Subbarao, take a bow

In less than two weeks, D. Subbarao will be laying down office as Governor, Reserve Bank of India (RBI). At the start of his tenure and towards the end, there have been severe problems.

How will history assess Governor Subbarao’s era? A dispassionate account will surely appreciate the valiant role of Governor Subbarao in keeping the ship on an even keel.

He has heroically led the RBI with maturity and judgment, despite being aware that he would be pilloried by the government and others who survive on government patronage.

Subbarao can take comfort in the fact that, at some point of time, each of his predecessors in the past thirty years has been vilified, only to be recognised that they were the saviours.

Notwithstanding all the attacks on Subbarao — overt and covert — he can close his stint in the RBI with great satisfaction and a clear conscience.

Unwarranted Attack

Arvind Panagariya, Professor of Economics at Columbia University, brashly sums up that Subbarao’s tenure is “one of the worst eras of performance by the RBI Governor”.

He goes on to blame Governor Subbarao for not building up forex reserves when the rupee was appreciating sharply in 2009-10 and instead allowing Indian companies to borrow abroad.

Panagariya berates Governor Subbarao for raising interest rates on 13 consecutive times and that Governor Subbarao’s public pronouncements suggests that he stands behind this policy.

Drawing a timeline of real growth, inflation, forex reserves and the balance of payments current account deficit (CAD) for each Governor’s era is totally meaningless unless it is contextualised in the overall domestic and international environment.

Panagariya shows a total unawareness of the political economy of the formulation of monetary and exchange rate policies. The fact that the government holds sway over policy formulation needs to be appreciated.

Panagariya’s criticism of Governor Subbarao is uninformed, unreasoned and unwarranted. Panagariya has to familiarise himself with the process of macroeconomic policy formulation in India before coming to any reasoned judgement on a Governor’s era.

Forex Intervention

The viewpoint that the RBI should have increased its forex reserves when the rupee was appreciating has been raised by Indian analysts and opinion makers.

Panagariya should surely know that the government has an overarching role in the formulation of forex market policy.

Again, the government is not a mere bystander in the formulation of interest rate and the stance of monetary tightening or easing.

The Finance Minister has indicated that the target would be to bring down the CAD from 4.8 per cent of GDP in 2012-13 to 3.7 per cent in 2013-14 with a red line at a total CAD of $70 billion. Much of the talk has been about financing and not the reduction of the CAD. The exchange rate is an important component in attaining this target. Banning imports does not reduce the CAD.

Growth-Inflation Balance

The Finance Minister has unequivocally said that RBI’s mandate is just not price stability but growth and employment.

Then there is no pressure on fiscal policy for financial stability, growth and employment. This sort of shifting the blame to RBI is totally counterproductive.

Added to this, the Prime Minister has called for evolving fresh thinking on RBI’s monetary policy in a globalised environment. What is intriguing is that the Prime Minister has invoked the Sukhamoy Chakravarty Committee Report on the Monetary System (1985) which focused on rationalisation of monetary controls and called for monetary targeting with feedback. One is afraid that foreign investors could misconstrue this reference to mean that one should go back to the controls of the 1980s.

Governor Subbarao in a spirited defence has argued that the contention that the RBI is obsessed with inflation, oblivious of growth concerns is both inaccurate and unfair. He argues that RBI is committed to inflation control, not because it does not care for growth but because it does care for growth.

The Issue of Gold

I have said this earlier and I would unhesitatingly reiterate it, that one of Governor Subbarao’s outstanding achievements is to have boldly bought 200 tonnes of gold to diversify the forex reserves; history would etch his name in gold.

Interest Rate Policy in Retrospect

Governor Subbarao is being savagely attacked for having kept interest rates too high.

Given the inflation rate, key interest rates are negative and lowering interest rates further would only reduce financial savings and thereby widen the CAD.

Unreconstructed optimists who have an overwhelming say in policy formulation, supported by large industry and financial market participants, make a gross error in claiming that lower interest rates and lower reserve requirements would stimulate growth and lower the CAD.

The real criticism of Governor Subbarao should have been that he should not have lowered interest rates and liquidity to the extent he did in 2008-09, and that in the recent period he should have raised interest rates more sharply and tightened money. But that was nobody’s criticism then, and it is not so now.

As such, the critics of Governor Subbarao are dancing in mid-air with nebulous concepts which deviate from the basic tenets of macroeconomic policy.

Eventual Triumph

The rough and tumble of the current debate does not enable a fair assessment of Governor Subbarao’s achievements. When the definitive history of the recent period is written, Subbarao’s policies will be better appreciated.

As he rides into the twilight, he can hold his head high knowing that ultimately he made an important contribution to economic policy and that he did what was right, while being aware that he would be savagely criticised.

Let us salute Governor Subbarao.

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

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