In 1980, with a raging inflation and an unemployment rate of over 7% in the US, advisers of President-elect Ronald Reagan warned that the Federal Reserve’s independence “should not mean a lack of accountability”, demanded clearer monetary targets from the central bank, and encouraged efforts by the US Congress to monitor the Fed’s performance.
Several economists including the Nobel Prize winner Milton Friedman assailed Paul Volcker, the Chairman of the Federal Reserve — and Arthur F Burns told Volcker that “Milton wants to abolish the Fed (and) replace you with a computer”, Sebastian Mallaby recorded in his magisterial biography of Volcker’s successor Alan Greenspan, The Man Who Knew: The Life and Times of Alan Greenspan (2016).
After Reagan moved into the White House in January 1981, his staff let it be known that the President would visit the Federal Reserve headquarters at Eccles Building in Washington DC. “Bristling at the thought — the symbolism of the Commander-in-Chief marching into his office had to be avoided — he [Volcker] changed the meeting to the Treasury,” Mallaby has written.
When they met, Reagan asked Volcker: “I’ve had several letters from people who raise the question of why we need the Federal Reserve. What do you suggest I say to them?”
Volcker replied: “Mr President, there have been concerns along those lines, but I think you can make a strong case that we have operated quite well. Unfortunately, we are the only game in town right now fighting inflation. Once the budget gets under control, we will have a better shot at taking the pressure off prices.”
The answer did the trick — it switched the focus to budget policy. “The more he could avoid monetary issues, the more he would preserve his independence,” Mallaby wrote. Volcker, who served until 1987, finally won the battle against inflation.
Government vs RBI
RBI Deputy Governor Viral Acharya may have alluded to this approach to decision-making in his October 26 speech that riled the government. A government’s horizon of decisionmaking is rendered short, like a T20 cricket match, by considerations such as national and state elections, and populist alternatives acquire urgency, Acharya said. A central bank, by contrast, plays a Test match, trying to win each session of a day’s play but importantly, also to survive so as to have a chance to win the next session. In that speech came the first indication of an escalation that has seen the sovereign take the first step towards issuing a directive to RBI by initiating consultations with the Governor — invoking a provision in the RBI Act that had not been used even during wars or major financial crises.
To be sure, conflicts between the government and RBI are not new. The longest-serving RBI Governor after Independence, Benegal Rama Rau (1949-57), was forced to quit after a confrontation with then Finance Minister T T Krishnamachari. Prime Minister Jawaharlal Nehru backed his cabinet colleague, and wrote to Rau: “Obviously [the Bank] also has a high status and responsibility. It has to advise the government, but it also has to keep in line with the government.”
However, in April 1964, the same TTK told Lok Sabha: “I am very happy that successive Governors of the Reserve Bank have been able to shoulder this increasing responsibility that is being cast on them, are… able to take an independent view and [do] not completely subordinate their views to those of the party in power, including the Minister. I have been very grateful during my two spells as Finance Minister for the independence shown by the Reserve Bank and I want it to have that independence.” (History of the Reserve Bank of India)
Politics and tenures
The tenures of two other RBI Governors were impacted by political changes. K R Puri, who was appointed by Indira Gandhi’s government a couple of months into the Emergency had to leave in May 1977 after the Janata Party came to power. R N Malhotra, who became Governor in 1985, got an extension after his term ended; however, he had to leave in 1990 after Chandra Shekhar became PM.
The Chandra Shekhar government, in which Yashwant Sinha was Finance Minister, moved Finance Secretary Bimal Jalan to the Prime Minister’s Economic Advisory Council. Ironically, in 1998, when Atal Bihari Vajpayee’s NDA government assumed office, Sinha “inherited” Jalan as RBI Governor — appointed by the United Front government in the previous year. “We built the best of relationships, with our roles clearly defined, and by building a rapport with the backing of Prime Minister Vajpayee, who kept the [RSS affiliate] Swadeshi Jagran Manch at bay,” Sinha told The Indian Express Wednesday.
Express Editorial | An area of conflict
Unlike what is unfolding now, differences between the government and RBI were probably handled with greater subtlety in the past. Several earlier Governors refrained from boiling over in public, and tempered their language while signalling disagreements with fiscal policymakers. “You can differ strongly when pushed to the extreme. But you have to choose your words carefully,” a former Governor said Wednesday.
Manmohan Singh, who was RBI Governor between 1982 and 1985 provided an insight into negotiations with the government in a conversation that his daughter Daman Singh reproduced in her book Strictly Personal: Manmohan and Gursharan (2014). “There is always give-and-take. I had to take the government into confidence. The Governor of RBI is not superior to the Finance Minister in authority. And if the Finance Minister insists, I don’t see that the Governor can really refuse unless he is willing to give up his job.”
Indeed, that is what some Governors may have chosen to do. Over a decade ago, a Governor of the RBI was called by a Parliamentary panel whose chief asked him who appointed the head of the central bank. “The Cabinet and the Prime Minister,” the Governor said. The MP then wanted to know who sacked the Governor. “Sir, they don’t wait [for that]. They go,” the Governor replied.
That Parliamentary Committee chief was gracious enough to apologise. But as Manmohan Singh, when asked if he would have liked to stay on in the RBI, told his daughter: “Well, I would have liked to, but then when you are told to leave, I guess you leave.”