Newsmaker: Chakravarti Rangarajan

A new innings for the reformer

In February 2002, Chakravarti Rangarajan, the then governor of Andhra Pradesh, delivered an address during the Budget session in the Assembly.

As Rangarajan was speaking about much-needed reforms in the state, the building plunged into darkness because of a power cut. Instantly, Opposition legislators were on their feet jeering him with cries of "shame".

This was the only time in his career when Rangarajan was in the limelight for a wrong reason. All his career, he has been known for his zeal for pushing the reforms agenda.

He is one of the very few economists who have had a long and successful academic career followed by an equally long and distinguished career in the government.

After heading the Twelfth Finance Commission, which has just submitted its report, Rangarajan, at 73, is ready for a new innings as chairman of the Prime Minister's economic advisory council.

His appointment does not come as a surprise. He was a member of the economic advisory council between 1985 and 1991. In 1991, when Manmohan Singh, as finance minister, unveiled the economic reforms, Rangarajan played a crucial role as member in the Planning Commission.

Around the same time, he also headed two important panels that laid down the roadmap for reforms "" the high level committee on balance of payments and the one on disinvestment of shares in public sector enterprises. The first committee laid down the roadmap for market-determined exchange rates, while the second sowed the seeds for bringing down the government equity in some PSUs to below 51 per cent.

Very few people understand the Indian economy better than Rangarajan. Releasing his Select Essays on Indian Economy last year, Reserve Bank of India Governor YV Reddy said: "Rangarajan had anticipated problems and issues that are relevant today way back in the '70s and '80s. In that sense, he is a visionary."

Born into a family of distinguished lawyers and judges at Ariyallur in Tamil Nadu, Rangarajan was an exceptional student. After graduating from the Loyola College in Madras, he went to the University of Pennsylvania for a PhD in economics.

In the US, he taught at the Wharton School of Finance and Commerce, University of Pennsylvania and the Graduate School of Business Administration, New York University. For over a decade and a half from 1966, he taught at the Indian Institute of Management, Ahmedabad.

Rangarajan was the first deputy governor of RBI (from February 12, 1982 to August 20, 1991) to come directly from academia. He proved his critics wrong by blending academics with policy issues and stressing the need to move away from excessive pre-emptions and micro-regulation at a time when reforms were a distant dream.

His experiment of freeing deposit rates up to one year within a ceiling in April 1985 was a failure as banks were not prepared for such freedom. However, an undaunted Rangarajan continued to push for the deregulation of interest rates.

In 1992, he succeeded S Venkitaramanan as RBI governor in the aftermath of the securities scam. On Mint Road, he played second fiddle to Manmohan Singh in pushing reforms.

His efforts were visible in the unification of the market-determined exchange rate in 1993 and the current account convertibility in 1994. But the most important landmark of his tenure as RBI governor was the agreement between the government and the bank in 1997 that put an end to the automatic monetisation of the Budget deficit through ad hoc treasury bills.

He also introduced prudential norms, cleaned up the banking system and pulled down barriers between banks and financial institutions, paving the way for universal banking in India.

His detractors, however, blame him for his "monetarist" policy, which, they say, led to the recession in the late 1990s and the first couple of years of this century.

According to them, the tight money policy during his tenure, which saw interest rates hitting the roof in 1995-96, was at the root of the recession as companies crumbled under the interest rate burden.

His followers, however, say he had to remain vigilant about inflationary pressures and this "naturally led to policies of monetary restraint at times when inflation accelerated".

In his first interview to the Press after taking up the new assignment as chairman of the economic advisory council, Rangarajan said: "In terms of the overall macroeconomic situation, the country needs a savings rate of 28 per cent to achieve 7 per cent economic growth. Against this, the current savings rate is only about 23-24 per cent... it is important to improve the savings rate."

At a National Institute of Bank Management function in Pune in August 2004 Rangarajan pitched for a hike in deposit rates to ensure positive returns for savers in an era of high inflation. Now, as chairman of the economic advisory council, will he seriously push for a higher interest regime? Bankers are watching him with interest.