Years ago, on occasions when our Republic had narrowly escaped some political or policy disaster through sheer luck, finance minister Manmohan Singh would smile wanly and say “Only God looks after this country!” Perhaps it would have been more accurate to say “God and a few good men…” That’s certainly the impression I formed during my 15 years in senior echelons of government: how often a handful of dedicated, talented and hardworking public servants prevented really bad decisions on public policy. Of course, frequently they failed to plug the dykes in the sea of mediocre governance and callous administration. But their success rate was disproportionately high relative to their small numbers and that success was usually achieved against the odds.
No one exemplifies this better than Manmohan Singh himself. Twice in less than two decades he has played the pivotal role in changing the course of India’s history. In the early 1990s, as finance minister, he wrought a sea change in India’s economic policies, which unleashed the economic dynamism of the last 17 years and led to the country’s rise in global economic and political affairs. Now, in the past three months, his tenacious pursuit of the nuclear deal has won the truly historic end of India’s 34-year old nuclear and technological isolation. Almost everyone had given up any serious hopes for success a year ago, when the Congress leadership’s attempt to force the issue was undercut by its election-fearing, governmental allies and the virulent opposition of the Left. At that time, most of the chatterati, including myself, felt that the publicly humiliated Prime Minister should resign.
Well, speaking for myself, I cover myself in the proverbial sack cloth and ashes and chant a hundred mea culpa’s. For Singh didn’t just survive and cling to his seemingly powerless office in the well-worn Indian tradition. He kept the deal alive, grasped the political opportunity offered by the Samajwadi Party (SP) after the UP elections and persuaded his UPA colleagues to take the high risk route of a break with the Left and the nail-biting, parliamentary trust vote of late July. And he won… in Parliament in July and in Vienna last week when the Nuclear Suppliers Group agreed to the crucial waiver for India. Of course, there were many other architects of this enterprise, ranging from political players (including Sonia Gandhi, the Congress political managers, the SP leadership and US President George Bush with his steadfast support) to the outstanding Indian negotiating team (including Shyam Saran, Shankar Menon, Anil Kakodkar, Ronen Sen and S. Jaishankar). But when all is said and done, the fact is that this long-sought end to India’s nuclear isolation has happened primarily because of two men, Manmohan Singh and George Bush. We owe them gratitude and respect.
Another outstanding public servant demitted office last week. Yaga Venugopal Reddy ended his five-year term as Governor of the RBI and went home to Hyderabad. His contributions were enormous, though under-rated thanks to his weakness in public relations and the lack of consistent support from a finance ministry with imperfect mastery over sound macroeconomic policy. Courage, independence and foresight were the hallmarks of Reddy’s stewardship of the RBI. It took a lot of courage to extend effective regulatory oversight over the giant, politically powerful non-bank financial companies, such as Peerless and Sahara. He achieved substantially more than his predecessors. Similarly with the urban cooperative banks (UCBs): under Reddy the RBI concluded memoranda of understanding with 19 state governments, accounting for over 90 percent of UCBs. It is also perhaps no coincidence that there was no significant bank failure on his watch and the RBI successfully phased in Basle II norms for capital adequacy across the banking industry.
It took foresight to anticipate the possible perils of explosive bank lending to retail customers and for real estate. From early in Reddy’s term, the RBI tightened prudential norms in these areas. He sensed the dangers from exuberant foreign investment in real estate and advocated caution long before the bubbles had built up. Years before most people, Reddy foresaw the serious macroeconomic management challenges posed by the unprecedented acceleration in India’s growth and the associated, extraordinary surge in foreign capital inflows. The two big, linked challenges were how to manage the exchange rate and how to calibrate monetary policy. On these big issues, Reddy’s RBI made the correct strategic choices. Despite plenty of faulty advice from some commentators, it chose to contain the real appreciation of the rupee through a determined policy of sterilized forex intervention through sales of government securities (via MSS), operations of the liquidity adjustment facility and occasional recourse to CRR increases, combined with a calibrated liberalization of capital outflows. This effective containment of real appreciation (except in spring/summer of 2007) was the key factor propelling rapid growth of India’s exports of goods and services and shielding domestic tradable production from a major, temporary bout of currency overvaluation.
On monetary policy, Reddy began a gradual programme of tightening liquidity conditions right from 2004 and sustained it in the face of both explicit and implicit opposition from the finance ministry, though perhaps less strongly than he would have preferred. After the global commodity price shock of spring 2008 it has become fashionable in some quarters to criticize the RBI and Reddy for “falling behind the curve” in monetary tightening. Some of the same latter-day critics were among those opposing RBI earlier tightening initiatives! The simple fact is that no politically feasible degree of monetary restraint during the go-go years of 2004-07could have preempted the commodity price shock that hit India in March 2008.
Reddy’s conduct of monetary and exchange rate management was complicated by a shrill anti-RBI campaign mounted (with governmental encouragement, some claim) by a few columnists with insufficient grasp of modern central banking and even less of common courtesy. Fortunately, Reddy was not deflected from his chosen path by either these diatribes or the rumblings from the finance ministry, except perhaps in spring 2007. One thing is for sure: no one accused Venu Reddy of undermining the autonomy and independence of the RBI!
Let me end by distributing a few personal awards for performance in 2004-08:
- “Most visionary statecraft” goes to Prime Minister Manmohan Singh.
- “Best Economic Policymaker” is won by Y. Venugopal Reddy.
- “India’s best foreign friend” goes to US President George Bush.
- “Politician with the worst economics and politics” is won by Prakash Karat.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to Government of India. Views expressed are personal.
