Should finance ministers from Tamil Nadu assume additional charge as RBI governors?
New Delhi August 18, 2006
The recent confrontation between the finance ministry and the Reserve Bank of India (RBI) — when the former more-or-less forbade some banks from raising interest rates after the latter had signalled that they should — is only one more in a long series of such major and minor confrontations. By a strange coincidence, almost all have involved a finance minister who comes from Tamil Nadu.
The first one, by far the ugliest, happened half a century ago in 1956 and it more-or-less settled the RBI’s fate as a subordinate arm of the government. We have two accounts of it — one in Volume 2 of the RBI’s official history and another in B K Nehru’s autobiography.
The finance minister was T T Krishnamachari (TTK) who not only thought that he knew everything but also that no one else knew anything. The governor was Sir Benegal Rama Rau, an ICS officer of impeccable credentials.
From the very start TTK treated Rama Rau shabbily, and the latter complained at least thrice to the prime minister about TTK’s “rudeness”, “rude language” and “rude behaviour”. Once TTK even announced a monetary policy in Rama Rau’s presence, which was different from what the RBI was going to announce.
But what proved to be the last straw was the announcement by TTK of a stamp duty on bills. He refused to acknowledge that it was a revenue measure and wouldn’t tell even Parliament — which did not command much respect from him anyway — of how much the tax would fetch.
TTK wanted to money to continue to be cheap but at the same time said the tax, which would eventually raise the lending rate, was a credit control measure. How both could be true, he did not deign to explain.
Rama Rau and others tried to dissuade TTK, to no avail. TTK even told Parliament that the proposed hike was a “fiscal measure with a monetary intent”! This led Rama Rau to write a letter in which he said that henceforth “two authorities would operate the Bank Rate.”
The finally matter went up to Jawaharlal Nehru, and a meeting was called in the cabinet room to discuss the matter. TTK and Rama Rau came face to face outside it, and according to B K Nehru, TTK “let fly in no uncertain terms and in the loudest of voices.” He made it clear that the RBI was a “department” or “section” of the finance ministry.
Rama Rau immediately resigned but was persuaded to stay on by Jawaharlal Nehru and G B Pant, the home minister. But TTK’s attacks on him and pressure on the RBI continued.
Eventually, Nehru took TTK’s side and wrote to Rama Rau that the RBI was “obviously a part of the activities of the Government… and has to keep in line.” Rama Rau resigned, and Nehru’s response was short: ok, buzz off. A little earlier, Nehru had written to Vaikunth Lal Mehta that the RBI had to have its autonomy, and so on!
In the 1960s, the government was too preoccupied with other things — wars, political succession and drought — to engage with the RBI. In any case, after the above episode, the RBI was too shell-shocked. It just mumbled and grumbled.
There was a series of minor confrontations in the 1970s but, compared to the TTK-Rama Rau drama, they were nothing. Still, one thing became clear: the finance ministry, at least under C Subramaniam during 1975-77, treated RBI like a UP chief minister treats a Collectorate. There were as many as four governors during this period — one for just two months.
In the 1980s, there was only one instance of a major face-off. In 1983, Manmohan Singh was governor. Pranab Mukherjee, who was the finance minister, wanted the RBI to grant a licence to the BCCI.
Singh preferred to resign but eventually didn’t, perhaps because Indira Gandhi asked him not to. BCCI got the licence.
From 1985 to 1989, there was very little tension in spite of the huge fiscal expansion. This cordiality continued through much of the 1990s. One reason was that Singh had been governor. Another was that Yashwant Sinha did not face fiscally expansionary pressure from his party. But the main reason was that both Singh and Sinha respected the governors and listened to them.
So if respect and listening be the sine qua non for harmony between a finance minister and the RBI governor, perhaps finance ministers from Tamil Nadu should assume additional charge as RBI governors.
Even they would find it hard not to respect and listen to themselves.