PM gave RBI Guv a pat on back, not rap on knuckles

Headlines yesterday seemed to suggest that Prime Minister Manmohan Singh had a faceoff with Reserve Bank of India (RBI) Governor D Subbarao over the conduct of monetary policy. The Economic Times said that the PM and Subbarao “sparred” over RBI policies, and The Times of India said the PM wanted “new thinking” in the RBI - indirectly suggesting the Subbarao’s thinking was of the old type.

This writer, who was right there when the “sparring” allegedly happened, would like to put the record straight and in the right context and perspective. The occasion was the release of the book The History of the RBI, Vol 4, at the PM’s residence on Saturday.

[caption id=“attachment_1043201” align=“alignright” width=“380”]  PTI[/caption]

The PM’s exact words were something like this: “The Reserve Bank has done the country proud - the role which it has played in shaping the monetary policy, in shaping the credit policy, and, if I remember correctly, in also influencing, particularly, the supply of credit to rural areas. The Reserve Bank has served our country with great distinction. But I venture to think that the best is yet to come.”

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If this sounds like “sparring” maybe the dictionary meaning of the word “spar” needs to change.

And now to the point where he asked the RBI to “revisit” some issues. This was interpreted to mean the PM didn’t like what the RBI did over the last couple of years.

“When I became the Governor, I had no great knowledge of what monetary policy is about, and therefore, I asked the late Prof (Sukhamoy) Chakravarty to head a committee to look at the functioning, the goals, the means and measures of monetary policy, and that report was pretty influential for a period of time. And I would venture to think that the time has come when we should revisit some of those areas - the possibilities and limitations of monetary policy in a globalised economy, in a fiscally-constrained economy, I think that is one subject. But macro-economic policy-making, targets and instruments, I think, is another area, where I feel fresh thinking is called for, and I sincerely hope that the Governors of the future, particularly Dr Raghuram Rajan, will attempt to revisit some of these difficult areas.”

Asking for a rethink on the seminal Sukhamoy Chakravarty report of the eighties can hardly be reduced to the finance minister’s recent and less-than-elegant efforts to deflect his government’s failures on to the RBI in Parliament. Clearly the PM was speaking like a senior economist, a policy maker of 40 years’ vintage, and an elder statesman on how to chart the future course of policy. Note his words: “I sincerely hope governors of the future ….will revisit some of these difficult areas”. Governors, he said, not governor. His reference clearly was to the decades ahead, not the next credit policy.

That he harboured no rancour with the RBI is obvious from these words too: “As I said, the Reserve Bank has served our country with great distinction. But as I venture to think, the best is yet to come. With these words, I wish Dr Subbarao the best. He has served the Reserve Bank and our country with great devotion.”

Does the reference to Subbarao serving “our country with great devotion” sound like a grumpy putdown?

Of course, we need to revisit our goals. Is economic growth of 8 percent possible, given the country’s infrastructure? Will such growth willy-nilly lead to high inflation? Should we, therefore, scale down growth targets till we correct infrastructure bottlenecks? What then should be the intermediate growth target?

And more broadly, should we look for inclusive growth before we look for rapid growth? How much growth can we sacrifice for inclusiveness? Can we, in the cause of growth, ignore the fundamental rights of tribals and the poor?

I would venture to think the PM was referring to these questions when he called for “fresh thinking”.