Roving Periscope: How UPA govt tried to make the RBI its cheerleader?

Virendra Pandit

New Delhi: Former Reserve Bank of India (RBI) Governor D. Subbarao’s recent memoirs have exposed the UPA government’s alleged pressure during his tenure (2008-13) on the central bank to paint a rosier picture of its performance.

His book arrived when his successor, the former RBI chief Raghuram Rajan, was under attack in some sections, which accused him of acting almost as a spokesman of the Indian National Congress-led UPA which had appointed him. Dr. Rajan’s tenure (2013-18), most of which was under the NDA government led by Prime Minister Narendra Modi, was among the most controversial ones for a central bank boss.

The finance ministry under then FMs Pranab Mukherjee and P Chidambaram used to pressurize the RBI to soften interest rates and present a rosier picture of growth to shore up sentiments, Dr. Subbarao has recalled.

In his book “Just A Mercenary? Notes from My Life and Career,” the former RBI chief also wrote that there is ‘little understanding and sensitivity’ in the government on the importance of the central bank’s autonomy, the media reported on Tuesday.

Dr. Subbarao, 74, who is currently a senior fellow at the Yale Jackson School in the US, recalled instances where government officials contested the RBI’s estimates and pressured it for higher growth projections and lower inflation rates to boost sentiment.

Despite disagreements, however, he maintained the central bank’s independence and refused to deviate from its professional judgment.
“Having been both in the government and in the RBI, I can say with some authority that there is little understanding and sensitivity within the government on the importance of central bank autonomy,” he said in the book.

Dr. Subbarao was the Union Finance Secretary (2007-08) before taking over as the RBI Governor a few days before the breakout of the global financial crisis after the Lehman Brothers crashed into bankruptcy on September 16, 2008, making it the biggest corporate failure in history.

In a chapter titled ‘Reserve Bank as the Government’s Cheerleader?’, he recalled that pressure by the government was not confined to the Reserve Bank’s interest rate stance. On occasions, it extended to pressuring the RBI to present rosier estimates of growth and inflation at variance with our objective assessment.

“I remember one such occasion when Pranab Mukherjee was the finance minister. Arvind Mayaram, the finance secretary, and Kaushik Basu, the chief economic adviser, contested our estimates with their assumptions and estimates, which I thought was par for the course,” he wrote.

What upset him, Dr. Subbarao said, was that almost seamlessly the discussion moved from objective arguments to subjective considerations, with suggestions that the Reserve Bank must project a higher growth rate and a lower inflation rate to share responsibility with the government for ‘shoring up sentiment.’

“Mayaram went to the extent of saying in one meeting that ‘whereas everywhere else in the world, governments and central banks are cooperating, here in India, the Reserve Bank is being very recalcitrant,’” he recalled.

Dr. Subbarao said he was invariably discomfited and annoyed by this demand that the RBI should be a cheerleader for the government.
“It also dismayed me that the Ministry of Finance would seek a higher estimate for growth while simultaneously arguing for a softer stance on the interest rate without seeing the obvious inconsistency between these two demands,” he wrote.

The former RBI chief pointed out that he used to take a firm position that the central bank cannot deviate from its best professional judgment just to doctor public sentiment.

“Our projections must be consistent with our policy stance, and tinkering with estimates for growth and inflation would erode the credibility of the Reserve Bank,” he noted.

Dr. Subbarao observed that it is interesting, even somewhat comforting, that these tensions between the government and central bank are not unique to India or emerging economies as they play out in rich countries as well.

He also recalled that he had run-ins with both Mukherjee and Chidambaram on the RBI’s policy stance as both of them invariably pressed for softer rates although their styles were different.

“Chidambaram typically argued his case like the lawyer that he so eminently is, while Mukherjee was the quintessential politician,” Subbarao wrote.

Mukherjee let his view be known and left it to his officers to argue his case, he said, adding that “the net result was an uncomfortable relationship.”

Dr. Subbarao recalled that in October 2012, shortly after Chidambaram returned as finance minister from the Home Ministry, he set about in earnest to reverse the fiscal profligacy of the Mukherjee regime, possibly to compensate for the fiscal tightening he was embarking on.

“So, he very much wanted a softer monetary regime and put enormous pressure on the RBI to lower the interest rate. On objective considerations, I could not oblige him though,” Subbarao wrote.

The former RBI governor said that his refusal to fall in line upset Chidambaram enough to do something very unusual and uncharacteristic to go public with his strong disapproval of the Reserve Bank’s stance.

“In his ‘doorstop’ media interaction outside the North Block about an hour after the Reserve Bank put out its hawkish policy statement, expressing concern on inflation, Chidambaram said (that) ‘ “growth is as much a concern as inflation. If the government has to walk alone to face the challenge of growth, we will walk alone,’ “ Subbarao recalled.

Through his memoir, he also recounted his journey – his hopes and despair, his successes and setbacks, his mistakes and misdeeds, and the lessons he learned along the way – with rare candor and honesty.

At the start of his career as sub-collector of Parvathipuram sub-division in north-coastal Andhra Pradesh way back in 1974, Subbarao learned that tribal development requires more than enthusiasm; it requires most of all an understanding of poverty.

Nearly 40 years later, in 2013, as the RBI Governor amid a fierce exchange rate crisis, Dr. Subbarao learned the harsh challenges of emerging economies in an unequal world.