Raghuram Rajan: The Governor and Governance

EVERY NOW AND then, India witnesses a replay of an old debate: the independence of its democratic institutions from the Government. The questions always remain the same: is the Government harming the country’s long-term interests by exercising control of the various institutions which complement it in the difficult task of governing a nascent democracy? The latest hand-wringing over this evergreen debate came last week, over, of all things, the Reserve Bank of India’s relationship with the Government. Such was the intensity of the controversy that even film actors joined the debate.

Thus, no sooner had Subramanian Swamy, an irrepressible and some would say irresponsible BJP MP, demanded of the Government that it not extend the three-year term of the current RBI Governor Raghuram Rajan, than a veritable liberal storm broke out. Social media went berserk in defence of Rajan. Editorials were written and columns penned. People who are completely ignorant of the issues involved screamed, mumbled and grumbled that the end was nigh. It was mass hysteria the likes of which haven’t been seen since the Nirbhaya case in 2012.

One highly respected commentator on economic affairs went so far as to say that if Rajan’s term was not extended, hundreds of billions of dollars would flow out of India, leading to a major economic crisis. That did not happen. Another equally respected observer of the Indian scene said it was the NDA’s ‘Vodafone’ moment, meaning India would lose credibility in the world. That too has not happened. A third feared an economic collapse, which seems a very remote possibility. The co-founder of an important infotech company said he should be given two more terms and the Government rightly ignored him.

In the event, Rajan, a well-respected academic, economist and altogether a decent man, who is also blessed with good looks, himself announced that he was not seeking an extension because he wanted to go back to teaching and research at the University of Chicago, whence he had come. But he also told the media that he felt his position had been ‘undermined’ and cleverly did not say by whom.

Predictably, all kinds of rumours started flying. One of them said he had been made to go because he wanted to stay only for a year but the Government wanted him to stay for two. Another said that the Centre was unhappy with him because he had refused to put ‘someone’s’ portrait on currency notes. Who that someone might be wasn’t hard to guess. A third interpretation was that the NDA didn’t like his independence and wanted to bring him to heel. And so on.

During all this, only one or two people asked the relevant questions, which are three.

First, if Rajan was all that indispensable, what would happen when he finally had to leave after a full extension? Would the economy collapse then? Second, why was Rajan speaking out on political issues and not observing the proprieties of office which require people in his position to stick to the script? And third, most importantly, between the Government and the RBI, who is the boss?

Of these three questions, the first two are of temporary interest and will soon be forgotten. But the third one—who is the boss—is of serious long-term consequence because it involves the substance of the relationship between the Government and India’s institutions. At the heart of the question lies the issue of institutional independence from the Executive.

WHERE THE RBI is concerned, it has been haunting the country since the central bank’s inception in 1935. In all, as many as five of the 28 governors have been made to go by the Government. The first was an Australian, Sir Osborne Smith, and he was forced to resign within two years of taking office in 1935. In 1958, Sir Benegal Rama Rau was insulted so much by the then Finance Minister TT Krishnamachari that he too quit. Prime Minister Jawaharlal Nehru did not stand by him. In 1975, S Jagannathan, a soft-spoken ICS officer, also left a few weeks before his term was over because Indira Gandhi wanted him to do something which he was unwilling to do. In his place, she appointed KR Puri, rather as Narendra Modi appointed Pahalaj Nihalani to the CBFC. He was removed by the Janata Government in 1977 because he was seen as Sanjay Gandhi’s man. In 1980, the same KR Puri was asked by Indira Gandhi to conduct an official enquiry against the RBI’s sale of gold with a view to target Governor IG Patel, who was seen as former Prime Minister Morarji Desai’s man. In 1985, Rajiv Gandhi cut short Manmohan Singh’s term for no particular reason. In 1990, Prime Minister Chandra Shekhar made sure that Governor RN Malhotra resigned. There is thus a glorious history of friction between the Government and the RBI.

The same thing has begun to be visible in the newer institutions of governance that have slowly come into being over the last 80 years. At stake is the oldest question in governance: independence from the Government in shaping and deciding how things will be run.

The Government has been saying that these institutions should be content with ‘full’ autonomy. The institutions and academics have argued that if such autonomy is limited to buying phenyl for toilets, it is pointless.

Total freedom of action, they say, requires two things that the Government is not willing to concede: adequate funding and fixed tenures for those who head these institutions. Autonomy, they argue, has only one of these two requirements.

Independence, however, has come to mean not serving vested interests, be it of government, business, politicians or all three acting in collusion. The RBI, as it happens, is an exception—it has both fixed tenure and more-than-full funding—which is perhaps why it quarrels so much with the Government.

That said, India’s record is not as bad as critics suggest. By and large, the Government leaves the institutions alone. Problems arise when two objectives come into conflict, which is rare. But when it does happen, the rumbles run deep because the media and opposition politicians exaggerate the issue. Nothing has exemplified this better than the fraught relationship of the Government with, say, the CBI or the RBI or the CAG or the Election Commission.

In India, there as an additional aspect: sometimes, Parliament also wants to exercise some control, which further dilutes institutional independence. And now a new ingredient has been added to this brew with the Judiciary also wanting to have a say. But lest we conclude that India is an exception, history shows that this is absolutely par for the course.

INDIANS ARE FOND of citing the case of Western democracies and their highly successful institutions in curbing governmental arbitrariness. To such people, the Western model is always the best and the slightest deviation from it, regardless of India’s different context, is a matter for deep lament. But what everyone forgets is that the Western ways, even if well worth emulating, have evolved over at least four centuries. In Britain, for example, the first constitutional case involving the independence of the judiciary came up in 1618 when the chief justice ruled that the king did not have an absolute right to tax. The commodity in question was raisins. That set the tone for the centuries that followed. In 1649, parliament even beheaded the king who was the head of government. The British government fought with everyone over the next two centuries—parliament, judiciary, police, et al. Only the military remained subservient.

The US took a different approach after learning its lessons from Britain. Institutional independence was guaranteed in the US Constitution. But this has not meant the end of conflict, which, on the contrary, has been ongoing.

We find a similar story in most other democratic countries because it is in the nature of elected governments to take a short- term view of governance while institutions, free from the worry of re-election, take a much longer view. That is why balance is critical, but it takes time to achieve.

In Britain, it has taken 500 years, and in the US, 250. Independent India is barely 70 years old. It still has some way to go before the different parts of the governance mechanism begin to mesh properly.

THE QUESTIONS WE need to ask in India arise from this overall context. It is only since about 1920, after the constitutional reforms of 1919, that the process has begun.

But—perhaps naturally—there is near total ignorance of the process of institutional evolution and balance in the West. People here think getting the Government and institutions to strike a happy balance is like buying a microwave oven in a mall, that you can get it off the shelf. And since that is not the case, academic literature and newspapers are full of despair over the how badly India is doing in this regard.

These people are unaware that unlike in the West, there is a hierarchy of institutions in India: those that are created by the Constitution, those that are created by Parliament, and those that are created by ministries. The ones created by the Constitution come at the top of the hierarchy, the ones created by ministries at the bottom, and the ones created by Parliament fall in the middle, and for that reason, are the most problematic because their independence is ill-defined.

When this is combined with universal adult franchise that has a very large number of poor people voting, a conflict can and does arise between efficiency, equity and justice because of the varied and conflicting interpretations of the key players in the game, namely, the Government and the institution in question.

The distinction between efficiency, equity and justice is a fine one. But it is also a crucial one as it has a strong bearing on all governance outcomes. The persistent friction between the pursuit of justice can come into conflict with equity and efficiency, and vice-versa. Each of the three collides at some time or another with the other. The latest, somewhat trivial example of this is the rejection of the rule by the TRAI that operators reimburse customers for call drops. A less trivial instance is the Supreme Court’s view that an Aadhaar number is not necessary for obtaining certain types of government largesse.

But while the larger conflict is mainly between the Government and the institutions created by the Constitution, relative peace reigns between the other two tiers. They enjoy a largely cooperative relationship for a variety of reasons, of which largely common goals is perhaps the most important. This is particularly true of the RBI, which has been so much in the news lately because of the peculiar immaturity of its Governor.

Underlying the peace is a dismaying truth: while the institutions created by the Constitution are quite mature and independent, those created by Parliament and the ministries are not because of the peculiar policies regarding appointments—the two Chauhans, for example—and funding.

Both eventually have the same effect: an abridgement in the degree of freedom the institution is granted. It is not clear how this issue is going to be resolved.

One exception is the Central Vigilance Commission, set up in 1964, which is outside the control of any executive authority. Its mandate includes monitoring all vigilance activities under the Union Government. But a major weakness in its functioning is that it depends on the police agencies for investigation, and the police is controlled by the Government and thus lacks teeth.

Two other institutions that are crucial for overall economic governance are the Competition Commission of India (CCI) and the Securities and Exchange Board of India (SEBI). Both are independent and so far there have been no cases of gross government interference, though minor transgressions of the principle abound. For instance, one problem with SEBI is that the Government can issue written ‘policy directives’ of a binding nature to it.

The RBI, which has been in the news for all the wrong reasons, is probably the most powerful and prestigious amongst the economic institutions. After all, it determines the price of money in the country and the external value of the national currency.

It is also the lender of last resort to banks and thus crucial to the financial stability of the country, which is sometimes threatened not because of the banks, but because the RBI also lends money to the Government.

Given this extraordinary role in the affairs of a country, just how independent a central bank should be has been the subject of debate for a very long time now, almost since the first of them, the Bank of England, was started in 1694. Here again, evolution has played a role, and different countries, given their different starting points and historical circumstances, have adopted different approaches.

In India, from the very start in 1935, the British government had no doubt whatsoever that the RBI was free, but within the limits prescribed by the Government on the matter of the rate at which it would lend money to it—3 per cent. It remained there till 1951 when it was nudged upwards in 1951 to 3.5 per cent. After Independence, the Indian Government adopted this approach until 1958, when under an assertive finance minister and a supportive prime minister it was forced to accept that the limits of its freedom had been redrawn. The Governor resigned.

These limits were further constricted after 1969 when banks were nationalised under Indira Gandhi, India’s most assertive Prime Minister ever, and a huge set of anti-poverty programmes funded by the exchequer was set in motion. This led to a further de facto, if not de jure, reduction in the powers of the RBI on both banking supervision and the price of money, as the Government now became a massive borrower.

This state of affairs continued until 1992 when the new financial sector reforms required the Government to loosen the leash a little. But most of this loosening has been at the margin. The more savvy governors have known this.

Thus, the core of the ‘subordinate office’ relationship remains intact, something that Rajan failed to grasp and for which he has paid a price. He can take comfort from the fact that the first governor also had the same experience.

IT SHOULD NOT have been, but has become necessary to point out—especially to scholars and intellectuals who espouse a certain view of institutional independence that are rooted in Western liberal traditions—that governments in India are unique because in no other country are they required to balance such varied interests among such a large number of people. The espousal of a Western model would not matter except that the same group of persons also, simultaneously, vest the Indian state with a vastly more expanded role than obtains in any other comparable country.

They forget, however, that the larger the role that is ascribed to the state, the less space there will be for institutions to operate independently. The two are mutually contradictory propositions because the management of governance requires a freer hand to the Government than would be possible if every institution was working at cross purposes with the other, as is implicit in the ‘fully independent’ proposition.

We have, in recent times, seen this happen when the Supreme Court and Parliament have more or less paralysed both the Central Government and state governments. But they are creatures of the Constitution, and as such have a larger role in the governance of the country than the other institutions that have lesser provenance.

India has to strike that fine balance between the needs of institutional independence and good governance in a highly complex political, social and economic environment. It is not going to be easy, but we will get there faster than the West did.

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