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Book Review
Weathering a global crisis
K. SUBRAMANIAN
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Essays that relate to the years which witnessed the unfolding of a financial crisis
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INDIA AND THE GLOBAL FINANCIAL CRISIS: Y.V. Reddy; Oriental Blackswan, 3-6-752,Himayatnagar, Hyderabad-500029. Rs. 595.
This collection of speeches by Y.V. Reddy as Governor of the Reserve Bank of India is not an ordinary collection, for they relate to the years that witnessed the unfolding of a financial crisis described as the “worst in a century.” Those years also saw the fall from grace of the wizards of central banks in advanced countries.
In the pre-crisis era, it was the pastime of IMF researchers to churn out papers correlating the capacity of central banks to fight inflation with their level of “independence.” They evolved an elaborate Central Bank Independence (CBI) index. A working paper published in April 2007 studied the CBI of 163 banks. Curiously, the RBI’s score was a mere 0.25, compared to the tally of 0.56 secured by a group of 32 emerging markets. How could a ‘weak’ RBI weather a global crisis while stalwarts are still stuck in the mud?
Efforts
From this collection of lectures we get glimpses of the untiring efforts made by the RBI in assessing developments within the country and abroad and placing them especially in the context of globalisation and India’s move towards financial opening. As some of the lectures suggest, globalisation is no garden party and a precipitate entry into the thicket without preparatory build-up of institutional capacity for capital absorption may not ensure bliss.
Herein lies the message of ‘gradualism’ or ‘calibration’ of the reform process for which India has won global plaudits. Much of it was due to the wise inputs provided by Reddy as Governor. Reform zealots were impatient. Economists like Percy Mistry and Raghuram Rajan wanted him to stick to the interest perch and not stray into other territories.
Unorthodox methods
Sadly for critics, Reddy was unapologetic and steadfast in pursuing unorthodox methods. He recounts them all and they range from pricking the bubble in advance, prudential regulation, liquidity management, to battling the ‘impossible trinity.’ All these have been vindicated by later developments on the crisis front. He weaves all interconnected notes as in a symphony. The lectures make no easy reading and some of them cover areas that are difficult or abstruse. However, Reddy, true to his lucid and cultivated style, keeps them free of jargon.
It is evident that Reddy was not fixated with monetary objectives, unlike his western peers. Recent debates and academic exchanges highlighted the view that the earlier monetary policies had just “one tool, one target”: the tool was short-term interest rate and the target, price stability. RBI chief Reddy perceived them more organically and felt the need for multiplicity of objectives and instruments. As he put it in a lecture delivered on June 30, 2007 (not included in this collection), “the switchover to a multiple indicator approach provided necessary flexibility to respond more effectively to changes in domestic and international economic environment and financial market conditions.”
In the same speech, he dealt with the independence of the RBI and its relationship with the government. He had no illusion about the autonomy of monetary policy in countries like India. He said that while there was no de jure autonomy for the RBI, “de facto, the experience reflects a growing degree of autonomy.”
Policy differences
He elaborates the same issue in several places in this book and says, “The RBI exercises its independence only within the space defined by the government.” This leads us to the issue of policy differences that showed up between the RBI and the government on some major issues such as foreign bank entry and Lahiri Committee report on participatory notes. Reddy however puts a positive spin on these differences by saying that they were “often in the nature of creative tensions, with a notable beneficial impact on the economy.”
There is no evidence of bitterness or injured pride. As noted earlier, he was content with the ‘space’ given to the RBI. Rather, it may be more appropriate to say that Reddy appropriated the space by the strength of his endowments and stature.
We are gung-ho about India’s inclusion in G-20. Not so Reddy. He draws attention to the “danger that the policies of those countries may be stretched beyond what is required” and how “… attempts are being made to bring EMEs in alignment with the design of recovery and reform led by the U.S.”
As for the current status of our economy, he is optimistic but enters a cautionary note on the scope for fiscal and monetary stimulus vis-À-vis the inflationary undercurrents.
The epilogue is the icing on the cake. On the whole, the collection is Reddy’s gift to the nation. Unlike many “collected speeches” which gather dust in libraries, this will endure long and be cherished by academics and bankers.
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