Reserve Bank of India (RBI) Governor Raghuram Rajan said he will not be seeking a second term. In a farewell letter of sorts written to his staff, Rajan said that he will return to academia after his term ends in September this year.

According to some media sources, this move has caught the government off-guard, as things seemed okay at Rajan’s end almost till he sent that letter to his staff. In an interview given to NDTV  last week, Rajan had said that he and the Finance Minister had never really had any arguments, not even on the matter of interest rates. Sure, they both did try to convince each other of their viewpoints, but the arguments never went out of hand. He also said that despite the occasional back and forth, all decisions were ultimately his.

As Rajan said, “Our objectives are the same: We all want growth, we all want low inflation.”

But despite common objectives, priorities differ. The Reserve Bank’s inflation focus does not coincide with the electoral cycles that governments face. And this is why the relationship between North Block and Mint Street always invites friction.

But true conflicts are rare. Rajan’s exit is one such rare occurrence, precipitated by the personal attacks launched by BJP Rajya Sabha MP Subramanian Swamy. But not unprecedented. The spat between TT Krishnamachari (TTK), Finance Minister under Jawaharlal Nehru, and then RBI Governor Benegal Rama Rau (Like Raghuram Rajan, also an RR’), is well documented by G Balachandran in the second volume of the History of the RBI (1951-1967).

The events culminating in Rama Rau’s resignation showed how a powerful Finance Minister could use his influence “to subordinate the will of the bank to his own.”

How the events unfolded back then

Relations between TTK and RR weren’t cordial even when the former wasn’t the Finance Minister. When TTK was Industry and Commerce Minister, he was one of the votaries of nationalisation of the then Imperial Bank of India (now the State Bank of India).

In 1952, he wrote a letter to Finance Minister CD Deshmukh, in which he admitted that he was “prejudiced against Rama Rau and [had] criticised his appointment as Governor in the past” . He alleged that RR was putting his interest above that of the country. He added that RR didn’t favour the nationalisation of the Imperial Bank because the person whom the bank’s Managing Director (MD) was grooming (for succession) at the time was a relative of RR. This was quite subjective, and a veiled personal attack without substantial evidence.

In 1954, Governor RR “circulated a note arguing for a scheme of time-bound support for the handloom sector administered through institutional financing agencies to replace the existing cess fund scheme.” This irked TTK, who favoured the latter. He deliberately misrepresented RR’s remarks to the Cabinet on the issue.

Serving in the office for over five years, RR was tired of his stint and wanted to bid adieu to public service for good. But Prime Minister Nehru and Finance Minister Deshmukh persuaded him to carry on for one more term. In 1956, Deshmukh himself resigned, and TTK became Finance Minister. Given their old rivalry, it was only a matter of time before relations between the ministry and the central bank went sour.

In his many letters to PM Nehru, RR complained about the way TTK behaved towards him. He apparently “used rude language, passed rude remarks, and indulged in rude behaviour.” G Balachandran notes in his book that RR “would have, but for the Prime Minister’s intervention, handed in his papers earlier.”

Frequent battles

The Finance Minister was always ready to pick a fight with the central bank. One such fight over a supplementary taxation proposal tabled by TTK in parliament proved to be the final nail in the Governor’s proverbial coffin.

The Finance Minister proposed to increase the stamp duty on bills from 2 annas per Rs 1,000 to a maximum of 160 annas (or Rs 10 per Rs 1,000), with the immediate hike being to 80 annas, or Rs 5 per Rs 1,000. Such a steep hike was bound to affect the viability of the central bank’s bill market scheme, which Governor RR had himself laboured to bring to fruition.

Balachandran describes the impact of the TTK’s scheme thus:

The confrontation, it seemed, was deliberate and forced. The Finance Minister’s new scheme would have barely fetched Rs 2 crore to the government’s tax kitty, which was insignificant given that the aggregate bill market drawings in 1956 were Rs 436 crore.

TTK argued that his proposal was aimed at promoting the use of bills. He justified the increase in stamp duty as a “credit control measure falling short of a generalised increase in the Bank Rate, which he preferred to avoid, both to preserve easy money conditions in the market and to reduce the possibility of banks profiting from it.”

However, Balachandran says that both explanations by TTK defied understanding. He reasons:

Clearly, the aim was to force a confrontation, and this was the perfect issue on which to confront the Governor, as the latter considered it one of his principal achievements., which TTK’s steep hike would have killed.

When he introduced his proposal in the Parliament, TTK had called it a fiscal measure with a monetary intent, but he didn’t think it right to consult the RBI on the merits of the issue given the latter’s role in framing monetary policy. Rather, he only asked the central bank about whether the increase should be 40 times or 80 times the prevailing rate.

One more incident shows how forced the confrontation was. Banks and businesses wanted easier credit and increased access to the bill market scheme in 1956-57. TTK’s proposal “would discourage the use of bills and force banks which had them to sell or borrow against government securities.” Thanks to TTK’s new proposal, banks could no longer borrow under the bill market scheme except at a loss to themselves.

Understandably, banks reduced their bill market limits with the RBI. But TTK smelled a conspiracy. He suspected that the RBI was in bed with the banks, who were deliberately creating a credit squeeze to force him to back down. And thus started his open ranting and raving against the banks and the Governor.

RR tried to reason with him but to no avail. The matter reached the Prime Minister, who put it to the Cabinet. RR was also invited.

Balachandran says, quoting an account given by BK Nehru, TTK was “angry with the Governor for forgetting that he had been asked to attend ... only to answer specific questions, and for his ‘temerity’ in speaking at the meeting in defence of the Bank’s views.”

Balachandran further adds that “when next they met, according to BK Nehru, the Finance Minister “let fly in no uncertain terms and in the loudest of voices, at the Governor of the Reserve Bank of India.”

In one meeting with the RBI Governor, TTK even derogatorily dubbed the RBI as a ‘department’ or a ‘section’ of the Finance Ministry.

With repeated insults hurled at RR, he couldn’t continue to hold office. In fact, no self-respecting individual would. So, he decided to quit. But again, PM Nehru and GB Pant persuaded him to stay.

Buoyed by the PM’s assurance, he called a special meeting of the board to make all the members aware of the implications of TTK’s new proposal and the way this decision was forced without the consultation of the RBI. After all, how could the executive usurp the power of setting and altering the Bank Rate, which is the responsibility of the central bank? The memo circulated at the meeting also mentioned the way TTK had described the RBI as a department or a section of his ministry.

The Finance Ministry forwarded the memo to the PM who told RR that the memo was “improper” and “agitational”. He immediately shot a letter to RR:

Though Nehru felt that the whole matter was not handled properly, and that the RBI should have been consulted before formulating any such proposal, Balachandran sayshe yielded little ground to Rama Rau. He wrote to him:

Nehru’s letters took RR by surprise. After all, it was he who had convinced RR to stay on despite all the insults heaped on him. But RR could do little. The Prime Minister left the country for a foreign visit. Behind his back, TTK intensified his attacks on the RBI. He sarcastically termed it “reserved”, accused it of “being incapable of doing any thinking”, betraying a “clerical mentality,” and so on.

Tired with such public humiliation time and again, RR wrote back to PM Nehru and offered his resignation, pleading with him to accept it.

But PM Nehru was in no mood to yield any ground. He had made up his mind to let go of RR. He wrote back:

In his resignation letter to TTK, RR lamented that he had:

Rama Rau left office on 14 January 1957. Thorough gentleman that he was, he told PM Nehru that he would not issue any public statement even after vacating office unless there was some fresh provocation from the Finance Ministry. Disgusted with all this, Purushotamdas Thakurdas, the bank’s director since its foundation in 1935, also put in his papers.

RR sacrificed his office for the independence of the RBI. But the way it happened, it had grave future consequences. BK Nehru writes:

Balachandran says that his view might be exaggerated. He may be right, for no individual is bigger than the institution. And the RBI did prevail. But the conflict marred the reputation of an institution as important and esteemed as the RBI. This case has implications for us and future generations.

In the present case, the NDA government failed to rein in Swamy after he made intemperate attacks on Rajan. While the attacks of someone outside the government do not rank in the same category as TTK’s attack on the RBI Governor, it still left Rajan with little choice but to leave. There was no public reprimand of Swamy.

Some things change, some remain the same.

Hero Image Credit: Book ‘India’s Industrialists by Gita Piramal and Margaret Herdeck