The RBI Governor has completed one year at the office. The hype has subsided. When he took office, he came as a breath of fresh air in an atmosphere that was depressing and made depressing by the previous UPA government. Now, he is not in the centre of things. Perhaps, he would welcome it. His interview with Tamal in MINT was a good one. His comment about the eco-system that breeds corruption and deliberately bad lending decisions in public sector banks hit the mark very well:
You are demanding a huge amount of honesty in the system when you put people in charge of Rs.5-10 trillion of assets, give them absolute command, and tell them they are here for one or two years. If you give them that kind of structure—low salary, absolute command and a limited time period—you are creating a perverse incentive. The people who stay honest in the system are showing that it can be done, but the system has to be such that you recognize the temptation and you don’t require somebody to be above average in terms of honesty in order to stay honest in the system.
Also, he showed remarkable intellectual openness in minimising the role of ownership in banking.
But in the meantime, if I had absolute power, I would perhaps let one small public sector bank be privatized and see what happens. Learn from that….. To my mind, however, ownership is relatively a small aspect if you have the right governance.
This is not a flip-flop. If one read the Indian version of ‘Faultlines’ (I did it during my two months of back and forthing between Bangalore and Singapore in June-August this year), one would notice that he has been consistent. Even in that book, he described himself as a pragmatist rather than a capitalist or a free-marketer. This blog has consistently argued that economic policy-making would be a lot better if it was not bogged down by ideology. Economic policy-making has to be empirical and not ideological.
In fact, in that book, he had interestingly proposed that policies dealing with early stages of life (infants and children) could be more interventionist and welfare-oriented whereas policies dealing with adults could be more laissez-faire or market oriented. He explains the logic for this duality quite well. It makes sense.
(Postscript: I was invited to share my thoughts on his stewardship at the end of one year in the programme, ‘Macros with Mythili’. It was recorded on 3rd September. It was posted on the Internet this (19.9. 2014) morning, I guess. Here is the link. Dr. K.C. Chakraborty was the other discussant with Ms. Mythili Bhusnurmath.)