It is eerie how each decade, with one exception, 1960, has ended badly for the economy — a pattern that has been maintained throughout the 77 years India has been independent. 1949 was the immediate aftermath of the Partition and the British decision to cheat on its sterling obligations; 1969 was the year the Congress party split; 1979 is described above; and as we shall, in 1990, India almost went bankrupt.

The years 1999 and 2009 were not much better. In both the economy performed very poorly. Most annoyingly for the Indian economy, the 1970s ended very badly. Inflation shot up at one point to 27 per cent; the forex reserves dwindled to alarmingly low levels; 1979 became the worst drought year in a century; and political instability came back with a vengeance with there being only a caretaker government from July 1979 to January 1980.

Indira Gandhi came back as Prime Minister in January 1980 and almost immediately she agreed to approach the IMF for a loan under the Extended Fund Facility (EFF) which is a soft loan window of the IMF with a longer repayment period of three or four years for countries that have run into a balance of payments problem because of what the IMF calls ‘structural weaknesses’. The loan comes with strings attached, the most important of which is that the borrower must give up its old policies of state control. From the IMF’s point of view this was a ‘walk into my parlour situation’ because it had been trying since 1966 to get India to change its statist policies, to no avail. From India’s point of view, the loan was needed so that it would be able to buy Mirage fighter aircraft from France.

The US knew what India was up to and tried to block it. But eventually India managed to get the approval of the IMF board. To do so, it made several commitments about ‘structural reform’. The Indian government’s letter to the IMF was leaked to The Hindu . Just who leaked it is not known but there are various theories, (including one that The Hindu ’s correspondent there, a Brahmin, befriended the Brahmin cook of a Brahmin official).

The aftermath There was the usual political storm, led by the Left but nothing came of it. Indira Gandhi stood firm domestically and agreed to do as bidden by the IMF. But in her usual way she wriggled out of the commitments.

Not just that. She also declined the last tranche due in 1983 because the next year was an election year and she could not afford the strict fiscal discipline that India had been made to observe since 1982. In actual fact, there was a lot of fiscal subterfuge. India also carefully hid its actual level of reserves. The result was that it ended up with the Mirage fighters and the IMF didn’t quite get what it wanted.

For that it would have to wait till a really big balance of payments crisis hit India in 1991. But in 1981, the emphasis was on containing inflation, which meant a very tight monetary policy, stringent credit policies and targeting, if not achieving, a lower revenue deficit which had surfaced after a very long time in 1980.

The RBI, under Patel who knew about the secret negotiation with the IMF, really tightened the monetary screws, raising the CRR and the bank rate. The SLR was also raised to 35 per cent. By September 1981, however, it was clear that these measures were not working and in October that year, Patel tightened money even further by raising the CRR from 7 to 8 per cent in the busy season. He was told by many not to be so severe but he went ahead anyway to make sure that the IMF’s ceiling on money supply growth was met. It was, in February 1982.

Indeed to meet the IMF’s requirements on expenditure ceilings, the government was even forced to ask public sector companies to deposit their excess cash in the treasury instead of leaving it in the banks because deposit growth in the first half of 1981 had been very high, leading to higher-than-needed credit growth.

The RBI’s official history says that the government had decided to undertake structural reform even before being told by the IMF to do so. But another theory is that it decided to only pretend that it was doing so because it badly wanted that EFF loan to be able to use its own foreign exchange for the Mirages.


Inflation, growth and RBI But in 2008, the RBI under its new governor, fresh from heading the Finance Ministry, was suffering from a joined-at-the-hip syndrome. It would take Subbarao another three years before he started to act independently by which time it was too late.

Between 2008 and 2011, however, when he got a two-year extension, the RBI was fully compliant with the government’s requirements, requests and requisitions. It was almost as if he was in complete awe of the government.

The three men who called the shots were all at the peak of their powers — Prime Minister Manmohan Singh who was widely credited in 2009 with having won the general election; C Rangarajan, who headed the Prime Minister’s Economic Affairs committee (PMEAC) where Subbarao had been his number two; and Montek Singh Ahluwalia who headed the Planning Commission and who was, as Manmohan Singh’s daughter would later write, almost like his son.

Subbarao was practically bludgeoned into following a very loose monetary policy as part of the ‘stimulus’. A combination of domestic political, global and personal factors led India to inflate the economy to such an extent that in 2010 its GDP growth almost reached the magic double-digit figure of 10 per cent.

Prices were growing faster than output, and the product gave the higher growth rate. The birds would come home to roost in Subbarao’s last two years as governor in 2012 and 2013. Inflation went into double digits, especially food inflation. Industrial growth had come at a cost to the poor, who would retaliate in 2014 by voting the Congress government out and a BJP government in with a simple majority for the first time since 1984. If there was one thing other than corruption that contributed to the Congress defeat — it crashed to just 44 seats in 2014 from 208 in 2009 — it was inflation.

The RBI played a major role in that denouement and Subbarao’s compliant attitude during his first term as governor will have to be counted as an important factor in it. He overlooked the most important charge that the RBI Act makes on the RBI — inflation control.

It now turns out that he also failed in controlling the banks in their lending spree to big borrowers who would subsequently virtually refuse to return their loans, running into several lakhs of crores.

Changing factors The attitude of the RBI between 2009 and 2012 is reflected in the speeches its governor and deputy governors were making. On the one hand there was a dramatic increase in the number because the old practice of only the governor and deputy governors speaking in public was given up, and even executive directors started to speak on the public fora, resulting in considerable confusion.

On the other hand, they spoke about everything except the main problem — inflation. Even when they did speak about it, it was on a defensive note, wherein they sprayed a lot of academic red herrings.

The fact their old adversary, the government, which was leading them by the nose, was completely overlooked. The mode was more justificatory than combative, accommodative than adversarial. It was as if the RBI had collectively decided to bury Reddy’s ghost. In effect, the RBI became the most articulate advocate of fiscal expansion and monetary laxity.

In that major sense, the years 2009-11were amongst the most inglorious years of the RBI. Soon after he got his second term in September 2011, Subbarao started becoming critical of the government.

He spoke repeatedly about inflation, growth, politics, the laws of economics and the laws of physics which they were supposed to resemble but didn’t. Reams have been written about this sudden turnaround. They do not, however, take away from a simple fact: he was trying to shut the stable door after the horses had bolted.

The economy went into a steep downward spiral from which it is still to recover. Not to put too fine a point on it, despite his best intentions and efforts, it must be said that Subbarao failed to do his job. He allowed both prices and bad loans to rise, thus failing on the macro side as well as the regulatory side.

These two are the most important tasks which the RBI is charged with. It may sound very harsh but to the extent that a person must be judged by the outcomes he delivers, it is true. You judge a batsman by the number of runs he scores and a bowler by the number of wickets he takes. Nothing else matters.

TCA Srinivasa Raghavan began his career in 1975 as the economics editor at Macmillan India. In 1980, he switched to journalism. Over the next thirty-three years he worked with the Free Press Journal, Eastern Economist, Financial Express, Indian Express, Business Standard and The Hindu BusinessLine. Between 2004 and 2011, he was a consultant with the RBI.

Extracted with permission from Tranquebar