It was 1991. Years of fiscal profligacy had led to severe stress on India’s balance of payments. The Gulf War and a political vacuum in India transformed the stress into a full blown crisis.
YV Reddy was heading the balance of payments division in the government at the time.
“...I was continuously associated with the design and implementation of measures intrinsic to these historic events – events that saw our country move from despondency in 1990 to hope in 1993,” Reddy writes in his just released autobiography ‘Advice & Dissent: My Life In Public Service’.
The events, as described by Reddy, ranged from the bitter to the baffling.
“Prior to the onset of the foreign exchange crisis, there were many global banks and financial institutions offering us loans and short-term credits. Japanese investors were among those who were keen to lend even towards the end of 1990. However, as the crisis unfolded, all these friendly bankers disappeared. Many times my calls were not returned. That was a bitter experience,” Reddy recalls.
If some experiences during that time were bitter, others, as Reddy describes them, were laced with incredulity.
Reddy writes:
“I was advised by the office of the state minister for finance or the Finance Minister’s office to meet individuals who claimed to be able to give billions of dollars to India if only we authorised them to do it. I used to meet such intermediaries but never give anything in writing. Often I insisted on getting more and more details about the sources, till the other party was exhausted. In one case, referred by a minister of state, I asked for the contact details of the person or institution offering the loan. I got it after some reluctance from him, and when I tried to reach the party offering the loan, I found that it was the telephone number of a Holiday Inn in New Jersey. ”
There were other proposals that Reddy had to oppose. One such proposal was to freeze non-resident Indians’ (NRI) deposits. Reddy suggested that such an idea should not even be up for discussion. His view was that once the confidence of the Indian diaspora was lost, the country’s self respect and pride would stand damaged. Reddy’s dissent held the country in good stead as, over the years, it went on to tap resources of non-resident Indians in times of crisis.
From dodging political requests, which may not have been in the best interest of the country, to preventing measures that could hurt the economy in the long run, those days were among the most challenging, Reddy told BloombergQuint in an interview ahead of the launch of his book.
That was easily the most tense period because political leadership was not in a position (to take decisions), in some ways. That was a difficult situation and in some ways, I had the advantage because I didn’t have a deep understanding of the subject to start with. Therefore I learnt.YV Reddy, Former Governor, Reserve Bank of India
Protecting The Economy From The Government
The debate over central bank independence and autonomy raged before, during and after Reddy’s time. He often used humour to tackle questions on the issue, but always with a serious underlying message.
To make his point, Reddy recounts this anecdote:
“Soon after I took over (as governor), a journalist once asked me, ‘Governor, how independent is the RBI?’ ‘I am very independent,’ I replied. ‘The RBI has full autonomy. I have taken permission of my finance minister to tell you that.”
Explaining his approach to autonomy and independence, Reddy writes that there are three overlapping spheres of activity in the RBI-government relationship – operational issues, policy matters and structural reforms. In operational matters, Reddy says that he insisted on having the freedom to decide. On policy matters, he was particular about consultations to avoid discord. On structural issues, he believed in close coordination.
While interacting with the government, I had to sometimes take a firm stance on important issues. If there were persisting differences of views, I was prepared to annoy, or even irritate and frustrate the sovereign, if necessary. But I was not inclined to defy. In final analysis, the sovereign is the sovereign....
Reddy details a number of instances where he had to take a stance opposing the government. One such instance was the attempt to open up the Indian economy to greater participation from foreign banks in 2004.
Reddy felt the economy was not ready for this. The political leadership, including P Chidambaram, who was finance minister at the time, felt that a commitment to open up had been made to the global financial community and must be upheld.
"Governor, this is a national commitment made to global financial community. How do we justify reversal of such a policy?’” Reddy recalls Chidambaram saying to him.
Reddy dissented.
"It has serious irreversible consequences. I believe it is better to go back on our commitment at this stage, in national interest," Reddy told the minister.
Later Reddy told Rakesh Mohan, then the economic affairs secretary, that he would prefer to step down as governor if the government decided to go ahead with the plan to open up to foreign banks as suggested.
It didn’t come to that.
The government stuck to its commitment but allowed Reddy to come up with a roadmap to gradual foreign participation to address his concerns. In hindsight, Reddy’s dissent on the entry of foreign banks helped protect India from the worst of the global financial crisis of 2008-09.
Reddy didn’t win all battles. One where he was forced to back down was a passing reference to the ‘Tobin Tax’ in a speech in 2005. This was a time when India was facing volatile capital flows. A Tobin Tax, which can be imposed on international financial transactions to tackle volatile capital flows, was, at that time, seen as regressive.
Reddy’s reference to it spooked investors. Reddy writes that he received a call from Chidambaram within an hour. ‘Honestly, Venu, I think you should not have made a comment relating to a fiscal matter,’ Chidambaram said. Reddy agrees that he overstepped the limit in making a comment on a fiscal subject.
He was compelled to call a meeting with the media to explain and also to modify the sentence which referred to the Tobin Tax in his speech, which had been published on the Reserve Bank of India website.
To sum up what he calls a complex relationship between the government and the Reserve Bank, Reddy offers another anecdote:
Towards the end of my tenure, I was asked whether I believed in a single objective. I knew they were referring to price stability. Yes, I replied. My single objective is to protect the Indian economy from the Government of India.
The More Things Change...
The more things change, the more they stay the same, goes the old adage.
That is certainly true for the Indian banking sector, where issues surrounding ownership and governance of public sector banks remain unaddressed. Reddy in his book expresses disappointment over the inability to make greater progress in reforming public sector bank governance.
“...most of the basic structural issues of the financial system, especially that of the public sector component of the banking system remain unaddressed,” writes Reddy.
Today as India’s banking sector finds itself in the midst of a bad loan crisis, Reddy says that weak governance across public sector banks is reflected in the difference in bad loans at private versus state-owned banks.
When asked whether he supported the direct involvement of the Reserve Bank in resolution of bad loans, Reddy said such an involvement is ‘conceptually not dispensable’. If this is being done as an extraordinary measure, the task should be completed quickly and the central bank must exit, he suggested.
I think conceptually it is not defensible. Because the job of the regulator is to tell the bank. Say that you do not have adequate capital. You bring adequate capital because I have to protect depositors. I have to protect the system. It is the business of the bank, the board and the bank owner to take action.YV Reddy, Former Governor, Reserve Bank of India
Soon to turn 76, Reddy advises the central bank and the government to go back to focusing on core issues – in this case, that of weak credit growth. Credit has to be unchoked to ensure the economy continues to grow, he said.
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