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Raghuram Rajan not first, several cases of ‘disconnect’ in last 60 years

Express Economic history series: Pranab Mukherjee, who was Finance Minister then, was opposed to the proposal, prompting Prime Minister Manmohan Singh, a former RBI Governor himself in the mid-80s.

Written by Shaji Vikraman | New Delhi | Updated: June 20, 2016 8:44:55 pm
rbi capital expenditure, rbi P2P capital, p2p capital, business news, rbi raghuram rajan, raghuram rajan, india news There are other cases of Governors being forced out in RBI’s history. One of the earliest Governors to leave after a conflict with the government was Sir Benegal Rama Rau, a civil servant, who left in 1957 after serious differences with Nehru’s Finance Minister. (Express Photo by Prashant Nadkar/ file)

On the sidelines of the autumn meeting of the International Monetary Fund (IMF) and the World Bank in Prague in August 2000 which was marked by protests on the streets, India’s then Finance Minister, Yashwant Sinha, and the Executive Director representing India on the board of the IMF, Vijay Kelkar, discussed something far removed from the global economic order or outlook. Kelkar, who had moved to Washington after having served as Finance Secretary in 1998-99 during Sinha’s term, suggested to his boss that with RBI Governor Bimal Jalan’s term coming to an end in November that year, an early decision and announcement of a fresh term for the incumbent would help check lobbying for the job. Sinha then got the approval of Prime Minister Atal Bihari Vajpayee — and a second term in office for another couple of years was announced well before Jalan’s original term was to end in the third week of November.

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That was a rare occasion over the last few decades when an appointment to this key assignment was not reduced to a spectator sport — as appears to have been the case now, accompanied by plenty of media hype.

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When the second UPA government was in power, well before the three-year term of Duvvuri Subbarao was to end in September 2011, the suggestion at the top level within the establishment was to appoint him for two more years. Pranab Mukherjee, who was Finance Minister then, was opposed to the proposal, prompting Prime Minister Manmohan Singh, a former RBI Governor himself in the mid-80s, to take the decision to back Subbarao — with the announcement coming from the Prime Minister’s Office. Subbarao’s appointment as Governor in September 2008 had itself signalled a new approach: the government chose to call, besides Subbarao, who was Finance Secretary then, others such as Rakesh Mohan, who was RBI Deputy Governor and travelling abroad at the time, Deepak Parekh, the HDFC chief, and O P Bhat, then Chairman of SBI, for an interaction with Finance Minister P Chidambaram and C Rangarajan, then Chairman of the Prime Minister’s Economic Advisory Council (PMEAC). It wasn’t termed as an interview, and Subbarao was chosen.

WATCH VIDEO: RBI Governor Raghuram Rajan Delivers The First RNG Lecture


No one would know more about the sensitivity involved in this matter than perhaps Manmohan Singh himself. He quit in 1984 after the Cabinet approved a proposal to withdraw the RBI’s powers to issue licences to foreign banks after a row over granting a branch licence to the Bank of Credit and Commerce International (BCCI), a bank with a dubious reputation, which collapsed a few years later. Singh has told his daughter, Daman Singh, which has been recounted by her in her book, Strictly Personal: Manmohan and Gursharan, that he had sent his resignation to the Finance Minister, Pranab Mukherjee, and to the Prime Minister, Indira Gandhi. Later, after she was persuaded, the proposal was dropped — and Singh stayed on in the job until early 1985, before returning to Delhi and joining the Planning Commission.

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But not all RBI Governors have been as lucky or fortunate. R N Malhotra, a former Secretary, Economic Affairs, was RBI Governor for five years, and had his term extended during the term of the shortlived V P Singh government. But when that government collapsed in November 1990, the new government headed by Prime Minister Chandra Shekhar decided to let go of the Governor. By the time Yashwant Sinha became Finance Minister in that government, a decision had already been taken to bring in S Venkitaramanan, again a former Finance Secretary, to replace Malhotra as part of a political deal for the support offered to the government by the Rajiv Gandhi-led Congress. The unpleasant task of conveying the news to the serving Governor was left to Sinha. Venkitaramanan stayed in the job for two years — which included the days of the balance of payments crisis of 1990-91 — with calls for his ouster coming towards the end of his term after the securities scam of 1992.

Earlier, in 1975, during the time of the Emergency, Indira Gandhi’s government appointed K R Puri, who was then head of the Life Insurance Corporation of India, as RBI chief. But soon after the Morarji Desai-led Janata government came to power, Puri was removed and M Narasimham, who had worked with the RBI earlier, but was then the Secretary, Banking and Economic Affairs, was appointed Governor — the first time that an RBI staffer had made it to the top job. Just under seven months later, however, Narasimham was replaced by the distinguished economist I G Patel.

Much earlier, in 1970, L K Jha, another distinguished Governor, had been moved out some months after Indira’s government decided to nationalise banks in 1969. Jha was appointed India’s ambassador to the United States.

There are other cases of Governors being forced out in RBI’s history. One of the earliest Governors to leave after a conflict with the government was Sir Benegal Rama Rau, a civil servant, who left in 1957 after serious differences with Jawaharlal Nehru’s Finance Minister, T T Krishnamachari, on a couple of issues including that of the Imperial Bank, the predecessor of the State Bank of India, and, more importantly, over a proposal by the Finance Minister to raise the stamp duty on bills.

TTK at this time apparently referred to the RBI as a Department of the Finance Ministry, signalling that it was a subordinate office. Rama Rau protested to Nehru about the Finance Minister’s public attacks on the RBI — saying that under the circumstances, it was absolutely impossible for him to continue in office, and seeking his permission to submit his resignation. Nehru wrote to him saying that the RBI has high status and responsibility, and has to advise the government, but it also has to keep in line with the government.

Rama Rau quit, ending a long and illustrous career as an administrator, including the longest term as Governor of RBI. He wrote to Nehru that he wouldn’t issue any public statement even after relinquishing office, unless there was some “fresh provocation since any public controversy between the Reserve Bank and the Finance Ministry might have repercussions in this country and abroad”.

It is instructive to look back on Rama Rau’s vow of silence in the light of Governor Raghuram Rajan’s announcement on Saturday that he would return to academics. All these should stoke a debate on institutions. Daman Singh in her book recounts a conversation with her father on whether he would have liked to stay longer than the two- and-a-half years that he was in the RBI as Governor. “Well, I would have liked to, but when you are told to leave…,” she quotes Manmohan Singh as having replied.

Elsewhere, Singh says, “The Governor of the RBI is not superior to the Finance Minister in authority. And if the Finance Minister insists (on something), I don’t see that the Governor can really refuse, unless he is willing to give up his job.”

That says a lot. And it may be relevant now as well.

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