Making RBI’s professional skills comparable to the best in the world will not be easy because those who have to be supervised the most – the PSBs – are owned by the govt, which also owns the RBI
It’s not often that Reserve Bank of India (RBI) governors are reappointed for two terms. But when they are, it means just one thing: they get along perfectly with the finance minister.
In the past 20 years, Bimal Jalan (1997-2000) and D Subbarao (2008-13) have been appointed for a second term. Now we have a third, the incumbent Shaktikanta Das. It’s a wise decision because whatever the prejudiced may say about him, he understands what the job requires: work in tandem with the government, not in confrontation with it.
The professional economists who were appointed to the post after Subbarao had lacked that quality. They misinterpreted central bank independence when it is owned by the government. In that sense, Das and Finance Minister N Sitharaman are like Jadeja and Dhoni: their running between wickets for the quick singles and twos is perfect. That’s a result of understanding, anticipation and cooperation.
It’s also a fact that every governor who was reappointed for a second term had to deal with a major crisis as soon as he took up his post. Jalan had the Asian financial crisis of 1997-99 to contend with as soon as he took over. Subbarao also had to deal with the global financial crisis of 2008-11: It hit in the week he started.
Jalan enjoyed the confidence of the then finance minister Yashwant Sinha to such an extent that the latter never interfered. Subbarao worked well with Pranab Mukherjee, at least until his second term was granted. He then became critical of the government’s fiscal profligacy. Subbarao started with a crisis and ended with one too, the near-balance of payments crisis of 2013. In part he had only himself to blame for not being able to rein in his minister.
And now Das has had to deal with the coronavirus crisis. The only difference is that during 2018 he had yet another crisis to sort out: banks’ NPA crisis. But it has been handled so smoothly that no one even remembers it now.
Das’ luck and legacy
Das has had, in some ways, the best of both worlds: a largely hands-off prime minister and a finance minister who tells him what to do, but not how to do it.
This is not to say the two have not had their tensions. The most notable of this was caused by the abject failure of the RBI between 2008 and 2013 as banking regulator. Subbarao, sadly, had taken his eyes off the ball. A longer-term problem that Das has had to deal with is that of staff morale, most notably of the research department which is crucial to the RBI’s economic management.
The years after 2009 saw a huge diminution in the role of the research department as successive economist deputy governors who headed it devalued its role. However, Das’ biggest challenge is the task set by the finance minister: upgrade the skills of the RBI staff. It will be a work-in-progress for a long time because he has met with stiff resistance from the unions.
That is why his real legacy, which he will have to craft in his second term three years, will be to make the RBI’s professional skills comparable to the best in the world. That’s what he needs to be remembered for. This is not going to be easy because those who have to be supervised the most – the public-sector banks – are owned by the government, which also owns the RBI.
And here lies the problem: in order for regulation to be effective, all but one or two of the nationalised banks must be privatised so that political interference is eliminated from the sector as a whole.
So, whether Das succeeds or not will depend on the person who has set him the task: the finance minister.