YV Reddy has been one of the doyens of Indian economic policymaking for almost 2 decades since 1991 - having handled the 1991 balance of payments crisis as banking secretary, aided the liberalisation of the economy in Manmohan Singh’s finance ministry, shaped the liberalisation of the financial and the external sector as deputy governor under Bimal Jalan and stabilised the banking system to face the challenges of excessive financialization that led to the Lehman crisis. Reddy was one of those governors who was chosen by the NDA in 2003 and continued by the UPA in 2004. His advice, therefore, needs to be taken without the lens of partisanship. If Dr Reddy is inclined to any party, it is India’s public interest.

In his RR Kale Memorial speech delivered at the Gokhale Institute on Friday, Dr Reddy raises important issues which all well-meaning citizens and policymakers in all regulatory institutions, in North Block and in all political parties need to ponder over.

First, on the issue of RBI reserves, he asks if it is fair for the government to demand previous two years of surpluses, which have already been made part of RBI’s reserves when a Bimal Jalan committee is examining how much of those reserves are needed for a strong and independent central bank. Wouldn’t courtesy require that the government of the day at least wait for Jalan committee’s recommendations. Reddy calls this coercive monetisation of the deficit, not very different from the automatic monetisation of the fisc that prevailed before the 1991 reforms. That ’s a measure of how we have regressed in terms of de-institutionalising the RBI.

While we await the Jalan committee’s recommendations, Reddy’s words of caution are as follows: that it may be worth keeping the central bank’s balance sheet strong especially when the government’s fisc is weak with deficits. Denuding the central bank’s reserves including the unrealised gains - kept as revaluation reserves - can be dangerous when next time there is a run on the rupee. Secondly, Reddy warns that transferring RBI's supposed “excess” capital directly to banks as suggested by the former Chief Economic Advisor, is constitutionally improper, since the RBI’s money should rightfully go to the Consolidated fund, Probably the wily former governor is smelling that the government may indeed take recourse to this plan, considering that there is no mention of providing capital to banks in next year’s budget.

The second issue Reddy points to is the tendency of governments to push their agenda on the banking system – a saga that began with the nationalization of banks in 1969. Clearly, we haven’t reformed much since that deleterious move. The current government has ordered an SME package which, good principles require, be provided from the government’s budgetary resources. But forcing the RBI to design a package that is mandated via the banks, is perilous for banks and the RBI. What moral authority will RBI have to question the banks if those loans go bad?

An allied issue Reddy talks about is the government arm-twisting the RBI to relax the Prompt Corrective Action rules. If RBI is the banking regulator, it ought to be allowed to determine which banks ought to be curbed from what kind of lending. The government’s strong-arming weakens the RBIs regulatory rigour. Again who is to blame if these banks ratchet up more bad loans?

Reddy also addresses the frequently expressed cry that RBI ought to arrange liquidity for NBFCs in the ongoing debt market problem. As Reddy points out IL&FS was not a liquidity issue. It was an asset quality problem. And now as more aggressively run NBFCs and mutual funds come out of the woodwork, it is increasingly clear that asking the RBI to provide a line of credit to NBFCs is like asking the central bank to evergreen bad loans run up by questionable NBFCs and MFs to make quick profits or worse, just syphon money.

Ultimately, what Reddy is defending is the RBI’s right to say “no” when the institution is asked to take dangerous steps by an all-powerful sovereign whose eye is on the next election. He is defending RBI’s ability to talk truth to power. Every well-meaning citizen needs to hear his plea. Reddy ends his speech by quoting the ominous words of the first Indian RBI governor, CD Deshmukh “No country can have better public institutions than it deserves”.

First Published:Feb 10, 2019 5:56 PM IST