Subbarao's successor: Why selection of RBI governor should be more transparent

The appointments process to top jobs in the Government is beset by intrigue, shrouded in opacity and usually smallin outcome. There are few jobs in the system of the government that match the importance of RBI Governor. Unfortunately, the process of appointment doesn’t reflect the importance of the post.

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Finance Minister P.Chidambaram has ended one element of uncertainty in the process by telling The Economic Times that incumbent D. Subbarao is not in the running for an extension when he completes five years in office on September 5. But the “search” for a successor, which the minister says is on, is not transparent. The least Chidambaram could have done was to heed the advice of the Financial Sector Legislative Reforms Commission, appointed by his own ministry to streamline the functioning of India’s financial sector. The Commission, in its draft report , now the subject of public discussion and feedback, has clearly recommended that the search for top jobs at all regulatory bodies (including RBI) must be fully transparent. The FSLRC recommends that the Government constitute a selection committee which would then recommend a three-names shortlist to the Government. The search committee would be chaired by a Government representative and contain one other Government nominee. However, the majority membership of the committee must consist of three experts (with no links to Government) who are well versed in matters of finance, economics, law and public administration. That is meant to act as a check on Government officials pushing their own tribe for top jobs. The committee’s deliberations will be made public. They will have to explain why each of the shortlisted candidates were chosen.

Unfortunately, Chidambaram has constituted no such committee to suggest names of candidates to succeed Subbarao. At the very least, the Finance Ministry should have advertised the position, in India and abroad. While it would be expecting too much for any Indian Government to consider foreign nationals for the RBI job (the UK recently appointed a Canadian as Governor of the Bank of England), it makes complete sense to solicit the candidature of Indian nationals from the worlds of academia or private sector (banking, investment banking) or international organizations (World Bank, IMF). That would only bring diversity and richness to a shortlist which would otherwise consist solely of economists serving in the Government system (eg. Raghuram Rajan, Saumitra Chaudhuri) or bureaucrats serving in the Finance Ministry (eg. Arvind Mayaram, Sumit Bose).

The trouble is that the Government is uncomfortable with people from outside the system who may be too “independent” of the political executive. But there is a counterpoint to that. Has Subbarao, who was serving as Finance Secretary when he was elevated to RBI Governor, followed the directions of the Finance Ministry and the PMO? The plain answer is no. Retired bureaucrats, once esconsed in independent jobs, tend to strike back at the Empire. Look no further than former CAG Vinod Rai. So the old belief that a person from within the system will be more malleable ought to be junked.

The RBI Governor performs several critical tasks. By setting interest rates and controlling liquidity, he or she is a crucial macroeconomic manager. He or she is also the regulator of the entire banking system. If that weren’t a large enough domain, the RBI Governor also manages Government debt. Of course, there is a large RBI bureaucracy which assists the Governor in these tasks, but the way RBI is structured, a lot of power vests in the single person at the top. So it is absolutely critical to choose a person on merit rather than other criteria like loyalty or malleability. There is no better time to favour merit than now when the economy is in deep crisis, when several economists are warning of a return to 1991. A candidate chosen on merit would command a credibility that is so desperately needed as the macro economy flounders and the rupee journeys to new lows almost every day. Of course, the final choice will still be political (as it should be in a democracy), but all the shortlisted candidates would meet the basic criteria in merit.

Ultimately, of course, there is an even bigger task at hand than managing a short-term crisis. The RBI, a monolith, prone to group think and resistant to new ideas, needs to be reformed. Again, the FSLRC has several recommendations which the Government ought to adopt. The function of managing the Government’s debt is a clear conflict of interest with the RBI’s mandate to set interest rates. It must be hived off into an independent debt management office. The task of setting interest rates must be assigned to a monetary policy committee (of internal and external experts) rather than be vested in the sole hands of the RBI Governor. Finance Minister P Chidambaram has explicitly or implicitly agreed with these suggestions. But change would require a Governor who is willing to abdicate some of his immense powers. In India’s system of Government any “insider” will frown at the very thought of ceding turf.

Reform of the RBI isn’t the kind of big ticket reform that will win votes. On the other hand, it isn’t a controversial reform that will cost votes either. A crisis is an opportunity. Manmohan Singh and P Chidambaram have a unique opportunity to reform the RBI. They even have FSLRC’s blueprint. They just need to summon the will to appoint, with transparency, the best man (or woman) as RBI Governor on September 5.