Money and power

At the end of 2016, the reputation of the Reserve Bank of India (RBI) — one of India’s few public institutions of integrity and professionalism — was in tatters. Used by the Narendra Modi government to implement the demonetisation programme, India’s central bank became a household name for the wrong reasons. The shortage of cash and the frequent modifications in regulations saw the RBI become the subject of public debate.

As the RBI seeks to rebuild its reputation, it is fortuitous that we have with us a book which the preface tells us aims to take the layperson through the history of the RBI. The layperson needs such a piece of writing for, again as this book itself points out, the many volumes of the official history of the RBI are far too tedious for the general reader to want to plough through. Some credit though must be given to the RBI for commissioning volume after volume of its history over the decades, perhaps the only public institution in India that has given history its importance.

TCA Srinivasa Raghavan has been writing and commenting on the economy in many of India’s leading newspapers for more than three decades. He was also involved in the writing of Volume 3 (1967-81) of the official history of RBI and for a while Volume 4 (1981-97). He says for close to a decade he also had access to the archives of the central bank. You could therefore not find a more knowledgeable person to write a book that explains, demystifies and critiques the working of the RBI since its establishment in 1935.

Working through details

The origins of India’s central bank in colonial India from the initial discussions in the early 20th century to the enactment of the Reserve Bank of India Act of 1934 and then the working of the privately-held RBI between 1935 and 1949 are laid out in fascinating detail in the first two chapters of the book.

Thereafter, in the following six chapters, Dialogue of the Deaf covers all the main events after 1947. The writer talks about everything from the forced resignation in 1957 of the then RBI Governor, Benegal Rama Rau, to the debate on rural credit, nationalisation of banks, management of foreign exchange, the burden of financing government deficit, priority sector lending, the 1991 crisis and then the reforms from 1990 onwards. The discussion is sometimes leavened by cricket analogies and sometimes by colourful asides at personalities. These can be pointless, sometimes, like “…whenever there has been a finance minister from Tamil Nadu, there has been trouble between him and the governor (p 235)”)

Yet, Raghavan has not been able to distill his vast knowledge of the detail into a straightforward story. The treatment is far too episodic for the reader to get a coherent account about how the central bank has worked (or not been able to work) over the decades. There are sweeping assessments of Prime Ministers, Finance Ministers and RBI Governors. There is a lot of information about many events surrounding the making and implementation of policy, including many instances of repetition which have escaped the editor’s eye. But all of this cannot substitute for a readable history about an institution.

Money and power

It is really only in the last two chapters (Chapters 7 and 8) that cover the years since the mid-1990s that we have a comprehensive discussion of the role that the RBI has tried to perform in its domain. But this is perhaps too little and too late for a book which its title suggests is about the tussle between the RBI and the government and the preface says is about the RBI’s role in “money, interest and prices”.

The relationship between governments and central banks has become a matter of public interest and policy relevance over the past couple of decades and more. The “independence” of the central bank is seen as promising good monetary policy, and therefore facilitating economic growth with low inflation, because this will compensate for the “bad policies” of short-sighted elected representatives. The global evidence on this is mixed.

What is relevant in India is that the RBI is not a constitutional body but has been created by legislation and is therefore accountable to Parliament. Its efficacy lies in how well it uses the powers it has, exercises the autonomy that it is able to carve out for itself and resists government interference in its domain.

Dialogue of the Deaf ends with what has become a standard prescription for all organisations these days: they need to reinvent themselves. Well, over the past few years the RBI has indeed begun to transform itself into a single-objective central bank by adopting inflation targeting as an explicit — and sole? — goal. Some would say that this is neither desirable nor is it going to work.

One hopes that Raghavan draws on his knowledge of the central bank to critically examine this new role of the RBI in his next book, a closely argued analysis written for the layperson.

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Printable version | Dec 1, 2021 3:35:04 PM |

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