasions,subbarao wrote that he was “invariably discomfited and annoyed by this demand that the RBI should be a cheerleader for the government”. “There was a lot of suspicion in those early weeks of my tenure that I was a government lackey sent to the Reserve Bank to act at the government’s bidding,” Subbaraowroteinhisrecentbook ‘Justamercenary?notesfrommy Life and Career’
Government–central bank differences on monetary policy are hardwired into the system, he wrote. Subbarao, who was the Union Finance Secretary in 200708, was the RBI Governor during 2008-2013whentheglobalfinancialcrisisrockedthefinancialsystem.
“Both Chidambaram and Pranab Mukherjee who were finance ministers during that period were vexed by the RBI’S antiinflation stance, which they thought was stymieing growth,”
Subbarao said. The issue became particularly sensitive because the government was continuously beinggrilledforits‘policyparalysis’, and they saw a softer interest ratestancebytherbiasawayout of the quagmire, he wrote.
“I had run-ins with both Chidambaramandmukherjeeon the RBI’S policy stance. Both of theminvariablypressedforsofter rates although their styles were different,” Subbarao said, noting that Chidambaram typically argued his case like the lawyer that he so eminently is, while Mukherjeewasthequintessential politician. “He let his view be known and left it to his officers to argue his case,” Subbarao said in the book.
In October 2012, shortly after Chidambaram returned as finance minister from the Home Ministry, he set about in earnest to reverse the fiscal profligacy of the Mukherjee regime. “Possibly to compensate for the fiscal tightening he was embarking on, he very much wanted a softer monetary regime and put enormous pressure on the RBI to lower the interest rate. On objective considerations, I could not oblige him though,” Subbarao wrote.
“My refusal to fall in line evidently upset Chidambaram enough to do something very unusualanduncharacteristic—togo publicwithhisstrongdisapproval of the Reserve Bank’s stance,” he said.inhis‘doorstop’mediainteraction outside the North Block about an hour after the Reserve Bank put out its hawkish policy statement expressing concern on inflation, Chidambaram said: ‘Growth is as much a concern as inflation. If the government has to walkalonetofacethechallengeof growth, we will walk alone.”
Pressure from the government was not confined to the Reserve Bank’s interest rate stance;onoccasion,itextendedto pressuring the RBI to present rosierestimatesofgrowthandinflation at variance with the RBI’S objective assessment, he said. “I remember one such occasion when Pranab Mukherjee was the finance minister. Arvind Mayaram, the finance secretary, and Kaushik Basu, the chief economic adviser, contested our estimates with their assumptions and estimates, which I thought was par for the course,” Subbarao wrote.
Whatupsetsubbarao,though, was that almost seamlessly the discussion moved from objective arguments to subjective considerations,withsuggestionsthatthe Reserve Bank must project a highergrowthrateandalowerinflation rate in order to share responsibilitywiththegovernment for‘shoringupsentiment’,hesaid in the book. “Mayaram went to the extent of saying in one meetingthat‘whereaseverywhereelse in the world, governments and central banks are cooperating, here in India the Reserve Bank is beingveryrecalcitrant’,”hewrote.
“I was invariably discomfited andannoyedbythisdemandthat therbishouldbeacheerleaderfor the government. It also dismayed me that the Ministry of Finance would seek a higher estimate for growth while simultaneously arguing for a softer stance on the interest rate without seeing the obvious inconsistency between these two demands,” he wrote.
“I used to take a firm position that the Reserve Bank cannot deviate from its best professional judgement just to doctor public sentiment,” he said. “Our projections must be consistent with our policy stance, and tinkering with estimatesforgrowthandinflation would erode the credibility of the Reserve Bank.”
GOVT-RBI tussle
The four predecessors of current Governor Shaktikanta Das — Yvreddy,dsubbarao,raghuram Rajan and Urjit Patel — had runinswiththegovernmentsindelhi on various issues.
Former Governor YV Reddy, whowasrbigovernorfrom2003 to2008,sharedanuncomfortable relationshipwithpchidambaram and had to even offer an “unconditional apology” to the minister after the then Prime Minister Manmohan Singh tried to sort things out between them.
Raghuramrajanwhowasthe RBI Governor between 2013 and 2016, said, “in this environment, where the central bank has to occasionally stand firm against the highest echelons of central and state government, recall the words of my predecessor, Dr. Subbarao,whenhesaid“idohope the Finance Minister will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I wanttogoforawalk,evenifihave to walk alone. But thank God, the Reserve Bank exists.’” I would go a little further. The Reserve Bank cannot just exist, its ability to say “No!” has to be protected.”