It is not often that a Journal of international repute like the Economist, London, showers praise on the central Bank of a former British Colony. Sample this: " Judging by the numbers, RBI is among the world's best central banks. Its record on banking growth and inflation is decent enough. Since 1995 wholesale prices have risen by an average of 6% a year, not too far from RBI's comfort zone of 5%. Growth has averaged 7% a year". The journal also gives credit to RBI for escaping the Asian currency crisis of 1997 and the more recent global financial crisis of 2008. Elaborating on the other strengths of RBI, The Economist emphasizes: " Relative to most Indian state bodies, the RBI has more brains, muscle and integrity it is about the only institution in the country you never hear accused of graft". The Asian currency crisis of 1997 has an interesting story behind it. RBI resisted the pressure of IMF to move towards full convertibility of the rupee and that saved India. Wisdom dawned on the IMF subsequently and today IMF champions some controls on convertibility on capital account! In the global financial crisis of 2008, when the icons of American and European financial system - Commercial banks, investment banks, mortgage houses and insurance giants -- collapsed like a pack of cards, the Indian financial system stood rock- like unscathed.There were two reasons for the stability of the Indian system. First, the regulatory framework was in place. The dominance of the public sector segment of the financial sector reinforced the discipline. Second, as Professor Joseph Stiglitz, the Noble Laureate, in an interview to an Indian T. V. channel said: '' The US financial system collapsed because we did not have a Reddy at the helm". The reference here is to Dr. . V. Reddy, former Governor of Reserve Bank of India, and there cannot be a better tribute to the management of the Indian financial system. Dr. Reddy who was accused of being " intolerant towards innovation", hastened slowly in introducing structured credit products. Even those Indian financial wizards who scoffed at Dr. Reddy's soft- pedaling structured credit products have remained to pray. The Economist also gives credit to RBI for retaining its multiple objectives. It may be recalled that solely inflation targeting became fashionable because it worked well for some extended period in countries like Canada, New Zealand and Thailand. Even in India some experts like Dr. S. S. Tarapore, former Deputy Governor, began to advocate its adoption by RBI. The global financial crisis has demonstrated that the assumption that price stability ensures financial stability is wrong. The crisis has proved that price inflation targeting alone is inadvisable and that the mandate of Central Banks should extend beyond price stability to include bank regulation and supervision, promoting growth. RBI's multiple objectives approach stands vindicated. In fact, it is the founding fathers of RBI who had the vision to build the promotion of rural credit into the statutes of RBI - an annual objective in the 1930s. Growth, employment and equity are among the other objectives. The nationalisation of commercial banks in 1969 has also to be viewed against this background. The branch expansion programme in the post- nationalisation period was unprecedented in the history of world banking. Much before " financial inclusion" became fashionable, RBI had set the stage for the phenomenon. In the initial flush of enthusiasm of implementing financial sector reforms in the early 1990s Indian policymakers were intoxicated with the market theology of IMF and the World Bank and hence committed major mistakes. Three of them may be highlighted here. First, the inequitable interest rate structure. Blindly adopting Basle norms, they ushered in a rate structure designed to pamper the private corporate sector and which was biased against agricultural and the small borrowers generally. For instance, a small farmer was made to pay an interest rate of 12 per cent at a time when a highly rated corporate could raise money from banks at 6 per cent. Later, RBI admitted that this led to cross subsidization of economically well- off borrowers by poor borrowers. It took nearly two decades for the RBI to correct the distortion. Second, directed credit is bad and hence credit to priority sectors suffered. Banks openly defaulted on the target for priority sectors and RBI winked at the default. Third, the unkindest cut of the Basel bank culture induced by- product was the disenfranchisement of small farmers.Public sector banks were trying to boost their profits by economies of exclusion. There was a dramatic decline in the number of small borrower accounts with credit limits of Rs. 25,000. Their number, which had soared to 62.55 million in March 1992, dipped to only 36.87 million in March 2003. Taken together, these reflect the muddying of policy waters by the contemporary Indian policy makers who were obsessed with mimicking American or British banking models, or the so- called " international best practices". This muddled thinking did a lot of harm to the economy. Fortunately, sanity dawned on RBI and today its Report on Currency and Finance 2010- 11 preaches: " Think Global, but Act Local". In fact it is this mantra which has made what is RBI today, from the founding fathers' days to Dr. Reddy's days.The London Economist does not seem to have given up its market theology, unfortunately. It quotes Raghuram Rajan's view that RBI is inhibiting India's potential, India runs a " repressed financial system", and so on. The Economist must remind itself that this view is dated and that after the global financial crisis of - 2008, the rationale for privatisation has all but vanished. Finally, the Economist's warning: " Indeed, the thing that endangers India today is not its financial markets but its Government". The reference here is to India's fiscal deficit which may soar to 6 per cent of the GDP in 2010- 1 - a disturbing development. Is this deterioration in deficit just a product of financial indiscipline and " populist politics?" In this contexts, the Economist quotes the present Governor Dr. Subbarao: " In the presence of large sovereign borrowing ..... Central Banks typically have little chance". Another by- product of this issue is, pre- emption of banking sectors resources for Government through the prescription of Statutory Liquidity Ratio ( SLR). At present SLR stands at 24 per cent. We can sympathize with the Economist's inability to appreciate the significance of such pre- emption because even IMF despite its continuous contact with Indian monetary authorities is unable to do so. First, the budgetary support to our five- year Development Plans. Secondly, subsidies. In a society where there is no general social security, food subsidy becomes important. After the global financial crisis of 2008, economists from America or England cannot claim that markets allocate resources more efficiently. While there are no two opinions on reining in the large fiscal deficit, the manner in which it should done should be different. Fiscal inequity should be removed: dividends received by individuals are at present totally exempt from income tax without any limit. On the whole, the Economist's objective appraisal of RBI's performance in the recent period by highlighting its years of glory is indeed welcome.
FPJ
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