Wednesday, August 7, 2013

‘Outsider’ inside RBI

Why should the officers of the Indian Revenue Services, Accounts and Audit services who keep juggling macroeconomic facts and figures – all their lives -- never get a chance to reach the top? Imagine the drudgery and quandary of these services when the highest level a man can ever reach is Executive Director but always leave the top-most chair empty for the Governor – who is always an outsider

By Neeraj Mahajan

Raghuram Rajan
Is it better to be selected or promoted—this is the new debate inside RBI?
D. Subbarao

As Raghuram Rajan prepares to step into the shoes of D. Subbarao’s –at the fag-end of his five year term which comes to an end on September 4, 2013. This will be yet another instance in the last six decades when an outsider is going to take over the reins of from the insiders who spend their entire life working for the Central bank but never get a chance to break the glass ceiling.

If Reserve Bank of India (RBI) is the Central Bank of India then why should the highly qualified officers (M.Phil, Ph.D, MBA or Chartered/ Cost Accountant, Company Secretary) selected by the Reserve Bank of India Services Board or professional bankers never get a chance to head it? Why should the officers of the Indian Revenue Services, Accounts and Audit services who keep juggling macroeconomic facts and figures – all their lives -- never get a chance to reach the top? Imagine the drudgery and quandary of these services when the highest level a man  can ever reach is Executive Director but always leave the top-most chair empty for the Governor – who is always an outsider. He may be an economist, academic, career bureaucrat or banker – but never professional RBI officers – having the latest banking and monetary trends – in India or abroad, on their tips. Though the RBI follows an in house promotion policy, where all staff persons are promoted internally—this does not apply to the topmost jobs. You may be the most capable person but you cannot become Deputy Governor or Governor – who are not promoted but selected by the government.

Exterior of Bank of England
In terms of importance the Governor is the Reserve Bank’s chief executive, banker cum Debt Manager to the central government and banker to banks who controls the economic growth, financial stability, price steadiness, cost as well as seamless clearing, funds transfer and settlement of inter-bank obligations. His other activities involve managing the nation’s financial sector, Issuing Currency notes, keeping reserves, Banking Regulation, foreign Exchange, inflation and liquidity management, smooth and efficient monetary and Financial Stability, payment settlement Systems and economic developmental. Like his Canadian counterpart called Governor General – a constitutional and ceremonial post who serves for an unfixed period of time,  normally for a period of five years—at Her Majesty's pleasure—the Governor of Reserve Bank of India – serves at the Prime Minister’s Pleasure. 

Mark Carney- world’s most
powerful central banker. 
 
Even though transparency in the central bank’s functioning and its strength depends on who is its governor-- unlike the Governor of Bank of England who is usually appointment from within the staff of the Bank and an incumbent grooms his or her successor— merit is not the sole criterion for selecting the RBI Governor. Political equations with the powers are the main considerations for his selection. Invariably it’s a hush-hush closed door decision in India, unlike UK which has an open door policy where any competent person-- economist, civil servant or even foreigner can apply in response to a public advertisement. 48-year-old Mark Carney a former head of Bank of Canada who replaced Mervyn King as the current and 120th Governor in 2013 is an example. He is the first foreigner to run UK’s central bank in its 319-year history and the world’s most powerful central banker.

India on the other hand does not have a formal process of promoting or selecting and RBI Governor. There is no search committee, no list of eligible and deserving candidates and the Prime Minister’s Office (PMO) decides on the governor with or without the inputs from the finance ministry or outgoing governor. It is a political decision – to match the convenience of the ruling party and corporate houses too try to influence the decision.   

At the time of independence Sir Chintaman Deshmukh the first Indian Governor of Reserve Bank, not only presided over RBI’s transition from the British rule but also division of assets and liabilities between India and Pakistan. During his tenure RBI was nationalized and transformed from a shareholder’s institution to a State owned organization. Today Reserve Bank has become a department of the government of India and a post retirement option for rewarding tired and worn out bureaucrats. Any government wants a RBI Governor -- without a mind of his own-- who can be his master’s voice.

Indira Gandhi 

This trend started in the 60s when Indira Gandhi nationalized 14 major commercial banks without even 
consulting Lakshmi Kant Jha- an accomplished 1937 batch civil servant. Familiarity as they say breeds content, she knew he wouldn’t mind because he had served as Secretary to the Prime Minister prior to taking over as the eighth Governor of RBI. His successor B. N. Adarkar an economist had been Economic Adviser and Deputy Governor of RBI before heading RBI for 42 days. He is one of those unfortunate ones like K G Ambegaonkar who never got to sign any currency note. His successor Sarukkai Jagannathan, ICS, a product of Presidency College, Madras was Executive Director at the World Bank. His signature can be seen on Rs 20 and Rs 50 denomination currency notes. N. C. Sen Gupta who followed him was Secretary, Department of Banking, Ministry of Finance but remained Governor for just four months. Before he left, he put his sign on 1000 rupee note. Like him K. R. Puri a former Chairman and Managing Director of LIC was the only other governor to sign a 1000 rupee note.

Strangely none of the 22 Governors in RBI have been women. Maidavolu Narasimham—the 13th CEO was the first Reserve Bank cadre officer to reach the very top. He joined RBI as a Research Officer in Economic Department and served as Additional Secretary, Department of Economic Affairs and Secretary, Ministry of Finance before taking over as Governor RBI for a short stint of seven months. Later he served as Executive Director at World Bank and International Monetary Fund and was awarded Padma Vibhushan in 2000.

Apart from him the trio-- K. J. Ubesi, Shyama Gopimath and Usha Thorat brought in a whiff of fresh air and
Usha Thorat
did RBI proud. K. J. Ubesi became the first female Deputy Governor of the Reserve Bank, followed by Shyama Gopimath (second) and Usha Thorat (third). Besides being the only three women to occupy the deputy governor’s office– Ubesi, Gopimath and Thorat along with Narasimham – were in-house RBI officers who managed to bypass the hierarchical obstacle. KJ Udeshi who replaced GP Muniappan, joined RBI in 1965 and rose to Executive director level in 2001. She handled exchange control, internal administration and human resources departments. A post-graduate in Economics, diploma holder from the National Institute of Bank Management and a Certificated Associate of the Indian Institute of Bankers (CAIIB), she was co-chairperson on sub-group on banking and finance and left her mark in forex management. Like her Shyamala Gopinath a master degree in commerce, and Certified Associate of Indian Institute of Banking and Finance joined RBI in 1972 and worked in various capacities including deputation to IMF before taking over as Executive Director and later deputy governor RBI. She is now Chairperson Advisory Board on Bank, Commercial and Financial Fraud—a set up for probing bank, commercial and financial frauds after retirement. Lastly Usha Thorat, an alumnus of Lady Shri Ram College for Women and Delhi School of Economics was one of the key players behind RBI efforts towards financial Inclusion, banking regulation and currency management.

Dr. IG Patel– a distinguished economist turned civil servant was Secretary, Ministry of Finance before shifting to RBI and after retirement became Director, London School of Economics and Political Science. He played a crucial role in negotiating IMF assistance to tide over the balance of payments constraints in 1981. P. V. Narasimha Rao reportedly wanted him to be his finance minister but Patel refused.

Still this didn’t stop Rao from conferring Padma Vibhushan for his contribution to economics. Rs 1000, Rs 5000 and Rs 10,000 denomination currency notes were released during his tenure. His successor Manmohan Singh an economics graduate from Punjab University, Cambridge and the Oxford University remained Governor of RBI for three years but unlike most others his career graph only went up and up since the RBI days. Singh went on to become Deputy Chairman of Planning Commission, Finance Minister, Rajya Sabha MP from Assam and the Prime Minister of India. As Rao’s finance minister, Singh spearheaded Indian economic reforms and end of infamous Licence Raj. His successor Amitav Ghosh a former chairman of Allahabad Bank and Deputy Governor of RBI since 1982 – his stint of 20 days was the shortest tenure ever served by any RBI governor. In contrast Sir Benegal Rama Rau had the longest tenure as Governor of the RBI. He resigned just before the expiry of his second extended term, due differences with the then Finance Minister.

Dr. R.N. Malhotra, served as RBI Governor during Rajeev Gandhi years. A member of the Indian Administrative Services, he had been Secretary, Finance and Executive Director of IMF before occupying the RBI Governor’s Central Office. He left his mark on the 500-rupee note. S. Venkitaramanan who followed him was a Master's degree in Physics from University of Kerala and Master's Degree in Industrial Administration from Carnegie Mellon University, Pittsburg, USA. He had no major economic credentials but by virtue of being and IAS and former Finance Secretary and adviser to Government of Karnataka he was asked to take over as CEO of RBI. Venkitaramanan had to bear the brunt of India’s deepest balance of payments crisis in 1991. His successor Dr. Chakravarthi Rangarajan a distinguished economist who taught at University of Pennsylvania and IIM-A was awarded Padma Vibhushan India's second highest civilian award. After demitting office he served as Governor of Andhra Pradesh, Orissa and Tamil Nadu, Chairman of the Twelfth Finance Commission. Chairman of Prime Minister's Economic Advisory Council o the Chairman of the Madras School of Economics, Chennai and nominated as a member of the Rajya Sabha. Though he resigned as Chairman of PM’s Economic Advisory Council, he was re-appointed to the post.  His successor Dr Bimal Jalan was the Chief Economic Adviser, Banking Secretary and on the Central Board of Directors of RBI as the Finance Secretary, Ministry of Finance. He has also been Chairman of the Economic Advisory Council to the Prime Minister and served as Executive Director of International Monetary Fund, World Bank and Member-Secretary, Planning Commission before going on to head the RBI. Another Rupee 1000 note was introduced during his tenure. He helped to steer India safely through the Asian economic Crisis and strengthening of the balance of payments position. His successor was Dr. Yaga Venugopal Reddy, a 1964 batch IAS officer – who took over when Jaswant Singh was India's Finance Minister. He quit as deputy governor of RBI to join as Executive Director, International Monetary Fund and prior to joining the IAS used to work as a visiting faculty member at Osmania University, Administrative Staff College of India and London School of Economics. He has held the positions of Secretary (Banking) in Ministry of Finance and Principal Secretary in Government of Andhra Pradesh.

The incumbent Duvvuri Subbarao is a 1972 batch IAS officer of Andhra Pradesh cadre from Eluru, a small town near Vijayawada, Andhra Pradesh. He is a Physics graduate from IIT Kharagpur (Director's Gold Medal) and M.Sc in Physics from IIT Kanpur. He topped the IAS examination in 1972 and joined in the Andhra Pradesh cadre. He later received a Ph.D. in Economics from Andhra University. 

A closer introspection reveals that S. Venkitaramanan and the current RBI Chairman Duvvuri Subbarao have been studied Physics. Subbarao incidentally is one of the first IITians to head the RBI. More than 63 % i.e. 14 out of 22 RBI Governors-- Sir James Braid Taylor, C D Deshmukh, Benegal Rama Rau, K. G. Ambegaokar, H V R Iengar, L K Jha, S Jagannathan, N C Sen Gupta, Dr. I G Patel, R.N. Malhotra, S Venkitaramanan, Dr. Bimal Jalan, Dr. Yaga Venugopal Reddy and Dr. D. Subbarao have been IAS officers. Almost seven of them –had served as Banking Secretaries.  Atleast two of them Bimal Jalan and Dr. D. Subbarao had been part of the Economic Advisory Council to the Prime Minister while the first ICS to become RBI Governor Sir James Braid Taylor had been an additional secretary in Ministry of Finance. N C Sen Gupta had been Secretary, Department of Banking while L K Jha’s claim to fame was that he had served as Secretary to the Prime Minister.
As far as others are concerned M Narasimham was the only RBI officer ever to be promoted as RBI Governor. P C Bhattacharya was the only Indian Audit Service officer but then he had also served as Secretary Finance Ministry and Chairman of SBI. Sir Osborne Smith, K R Puri and A Ghosh were the only professional bankers to be vertically integrated. Dr. C Rangarajan, Dr Manmohan Singh and B N Adarkar – were the only economists. But then even the decision to appoint them does not appear to be purely for their economic soundness but the fact that Adarkar had served as Economic Adviser Government of India as well as Ministry of Commerce & Industry while Manmohan Singh had been Secretary Finance as well as Member Secretary of the Planning Commission. Of all RBI Governors so far Dr Bimal Jalan, on the face of it had the heavy weight credentials having served as Banking Secretary, Finance Secretary, Member Secretary to Planning Commission and Chairman, Economic Advisory Council to Prime Minister.            

This brings us to the question about the role played by the RBI Governor? Does he ever get to use the powers that he is given in the constitution? What is the use and purpose of an institution like the RBI if it is not allowed to function independently? Politicization of RBI stated way back in 1957 when Sir Benegal Rama Rau resigned before his second extended term of office expired due to differences with the Finance Minister, today it has reached a level where the government is publically using pressure tactics to push the RBI governor in corner prevent him from independently discharging his duties. According to sources in the recent past there has been occasions when North Block has tried to snub the RBI Governor by summoning and trying to deal directly with his Deputy Governors. “This is a wrong precedence they are setting,” they said.

Significantly a day ahead of RBI's monetary policy review, Finance Minister P Chidambaram could not restrain himself from claiming publically that the central bank’s mandate is not only to ensure price stability but also to promote growth and generate employment. He openly stated that he did not expect any hike in interest rates of the commercial banks. Significantly there is a wide gap between Chidambaram’s understanding of RBI’s mandate and Governor D Subbarao who maintains, “RBI's mandate is to maintain prices and financial stability and includes macro and micro-prudential regulation"

The bone of contention is that the RBI has raised interest rates and vowed to battle price pressures even at the cost of sacrificing short-term growth, while the government may want a strong growth to increase social spending and keep fiscal deficit in check. This however does not go down well with Dr Subbarao who is said to believe that, the central bank should be frees from pressure of responding to short-term developments which make it deviate from its long term and medium term goals.

In light of this Chidambaram’s public remarks after the RBI Governor met him and PM Manmohan Singh to discuss the macro-economic situation – amounts to dictating terms to RBI on what it should or what it should not do. “This antagonism between central bank and government is very functional antagonism, a healthy antagonism. I am not saying it is unhealthy, it is perhaps healthy", Chidambaram was quoted as saying.

Separately RBI Governor D Subbarao was quoted pitching for greater autonomy for central banks to function independently in order to serve the economies better. "Economies will be best served if governments ensure that their central banks are able to conduct monetary policy independently and free of fiscal compulsions. This will require, among other things, responsible and credible fiscal consolidation," he in a speech at the European Economic and Financial Centre. 

Going by past experience even though RBI has been a favored destination for finance ministry officials, bureaucrat in the finance ministry have not liked RBI taking an independent stand at variance with the ministry. Invariably this results in attempts to but the central bank down to size. And to do that what could be a better way than to cut short the tenure of its most competent and independent minded officers who dare to speak their mind. This in fact is the reason why Manmohan Singh’s successor Amitav Ghosh – a former chairman of Allahabad Bank lasted only 20 days while Deputy Governors Usha Thorat and Subir Gokarn were not granted extension. The unfortunate reality that emerges is that RBI is not constitutionally independent and the government always has the capacity to pull strings because of the fact that it appoints the governor and his four deputies. This is a very important factor as most policy level decisions are taken by Reserve Bank's Board of Directors, consisting of fourteen non-executive, independent directors nominated by the Government, Governor and four Deputy Governors. By virtue of its powers to award, reward and appoint the Government had an edge to manipulate policy.

Being a central banker is a thankless job. As Duvvuri Subbarao said in a speech at the SAARC Finance Governors' symposium, “It is important for the government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators."

Preserving financial stability requires coordination among regulators, and between regulators and governments; it is generally acknowledged that these coordination mechanisms, especially as between the government and the regulators, must function in ways that do not compromise the autonomy of the regulators," he said.

Not just Finance Minister P Chidambaram, but even his predecessor, Pranab Mukherjee demanded interest rate cuts from the RBI despite the damage caused to the economy and investor confidence. Even in the past clashes have taken place between the RBI governor Y.V. Reddy who was “fiercely independent and finance Minister P. Chidambaram over monetary policy.

In a way by denying extension to Gokarn the government seems to have sent a message to Governor Subbarao whose second term ends in September this year to behave like a “good” bureaucrat and toe the line and expect a sweatner in the end or make a noise and be shown the door. Gokarn’s successor, Urjit Patel, has been given only two-years instead of a typical three-year term. 

According to informed sources the last thing India needs is a RBI dancing to the governments tunes. A new RBI governor even an economist would need atleast six months to understand the finer nuances and complexities of the national and international and before he even settles down its time to go. The RBI’s role is to work out an appropriate monetary policy for the economy instead of the party in power or politicians. 

But this does not prevent some vested interests to demand a truncated central bank with virtually no say in the non-bank financial sector, government securities and foreign exchange market. If and when this happens the RBI might lose its say in managing the exchange rate, forex reserve, and government debt management. For this purpose a separate Debt Management Office (DMO) independent of the RBI, is being demanded under the administrative control of North Block.

The saddest part of the story is that even the RBI Act does not empower the RBI to take up a firm stand against the government pressures. It clearly states, “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.” This gives the government a legal right to give a whack on the central bank’s bottom—whenever it find the RBI growing too big for its boots.