The fourth volume of RBI’s history is an exciting read, particularly when the govt is grappling with a critical phase of the economy
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| The fourth volume of RBI’s history (1981-1997), is much more than the story of central banking—it’s the economic history of India during that period. Photo: Pradeep Gaur/Mint |
In the past few years, former Reserve Bank of India (RBI) governor D. Subbarao repeatedly urged the government to address structural issues in the Indian economy. He was not the first one to do so. In May 1989, then RBI governor R. N. Malhotra wrote to the finance ministry: “From all accounts, it appears that if no strong policy actions are initiated, the trade deficit in 1989-90 will be even higher than that in 1988-89. Oil prices have already started rising and the increase in commodity prices in general may cause the import bill to increase faster. Apart from the fact that the rising current account deficit has serious implications for debt servicing in future, even in short run there can be difficulties in financing a deficit of this order. Last year, we allowed the reserves to fall to the extent of Rs.1,500 crore. We cannot allow any further decline in reserves...All these point to the need for decisive action to limit the trade and current account deficit.”
In early 1991, India’s foreign exchange reserves dropped to $1.1 billion, which could just cover five weeks of imports; oil prices escalated sharply because of the Gulf War and remittances from Indian workers in the Gulf declined; and by April 1991, there was a significant withdrawal of non-resident Indian deposits and several Indian banks stopped honouring Indian letters of credit for import transactions. The current account deficit was 3% of gross domestic product (GDP) and by June 1991, the wholesale price inflation was 16%. All these led to the pledging of gold, the government asking for a 20-month stand-by arrangement from the International Monetary Fund (IMF), and a series of reforms in the real and financial sectors.
The RBI annual report in 1991-92 explained the underlying causes of the economic crisis: “The country was faced with a risk of default on external debt servicing during the early months of fiscal year 1991-92. The strain on external and internal resources, the threat to monetary stability and the resultant inflationary process had begun to hinder investment plans both in the public and private sectors, giving rise to distortions in production and employment generation. The situation called for strong stabilization measures: fiscal correction, monetary tightening, inflation control and strengthening of the competitiveness of India’s exports.”
The fourth volume of RBI’s history (1981-1997), the outcome of three years’ work by current and former officials of RBI, and guided by an independent advisory committee under the chairmanship of former RBI governor Bimal Jalan, is much more than the story of central banking—it’s the economic history of India during that period.
Indeed, the defining event of the period was the balance of payment crisis of 1991, which falls between two phases of India’s economic history—pre-crisis and post-crisis or pre-reform and post-reform, depending on how one looks back at history. It traces India’s emergence as a global economic power after it was forced to embrace economic liberalization. For the government, there were immense challenges on the fiscal front while RBI’s job was to ensure monetary stability and inflation control.
The first volume (1935-1975) covered the birth of RBI and challenges in the formative years; the second volume (1951-1967) was on RBI’s role in process and development of planning; and the third volume (1967-1985) focused on the spread of banking services in a period when the government and not RBI was making all important policies. The latest volume covers the most eventful period in India’s economic history when RBI and the government worked in close coordination.
Five governors were at the helm of RBI during this period—I.G. Patel, Manmohan Singh, R. N. Malhotra,S. Venkitaramanan and C. Rangarajan. Besides, Amitabha Ghosh was also in office for three weeks. In some sense, this was also the Rangarajan era in RBI as barring a small stint at Planning Commission, Rangarajan was with RBI between February 1982 and November 1997, first as a deputy governor and then as governor. The seeds of liberalization and reforms were sown in 1980s in industry, trade, taxation and deft exchange rate management. In March 1985, the government announced de-licensing of 25 broad categories of industries. By 1990, the number of de-licensed industries rose to 31.
Industrial reforms were accompanied with other reforms—a long-term fiscal policy was announced in December 1985; the Securities and Exchange Board of India was formed in 1988-89; and the Unit Trust of India floated the India Growth Fund in 1988 to offer non-resident Indians and foreign investors a route to indirectly invest in Indians stocks. These reforms led to economic growth—the average annual growth between 1980 and 1985 was 5.7% and in the second half of the 1980s, 5.8%, in contrast to 3.5% in the first three decades after independence but as an outcome of fiscal expansion it was fragile and unsustainable.
RBI ushered in reforms following the seminal recommendations of quite a few committees. The Sukhamoy Chakravarty committee examined the monetary systems and suggested ways to strengthen it by looking at the budget deficit from the angle of monetization of the deficit by RBI; 182-day treasury bills, certificates of deposits and commercial paper were introduced based on the recommendations of the N. Vaghul committee; and the Rangarajan committee on balance of payments recommended the introduction of a liberalized exchange rate management—a transitional system with a dual rate with the objective of moving towards convertibility on current account transactions. The banks also transformed themselves from social to commercial institutions in carefully sequenced reforms, following the recommendations of Narasimham committee.
Overall, the two-set, 1,348-page fourth volume of the history of India’s central bank is an exciting read, particularly now when the government is grappling with a very critical phase of the economy, and the banking regulator is playing the role of an alert watchdog.
Source:The mint
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