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T C A Srinivasa-Raghavan: Governor Patel: Float like a butterfly, sting like one

The first time an economist was made governor was in May 1977

T C A Srinivasa-Raghavan 

T C A Srinivasa-Raghavan

On Monday, the Reserve Bank of India (RBI) will get its 24th Governor, Urjit Patel. He is an economist. The first time an economist was made governor was in May 1977. That was M Narasimham, an old RBI hand, who held the post for six months. Since then there have been eight economists who have been governors: I G Patel, Manmohan Singh, C Rangarajan, Bimal Jalan, Y V Reddy, D Subbarao and Raghuram Rajan. Now there is the ninth, Urjit Patel. Of these eight, all but Rangarajan had served for several years in the finance ministry. Rangarajan was never there but had been part of the government system since 1981. Rajan had served for a year. Patel has been there for in-out assignments. In that sense they are the only two to have parachuted into the government system of which the RBI is a part. The others came in fully aware of the way the government, and the politicians who head it, work. About 10 years ago I had written an article asking who had been more successful, as governors - economists or bureaucrats. I had said the bureaucrats performed better. This had upset the economists. It is worth asking that question once again, not least because it gets confusing when a bureaucrat also has a PhD in economics the way Jalan, Reddy and Subbarao did. All three have doctorates from Indian universities. Rajan and Patel's PhDs are from MIT and Yale respectively. They are therefore bound to view things differently, including their place in the government's scheme of things. Mirror, mirror on the wall Governors face two types of problems: immediate ones, which are several but which can be solved because the RBI is empowered to solve them. These are largely managerial problems and don't require any prior knowledge of economics. Other non-economist governors have coped well with problems like foreign exchange, the exchange rate, banking, stock market scams, etc. But then there are two permanent problems that can't be solved by the RBI, although several governors have thought they can actually solve them. These are the two structural problems: inflation and the government.

The latter is the biggest problem of all because it causes the inflation. The RBI is quite powerless here. It can only bleat helplessly as the incumbent governor watches his reputation muddied and his legacy go down the tube. No governor has succeeded in taming the government, and therefore inflation. Or, more charitably, only three governors can be said to have been successful. (Contrary to popular myth, I G Patel was quite unsuccessful. He could manage neither inflation nor the government. You only need to examine the record). The ones who succeeded in managing both are Manmohan Singh, whose term was mysteriously cut short by Rajiv Gandhi who moved him up, and out; Rangarajan, who got along splendidly with his finance minister, Manmohan Singh; and Jalan who also had a good equation with his finance minister, Yashwant Sinha. All three were also luckier than the others with inflation. They could therefore focus on managing the government. To be a successful governor, you need to be lucky with inflation and self-effacing with the government. The last is very important. In the last 13 years, Reddy was lucky with inflation but had problems with the government after 2006. Subbarao got unlucky with inflation after 2011 but got on fairly okay with the government. Butterfly or bee? Urjit Patel has, so far at least, been floating like a butterfly around the government and stinging the RBI like a bee. He dislikes the fiscal dominance of the former and the monetary pusillanimity of the latter. He has even said so in writing. But now he will have to change his technique. He will have to float like a butterfly and sting like one, too. He will also have to be mindful of the government's preferences, as in, say, the matter of bank licensing. By all accounts, he will be able to do both unless the feudalism of the RBI makes him forget - and it can - that the order of precedence does not mention the governor of the RBI even though he enjoys the status of minister of state. Also, he needs to remember that there is a Boss Group and it is best to pay attention to it. Central bank independence is important but it should not be confused with the recalcitrance of governors. That way lies ignominy, as so many have found to their detriment.

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First Published: Fri, September 02 2016. 21:37 IST
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