Former Reserve Bank of India Governor D. Subbarao’s recently released account of his innings as RBI Governor — Who Moved My Interest Rate? Leading the Reserve Bank of India Through Five Turbulent Years — has stories of the run-ins he had with successive Finance Ministers. The media has been quick to lap up these stories.
We learn that the differences between the National Democratic Alliance government and the present RBI Governor are by no means novel. The United Progressive Alliance government behaved in exactly the same fashion. Both the Governors manfully stood up to the government and ended up paying a price for doing so — so we are told.
This is a theme that the media loves to play up from time to time: the Evil Politician pitted against the Wise and the Noble. The Upright Technocrat confronting the Lowliest of the Human Species. The media audience loves these stories because the majority would any day identify with professionals rather than with politicians. The former are People Like Us. As for politicians…. Ugh.
They made news
Alas, the reality is rather more nuanced. For politicians to leave matters entirely to technocrats isn’t really a sensible solution. We have come round to this realisation in many cases.
When T.N. Seshan socked political parties as Central Election Commissioner, he was lustily cheered. Until one day there was a sense that he was overdoing things and the political authority responded by having three Election Commissioners instead of one all-powerful CEC.
As Comptroller and Auditor General, Vinod Rai became something of an icon when he unveiled his reports on various “scams”. But the concept of “presumptive losses” that Mr. Rai propounded has had its fair share of sceptics. The concept seems to imply that government must always use the auction route to maximise revenues in the sale of natural resources. And yet, in 2012, the Supreme Court ruled that the government was not bound to use the auction route in every case.
There has been a clamour from time to time for the Central Bureau of Investigation (CBI) to be made independent of the government. In light of the facts that have come to light about Ranjit Sinha, the former CBI Director, and his handling of the coal mine allocation cases, we must wonder whether this is such a great idea.
The judiciary commands great respect among ordinary people. Yet, many people are uncomfortable with the notion that its independence includes leaving the appointment of judges entirely to the judiciary. In all these cases, we understand that autonomy has its limits.
Is there any reason a different logic should apply to the RBI? This is the central issue posed by what promises to be a refreshingly candid account by Mr. Subbarao of his years at the RBI. Mr. Subbarao writes, “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 the Reserve Bank’s unduly hawkish stance on interest rates, totally unmindful of growth concerns”.
Both Mr. Mukherjee and Mr. Chidambaram leaned on Mr. Subbarao to lower interest rates. Mr. Subbarao believes that Mr. Mukherjee and Mr. Chidambaram were wrong in seeking to sacrifice price stability at the altar of growth. He makes the point that there is no contradiction between price stability and growth.
Matter of judgment
Very true. But what constitutes price stability at a given point in time is a matter of judgment. Mr. Subbarao was operating in an era in which there was no inflation number that the government and the RBI had agreed on. That was to happen later in Raghuram Rajan’s time.
Mr. Mukherjee and Mr. Chidambaram were entitled to the view that a higher level of inflation was consistent with growth. And for them to have conveyed their views, however strongly, to the RBI Governor cannot be said to constitute interference with autonomy. Had either attempted to remove Mr. Subbarao from office for not falling in line, it would have been a different matter altogether.
Mr. Subbarao says that Mr. Mukherjee and Mr. Chidambaram did not stop with merely conveying their views. They made their displeasure known in other ways. At a G-20 dinner in Mexico, Mr. Chidambaram pointedly ignored Mr. Subbarao while greeting everybody else. Well, you could call it churlish behaviour but bosses express their displeasure in such ways all the time and in every organisation. Mr. Chidambaram has been gracious enough to write a generous endorsement for Mr. Subbarao’s book. This does indicate that Mr. Chidambaram’s snub was not personal, it was about making a larger point.
Mr. Subbarao says that the RBI paid a price for not toeing the ministers’ line in more material ways. Mr. Mukherjee refused to grant another term as Deputy Governor to Usha Thorat. Mr. Chidambaram did likewise with Subir Gokarn.
Mr. Subbarao concedes that the government has the power, under the law, to appoint deputy governors. However, he feels that the government should leave it to the Governor to choose his team. Maybe. But this does not mean that the government should go along with one particular candidate preferred by the Governor. There is a case for the government to select any one of three candidates proposed by a committee headed by the Governor. This is what happened when it came to selecting a successor to Mr. Gokarn. Nobody has faulted the choice of successor. In other words, people can legitimately differ on what constitutes autonomy in a given situation.
Mr. Subbarao’s basic message is well taken. It is important to safeguard autonomy in institutions such as the RBI, the Indian Institutes of Technology and the Indian Institutes of Management (IIM), etc. But autonomy must always be married to accountability. The government is accountable to Parliament and to the electorate. Whom are technocrats accountable to?
We will soon have a Monetary Policy Committee on which three out of six members will be government representatives. The other three members will be experts from outside. The government will define the medium-term inflation target. The RBI Governor will have to find ways to meet the target and explain any failure to do so. Thus, in respect of monetary policy, we have a framework for autonomy with accountability.
Autonomy and accountability
We need to put in place broader mechanisms for accountability for autonomous institutions in general. One way to do so is to subject them to oversight by Parliament. The Chairman of the U.S. Federal Reserve appears before the U.S. Congress and fields questions on a range of matters related to the Fed. It would be helpful to institute a similar mechanism in India for the RBI. Similarly, the IIM Bill, which seeks to cover the IIMs through an Act of Parliament, is a step in the right direction. Another way is to subject autonomous institutions to independent management audit every few years. These audits may be carried out by committees of eminent persons. The committees should interact with all stakeholders — the government, Members of Parliament, management, employees, customers and others — and document how the institution has fared in relation to its mandate. These documents should be placed in the public domain.
Institutional autonomy cannot mean the freedom to operate independently of the government. Rather, it is the freedom to deliver on mandates defined by the government and with due consultation with the government. When technocrats arrogate to themselves the right to decide on matters that fall within their ambit all by themselves, it is not autonomy, it is usurpation.
Former RBI Governor Y.V. Reddy is said to have once quipped, “The Reserve Bank is totally free within the limits set by the government.” That could well serve as a motto for all autonomous institutions.
T.T. Ram Mohan is a professor at IIM Ahmedabad. E-mail: firstname.lastname@example.org This article is based on reports and excerpts that have appeared in the media. The author has not had access to D. Subbarao’s book.
Keywords: CBI, RBI, institutional autonomy, D. Subbarao