Even my window opens only to the south, the proud president of the German Bundesbank once told me, “so no winds of influence from the north can waft into my room!”
He was referring to the fact that located as the German central bank is, in Frankfurt, it jealously guards its independence from political authorities in the Capital (earlier Bonn and now Berlin) that lies to the north.
The prized independence of the German Bundesbank is the envy of many central bankers around the world. The yo-yo battle for policy primacy between monetary and fiscal policy authorities is universal, and in India it has been going on from the very inception of the Reserve Bank of India (RBI).
In the early years after Independence, the charismatic leadership of Chintaman Dwarakanath Deshmukh and Benegal Rama Rau imparted to the central bank a certain stature that has waned and waxed since then. While Dr Deshmukh stood up to even Prime Minister Jawaharlal Nehru, Mr Rama Rau’s seven-year-long term ended in 1957 when he resigned in the wake of India’s first major foreign exchange crisis and the Haridas Mundra affair. He was the only governor to so quit.
Of the Deshmukh-Rama Rau era, another distinguished central banker, K S Krishnaswamy, writes in his memoirs (Windows of Opportunity, Memoirs of an Economic Advisor, Orient Blackswan, 2010):
“Even in the corridors of power of New Delhi, the Reserve Bank enjoyed in the early 1950s a rare reputation for efficiency, integrity and sobriety of judgement. Part of this derived, of course, from the signal contributions the Bank had made under Chintaman Deshmukh’s leadership, …but a substantial part also originated from the acceptance of the principle that the central bank of a country should enjoy de facto, if not de jure, great autonomy in matters of monetary and banking policy. It was believed that, like the Bank of England under Montagu Norman, the RBI should be the undisputed guardian of the nation’s currency and banking standards and that in these and other matters, the government should not only not interfere with the RBI but seek advice for its own guidance in other matters.” (p.184)
Dr Krishnaswamy, who worked off and on at RBI between the late1950s and the late1970s, and retired as its deputy governor, repeatedly refers in various sections of his memoirs to the ding-dong battle for authority between North Block, home of the Union finance ministry (MoF), and Mint Road, where RBI’s home resides. If the 1950s were the heydays of RBI, the 1970s marked the nadir. The appointment of a Sanjay Gandhi crony, K R Puri, as governor, was universally resented by India’s economic policy-makers.
Says Dr Krishnaswamy, “By the 1970s, relations between the RBI and the central government had changed enough to deny the former much of the prestige and independence it should have had as arbiter of the country’s monetary policy.”
Dr Krishnaswamy was not a puritanical central banker. He understood the importance of good relations between the government and RBI, and says at one point, “Like all other public institutions, the RBI management also had to maintain good relations with the PMO.” (p.107)
Dr Krishnaswamy’s recalling of MoF-RBI tensions echoes the memoirs of another central banker, the redoubtable governor I G Patel. (Glimpses of Indian Economic Policy: An Insider’s View, Oxford University Press, 2002). Dr Patel had to handle three different governments as RBI governor, between 1977 and 1982, with varying perceptions about relations between Delhi and Mumbai, ending his tenure with Pranab Mukherjee as finance minister!
Dr Patel has some nice things to say about Mr Mukherjee, and adds, “He was very friendly — after all, I was a son-in-law of Bengal!” (p.176) But he was not so generous towards the prime minister of the day. “I had more than my share of undue pressure from Delhi after Mrs Gandhi’s return to power”, he complains, adding subsequently, “By the middle of 1982, it was clear to me that Mrs Gandhi would be happy to see me go.”
Not all governors had a tough time with Delhi. It depended both on the style of the prime minister and finance minister of the day and on the governor’s own willingness and ability to deal with pressures from Delhi. Both Dr Krishnaswamy and Dr Patel refer to pressures from minions below — MoF officials, especially of the banking division, and other ministers and power brokers. This is all par for the course in the corridors of power.
The quarter century since then, with Manmohan Singh, R N Malhotra, S Venkitaramanan, C Rangarajan, Bimal Jalan and Y V Reddy in saddle, has seen a number of RBI-MoF tussles. Dr Rangarajan was perhaps the luckiest governor since the finance minister he had to deal with, Dr Singh, was in fact his governor when the former was a deputy. (The Singh-Rangarajan partnership began in Mumbai in 1982 and remains robust even now!)
Dr Krishnaswamy’s memoirs are a helpful reminder of how difficult the MoF- RBI relationship can get and how assertive the former can get if it wants to. Dr Krishnaswamy was himself a victim of this in 1977 when New Delhi decided to send an MoF secretary, M Narasimham, as a stop-gap governor asked to keep the seat warm for I G Patel, rather than name an incumbent deputy governor like him for the post. Dr Krishnaswamy suspects Mr Narasimham “wangled the job”! (p.124)
Given this history of the relations between the MoF and RBI, the recent bout of discomfort on Mint Street is par for the course. The question, however, is whether the recent attempt to deflate RBI was just one of those things or was it the “empire striking back” after that challenging era of an insurgent, if prescient, governor!