Govt-RBI tiff has ended badly for 4 governors so far. Will Patel be 5th?

When the British set up the RBI, they said, as part of their divide-and-rule policy, that half the board members would be appointed by the government

Few people know this, but it took the British 22 years to set up the Reserve Bank of India (RBI). The idea came from John Maynard Keynes in 1913.

Soon after, the First World War started in 1914 and the suggestion became an irrelevance. It was revived in 1925 and a Commission under a member of Parliament by the name of Hilton Young was set up in 1926.

The Commission recommended the setting up of the RBI. But immediately a controversy arose as to who would control the RBI.

Young said the shareholders of the Imperial Bank — which would become State Bank of India in 1956 — should control it. The government said no, as that was politically impracticable.

Nothing much happened until 1931, when constitutional reforms were being examined. These reforms would result in some financial autonomy to the provincial governments, meaning Indian politicians, when they were formed.

So, in September 1930, the British government in India told the British government a central bank had to be formed before any financial responsibility was transferred to the Indians. Half the board members, it said, would be appointed by the Viceroy.

In 1931, the Central Banking Enquiry Committee submitted its report, which also strongly recommended the establishment of the Reserve Bank at the earliest. It emphasised the need for freedom from politicians, that is, Indians.

‘The paramount interests for the country involved in the establishment, within the shortest time possible, of such an independent institution, free from political influence, can hardly be overestimated.’

In 1933, a White Paper on the new constitutional reform was published. It simply assumed that the RBI would be set up. It also assumed that it would be free from political influence.

Finally, in 1933, the Reserve Bank of India Bill was introduced by the Finance Member of the Viceroy’s Council who said ‘When the direction of public finance is in the hands of a ministry responsible to a popularly elected legislature... it is desirable that the control of currency and credit in the country should be in the hands of an independent authority which can act with continuity.’

He added that it should be ‘independent of political influence’ meaning Indian politicians should be kept at an arm’s length. The Bill was passed in December that year.

But who would control this new bank? Who would sit on its board? What would the Board’s relationship be with the government in Delhi?

The Indians were against the board being selected by private shareholders. They wanted it to be an agent of the State so that public interest was always kept in view.

Politicians wanted the legislature to have a say in the selection of the Board and a Constitution like charter for it. But the Muslims and other minorities opposed it saying all the usual things about safeguards. In fact, in 1943, when the time came to appoint a deputy governor, the Muslim politicians asked that a Muslim be appointed!

The government, meanwhile, was determined to have its nominees, and all the debate and discussion became of academic interest only. The British ignored Indian opinion and decided to have a private, shareholders bank like the Bank of England.

They believed that private ownership would insulate the RBI from political interference. As part of their divide-and-rule policy, they said the shares would be widely dispersed and further that half the board members would be appointed by the government.

To satisfy Indian politicians some sops were thrown in but control would remain firmly in private British hands and through them, in the hands of the Viceroy’s Council. There were Indian businessmen, too, on the Board, but most of them kept their heads down.

As it turned out, however, much to British consternation, the Board and the Governor behaved as if they were accountable to no one. The Governor said he acted on behalf of the Board which treated the government as an adversary except for a brief while from 1937 to 1943 when an English bureaucrat – the only one, in the RBI’s history – was appointed governor. His job was to keep the Board in check.

Successive governments since then have sought to bring the RBI to heel. In all these years, there have been only four episodes which have ended badly for the governors.

The Urjit Patel episode may well become the fifth.