Amol Agrawal
One of my teachers, Prof Vivek Moorthy, would often tell me what matters for central banks is the appointments rule and not just monetary rules such as the Friedman rule, the Taylor Rule and the like.
Under this appointment rule, the central banker should be given a non-renewable and non-dismissible tenure of a reasonable term (say 6-8 years). Unless we get these appointment rules right, we cannot expect to achieve the economics/monetary rules in the first place.
The non-renewable term ensures that the central banker does not seek reappointment by being pliable to the government. The non-dismissible contract ensures the central banker can work without fear of being fired unless there is a case of fraud, manipulation etc. A reasonable term of tenure gives the central banker time to implement her policies.
Given this, it was really interesting to read the recent judgment of the Supreme Court on RBI’s ban of cryptocurrencies (Please read my piece on the judgment here). In the hearing, one of the allegations was “RBI’s decisions do not qualify for Judicial deference”. And the RBI (Reserve Bank of India) is a mere statutory body and its decisions are not binding as in the case of courts and governments.
The Supreme Court disagreed and called this allegation belittling the RBI’s authority. In fact, the judgment argues the opposite. “In fact, all countries have central banks/authorities, which, technically have independence from the government of the country. To ensure such independence, a fixed tenure is granted to the Board of Governors, so that they are not bogged down by political expediencies,” it said.
The judgment cites the case of the US Federal Reserve whose Board of Governors is appointed by the President, in consultation with Senate, for a period of 14 years! Thus, they serve office for more than three governments as the term of government in the US is 4 years. The chairperson of the Board is appointed for four years, which can be renewed. According to the SC, the chair is the second-most powerful person next only to the President! There is a reason why Trump has been attacking Jerome Powell. Likewise, European Central Bank officials are also appointed for a term of 8 years, which is non-renewable.
On the RBI, the decision says “world-wide, central authorities/banks are ensured an independence, but unfortunately Section 8(4) of the RBI Act, 1934 gives a tenure not exceeding five years, as the central government may fix at the time of appointment”.
This twin problem of a shorter tenure and the central government having the choice to fix the tenure “undermines the ability of the incumbents of office to be absolutely independent. The statutory scheme nevertheless provides for independence to the institution as such”.
It is interesting that where appointment rules skip attention of economists, the highest court of the land does recognise this problem. In an earlier piece, I did raise these points bringing to light how the government had weakened appointment rules of Information Commissioners responsible for the Right to Information (RTI). Ideally, the government should have applied the RTI appointment rules to other bodies, but has done just the opposite.
The RBI Act, 1934, specifies different tenure options and dismissal conditions for its Central Board and Monetary Policy Committee (MPC) members (Please see the accompanying table). The central government decides the tenure of the RBI Governor and Deputy Governors and the maximum one-time tenure can be 5 years and can be reappointed. This implies the Centre has a lot of flexibility in designing the contract. The typical pattern is the government appoints first term for 3 years and decides on renewal later. However, there are cases of some Governors who have served for more than 5 years (James Taylor, C D Deshmukh, B Rama Rau, C Rangarajan and Bimal Jalan).
The non-executive members have a lot of variety, with 10 experts appointed for 4 years, but they can be re-appointed without any limit. In the case of local board members, the tenure is 4 years and one can at most serve for 8 years. There is no specified tenure for the two government nominees and to further rub salt into the wounds, the Act actually says they will hold tenure as per “pleasure of the Central Government”! The dismissal conditions are not specified and one can be dismissed without much say in the process.
The Monetary Policy Committee (MPC) has emerged as another decision taking body within the central bank as it takes interest rate decisions (Please see my piece). In the 6-member MPC, three are from within the RBI and three are external members appointed by the government. The three members from the RBI are: the Governor, one Deputy Governor responsible for Monetary Policy, and one member appointed by the Central Board. This leads to confusing and complicated tenures. First, the tenure for the one member appointed by the Board is not specified. The tenure of the three external members is a non-renewable term of 4 years. Plus, these external members are given hearing on being dismissed. This means one half of the MPC can be dismissed without any hearing, which includes the RBI Governor and Deputy Governor whereas external MPC members which do not play any official role are given a hearing!
Whether we look at the Board or MPC, one can say executive members face more heat than non-executive members and it should be the other way round. The Governor and Deputy Governors can be appointed for 5 years, but that is rarely the case. The average tenure of Governors so far (excluding that of Shaktikanta Das who has also been given a renewable term of 3 years) is 3.5 years and of DGs shorter at 3.2 years. In fact, the earlier Governors got longer tenures, but this was curtailed over time as friction grew between the two – the government and the central bank.
If we remove the five Governors who were appointed as interim Governors (K G Ambegaonkar, B N Adarkar, N C Sen Gupta, M Narasimham and Amitav Ghosh), the average tenure improves to 4.3 years. Post 1991 reforms, of the six governors, the first four got a term of at least 5 years, but this practice was not continued for the next two. Even if the tenures have got longer, the government in most cases keeps the power with itself by first giving a shorter contract of 3 years typically and then renews based on its wishes.
Interestingly, if we compare the tenures of SC judges, it is a mixed record. The average tenure of Chief Justices of India is a low of 1.5 years whereas the tenure of judges who become chief justice averages around 8.1 years. The average tenure of SC justices is 5 years. There is a need to review these tenures as well as the Constitution does not specify the appointment rules of SC judges.
To sum up, the government should pay heed to the concerns of the SC judgment. In an earlier piece, I had argued for an overhaul of the RBI Act which has many loopholes and leads to lack of proper governance at the Board level. The issue of appointment rules is connected to the overall governance. The appointment rules are not just limited to the RBI, but even extend to other bodies such as SEBI (Securities and Exchange Board of India), PFRDA (Pension Fund Regulatory and Development Authority) and the like. Recently, we saw how the government reappointed the current SEBI chair by a mere 6 months. The initial appointment in 2017 was kept for 3 years and the government reappointed at the very last minute creating uncertainty for both the incumbent and the financial markets.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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