Rakesh Mohan presided at the RBI, when the Indian Central Bank was a proud contrarian. It went for macro prudential control, when the world only looked at interest rate as a tool. It looked at multiple indicators, when other central banks spoke of only inflation targeting. The RBI curbed complex derivatives even as the world got entangled in them.
Dr Mohan's book 'Growth with Financial Stability' is useful to understand the RBI's intellectual thought process during those years. In an interview with CNBC-TV18’s Latha Venkatesh, Rakesh Mohan, former Deputy Governor, RBI, speaks about his book.
Below is the transcript of his interview.
Q: What will be the challenges for RBI in the coming few years, especially in the post crisis period?
A: Central banking is a complex activity. People in the past 15 years or so internationally have been making it too simple activity in terms of inflation targeting. They think of interest rate and inflation as a hydraulic machine, you take interest rates up, inflation comes down, take interest rate down and inflation goes up and so on. So, the whole message of the book is, ‘Central banking is much more complex, you can’t keep it simple and stupid.’ The message that I am giving is a complex one. One, we have done a great deal of financial development over the last 20 years, and we have a long way to go. So, we need to keep doing financial development, we need to keep developing financial markets. We need to keep developing our banking system and enable it to meet the needs of the real economy as they arise. Two, you will have to keep a strong eye on regulation and supervision of the whole financial, not just commercial banks, NBFCs, other financial institutions, conglomerates and so on. It doesn’t mean that you ought to do interfering supervision and regulation, but do ‘intrusive regulation,’ a phrase used in the UK by the FSA. You need to be aware, you need to do intrusive regulation, you will have to be intelligent about it, and you will have to keep thinking, changing, and evolving. Third, I have chapter on financial inclusion. The findings are somewhat different, again complex. A) As far as we can figure out, actually India is above the trend line in terms of financial inclusion, financial depth. B) On the savings side, on the deposit side, actually there is relatively good access of people to savings deposits. C) However, the banking system does need to do much more in terms of extending credit for new activities, to agriculture, non-agricultural activities in rural areas, all the new activities coming up in urban areas. So, there is a long way to go for the financial system on the financial inclusion side also. So, it is a complex message.
Q: I read that part of your chapter on the way ahead. You say this unleashing of animal spirits by removing restrictions, we have probably reached the end of the tethered. Now, we have to concentrate on public investment, empower public investment to deliver better.
A: I am glad that message has gone through. I will give the context of that. I was involved in the first industrial policy in 1991 where the whole thrust of the policy was to get government out of business and to get government out of people’s hair. That is something we keep doing. On the other hand, however, the way I look at it is that by doing all that we have empowered the private sector to exercise animal spirit, to do what they are capable of doing. At the same time, what we have not done and what we need to do now is to empower the public sector to supply the public goods and services that are essential. By public sector, I mean the government governance as a whole; I don’t mean public sector enterprises. For the private sector to operate more efficiently in the future, the government and the public sector as a whole has to enable them to do that by greater public investment in schooling, health, sanitation, rural roads, urban roads, the whole urbanisation, and infrastructure.
Q: Until then, it is almost motherhood. How do you get them to deliver?
A: It is not motherhood. We have delivered many things, when we want to do it. If we can run an election the way we run the election, we can deliver, if we want to do it. So, the point is that you have to build appropriate institutions in the public sector, in government to deliver. For example, the census has just come out; there are various reports about what needs to be done in the next 20-30 years. To do all that, you have to have strong local governments, which are connected to the people, both in the medium size cities as well as large size cities so that they can start delivering. You have to empower these institutions to have adequate technical capacity. They don’t have technical capacity.
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