The Hindu Business Line : Tasks before Dr Reddy at RBI

DR Y. Venugopal Reddy is taking over as Governor of the Reserve Bank of India (RBI). I had an opportunity to work with him during the tumultuous days of the Gulf Crisis in the early 1990s. He was then Joint Secretary in the Ministry of Finance. He and I, as Adviser (International Finance) in the central bank, were members of a two-man Policy Group on External Debt Statistics of India, appointed by the then Governor, Mr S. Venkitaramanan.

It was necessitated by the fact that our external debt figures were somewhat cloudy. There were differences in the data among institutions such as the International Monetary Fund and the World Bank.

On top of that, the figures put out by the Government of India and the RBI also did not tally! And the differences were too large to be ignored.

Assisted by a Task Force manned by economists and statisticians of the RBI and the Finance Ministry, we were able to solve the mystery of the missing billions and recommend measures for producing reliable statistics.

What endeared Dr Reddy to me was his informal way of working without wearing the airs of an IAS officer, which one normally expects, and his response to suggestions and corrections without standing on false prestige. He inspired confidence in his colleagues by reposing trust in them.

When I was in Bishkek in 1993 as Operations Adviser to the Chairman of the National Bank of Kyrgyzstan on an IMF assignment, I was pleasantly surprised one day to receive a fax message from him. He was good enough to inform me of his promotion as Additional Secretary in Finance Ministry.

Even then he had all the potential to be the Deputy Governor (DG) of the RBI, given the high esteem in which he was held both in North Block and on Mint Street, and his ability to get along well with everyone. Of course, he later distinguished himself as a Deputy Governor.

Dr Reddy is inheriting a happy situation in terms of abundant forex reserves, attenuated inflation rates and an amenable banking scene, which seems to be manageable with regulations in place for dealing with the problem of non-performing assets.

This is in contrast to the position when Dr Bimal Jalan became Governor six years ago. He had to go through the baptism by fire in facing the turbulent forex markets. That he came out with success speaks volumes for his ability to learn the ropes quickly and the fact that central banking is neither a science nor an art but a craft.

Perhaps Dr Jalan's experience with the forex flare-up conditioned his mind to giving primacy to the external value of the rupee over the internal price level, as he himself once confessed. Still, it did not prevent him from relaxing exchange control to such an extent that, for all practical purposes, today India has full convertibility.

The liberal forex limits allowed for various current account transactions (for instance, $10,000 for travel) without any documentation do provide adequate scope for transferring capital to other countries. The small irritant of the inability of Indian residents to invest abroad may also be removed before long, with suitable safeguards to avoid capital flight.

From the way the authorities are looking at the accumulation of forex reserves, one gets the impression that it is considered a nuisance rather than a boon. Given that attitude, some capital flight following convertibility on capital account may not be altogether unwelcome, especially if it arrests the appreciation of the rupee. However, there have been instances when convertibility on capital account has actually led to net capital inflows.

Indonesia embarked on convertibility on capital account before doing so on current account, attracting large-scale foreign investments. Dr Reddy may want to devote some attention to the removal of the remaining restrictions on forex transactions. It can be done any time without waiting for the Budget or Credit Policy.

India has the second largest staff in a central bank after China. Dr Reddy should take the mechanisation and computerisation of RBI operations to its logical level. There have been tremendous strides in this regard during the time of Dr C. Rangarajan and Dr Jalan. Still one finds long queues in the RBI's banking hall in Mumbai.

There is a great need for Currency Verification and Counting (CVC) machines at the counters dealing with the public. The clean note policy initiated recently should be pursued with vigour. But, more important, there is a great scope for downsizing the staff employed in the Issue Department on such mundane tasks as the counting and verification of currency notes.

There has been some mechanisation in this area. But it has to be intensified so that the staff released can be gainfully employed in such areas as supervision. In this connection I recall a visit to the Reserve Bank of Australia, accompanying the then Governor, R. N. Malhotra, while attending a conference in Sydney in 1987.

We found that, with the help of CVC machines, the function of supplying currency to the entire country was managed by a staff of about half a dozen, with one supervisor, all operating out of a small room! Mr Malhotra remarked then that it would be difficult to replicate this in India because of opposition from the trade unions. But in recent times, I have found a mellowing in the attitude of trade unions, which seem to recognise that India should not lag behind in technical advances as, otherwise, in the final analysis, it would be a loss for everyone, including the bank staff.

Many more tasks face the new Governor. But there is one suggestion that I would like to reiterate. It is to give up the antiquated practice of bi-annual busy and slack season announcements of Credit Policy. It just provides photo opportunities and some publicity for officials in the media.

The practice was relevant when there was a marked seasonality in agriculture and in monetary and banking variables. It is no longer so. With the predominance of the service sector in GDP and the diversification of agriculture and industry, the economy is busy throughout the year.

The Credit Policy announcements keep the market unnecessarily on tenterhooks for many weeks, delaying important investment decisions. Despite statements to the contrary, there has been no change in the underlying convention of announcing policies with the onset of summer and winter. Policies cannot wait for an appointed day. They should be available to the public as and when they are made.

No other country follows the Indian procedure. The mid-term review of developments in the economy could be issued as a press release. There is also a case for reviving the publication of quarterly reviews of such developments in the RBI Bulletin.

(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI.)

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