TCA SRINIVASA RAGHAVAN 

                                                    

Dialogue of the Deaf by T.C.A.Srinivasa Raghavan ; Published by Tranquebar ; Pages 250 ; Price Rs 599/-

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The author of this book, Shri.T.C.A.Srinivasa Raghavan  ( hereafter TCA )was connected closely for eight years with the  R B I—as  Consultant for Volumes Three and Four of the Bank’s History. He had met forty five retired officials of R B I  for an oral history of the bank. He was associated with several business journals. Presently he is with “ Business Standard “.

The book under review  is the history of the Politics of Monetary Policy in India. The core of the book is the rather convoluted relationship between the  R B I  and the Government of India. At the time when the RBI  was at a discussion stage,  Governor of the Bank of England Sir Montague Norman declared, “ R B I has  to play the role of a ‘ Hindoo Wife’ who offers advice but never asserts herself ”. Analysing the history of Central Banking the author asserts that “..Central Banks have become a very important instrument of the State …they have been formed by the acts of the Legislature but their powers have been left blurry around the edges so that their accountability is unclear.”

The Bank of International Settlements serves central banks in their pursuit of monetary and fiscal stability to foster international co-operation in those areas and act as a bank for central banks. It has recommended broad supervisory standards for banks and the financial system generally. They have introduced Capital Adequacy Norms.

TCA  turns to the politics of monetary policy. Monetary policy is not something that is determined in the simplistic way monetary economists like to imagine. There are social and political forces that play a  larger role than simple demand and supply equations.       “ R B I ‘s research has been singularly deficient because it has it has been based on technical models that ignore political and social factors. This has led to an intellectual disjunction which has not stood anyone in good stead.”

J.M.Keynes’s work led to fiscal policy replacing monetary policy as the instrument that calibrates the levels of economic activity in a country. TCA  provides a neat summary of the evolution of the  R BI—the Hilton Young Commission —the role of J.M.Keynes—the Central Banking Enquiry Committee and the birth of  R B I  on April 1, 1935. Time there was when  R B I  was compared to the then popular—“ H M V “—“ His Master’s Voice”—Voice of the Government. We have a scintillating account of the story of Sterling Balances and this is followed by the mysterious tale of the resignation of the first R B I Governor. TCA  recapitulates events such as the resignation of  RB I’s First Governor, the absurd and acerbic relationship the Finance Minister T.T.Krishnamachari has with Governor Rama Rau leading to the latter’s exit, the nationalisation of the Imperial Bank of India.

He sums up cryptically—“ there was a constant wrangling between the Government, the  R B I, the  S B I  and although the  R B I won the battles Government  led by the indefatigable T T K  always won the war”.

 All through the 1970s fiscal policy dominated and the  R B I played second fiddle. A fractious democracy has mandated that there is complete fiscal dominance. TCA  pays tribute to Rangarajan and Tarapore for the monetary policy reforms of the 1990s. He calls for “ injection of more professional technical expertise into the R B I and the Finance Ministry”.

  TCA  writes on the intractable problem of rural credit which according to him “ could be traced to just one thing: Lack of Expertise”. R B I  lost the power to set the interest rates. And then came Indira Gandhi and swiftly bank nationalisation. Bank nationalisation had one beneficial impact. At the time of nationalisation there were around 8000 bank branches; by the end of 1985 the number had grown to more than 51,000.

The upheaval of the twenty years between 1950 and 1970 would change  R B I  from being a  mere Manager of the monetary system to an active participant in the development efforts. TCA  describes  R B I’s monetary policies between 1970 and 1996 as an “ exercise in credit rationing “. Two ticklish problems he expatiates on are the opening of Indian bank branches abroad and reciprocal opening of branches of foreign banks in the country and “ Gold Auctions”.

The R B I had to deal with an uncooperative Government throughout the 1980s. The first sign came in 1983 when the Government orders the  R B I  to give permission to the Bank of Credit and Commerce International to open a branch in Bombay. In April 1985  R B I allowed banks to determine the maturity structure of their liabilities and banks were given discretion to  fix interest rates on deposits  within a ceiling of 8 per cent, The experiment flopped and the status quo ante was restored. Again the problems of NBFCs proved quite intractable.

The author analyses the effects of the two devaluations of the India Rupee . The  R B I  played a crucial role in the 1990s. There was a Fundamental change in the relationship between the Government and the Bank. It was healthier due  to the Finance Ministers and the key officials of the Finance Ministry having a better understanding of the  R B I’s role. The Finance  Ministry officials needed the  R B I’s technical expertise in an increasingly complex economy. The   R B I  initiated several reforms in the financial sector. The most important change was the delinking of the budget deficit from monetisation.  A limit was fixed to resort to R B I for ad hoc treasury bills by the Central Government. Another important event was the replacement of FERA by  FEMA  which turned out to be a huge success.

In one chapter TCA  provides scintillating snapshots of startling events--  the Ketan Parekh Play ; the Global Trust Fiasco and the Harshad Mehta Affair ( The  then Finance Minister Manmohan Singh declared famously,” He did not lose sleep over the movements in the stock market”) .  He also provides cogent analysis of the two Reports of the Narasimham Committee, the Raghuram Rajan Report, the CFSA Report, etc.

Between Jalan and Reddy “..there was an increase in operational effectiveness of monetary policies through broadening and deepening various segments of the financial markets and redefining the regulatory role of the  R B I, strengthening of prudential and supervisory norms, improvement of the credit delivery system and development of technological and institutional infrastructure for an efficient financial sector.”

Regarding relations of R B I with Government, the author quotes with approval Dr.Y.V.Reddy who worked both as Deputy Governor and Governor—“ We are totally free--within the limits set by the Government.”

Finally TCA declares  that,”.. The huge variety of factors that determine outcomes in India also change, the interface between fiscal and monetary policies too will change. One of the most important factors to influence the change in the relationship will have to be the change in the RBI itself. It needs to re-invent itself to remain relevant”

P.P.Ramachandran.

09 / 04 / 2017