By TARUNKUMAR G. SINGHAL
Chartered Accountant
“Advice & Dissent – My Life in Public Service” by Y.V.
Reddy
Dr. Y.V. Reddy is well
known as an economist and the 21st Governor of the Reserve Bank of
India (2003-08). In 2010, the President awarded India’s second highest civilian
honour, the Padma Vibhushan, to him. At present he is Honorary
Professor, Centre for Economic and Social Studies (CESS), Hyderabad. After
completing his M.A. in Economics from Madras University, he obtained a Ph.D.
from Osmania University, Hyderabad. Joining the Indian Administrative Service
in 1964, he rose to the position of Secretary (Banking) in the Ministry of
Finance in 1995. He moved to the Reserve Bank of India in 1996 as Deputy
Governor and then to the International Monetary Fund in 2002 as Executive
Director on the Board. He was also the Chairman of the 14th Finance
Commission of India.
Looking back at his long
career in public service, he says that he was firm and unafraid to speak his
mind but avoided open discord. He writes about decision-making at several
levels and gives an account of the debate and thinking behind some landmark
events and some remarkable initiatives of his own whose benefits reached the
man on the street.
Reading between the
lines, one recognises controversies on key policy decisions which reverberate
even now. The book provides a ringside view of the licence permit raj, drought,
bonded labour, draconian forex controls, the balance of payments crisis,
liberalisation, high finance and the emergence of India as a key player in the
global economy.
As RBI Governor from 2003
to 2008, he presided over a period of high growth-low inflation, a stable rupee
and ample foreign exchange reserves – a far cry from the 1991 crisis he lived
through and describes in vivid detail, when the country had to mortgage its
gold to meet its debt obligations. He is credited with saving the Indian
banking system from the sub-prime and liquidity crises of 2008 that erupted
shortly after his term at RBI ended. Dr Reddy provides insight into the
post-crisis reflection undertaken by several global institutions on the
international monetary system and the financial architecture. In addition, he
describes the preparation of the 14th Finance Commission report,
which he chaired, and which is considered a game changer.
During his time as RBI
Governor, his cautious approach to markets was often at loggerheads with the
eternal market optimism of Mr. P. Chidambaram. The author presents a
fascinating narrative of his last five years in government, covering the
foreign exchange crisis of 1991 and the liberalisation initiated by the late
Mr. P.V. Narasimha Rao. However, he does not seem to sense the concomitant rise
in economic crime, hawala dealings and export earnings falsifications.
He was an early supporter of gold import liberalisation.
In essence, he believed
that the RBI must always counter the Finance Minister’s large fiscal deficit
with a tight monetary policy so that the nation does not face inflation. The
tension between the FM and the RBI is eternal and systemic. No government has
yet won an election on promises or achievement of economic growth and sound
money. The political belief is that only economic populism can win elections.
Dr. Reddy’s crowning
achievement, of course, was keeping India out of the global financial storm of
2008. His correct reading of the global economic situation was aided by his
innate market scepticism and he was able to take early steps against the
overheating of the economy even in the face of political opposition. The nation
must remain ever grateful to him for this. However, his cautious approach to
markets was destined to face resistance from the eternal market optimism of Mr.
Chidambaram. After several cat-and-mouse encounters, the then FM and the
political class lost faith in him and denied him further extensions.
He offers explicit
counsel in his book:
(1) “Never compromise
long-term professional credibility while pursuing advocacy that the compulsions
of immediate circumstances demand.”
(2) “This idea of
drawing from various beliefs and ideologies and arriving at what appears to be
an appropriate solution to the context became the guiding principle for me.”
(3) “Respect for people
without reference to hierarchy.”
(4) Speaking a local
language introduced a level of informality and personal connect in discourse.
(5) Economists often
advocate the desirable. Bureaucrats focus on what is feasible. It is possible
to begin with the search for the desirable, then move towards the feasible,
while at the same time assessing the costs and benefits of the distance between
the two. This is a way of reconciling and balancing the feasible and desirable,
always keeping the desirable in view. Similarly, starting from international
best practices, one can assess how the Indian situation is different. The goal
should be to move towards policies that are tailored for our requirements while
being consistent with international best practices. Or, to put it another way,
match the international best practice, but in our context.
(6) At the end of the
day, a key to realising reform is to make the powerful feel the pain of the status quo.
POLICY LESSONS – Dr. Reddy offers a very useful primer for prudent
liberalisation of the external account for any country. Recognising and
establishing the hierarchy of capital flows is very important for ensuring
financial stability.
“Low inflation, low
non-performing assets of the banking sector, and low fiscal deficit are key to
fuller convertibility.” Again, he is quite right and hence, on this basis,
India is a long way off from capital account convertibility.
Further, Indian imports
are related more to the level of economic activity rather than the exchange
rate. Policy makers should make a note of this. A weaker exchange rate might
push up the import price without discouraging it and encouraging domestic
production.
India’s dalliance with
high growth rates has always ended in tears – in the Eighties, in the
mid-Nineties and between 2003 and 2008. Frankly, the economy is not ready. As
to why this is so, read his comments on the features of the Indian society and
economy mentioned earlier.
Dr. Reddy is rather forthright on the farm loan waiver that
the UPA government announced in 2007. He thinks it was against the financial
reforms. He felt that reform of the domestic banking system was a pre-condition
for liberalisation of the banking sector for foreign ownership.
Thanks to his experience at
the IMF and from his keen observations, he had become increasingly wary of
financial liberalisation and the role of international financial conglomerates.
It is not hard to imagine the sources of pressure that were brought to bear on
the Indian Finance Ministry.
Reform of the domestic banking system is an unfinished task
for him. He feels that several public sector banks did not come under the
Banking Regulation Act and hence RBI could not regulate them effectively. He
also did not want RBI nominees on the Board as it would mean conflict of
interest. His recommendations on the procedures for the appointment of members
to the Boards of Public Sector Banks and to the positions of Chief Executive
Officers have not been heeded by governments. Unfortunately, this is still the
case. The Bank Boards Bureau has been dormant and ineffective. Governance of
Indian public sector banking leaves a lot to be desired and yet, many still
want to preserve it as it is, without any reform!
ON CENTRAL BANK INDEPENDENCE – Government ownership of
the banking system is one of the reasons why he feels that the so-called
independence of the Central Bank is constrained. He dedicates several pages to
the subject, dividing it into three aspects: operational, policy and
structural:
- Operational independence for the Central Bank:
He favours it.
- Policy matters: In consultation with the
government.
- Structural matters: In close coordination with
the government.
He admits that he was
prepared to ‘irritate’ and ‘frustrate’ the sovereign but not defy it. As a
legal construct of the government, without a constitutional authority, he is
clear that RBI cannot be equal to its creator.
Dr. Reddy ends the book on a high note with a chapter on his
stewardship of the 14th Finance Commission. He points out that the
former President, Mr. Pranab Mukherjee, had praised him for addressing many
fundamental issues with his work on the Commission. That is quite an apt note
to end the book by a man who has indeed addressed many fundamental issues on
monetary policy, too – hierarchy of capital flows, capital account
liberalisation, financial sector liberalisation, etc.
Leavened with his irrepressible sense of humour,
“Advice
and Dissent” is a warm, engaging account of a life that
moves easily from a career in the districts as a young IAS officer to the
higher echelons of policy making, in a trajectory that follows the changes in
the country itself. To the reader’s delight, the narrative is interspersed with
often deeply ironic vignettes and humorous tales of encounters with the high
and mighty.
