M Narasimham: Forgotten contributions

Journalists and sports people are often told that they are only as good as their last performance. This would resonate well with M Narasimham, economist, central banker, and economic administrator. He passed away on April 20. He was 94.

Much of what has been written about him since April 21 has been focused on the two reports on banking reform by the committee he chaired. The first was in 1994; the second in 1999.

I doubt he would have regarded his committees’ efforts as successful. Banking reform in the way the two committees wanted never really happened. There was too much political opposition. Hopefully those are ideas whose time has come now.

There is a lesson, though, in one of those recommendations about how crucial decisions are taken in India. This one pertains to the level of government shareholding in public sector banks.

Dr Y V Reddy once asked him how he had arrived at 33 per cent as the appropriate level for government shareholding in public sector banks. Narasimham replied that he chose 33 as a compromise between 51 and 26. Fifty-one per cent is what the ultra-cautious in the committee had wanted. Twenty-six per cent is what the ultra-liberals had wanted.

This story reminded me of a Govinda-Devang Patel song from the 1995 film The Gambler. It is called ‘Meri Marzi’ and it sums up the essence of this approach nicely. Cyril Radcliffe, who drew the dividing line between India and Pakistan in 1947, would have nodded in approval.

The early Narasimham

Jokes aside, few people know how large the shadow of Narasimham is over Indian banking. He had a role influencing almost every major decision.

In the early 1960s, for example, the RBI and the government were anxious to increase deposits with banks. One very important reason was to park what was called “house money” which was with the LIC and other such government institutions; the other, even more important reason, was to build a market for T-bills.

But the banks, all but one of which were in the private sector, wouldn’t offer decent rates of interest to depositors. So between 1962 and 1964, everyone who was engaged with the issue played ping-pong. Then, in mid-1964, Narasimham came up with a proposal that laid the foundation for rate regulation and term deposits.

He said banks could not pay any interest in 1-14 days, 1 per cent on 15-30 days, 2 per cent on 30-60 days, and 3 per cent on 60-90 days. The RBI accepted the proposal.

By the mid-1970s, Narasimham was the go-to man in the RBI. There was hardly any major issue on which he was not consulted and his advice was taken and often accepted.

One of these was the suggestion that the RBI regulate the credit amount to companies. So a limit of Rs 1 crore was placed. This had a peculiar fallout for the country, as well as Narasimham.

In 1975 Sanjay Gandhi wanted his credit limit to be enhanced to Rs 2 crore. The governor refused, saying he didn’t even have a factory, so why was he asking for an increase?

As a result, when he retired in mid-1975, K R Puri, chairman of LIC, was made governor — and he promptly doubled the limit. That was his only major decision.

In 1977, the Janata government asked him to leave and made Narasimham governor for five months. He is one of the six governors who have held the post for less than a year because there is no provision in the RBI Act for “acting” governor.

The later Narasimham

In 1981, when India was negotiating the loan with the IMF, Narasimham was at hand in Washington. He was ably assisted by two RBI officers.

One of them was the redoubtable Chandi Batliwala, who deserves a biography in her own right. Thanks to her efforts, Narasimham knew exactly what the other countries’ position was going to be on India’s application for the EFF (extended fund facility) loan.

The Hindu got hold of the ‘Letter of Intent’ and its publication caused a huge furore in India. Narasimham believed that the leak had come from someone in the Indian delegation but neither named the person nor pursued the matter. He said the publication of the letter had actually helped the Indian cause.

Lack of space constrains me from listing his other major contributions to policy and its execution. Suffice it to say that these are on a par with the banking reform recommendations that the two committees he chaired made.

In 2006 he recorded an interview about his life’s work. It is in the RBI’s archives. It would be a fitting tribute to him if it could be uploaded on the website.