The author of the book under review Dr.Rakesh Mohan was the Deputy Governor of the Reserve Bank of India twice and is presently the Professor of International Economics of Finance, School of Management, and Senior Fellow, Jackson Institute of Global Affairs, Yale University. He is also Senior Research Fellow of Stanford University . We had reviewed his earlier book “Monetary Policy in a Globalized Economy”. Over a hundred countries, advanced, emerging, and developing alike, have suffered from financial crisis over the past 30 years: India is among the few which have not. That was the motivation for this book which provides an understanding of Indian macroeconomic, fiscal, monetary and financial policies as they have evolved over the years, and as they have contributed to achievement of economic growth with financial stability. The book analyses the record of Indian economic growth since 1947; proceeds to deal with financial sector reforms, analyses monetary policy. We have an interpretation of the reasons for the global financial crisis and how it was contained in India. Critical reforms that are needed in other areas are also studied succinctly. Dr. Rakesh Mohan believes that the key to maintaining and accelerating economic growth is a reform of overall government functioning. He argues that RBI must be allowed to continue its practice of consistent and harmonious blending of monetary policy with prudential regulation. Monetary policy and financial sector reforms acquired paramount importance in our country in the background of the global financial crisis .The present book makes a sterling contribution on this vital topic. The author was a part of the policy group that dealt with this problem during a crucial period in the last decade. He had submitted a number of papers at different fora and has now revised and updated some of these. There are 12 essays in the book. The volume starts with a critical analysis of India’s growth since Independence, when public sector was the engine of growth, fiscal policy stood for high levels of taxation to generate finance for investment in that sector and budget deficits were monetized to fund investments. While it is undeniable that the RBI armoury was not well furnished measures were taken to employ instruments like the SLR and CRR to stem excessive undue expansion of money supply. The country averted high levels of inflation which plagued several developing economies. Post-liberalisation, the financial sector reforms have served to enhance not just the competitiveness and efficiency of banks, but also ensured their stability. The RBI compelled banks to follow internationally acceptable prudential norms of capital adequacy while accepting risk weighting of their assets and provisioning requirements. This resulted in credit being extended towards sound investments and abjuring speculative transactions. Indian banks were unaffected by the global turbulence during the East Asian financial crisis and the North Atlantic countries' financial meltdown . With the practice of automatic monetisation of the Central government's deficits getting phased out in the early 1990s, the RBI's ability to use monetary instruments was greatly strengthened. The Fiscal Responsibility and Budget Management Act guaranteed a substantial reduction in fiscal deficit at the Central and State levels. The private sector garnered more resources from the market and the interest rates dropped significantly during 2003-08. Since 2009, there has been a reversal. Safeguarding financial markets against volatility has acquired paramount importance in managing exchange rate and foreign capital inflow. A gradualist approach was adopted in respect of capital account. While risk capital was permitted to flow liberally in the form of FDI and portfolio investments, short term commercial borrowings were afforded only a limited scope. The impact of foreign capital volatility on portfolio investments was tempered through open market operations and ‘sterilization' measures. The author presents a strong, well-constructed defence of the monetary policy pursued by the RBI over the past two decades. Unlike the central banks of many other countries, which focussed exclusively on controlling inflation, the RBI targeted price stability, exchange rate management, and financial stability coupled with adequate credit supply to sustain growth. RBI has maintained price stability and developed a sound financial sector and without a shred of doubt been successful in achieving financial stability. However recently inflation has raised its ugly head and reached two-digit level, in spite of the RBI altering policy rates a dozen times in about 18 months. The economist points out that the financial system has failed in providing adequate credit to the farm sector and the small and micro enterprises. The development strategy should focus much more on agriculture, urban infrastructure, and human resource to maintain a substantial growth rate. We have a masterly review of the post-1991 monetary and financial policies by one who played a major role in policy formulation. The book is strongly commended to all students of economics, banking, planning as also the mandarins in Delhi.
FPJ
Watch the video of the book launch ceremony......