At the book launch event of former Reserve Bank of India Governor Duvvuri Subbarao's Who Moved My Interest Rates, former Finance Minister P Chidambaram took part in a panel discussion and offered his take on some of contentious issues raised by the ex-central bank chief.
In the book, Subbarao had alleged that Chidambaram had tried to pressure the central bank to cut interest rates even when inflation was high, denied extension to his favoured deputies and said that his own extension took place only because of the intervention of then PM Manmohan Singh.
Also taking part in the panel discussion, which was moderated by CNBC-TV18's Latha Venkatesh, was former Comptroller and Auditor-General Vinod Rai.
Below is the verbatim transcript of D Subbarao, Vinod Rai and P Chidambaram's interview to Latha Venkatesh on CNBC-TV18. Q: Let's start by saying by laying out what you think are the problems of autonomy for a public institution like the Reserve Bank? Subbarao: Problem of differences between the government and the central bank arise because of this difference in horizons. The Reserve Bank typically takes a longer term view prioritising price stability on the understanding and assumption that price stability guarantees long term sustainable growth. Governments typically tend to take a shorter term view and that creates some tension. I am not for a moment suggesting that the government is wrong or the Reserve Bank is right nor I am trying to make a value judgement, it is just that there are differences in horizon, differences in priorities and therefore tension between what the government wants and what the Reserve Bank wants. Q: You headed an institution which had constitutional protection, so basically is it only institutions protected by constitution that have independence in India like the Election Commission and the Comptroller and Auditor General (CAG). Is it that other institutions have to struggle hard to get autonomy or independence as the case maybe? Rai: I don’t think any one of the institutions have had to struggle for their autonomy or independence in that sense. See it is a question of each institution being allotted a certain space, a certain mandate and they have to function within that mandate. The question of in a parliamentary democracy, in a democracy there will be any number of opinions emerging from maybe the public, maybe parliament, maybe politicians, maybe bureaucrats whatever it is or maybe media. Media is always ahead in each of these, who have opinions which will be expressed maybe in favour of the institution or maybe against the decisions taken by the institution, but that’s a very healthy debate on that. Q: Do you think that the government strong-arms the central bank? Is that a fair charge, Mr Subbarao has quoted chapter and verse to say that he was not even allow to select his own deputies?
Chidambaram: Because the law says that the government will select his deputies and nobody will complain that the law is being followed. Change the law and ask the law to say that the governor will select his deputies and then of course the government can’t select his deputies. The point is autonomy does not mean [being beyond criticism. An institution can be autonomous, but that institution is subject -- as any other institution, any other person, and any other body -- to criticism as long as the criticism is bona fide, genuine criticism. I made this point several times quoting a famous English judge, “two reasonable men can hold exactly opposite views without forfeiting the right to be called reasonable”. You are almost equating as a moderator at least, not Dr Subbarao that autonomy means I am an independent republic. The institution is autonomous, but the decisions of the institution are subject to fair criticism. Besides, my experience -- and I have said this before and I reiterate it -- over a period of eight budgets as finance minister, there must have an at least 30-32 policy statements, I maintain that in eight out of 10 policy statements, the government makes the usual statement that yes we welcome the Reserve Bank of India (RBI) position.
Vinod is here he was financial services secretary. Ashok [Chawla] is here he was economic affairs secretary, they will bear me out. It's only in one or two out of 10 cases -- I know Dr Subbarao in one page says that is not being his experience -- but he will concede that my experience with policy statements are much longer than his experience with policy statements.
In 8 out of 10 policy statements, there is hardly any disagreement. In one or two there will be a disagreement. There may have been disagreement, but that precisely what makes a democracy a vibrant democracy.
Latha: I just want to ask P Chidambaram -- this particularly October 2012, the inflation number CPI was 10.2 to 10.4 for about eight months out of 12. In the remaining few months, it was 9.7-9.8.
Chidambaram: Not during my tenure as Finance Minister.
Latha: I am just saying 2012 -- I am arriving at a very different point altogether. In October 2012, the repo rate has already been brought down in April from 8.5 to 8 in the hope that inflation will fall from its high 10 percent levels. So the purpose of central banking is to keep interest rates at least 10 bps above the interest rate, governors like Rajan would wanted to be one percentage point more than inflation. So if inflation was running at 10 percent and if repo rate is 8 percent, already Subbarao is not being fair to the depositor, you are asking him to be further unfair, should you not have given the central bank the right to make that decision, they were already being more than fair to you.
Chidambaram: All this is Economics 101 which doesn't apply to real life. Times without numbers RBI has been behind the curve. Many commentators have pointed out whenever the RBI has been behind the curve. These are judgements that are made. When I returned to the ministry on August 1, 2012, we took determined steps to rein in the fiscal deficit, to rein in the current account deficit and we achieved substantial success by March 31, 2013 and again by March 31, 2014.
Therefore, since the government was doing a lot of heavy lifting and we were taking determined steps, we thought that the RBI should take some risk. RBI governor legitimately within his province thought it was not a right time to take a risk. These are two honest opinions held by the two reasonable men I referred to earlier.
Latha: Let me just add a few more in terms of data. P Chidambaram was referring to 2014 for 6.7, I am sticking to 2012 because this incident happened in 2012, the one I am elaborating, the resistance from the government to allow the RBI to have an all out war against inflation led to the current account deficit and eventually ended up in the run on the rupee in 2013 preceded by eight quarters of four percent current account deficit. Am I right in saying that the RBI is not getting enough elbow room to fight inflation?
Subbarao: The statement you made that the RBI was not allowed to conduct independent monetary policy is not correct.
There was pressure from the government but the implication that we had succumbed to the pressure is certainly wrong. Whatever decisions were taken, were taken by the RBI. There was pressure but there was no decision that was influenced by the pressure from the government.
Latha: When there is so much pressure for you to bring the rate down from 8 to 7.5 when there is 2 percentage point difference between repo rate and the inflation number. Would you have had the elbow room to raise rates -- October 2012?
Subbarao: Whatever I wanted to do, I could have done regardless of the government. As P Chidambaram said there is a point of view, that point of view was communicated, there was a price to pay for that etc but the point is to imply that any decision was deviated from the best professional judgement of the RBI because of the government's opinion is incorrect. That is what I am trying to say.
Latha: I am fighting the wrong battle because both have agreed that they gave each other space.
Subbarao: The space was taken by the RBI.
Latha: As an independent observer?
Rai: You must look at it like this. These are all professional institutions manned by professional people selected by the government. Once the government selects, the government expects them to perform the role which they are amended to perform. It is not a question of anybody who is giving you the space, there has to be healthy tension between monetary authority and the fisc, one is looking for growth, the other is looking for inflation.
In fact in the present days, there is a statute, which is being signed between the government and the RBI that the RBI will maintain the inflation at 4 percent to the band of 2 percent on this side or that side. The government has said that this is your mandate but the instrument about how they maintain it is left to the RBI. So I think that is a big fair situation.
Latha: I thought I saw a tension and I put it on the table.
Rai: It is a healthy tension and it is all over the globe, it is not only in India.
Latha: You think this is a fair way to resolve this tension that the monetary policy framework agreement has been signed and the RBI has given a target, is that a better way to handle the situation?
Chidambaram: That is right. There are several countries where the mandate of the central bank is not only price stability but also growth. There are several countries where the mandate is -- like US for example -- maintain employment and price stability. Therefore, price stability is not necessarily the gold standard by which you must measure the autonomy of the RBI.
It is possible that some countries may choose price stability as a sole goal. Now the government has chosen containing inflation as the sole objective of the RBI, which is the government is entitled to but a successor government can equally say, sorry the goals of RBI must be to ensure there is growth and price stability.
Another government could say goal of RBI should be to ensure that there is high employment and price stability. So, whatever the government decides is the mandate. Within that mandate, RBI is completely independent.
In the exercise of its independence, the central bank will take decisions, which will be applauded, which will be criticised but the fact that there is someone who criticises the decision of the RBI or the judgement of the RBI does not make the RBI any less autonomous. This is the point I have been making. You seem to think that autonomy means beyond criticism. There is nothing beyond criticism.
Supreme Court judgements can be criticised, that doesn’t mean that the Supreme Court is not autonomous. Have you seen the law reviews of universities in the US which analyse Supreme Court judgements? Many of those articles would be held in contempt in the Indian Supreme Court. But that is the kind of academic freedom or professional freedom one has to criticise decisions of other institutions. That doesn’t in anyway erode the autonomy of institution.For full discussion, watch accompanying videos...
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