It is a collection of articles written, and speeches delivered, by Rangarajan
C. Rangarajan, a former Governor of the Reserve Bank of India, has played a key role in policy formulation at the highest echelons in the country. Y. Venugopala Reddy, who retired as the RBI chief last year, called him a ‘visionary’ and looked upon him as his mentor. This book is a collection of articles written, and speeches delivered, by Rangarajan since 2000. He was an academic before he joined the RBI.
Broadly, the chapters fall under monetary policy, fiscal/financial stability, banking reforms, growth and development, globalisation, the Finance Commission, and so on. It is not in his grain to engage in racy rhetoric or polemics. At the first brush, the reader may not be excited by the measured, low-key monotones in which Rangarajan orchestrates his ideas. If he digs deeper, he will find nuggets embedded in them.
Monetary policy is indeed the first love of Rangarajan, and others such as fiscal, financial or exchange rate policies impinge on it because of cross-fertilisation. Unlike central bankers in the West who acted like the ‘Masters of the Universe’ until the crisis hit, he was under no illusion about the relationship between economic policy and monetary policy or between the government and the RBI.
As he puts it: “In a broad sense the objectives of monetary policy can be no different from the overall objectives of economic policy.” Though these ideas sound banal now, especially when the Treasury Departments and the regulators in the United States and elsewhere sit together and burn the midnight oil to bail out banks, it is noteworthy that he expressed these views in the 1990s. His peers in the West like Alan Greenspan would have smirked at his naïveté.
Rangarajan’s signal contribution was in promoting the idea of “threshold level of inflation.” It is a subtle combination that seeks to reconcile price stability with growth concerns. Drawing on a rich body of research on India, he is able to transcend the fashionable view (fad!) on “inflation” or “inflation expectations” prevalent in the West and posit the view that India can live with a higher level of inflation. “There is some amount of judgment involved in this, as econometric models are not able to capture all the costs of inflation.”
The chapter on ‘financial stability’ was written in 2004. It was the time when the western banking system, especially the U.S., was exploding, frenetically adopting financial innovations such as derivatives. With prescience, he had warned that “all these changes have undoubtedly created new opportunities, but they have also magnified risks.” He also drew attention to asset price inflation and how they would “cause serious distortions since they constitute the collateral for various loans.”
Currently, it is fashionable to harp on contra-cyclical approaches to safeguard against risks. Rangarajan was not so sanguine. He said: “The financial system may not be able to build sufficient cushions in good times which can act as collective shock absorbers in bad times.”
In his view, it is not easy to assess when markets are ‘overpriced’ or ‘misaligned’ with fundamentals. It is no exaggeration to say that these ideas, together with the standards he had set for banking regulation, led to the multiple-objective approach articulated and administered by Y.V. Reddy. On the structure and functioning of the regulatory system, he calls for closer cooperation and coordination among the various regulators. But, he feels, “eventually we would also have to move toward single authority supervising over various financial service providers.”
Rangarajan’s long and rich experience comes to the fore while discussing ‘consolidation.’ He cautions against the zeal for making big banks bigger, saying, “any meaningful consolidation among the public sector banks must be driven by commercial motivation by individual banks, with the government and the regulator playing at best a facilitating role.”
On infusion of more capital into the public sector banks, he is realistic. It has turned controversial in the background of a World Bank loan to capitalise them. Rangarajan suggested in 2007 that the government could bring down its equity and raise capital from the market. Another alternative given was that government-ownership could be defined to include quasi-governmental agencies like the LIC to safeguard their public sector status.
The chapter on ‘capital inflows’ dates back to 2000. The problems connected with the volatility of portfolio flows turned acute after 2003-04. The Lahiri Committee report was the high water mark. In spite of the RBI’s advice against unrestricted FII flows, the Finance Ministry is unrelenting in wooing FII flows. In 2000, long before the high street drama, Rangarajan advised thus: “What is needed is a clear identification of capital flows that can tend to be ‘volatile’ and use appropriate measures to discourage such flows.”
There are interesting papers on the fiscal responsibility and budget management (FRBM) issues. No doubt, Rangarajan is a votary of the FRBM and fiscal consolidation; but he is more benign and opts for a 6 per cent norm under our conditions. He sees no virtue in FRBM per se and is willing to be flexible.
The articles/speeches in this collection are of variable quality. Some are dated. Even so, one may read them as the record of a practitioner who was a part of the policy and had a grandstand view.
INDIA — Monetary Policy, Financial Stability and Other Essays: C. Rangarajan; Academic Foundation, 4772-73/23 Bharat Ram Road (23 Ansari Road), Daryaganj, New Delhi-110002. Rs. 995.