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T C A Srinivasa-Raghavan: Raghuram Rajan’s fine line

Anyone who has read Liaquat Ali’s “Lords of Finance“, to name just one of the hundreds of books on central banks, will tell you that the fiscal sins of governments are always laid on the narrow monetary laps of central banks. No central bank governor escapes this fate, anywhere.

So Raghuram Rajan, Governor of the Reserve Bank of India (RBI), should take heart. He is in the excellent company of Osborne Smith, the first governor, Sir Benegal Rama Rau, S Jagannathan, I G Patel, R N Malhotra, Y V Reddy and Duvvuri Subbarao.

Rajan should also take heart from the fact that Smith, Rama Rau, Puri and Malhotra were dumped by the government. As the Americans picturesquely put it, shit happens.

Smith, an Australian with a mind of his own, went because he fell afoul of the Viceroy’s Council for being too nice to Indian industrialists. Rama Rau went because he protested against TTK’s unorthodox policies and Nehru refused to support him against TTK.

Puri went because he was appointed during the Emergency to help Sanjay Gandhi by relaxing some credit rules. The new Janata government got rid of him in quick time.

A similar thing happened to Malhotra, who got the hint when Yashwant Sinha, the finance minister in the new Chandrashekhar government in 1991, “requested” him to come to Delhi for a chat. Malhotra quit.

Uneasy bedfellows
But such unfair send-offs are rare. After all, only four governors out of the 22 before Rajan have been shown the door.

The others have worked out a modus vivendi, which means agreeing to disagree, and to living together. It is not an altogether peaceful or comfortable co-existence.

Whatever the provocation, the governors know that they cannot cross the invisible line. But Rajan, in his youthful exuberance, might have done just that, with that line about “Make for India” instead of Narendra Modi’s “Make in India”. Silly.

The uncomfortable peace that exists between the government and RBI also always means that it is the latter that must take the blame. Consider a few examples.

In July 2008, when he raised interest rates, Reddy was blamed by one and all. The truth is that he had been asked to do so by the government and then left to face the music when the political wind changed after the nuclear Bill vote.

Something similar happened to Subbarao. The government went back on its promises about rolling back the post-2008 stimuli in 2011 and ran up huge fiscal deficits. It thus left him with no option but to keep raising rates.

One must mention here, for the record, that the formidable S S Tarapore, one of the most effective central bankers India has seen, has still not forgiven the finance ministry for letting down the RBI in the Economic Survey of 1996. In it, the government blamed the RBI for the sharp increase in rates in the last quarter of 1995. Tarapore still glowers with rage at the memory.

There have been dozens of similar instances in the 79 years of the RBI’s existence. The moral for future governors is clear: put up and shut up.

Doubles partners
Indeed, the FinMin-RBI engagement is like a mixed doubles match in tennis where the RBI plays the female partner. The credit goes to the men; the blame goes to the women.

Governors who get the point do well. The rest get vilified by industry and media because the government is more powerful than the RBI. Simple. The RBI has no chance.

But what about finance secretaries? Several of them have gone on to become governors, usually because they can be expected to kowtow to the government. Many have rebelled after getting the job.

A highly illustrative answer comes from the career of Bimal Jalan. He totally messed up as finance secretary in 1990 – a fact that he is excessively anxious to hide – but still went on to become RBI governor in 1997. Once there, he did a surprisingly good job by not taking any risks that would lead to another payments crisis during the Asian crisis of 1997-2000.

In the end, though, it all depends on how the finance minister and the RBI governor get on with each other, and how supportive the prime minister is of the latter when they are at loggerheads. Indira Gandhi saved Manmohan Singh when he would not support a Pranab Mukherjee decision in 1983.

In that respect, Rajan may well have blown it with that unfortunate turn of phrase. Modi may well let him go if he resigns.

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