S S Tarapore

The importance of being Prof Reddy

| Updated on: Feb 24, 2011
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The former RBI Governor's book attributes the global crisis to a climate of competitive deregulation in the industrialised world. Apprehensive of overheating, he argues that the benefits of growth trickle down slowly, while inflation hurts the poor instantly.

Dr Y.V. Reddy was Governor of the Reserve Bank of India (RBI) from 2003 to 2008. During his tenure he had more than his fair share of brickbats. But once the financial crisis hit the global economy and India weathered the storm with minimal damage, his percipient policies were acclaimed, both in India and globally, as being oracular.

As an interlocutor, he participated vigorously in the international debate on the global financial crisis and in the designing of a new international financial architecture. This voluntary role was, in some ways perhaps, more distinguished than his now acclaimed role as Governor.

Professor Reddy's book Global Crisis, Recession and Uneven Recovery , published by Orient Blackswan (2011) has already received media attention which is necessarily instantaneous and short-lived. However, even those who have read the book carefully would find it difficult to absorb the leitmotif of this seminal work which is breathtaking in its expanse.

EXCESSIVE DEREGULATION

In a foreword Andrew Sheng says, “India is a land of many talents but it was in the stars to have central bank governors of the calibre of Professor Reddy.”

Sheng commends Prof Reddy's concern for the poor, as in the run-up to the recent bubbles too much attention was devoted to becoming rich, with an inclination to forget the under-privileged.

Examining the causes of the global crisis, Dr Reddy argues that least regulation was considered to be the best and self-regulation was equated with optimal regulation. In some industrial countries development of the financial sector was co-terminus with their national interest which resulted in a race to reduce financial sector regulation. Dr Reddy attributes the global crisis to regulatory capture of the government by market forces. While the achievements of the financial sector were glorified, the penalties imposed by regulators were underplayed.

Respectability was accorded to unfettered market forces which fostered untrammelled greed. Human values changed which elevated markets to the status of God. In the all-pervasive climate of “greed” Dr Reddy recalls Gandhiji's statement that there is enough on this earth to meet the needs of all but not the greed of all.

It is fortuitous that the global crisis occurred before India embarked on an irrevocable direction of excessive deregulation of the financial sector.

Dr Reddy recalls the pithy statement of Dr Mervyn King, Governor, Bank of England, that banks are global in life but national in death — in effect, the buck stops at the national government to pick up the losses. Globalisation of finance without globalisation of regulation has inherent problems, but experts are unanimous that there is unlikely to be agreement on global regulation.

Discussion on the Tobin Tax (i.e. on financial transactions tax) has now emerged on the agenda at international fora. In 2004, Governor Reddy, in a speech referred to the need to study Tobin tax kind of measures.

There was an uproar both in financial circles and government and Governor Reddy was forced to recant. It must be of great satisfaction to Governor Reddy that he was in the avant garde . Dr Reddy suggests that individual countries may find it appropriate to introduce such taxes without waiting for a global consensus.

Dr Reddy's assessment is that the potential output growth is in the range 8.5 -9.0 per cent.

The concept of overheating raises hackles in India and when Governor Reddy referred to “over-heating”, the government advised him not to use this term — a case of macho spirits prevailing over hard realities.

Governor Reddy followed a monetary policy suited to an ‘over-heated' situation without referring to the forbidden word!

Unequal gains

7.Stressing the need for stability in the EMEs, Dr Reddy argues that the gains from growth trickle down to the poor after a time lag but the pains of inflation visit the poor instantly.

Responding to the critics on the excessive build-up of forex reserves by the EMEs, Dr Reddy argues that greater blame should accrue to the rich who consumed more, rather than the poor who worked harder and saved more.

In dealing with the threat to stability, monetary policy is the first line of defence, particularly when governance is weak or absent — this was amply borne out by the Indian experience in 1979-80, 1990-91 and 1995-96.

While analysis is focused on what went wrong in the major industrial countries, not enough attention is given to understanding why countries like Canada and Australia came out relatively unscathed from the global crisis.

In sum, one just cannot do justice to the rich expanse of this book. Suffice it to say that this book is a lexicon on global and national finance which should be mandatory reading for all policymakers, regulators, academics and others interested in the financial sector.

(The author is an economist. >blfeedback@thehindu.co.in )

Published on March 25, 2011

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