‘During my tenure as RBI Governor, there was more room for dissent’https://indianexpress.com/article/india/rbi-governor-room-for-dissent-yaga-venugopal-reddy-4723523/

‘During my tenure as RBI Governor, there was more room for dissent’

Former RBI Governor YV Reddy: Any government is well advised to take the technical advise of the RBI more seriously.

venugopal reddy, yv reddy, ex rbi governor, indian express
Former RBI Governor Yaga Venugopal Reddy

Yaga Venugopal Reddy is perhaps one of the last of those policy makers with a rich and wide exposure to not just the financial sector in India but also with the administrative experience of having worked at a critical time of the country’s growth in his home state – handling a range of assignments starting from the 1960s as an young IAS officer. Reddy who was Governor of RBI between 2003 and 2008 and later Chairman of the 14th Finance Commission — which recommended a record devolution of 42% of central taxes to states has written with warmth about his early days in his autobiography — Advice and Dissent- My Life in Public Service- which is being launched by Harper Collins on Tuesday. Ahead of the launch he spoke to Shaji Vikraman.

Q. One of the things that you have dealt with in your book is creative tensions between the finance minster and the governor and the creative tension between Mr P Chidambaram and you. You have also mentioned the fact that in BIS you sought a farewell. What actually did you mean by that? Are we to interpret that the relationship was not what it was at the end of the tenure, though you have praised Mr Chidambaram prior to that ?

Reddy: To put in perspective, I would consider our combination as one of the most productive period. The legislative measures taken and the institutional improvements, I would say the improvements in the banking system as a whole is perhaps unprecedented. But this is not appreciated because the type of financial sector reforms that the world thought is right and I was not agreeing with that. And Mr Chidambaram naturally was caught between the things that was believed by the whole world and then here I am. So despite personal regard, respect and trust he had a problem. How do you agree with a lone dissenter whether intellectually and in terms of practice. I genuinely feel that he had a problem. He has been more than considerate to me so I think that is the big picture.

In a way when I was explaining you have to read two chapters together — Working with Chidambaram and Creative Tensions, so don’t read only one part. Once you read them together then you would know the extent to which we worked together. We worked and therefore there is a result.


When I describe, I describe when we disagreed, why we disagreed and how we disagreed. So even in terms of a narration, there is a bias so we should not conclude that overall there is discomfort. This is also reflected by the fact while our relationship was less than warm towards the end, post crisis the extent of appreciation he has shown also shows that it was purely an ideological issue. So what I am saying is that these differences which you see is not personal, it is an ideological issue.

Q. You mention that Prime Minister, Manmohan Singh would have had a quiet chuckle with the back and forth between you and Chidambaram on many issues. So what were you alluding- that the PM being a governor himself would have been happy that there is a conflict?

Reddy: No, if you are thinking that he was enjoying our quarreling with each other, that is not correct.We all know Dr Manmohan Singh. What I had in mind was that he would have imagined a situation where when he was finance minister, he would have said the same thing as Chidambaram was saying, when he was governor he would have said the same thing as I was saying. So he would have been recollecting those times that is what I meant by chuckle.

Q. You were governor during an era when you had economic heavy weights all over. You start with Dr Manmohan Singh as the PM, a strong finance minster Chidambaram, Montek Singh as planning commission deputy chairman, Dr Rangarajan in the shadow. In such a constellation, how did you manage to hold your own?

Reddy: First, I think we have to accept that you can’t hold your own if the others were against me. The fact that I could hold on my own shows that they allowed to be. I think the credit goes to the leadership that they ready to recognise accept dissent. Dissent was acceptable.

Second, all of us were facing unprecedented policy challenges. A configuration, first for decades we suffered foreign exchange constraints, now we were having excess foreign exchange so what do you do with excess? For years we had a problem of stimulating growth and suddenly when the growth is towards nine per cent then suddenly someone comes and say overheating and that’s something which is strange and unfamiliar. Three, that is the time when you are trying to integrate with the global economy.

Therefore, it’s one thing to de-regulate, the other thing to create institution systems in a more market oriented economy to undergo structural transformation and integrate with global economy. And all this had to be done at a point of time when the global economy is going through an unprecedented boom. So in these circumstances, naturally it was inevitable that different points of view would come in.

The RBI had the advantage of consultation. You see in public systems, the totality of the economic wisdom with public institutions has the total aggregate amount of economic wisdom. It was a period that threw up new challenges and therefore tolerance for new ideas.

Q. One of the things which helped you succeed as you said was the willingness of the Manmohan Singh led dispensation to accept dissent. Since you left, one of your successors, Dr Raghuram Rajan left ahead of his tenure. Has it become even more difficult to dissent now ?

Reddy: Honestly, I don’t know. I cannot say anything about these developments. But in general I would still say that there is maximum consultation of economic knowledge in the Reserve Bank of India in the country compared to any other public institution. Therefore, any government is well advised to take the technical advise of the RBI more seriously.

Second, very often we tend to say, look we would like to have outside experts. But if you seen even in the analysis of global crisis, many of the outside experts, it’s very difficult to find outside experts without alignment of financial markets. So even if the government wants to get outside advice and not depend entirely on RBI, the government has to be careful in locating outside expertise which is not biased in favour of markets. This any government should be constantly aware.

Q. You have dealt with the issue of autonomy of the central bank and said that you have to grab autonomy and the fact that ultimately the sovereign is supreme. In the current circumstances, how should it evolve because we have seen after you two successors, all of them having had some relationship conflict between the government and the RBI. How should the relationship evolve and how do you ensure a smooth operational relationship?

Reddy: This is where I disagree. There is no question of smooth operational relationship. If you have a smooth operational relationship everybody wants to be nice to each other. Even in small group decision making if all of them want to be pleasant with each other optimal solution does not come. You require people to question each other and contest each other. Therefore, I wouldn’t say that simply because there are disagreements is not correct. There can be disagreements but the final outcome should take into account the importance of co-ordination. Second, whatever is the final outcome, if a decision is taken by the sovereign then the central bank has to do everything to make it smooth.

Let me give you an example, take the farmer’s loan waiver. We have every reason as I have explained that it is not correct in our view but finally when the sovereign decided that there are broader social considerations, social tensions and therefore, we have to do it. Not only did we do it but we accommodated fiscally by transferring more resources, RBI surpluses than required. So just because there are difference in the run up to the decision doesn’t mean there will be a spill over impact later.

Q. You said in your book that you regret two things. One is being party to the farm loan waiver . But now when you see this happening state after state with its fiscal impact. Even the current RBI governor has said that credit culture will be impacted. How do you view this waiver?

Reddy: First on the issue of credit culture, I think one of the first speeches, which I gave when I became the governor in 2003 is credit culture and that was lacking in India. That was my highest priority during my governorship. I didn’t succeed much. But there are broader issues but in terms of credit culture, Indian financial systems cannot improve significantly till such time that credit culture becomes conducive to proper credit system. I accept that as a general proposition a lot has to be done by different players, there is no doubt about it. Now this waiver of farmer’s loans should not be viewed in isolation. the liberal approach to restructuring loans and giving fresh loans is always cited as a justification for farm loan waiver.

So if you are restructuring the debt given to Air India thousands of crore then why not to millions to farmers? You have no answer. You cannot take a moralistic attitude and say that farm loan waiver is wrong. Compared to other sections this is less wrong. So it’s not as if this is going to destroy credit culture relative to other actions. That’s the point I am trying to make. This is destroying but there are other types of things that we have to deal with like credit restructuring and others. Therefore, we have to recognize this cannot be viewed in isolation apart from various justifications which in my tenure I did describe in detail.

Second, if you want to tackle it don’t think by simply stopping it you can improve the credit culture.The other thing technically, I would say that the farm loan waiver in this round is something where it is being done by different states. So it is states which are doing it. In some ways they are subject to the fiscal discipline by the centre and centre can have the moral right to moderate the decision. Whereas earlier it was the centre itself that was doing it. So therefore, I think given the subject at least this part that if any waiver has to be done, it should not be done by the centre.

Q. Do you think that some of the things that they are now trying such as bankruptcy, resolution, judicial process will actually succeed? And is there a risk of the RBI losing its credibility being at the centre of this if it does not succeed?

Reddy: I don’t know the details but whatever the government has acquired powers now those could have been done by the RBI on its own initiatives. This did not require a legal authority. Because essentially you have to resolve the problem and under the banking regulation Act they had the powers. But I think what this amendments and the legal system has done is that it has given priority and attention. And in some ways the government has taken part of the responsibility of cleaning up. This is essentially the RBI’s job. In theory, what does the government do? Government tells the regulator what’s happening. The banking system there is capital inadequacy what is happening? Now the problem here is if that question is asked the RBI will you are the owner. Because it is the owner’s responsibility.


The current arrangement is defensible on two considerations–first to demonstrate the collective determination of the government and the RBI to solve this big problem and second to recognise that this is an extraordinary situation requiring unconventional measures.

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