RBI governors must get one non-renewable 5-year term: D Subbarao

The minimum term of the RBI Governor should be longer than the current three years, says former RBI Governor D Subbarao. The Governor should be given one non-renewable five-year term. This he says is because every institution benefits from a change in leadership. Another former RBI Governor C Rangarajan agrees with Subbarao, saying that just like the government's five-year plans, a five-year Governor term is also vital. But contrary to this, former Governor YV Reddy says the tenure should not matter.Below is the verbatim transcript of the discussion.Q: You had raised the relation between Reserve Bank of India (RBI) and finance ministry to a fine art. You never came into their area of controversy. How did you manage that, we are told that RBI and finance ministry are usually at loggerheads, but how did you manage to be on the same side?Jalan: But this is not correct way that finance ministry and RBI are at loggerheads. I will say that you take your editorial office, there will be differences of views, so there are differences of views depending on what circumstances there are and what is from monetary policy point of view or principal policy point of view or political point of view, what is tenable and what is not tenable. So it differences of views are not the issue, but I would say and for your audience in particular that by and large the relationship has been extremely cordial and very good, not that there were no differences of views and tough decisions as you had said to be taken some time and they were taken with the concurrence of the government, because it is of utmost important to keep in mind that the economy requires an action at times would be very difficult, but government is accountable for that to parliament and that if the monetary policy actions have to be taken, then it should be done with a view to augmenting whatever future or whatever prospects are there for our growth with financial instrument.Q: That is certainly true but would you agree, is it that relations tend to be as cordial as Bimal Jalan says?Reddy: All of us have independent views about independence. I think that itself shows that each Governor has his own way at looking at independence. I think that is how it should be. There is no set pattern, it depends on the institutional context, the challenges, the individuals and the styles. So, I think it will be wrong to generalise about the relations.Q: You said once that a central bank which always disagrees is obnoxious and a central bank which always agrees is superfluous.Reddy: I agree with that and I think the ministers will also agree with that.Q: Does it make for a healthy relation or can it become an infructuous relation?Reddy: I am sure it is healthy because the purpose of creating a central bank and convincing people that we have handed over the most important matters of money and finance to a somewhat independent body. So, it is the government which has created a central bank to convince the people that they are apolitical, they are longer term, be assured the value of money is in safe hands, finances are in safe hands. It has been created by the government. So, it is in the government’s interest to convince the people that it is so and it is in the interest of the central bank itself to show to the people, that they are independent but at the same time as Bimal Jalan pointed, in the ultimate analysis, who is accountable to the people it is the sovereign.Jalan: Can I just make a very small point, it is not independent it’s autonomous.Q: I wanted to ask you that you and Dr Manmohan Singh had perhaps the best of relationship and the maximum reforms happened, when one central banker was the finance minister and you were in the central bank. So is it that reforms happen best when central bankers become finance ministers?Rangarajan: No, let me say that there was a real crisis before the country. In fact, the balance of payments crisis created because of ourselves is somewhat different from a balance of payments crisis, which is imposed on us because of external factors.I think handling the earlier one is a little more difficult and if I may say so, we could afford the luxury of a fight between the Governor and the finance minister at that time, but having said that let me say that these are somewhat different institutions. Obviously, the RBI is not part of the government in the sense in which a ministry is part of the government. There is a certain role for the RBI and it has to play that particular role and in playing that role it will have some views and opinions, which will not necessarily coincide with the government which has a lot of political association.Therefore it is to be expected that even when the objectives are the same there could be differences, but one other point which really comes up is that if there is no clarity on the objectives, then the problem becomes even more complicated. Therefore you say that the RBI is expected to do this that, this that, then there is much less scope for conflict, but as I said 2 independent or 2 autonomous organisations can have differences of opinion on problems that confront the economy.Ultimately, there must be some understanding in whose jurisdiction the final answer lies. There is always an issue that has been raised even in my time, that ultimately that the finance minister is responsible to the parliament. He has to answer the questions and he has to defend. Therefore, I would say that the direction in which we need to move is to understand the goals and objectives of each institution clearly and delineate and define very clearly what the objectives are, then the cost for friction will come down.And one more point that it is also important to find out, how the friction or the tension as some people call it which is good is resolved. This is where to some extent personalities count, to some extent traditions and the some code becomes absolutely necessary. Therefore, I would say that when you asked why there was close association, it is the question of how to resolve. It is not as if that there were no differences, I think even on reforms on phasing, on so many other things there could be differences, but they were resolved in a particular way.Q: It was more two personalities that could agree with one another, is it more a personality thing or even with conciliatory personalities these institutions will necessarily have friction? Rangarajan: That is what I am saying. Being two institutions there will be differences of opinion. Even when there is good rapport between the two that will not solve the problem because each institution, even Dr Manmohan Singh used to say that there is a dharma for Reserve Bank of India (RBI) therefore that dharma of RBI has to be preserved whoever is the Governor. Q: Don’t you think there are more cards in the finance ministry’s hands, both are autonomous institutions but the number of trump cards in the finance ministry’s hands are more than the number of cards in the RBI’s hand or does the RBI have any trump card at all? There are more ways in which they can arm twist you than you can. Subbarao: Certainly, there is no way that the Reserve Bank can arm twist the government, but the government can arm twist the Reserve Bank. However, it is up to the institution and the Governor to stand up for what he believes should be done in pursuit of the Reserve Bank’s objective. I agree with what all of my predecessors have said, which is that there are bound to be differences between the government and the Reserve Bank. Those differences are important in areas where the Reserve Bank is supposed to have autonomy. If there are differences for example in development schemes, that doesn’t matter. If there are differences for example even in exchange rate difference, that doesn’t matter. In areas where the Reserve Bank is supposed to have autonomy, monetary policy, differences are very important. I agree with Dr Rangarajan’s point that there is the sovereign the finance minister has to defend, the Reserve Bank in the parliament etc, of course, the governor is not a member of parliament, but no finance minister has ever been asked why did the Reserve Bank raise interest rates and if indeed some member of parliament asked the finance minister, it will be perfectly open and indeed appropriate for a finance minister to say that I have no answer to that, the Reserve Bank is an autonomous institution, I am not accountable to the parliament for what an autonomous institution is doing. So while we recognise this autonomy of the sovereign, we also have to recognise that that very sovereign has to respect the autonomy of the Reserve Bank. Q: Now that there is going to be a monetary policy committee, do you think the autonomy is better preserved because you have to influence too many people, so, is the MPC going to increase autonomy or at least preserve the Reserve Bank’s autonomy? Reddy: I think world over at least the belief is that it will be more convincing. Instead of one man trying to say that we disagree or we agree, when there is a committee, it is likely to be more acceptable and therefore it can afford to be more autonomous. However, much depends upon the composition of the committee. Rangarajan: When you talk about the friction or the tension the RBI and the government, we largely have in mind the monetary policy or issues relating to or connected with monetary policy. However, there is also the other problem, since you are also regulator of banks that is where even more problems arise. As a monetary policy authority, I have pushed and all my successors and everybody has pushed for the autonomy within certain framework; that is important. However, when it comes to the regulator of the banking system, then the RBI stands on the same footing as many other regulators and there there is a slightly different connotation between the relationship between the regulator. Q: Is that a tougher job to be able to convince or resist the government when you are a banking regulator? Rangarajan: As a banking regulator then there are issues that come on which pressure can be put and there the independence or the autonomy depends very much as the autonomy as other regulators have. That is an important issue because for example in the case of other regulators, there is an Appellate Authority. In case of the RBI, even if you decide to punish, penalise or do anything, there is no Appellate Authority. So, there are issues that will come up therefore we need to distinguish between the role of RBI as a monetary authority and the role of RBI as a regulator of banks.Q: Change of government is that a very big problem, all of you were appointed by one government and went to serve another government except Dr Subbarao who served under two different finance ministers, but of the same government is that a big problem. You were I think 4 and a half years under the Manmohan Singh government and then the United Front?Rangarajan: Well, there was no problem in that way in the sense that, your friction leading to an eruption of issues. The fact is that we continue to function smoothly even though the new finance minister had some different views on what we had done in the previous period, but I had to tell him that I am a continuing person and therefore I will defend what I have done. Therefore the transition was not troublesome, transition was smooth.Q: Your thought because I think there two or three kinds of governments?Jalan: What I am saying is that it is a part of democracy and we are what we are citizens of a democratic country of which we are very, very proud and it has institutions which are all accountable, so Reserve Bank is accountable, the government is accountable to parliament and we RBI job and finance minister’s job or the government’s job synchronises in trying to make sure that we have a high growth of financial stability. All of us agree on those ends as it were.Now the means, if you come to the mean that you need a very healthy relationship between different what you might say arms of the same equipment to be able to deliver and therefore the synchronisation of views is absolutely essential. Now there maybe differences, there may be that you have to compromise, there may be that you can’t take a very tough decision at a point of time when it politically it may lead to some disruption, but by and large we are all working for the same goals.And I would tell you that my experience both from the government side in the ministry of finance when I was involved on the other side and this side has been extremely favourable and I would say that the governor also appears before parliament, is accountable for the views and they can question the standing committee of parliament so on and so forth, but some time there may be frictions, but we have to accept that as a part of our democracy, as a part of our system which has succeeded to a very large extent and are tasked for the future is to maximise the gains that we have and minimise any losses or frictions that we have.Q: My point is actually the change of government, whether it creates kind of a suspicion about the previous person, so Dr Reddy should it be that Governor’s terms should be coterminous with the government or should it be a fixed term?Reddy: I have seen this relationship between the governor and minister as a deputy governor, so that’s more instructive and I have experience change of government as governor. Simple answer is in our country fortunately that does not make material difference as a summary.Yes, we have to explain what is to be continuous, convince but by and large I would say it does not make a difference and in fact, I would go to the extent of saying that coterminous is not good for money and finance. It should be apolitical so, the political cycle should not coincide.Q: If it is to be apolitical then it should also be a fixed term. Is it a good idea to have three years plus two years or is it better as you were getting, a fixed term of five years?Reddy: It depends, you can have elections every year also or once in five years. I don’t think they are related in my view.Jalan: The reason why I am interrupting is that it is not a fixed term like 5 years of MP, what I am saying is that it is an appointment made by the government of India in the interest of country’s growth with inflation, financial stability with growth and so on and so forth and all the people who are responsible for pushing our goals in a difficult circumstances also, if the world economy is declining and we find an excuse or something or the other but we have to do our best and it has to be in consonance and we have done reasonably well.Q: Is three years too little, should it be four years or five years? I am sure you will all have an opinion on that.Jalan: It doesn’t matter.Q: Do you think three years is enough, should the minimum term be longer?Subbarao: I think the minimum term should be longer. From my own experience and the experience of what has happened with other Governors, I would say that a Governor should be given a straight short five year term and it should also be a one-term non renewable. I think that will be good because having a Governor for 10 years is too long, certainly too long in our system and I always believed especially from my long experience in the IAS that the institution benefits from change in leadership, even if an extremely competent leader is changed after five years by a less competent person, I still believe that change of leadership contributes positively to the institution. So, I think we should have a five year term, non renewable so that it is very predictable and five years is a long enough time for a Governor to layout his agenda, implement it and also set the course for the successor Governor.Q: I wanted your view on it.Rangarajan: This used to be discussed even when we were drafting the plans, how long should it be? We have had five year plans and asked why five as somebody remarked four is too short and six is too long. Therefore, there is no particular way of defining what the tenure should be. However, taking everything into account, if you entrust a responsibility to somebody, he or she must have the time to initiate changes and to bring about the desired changes to a large extent and considering from that angle, five years appears to be the right thing. I also think that the appointment should be for five years in the first instance itself.Q: Non renewable, that would be genuinely perhaps independence promoting?Rangarajan: I have found that in non renewable cases, it has always been slightly longer. I think if it is six years it should not be renewable. In five years I do not know, I am not very sure but five years must be given and that is reasonable.Jalan: I think that there can be differences of view but let us say that five years or something but non renewability I don’t agree with. I am not saying that five years will be renewed for five years. What I am saying is that it depends on the circumstances, it depends on what we are doing and these are all institutions of our governance system and our governance system and it is of utmost important that we should not try to say that for five years you are the king and then you disappear.Q: But do you think that public sector banks now an institution of previous era and now we have to think of fresh on public sector banks altogether, the concept, I am not finding fault with people?Reddy: I think the broader question is the way the governance of a public sector institution engages in commercial activities, have to function in our economy that’s the bigger issue. You can’t have a competition and have public sector institutions by different sets of laws, different sets of disciplinary action, I think that article 14, extents of article 14 to public sector institutions indulging in commercial activities, unless we solve that bigger issue and so public sector banks issue is a subset of the bigger issue.