New Delhi: The finance ministry under Pranab Mukherjee and P Chidambaram used to pressure the RBI to ease interest rates and present a rosier picture of growth to bolster sentiments, recalled former RBI governor Duvvuri Subbarao in his memoir. In his recent book ‘Just A Mercenary?: Notes from My Life and Career’, Subbarao also wrote that there is ‘little understanding and sensitivity’ in the government about the importance of central bank autonomy.
“Having been in both the government and the RBI, I can say with some authority that there is little understanding and sensitivity within the government about the importance of central bank autonomy,” he said in the book.
Subbarao was finance secretary (2007-08) before taking over as the governor of the RBI for five years on September 5, 2008, a few days before the outbreak of the Lehman Brothers crisis. Lehman Brothers crashed into bankruptcy on September 16, making it the largest corporate failure in history.
In a chapter entitled ‘Reserve Bank as the Cheerleader of the Government?’, Subbarao recalled that pressure from the government was not limited to the interest rate stance of the Reserve Bank. On occasion, it has 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, countered our estimates with their assumptions and estimates, which I thought were par for the course,” he said. wrote
What upset him, Subbarao said, was that almost seamlessly the discussion moved from objective arguments to subjective considerations, with suggestions that the Reserve Bank should project a higher growth rate and a lower inflation rate to share responsibility with the government for “support”. feeling’.
“Mayaram said in one meeting that ‘while all over the world, governments and central banks are cooperating, here in India, the Reserve Bank is very reticent,'” he recalled.
Subbarao said that he is invariably displeased and annoyed by this demand that the RBI be a cheerleader for the government.
“I was also appalled that the Ministry of Finance would seek a higher estimate for growth while arguing for a softer stance on the interest rate without seeing the obvious inconsistency between these two demands,” he wrote.
The former RBI governor pointed out that he used to take a firm stand that the Reserve Bank cannot deviate from its best professional judgment just to cure public sentiment.
“Our projections must be consistent with our policy stance, and tampering with growth and inflation estimates will erode the Reserve Bank’s credibility,” he noted.
Subbarao also observed that it is interesting, even somewhat comforting, that these tensions between the government and the central bank are not unique to India or emerging economies as they also occur in rich countries.
He also recalled that he had encounters with both Chidambaram and Mukherjee on the political stance of the RBI when both of them usually pushed for softer rates even though their styles were different.
“Chidambaram typically argued his case as the lawyer that he so prominently is, while Mukherjee was the foremost politician,” Subbarao wrote.
Mukherjee let his opinion be known and left it to his officers to argue his case, he said, adding that “the net result was an uncomfortable relationship”.
The former RBI governor recalled that in October 2012, shortly after Chidambaram returned as finance minister from the Home Ministry, he began seriously reversing the fiscal deficit of the Mukherjee regime, possibly to compensate for the fiscal tightening he had started.
“So, he really wanted a softer monetary regime and put enormous pressure on the RBI to lower the interest rate. On objective considerations, however, I could not compel him,” Subbara wrote.
The former RBI governor said that his refusal to fall in line obviously 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 ‘door stopper’ media interaction outside the North Block about an hour after the Reserve Bank issued its hawkish policy statement, expressing concern over inflation, Chidambaram said (that) “growth is as much of a concern as inflation. If the government has to walk alone to face the challenge of growth, we will go alone,” Subbarao recalled.
Through his memoir, the 74-year-old also recounted his journey — his hopes and despairs, his successes and failures, 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 subdivision in north-coastal Andhra Pradesh way back in 1974, Subbarao learned that tribal development requires more than enthusiasm; it requires above all an understanding of poverty.
Almost 40 years later, in 2013, as the governor of the Reserve Bank of India in the midst of a raging exchange rate crisis, Subbarao learned the harsh challenges of emerging economies in an unequal world.
Subbarao is currently a senior fellow at the Yale Jackson School in the United States.