The picture that emerges from TCA Srinivasa Raghavan’s book about the relationship between the RBI and the government is not a happy one.
TCA Srinivasa Raghavan, Dialogue of the Deaf. Tranquebar. 2017.
Some of the finest writers on economics in India happen to be journalists who have spent their lives working for business newspapers and magazines. But other than writing and rewriting news reports, and writing columns, they have largely stayed away from authoring books and that is primarily because every journalist has a lazy gene in him somewhere. Jokes apart, thankfully, that has now started to change.
TCA Srinavasa Raghavan’s Dialogue of the Deaf is the latest addition to this trend. In this lucid book, Raghavan traces the history of the Reserve Bank of India (RBI), India’s central bank, along with the relationship it has shared with the government in general and the Ministry of Finance in particular. And the picture that emerges is not a happy one, at least not for the RBI.
Between September 2013 and September 2016, during the period Raghuram Rajan was the governor of the RBI, the picture that emerged, at least in the media, was that the Rajan-led RBI had the balls to take on the government over and over again. But that, as Raghavan writes in his book, is an exception to the rule and it is something that has rarely happened in the more than 80 years that the RBI has been in existence. RBI came into being on April 1, 1935.
The government has always played the role of a husband and RBI that of a subservient wife. And this was as true when the British ruled India as it has been in independent India. As Raghavan writes: “In India, the independence of monetary policy has been confused with the independence of the governors who have perhaps never heard of Montagu Norman’s view of the RBI as a wife in a Hindu joint family who advises but does what she is told. He believed that the relationship between the RBI and the Bank of England should be that of a ‘Hindoo marriage’ wherein the latter was the dominant spouse and the former the subservient wife.”
Montagu Norman was the governor of the Bank of England for a period of 25 years between 1920 and 1944. On a slightly different note, Lords of Finance, a book that was published a few years back, chronicles the interesting life of Norman and other central bankers during the period around The Great Depression of 1929, very well.
Getting back to the point, Norman was talking about the relationship between the Bank of England and the RBI in pre-independence India. Now if we were to replace the Bank of England with the government of India during the post-independence period, the relationship between the government and the RBI more or less stayed the same.
Much of Raghavan’s book deals with this. Take the case of T.T. Krishnamachari (TTK) who was the finance minister in 1956, when the Second Five Year Plan came into force. At the heart of this plan was the setting up of massive public sector enterprises and projects. This needed a lot of money and would mean deficit financing, ie. the government would spend more than it would earn.
This brought the RBI in direct confrontation with the government in general and TTK in specific. During those days governments ran balanced budgets—they spent only as much as they expected to earn. Hence, the government running a deficit wasn’t something that the RBI was comfortable with.
As Raghavan writes: “It (the RBI) lost the battle, as decisively as it has every battle since then”. The RBI governor at that point of time was Sir Benegal Rama Rau, an ICS officer. TTK had not been treating Rau very well. He complained to the prime minister Jawaharlal Nehru thrice. As Raghavan writes: “Once TTK even announced a monetary policy in Rama Rau’s presence, which was different from what the RBI was going to announce… He made it clear that the RBI was a ‘department’ or a ‘section’ of the finance ministry.”
As time went by and the fifties gave away to the sixties and Nehru to his daughter Indira Gandhi, RBI did really become a department of the finance ministry. This becomes clear with the way Gandhi decided to nationalise a bulk of India’s banks in 1969 and the RBI led by L.K. Jha agreed to fall in line without any fuss.
In fact, as Raghavan writes, Jha wasn’t even aware of the fact that Gandhi had plans to nationalise the banks: “Mrs. Gandhi acted decisively… She asked Jha, the RBI governor, to come over to Delhi. Jha thought he was being asked to discuss social control and he took with him a comprehensive note on the subject. When he offered it to Mrs. Gandhi she told him that ‘he could keep the note on her table and go to the next room and help in drafting the legislation on nationalising the banks.’” It was as random as that.
This relationship where the government was totally dominant on the RBI continued in the 1980s. By then the trend was that the finance secretary moved on to the RBI as a governor, post retirement. R.N. Malhotra was the RBI governor between 1985 and 1990, having been finance secretary earlier. Malhotra warned the Rajiv Gandhi government over and over again that it was spending much more than what it could afford to. This finally led to the 1991 economic crisis.
But given that Malhotra had now moved on to the other side, the government wouldn’t listen to him. The finance secretaries during that period, Bimal Jalan and S. Venkitramanan (both went on to become RBI governors) sided with the government. The irony was that Malhotra had been their boss when he was the finance secretary in the early 1980s. In fact, in a very interesting side story in the book, Raghavan talks about the bureaucrat B.K. Nehru being offered the job of the RBI governor by both TTK as well as Moraji Desai. He refused “saying he didn’t want to take orders from a joint secretary in the Finance Ministry”.
The story started to improve a little for the RBI once Bimal Jalan took over as the governor in 1997. And this continued under Y.V. Reddy who became the governor in 2003. In fact, under Reddy, the RBI found a voice of its own. There was great pressure on Reddy from the government to open up the Indian economy at a faster pace, in particular to American banks. While agreeing with the government on the need to open up the economy, Reddy also felt that the pace of liberalisation was not open to negotiation. And this held India in good stead when the financial crisis of 2008 struck. But even Reddy had to say yes to the government on many issues that he did not agree with and this included the appointment of Naina Lal Kidwai as the chief executive of HSBC Bank in India.
Raghavan ends his book in 2008 and leaves out the years since then. It would have been interesting to see what he thought of rockstar governor Raghuram Rajan and the skirmishes he had with the Narendra Modi government.
While the relationship between the RBI and the government is the core theme of the book, there are other things in which Raghavan goes into great detail. The history of the setting up of the RBI is very interestingly told and it does involve a man called John Maynard Keynes. Also, what many people did not know is that RBI was set up as a private bank in 1935 and shares in it were sold as well. Only in 1949, after independence, did the government nationalise it. Raghavan discusses this important detail.
Another interesting bit is the part about how the government got the RBI to monetise its deficit over the years. This basically meant that the RBI simply printed rupees in order to ensure that the expenditure of the government met its income. This practice started in 1956 when the RBI resorted to issuing ad hoc treasury bills to the tune of Rs 50 crore at the end of each Friday and Rs 4 crore at the end of each day. “This way the government would always have money and never be broke,” writes Raghavan. The practice continued for more than 40 years and was finally brought to an end in 1997.
To conclude, it is safe to say that Raghavan has written a very interesting and lucid book on what is a rather dry subject. In lesser hands, the same book could have turned into a soporific disaster. This one reads like a historical thriller, which does not have a twist at the end; because the government always wins.