The dialogue of the deaf

The title of the blog post is the title of the book that TCA Srinivasa Raghavan had written. It is coming out soon. Anand Ranganathan of ‘Newslaundry’ had a conversation with TCA recently on the central bank independence, especially in the light of the needless heat and dust generated in recent weeks on RBI independence (or, the lack thereof).

I had read TCA’s pithily written short ebook, ‘A crown of thorns’.  That was a delightful monograph. I did not know that and I still do not know how one can pack so much information and insights in such a short work. Full of interesting anecdotes and nuggets of history.

The manner in which RBI got around to becoming responsible for fixing the daily exchange rate was interesting. That two ICS officers decided on the issuance of ad-hoc Treasury bills was amazing as was the information on R.N. Malhotra’s premature (said with the benefit of hindsight) liberalisation of deposit rates.

Regardless of whether the central bank has got operational, functional, managerial and decision-making independence, in the end, it still boils down to successfully managing the government. Conflict is inherent in the RBI Governor’s job.

Now, let us come back to this conversation that Anand Ranganathan (AR for short) had with TCA Srinivasa Raghavan (TCA for short).

My comments on the conversation in no particular order of importance:

(1) I liked the interview. There was much that I agreed with and a few I disagreed with, not just with TCA, of course.

(2) Good to hear TCA state forthright that the British colonial rulers were bandits and hence, ‘terrible fellows’.

(3) TCA is terrific with remembering dates and years. He also did a very good job of how central banks evolved from their origins as financiers to the Sovereign. There is an excellent paper  that traces the origins of central banks. Although the exposition of this paper was for a different intellectual purpose, it is very useful reading for the rest of us to get the historical perspective on central banks.

(4) TCA was also very right to dismiss the canard of credibility that only the financial market types are interested in. In their view, a central bank is credible if it did what they expect it to do or want it to do or what they judge as the correct thing to do. Otherwise, not. It is BS. TCA was very right to call it out. In fact, the interviewer should have also asked him about this so-called Central Bank Transparency: ‘basically, do not do anything that I don’t expect’

(5) The interview was an hour long. AR spent 50% of it on demonetisation (three-month vintage) while the interviewee had written a book on the 82-year history of RBI and Govt. of India relationship.

(6)  I would have to disagree with the interviewer and the interviewee on demonetisation. We simply do not know or would not know enough now to make an informed judgement on it. Most of us are under tremendous social (subtle and self-imposed in most cases) pressure to subscribe to the prevailing narrative which, in turn, was heavily influenced by the chaos of the distribution of the currency notes. As TCA himself noted later, that would be forgotten in a few months’ time. If it is indeed the case, then how can we let that influence our judgement on demonetisation?

(7) In theory, TCA is correct that, to do some of the things on chasing corruption or black money (he said that the GoI should address tax rates to handle black money and cited a figure of 52% as the effective tax we pay), one did not need demonetisation. But, nothing like a ‘crisis’ – induced or inflicted by others – to focus minds. That is what the Government’s action has done. That is what I mentioned in my Bloomberg Quint interview with Ira Dugal.

(8) I am glad that TCA mentioned that RBI had no choice but to comply with the government. Really, far too much has been made out of RBI ‘surrendering’ meekly to the government as though RBI had other options.

(9) The FSLRC report is an important development in the relationship of RBI-Government relationship. Although TCA said that he would not want to say something without evidence, AR should have asked him to share his perspectives on things that he was comfortable sharing. The sole raisio d’ etre of the report was to undermine RBI and in 2012-13, I had written extensively on it.

(10) TCA is right that it is the government that has to decide on the ‘length of the arm’ in its relationship with the central bank. An enlightened government would allow and even encourage some institutions to behave as intellectual ‘check and balance’ on it whereas the founding fathers had created other institutions that serve as watchdogs in terms of propriety, governance, etc. The government should allow RBI, the office of the CEA and the NITI Aayog to play that role – the intellectual counterweight and sounding board, occasional devil’s advocate, etc. I had written this in April 2016 when a controversy broke out over Raghuram Rajan’s ‘one-eyed king’ remark:

It is one thing to take offence when government policies are criticised publicly by officials who are part of the government but it is another thing to expect everyone to be a cheerleader for the government and the country. This government rightly took credit for strengthening the federal framework by devolving substantial resources as per the Fourteenth Finance Commission recommendations. It followed it up in this year’s budget with devolution to local governments. These things strengthen the institutional foundations of the democracy. Similarly, it should boldly announce that it would expect, encourage and empower (as the case may be) the Chief Economic Advisor, the Vice-Chairman of NITI Aayog and the RBI governor to act as ‘risk managers’ and ‘devil’s advocates’ for the government. Among other things, their roles should be to ask questions, explode myths and puncture halos. The government should be grateful for the respectable voices from within that warn about risks and caution against disproportionate euphoria. The great Tamil saint Thiruvalluvar has said that such a government cannot be defeated by any enemy.

In this regard, TCA was also very right to point out that RBI independence and autonomy do not have the same meaning as it has in western nations, when 75% of the banking system is in government hands.

Coincidentally, as I was writing this, a friend shared with me Wolfgang Muenchau’s article in FT two days ago on the independence of central banks. He reckons that it might be an idea whose time is past. Perhaps, in the Western context. This is one more proof, if it were needed, that most things in economics are a function of context. Thus, central bank indepedence can be considered a fad that is fading away with time, as fads do.

But, I think, in the Indian context, central bank independence is a goal that is worth pursuing, including for the government.

(11) I am glad that TCA was categorical about the Economic Survey and what he thought of it. There is nothing wrong in the Economic Survey having the imprint of the CEA’s personality. But, that cannot be at the cost of its usefulness as a policy document. Or, put differently, such personal imprint should be within the framework of its usefulness to the government and policymakers.

(12) The last question and TCA’s answer were both good. The question was whether one needed a central bank to set the price of money. After all, markets are supposedly better in setting the price – based on demand and supply.

One of my friends – Srinivas Thiruvadanthai – always said that central banking was central planning. TCA responded well. As long as there is a government that had certain responsibilities – including fighting wars – then one needed a central bank which is not in the control of private (market) hands.

If societies were organised as free-standing and self-governing communities, I doubt if a central bank would be needed.

Otherwise, markets can do that job better. Recommend reading George Cooper’s ‘The Origins of financial crises’ – a short book. Title is specific but the content is broader.


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