The Hindu Business Line : Dr Jalan bids adieu to RBI

WHEN Dr Bimal Jalan took over as Governor of the Reserve Bank of India in November 1997, his eminent predecessor, Dr C. Rangarajan, a successful practitioner of central banking, remarked: "I was a war-time general. I hope Bimal Jalan can be a peace-time statesman". Dr Rangarajan's words have turned out to be both a forecast and a blessing.

I came to know Dr Bimal Jalan closely during my tenure as Finance Secretary in 1985-1989, when he was Chief Economic Adviser and Secretary, Banking. He had a legitimate claim to be considered for the post of Finance Secretary, but he accepted my appointment with good grace.

Coming from different backgrounds, as we did, we got on as well as two individuals with such diverse experience can. Dr Jalan worked closely with me as Finance Secretary, advising the Finance Ministry with remarkable professional competence, aided by his specially picked team of economists.

The first Budget of Rajiv Gandhi-V. P. Singh in 1985 owed a great deal to Dr Jalan's basic reformist instinct in favour of liberalisation of India's quota licence raj. He knew that the State had a distinct role to play, but within limits. He helped to initiate the first survey into the sources of black money, competently conducted by Dr Shankar Acharya.

He also initiated the acceptance of the recommendations of the Dr Sukhomoy Chakravarti on the Indian financial system — authored mostly by Dr C. Rangarajan. In consequence, he forced through the definition of deficit in terms of the Government's borrowing from the central bank in place of the earlier concepts. This was the beginning of the realisation that borrowing from the central bank had to be curtailed.

A no less significant role that Dr Bimal Jalan played in those years was the initiation of the long-term fiscal policy. He ensured that Dr Shankar Acharya and his team brought out a report on the long-term fiscal policy framework, which for the first time, clarified the concepts about fiscal deficit and set targets for the reduction and elimination of subsidies and excessive Government expenditure.

I recall, in particular, his intervention in solving a problem, which had arisen between Mr V. P. Singh as Finance Minister and Dr Manmohan Singh as Deputy Chairman, Planning Commission. The latter pleaded for a larger Plan and the former argued for a reduced effort. The compromise Dr Jalan evolved was pragmatic, although it held the seeds of future problems.

He squared the circle by including an estimate of nearly Rs 40,000 crore as resources from deficit financing, although this was not the first time such legerdemain had been adopted. That Dr Bimal Jalan lent his imprimatur to it to meet the goal of a larger Plan is significant; no less significant is the fact that an eminent economist-statesman, Dr Manmohan Singh, accepted it.

I must, however, mention that during his tenure as Finance Secretary, Dr Jalan did his best to warn both the Prime Minister (Rajiv Gandhi) and his successive Finance Ministers about the dangers of fiscal imprudence. When S. B. Chavan was Finance Minister, Dr Jalan put up a note through him to Rajiv Gandhi detailing his forecast of both fiscal and forex collapse.

This was towards the end of 1988. It was a warning to Rajiv Gandhi that he had to be prepared to take rather unpopular measures to control the fiscal situation before it was too late. Implicit also in the note was a hint that Rajiv Gandhi would be better advised to take an electoral plunge before it was too late. How one wishes Rajiv Gandhi had taken the implicit advice of Dr Jalan to go to the polls in early 1989!

Dr Jalan's regime at the RBI has been quite a successful one. True, the rise in our forex reserves owed its origin to the success of economic and financial reforms initiated in 1991 and implemented at the Bank mostly by his predecessor, Dr Rangarajan. That it is also part of an all-Asia trend is not to be denied.

All this does not, however, detract from the magnitude of Dr Jalan's success in managing the "crisis" of abundance. He has skilfully managed to keep the reserves at a healthy level and resisted the temptation to venture on "risky" exposures or on uncalled for liberalisation of the capital account. The mixture of restraint and liberalisation is characteristic and exemplary. Dr Jalan's exchange rate management has recently been subjected to criticism. Dr Jalan can claim, however, that he has been doing his best — given the limitations of a central banker can do when he is buffeted by huge inflows of forex. He has already recalibrated his interest rate policy to reduce the opportunity for arbitrage.

That he is keeping the rupee relatively strong cannot be urged as a point against him. We are in the same boat as China, which is being persuaded to "revalue" its currency by financial strongmen of the world, including Alan Greenspan. That the exports of India have done well in spite of the appreciating rupee must be Dr Jalan's parting reposte to his critics.

Suggestions about how to use the reserves for greater investments in India's industries are interesting, but may be impracticable. The issue of sale of dollars for rupees and consequent further appreciation of the rupee still remains.

It is a reflection of the change in times that Dr Jalan came in at a juncture when the rupee was falling and under threat and his best efforts were directed towards preventing the rupee from crashing. Today, if at all he is criticised by some, it is for keeping the rupee too high.

That he preserved his equanimity at both times is a tribute to his intellectual qualities. Earlier, he resorted to the conventional central banking tools of rise in interest rates and restrictions on currency trading to bring the markets to a stable phase.

As he departs from his office, he has to answer the question as to why the rupee is remaining high. This sharp change in the attitude of the markets is itself a tribute to Dr Jalan's stewardship.

Dr Jalan should also be credited with effecting a substantive change in the RBI's stance on monetarism. He has successfully rid the bank of its ideological shackles on the role of monetarism as a main guiding principle. It was a happy coincidence that Dr Jalan's entry as Governor came about at a time when the RBI's internal research was disclosing flaws in the assumed stability of the money multiplier.

While this may not be music to the ears of diehard monetarists, it is a fact that Dr Jalan's pragmatic rejection of ideology had a great deal to do with his recognising that inflation is not always and everywhere a monetary phenomenon. He was not disturbed even by occasional spikes in inflation from his policy of reducing interest rates and liberalising credit flow. Over Dr Jalan's tenure, he has substantially liberalised the RBI's policy in regard to pre-emptions, including the level and treatment of cash reserves. While his liberalisation of interest rates and credit policy synchronised with a similar global trend, one has to thank him for thinking out of the box.

It is especially apposite that he started doing so well before Milton Friedman himself became an apostate. He recently stated in an interview with Financial Times (June 8, 2003) that he (Milton Friedman) may have been misguided in his overemphasis on monetarism.

He is quoted as saying: "The use of quantity of money as a target has not been a success. I am not sure I would as of today push it as hard as I once did". A dramatic confession from the Apostle of Monetarism! That, however, came much after Dr Jalan discovered that money supply was not everything.

While Dr Jalan has not completely given up emphasis on money targets, he tempered them with an emphasis on the goals of growth and the need for higher investment. As we have seen, Dr Bimal Jalan is an advocate of higher growth targets. He has tried to bring out his successive Credit Policies to manage the needs of a growing economy. His interest rate policies have also served the same purpose. I hope that in his future roles also, important as they will be, he will carry the same commitment to the goal of a more prosperous India — a goal of growth with stability.

He is innovative enough to fashion suitable economic policies to reach these desirable, and in my view, achievable goals. Dr Jalan has demonstrated this by his persistent endeavour as Governor to raise the levels of investment in the economy, within the constraints of monetary stability.

The pragmatism with which he has pushed for liberalisation of banking and Credit Policy is in tune with Dr Jalan's intellectual make-up as an economist and a person. He is a truly "political" economist in the right sense of the term. No ideologue, he, is not a prisoner of dogma. He is a thinking man's economist, a pragmatist. Here is wishing him a fresh successful innings in the new playing fields he has chosen.

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