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Central Banking in India
The flow of events and ideas behind central banking in India, in four distinct phases since independence—1950–70, 1970–90, 1990–2010, and post 2010—is narrated. The 1950–70 period is characterised as one of planned fiscal dominance, while the 1970–90 period has seen the dominance of the fiscal and financial sector with an inward-looking bias. Although there was partnership in crisis management and reform between the Reserve Bank of India and the government during 1990–2010, the period witnessed some differences between the government and the RBI in the areas of monetary management and external sector. The period since 2010 is broadly categorised by the rebalancing and adoption of a new framework, like inflation targeting.
This is a mildly revised version of the Kale Memorial Lecture, organised by the Gokhale Institute of Economics and Politics, Pune on 9 February 2019. The author wishes to acknowledge Indirani Rao, G Padmanabhan, A Premchand, C Rammanohar Reddy, T C A Srinivasa Raghavan, Partha Ray, and Usha Thorat for their inputs and comments.
The issue of governance in central banking is being widely debated globally. The United States (US) President Donald Trump has criticised the Federal Reserve (Fed) for raising interest rates. The European Central Bank (ECB) President Mario Draghi recently raised the issue of the threat to central banks’ independence from governments stating that the “ECB mandate does not involve financing government’s deficit” (El-Erian 2018). President Erdogan of Turkey accused the Central Bank of a “traitorous” reluctance to lower interest rates. In India, tensions between government and the Reserve Bank of India (RBI) in the very recent past have been aired in public, culminating in the resignation of governor Urjit Patel. Shaktikanta Das who took over as governor in December 2018 said: “I will try and uphold the professionalism, the core values, the credibility and the autonomy of Reserve Bank” (Saha 2019).
The fiscal deficit has been a concern for long in India, but current concerns have new dimensions. There are controversies about measurement of the gross domestic product (GDP). The Comptroller and Auditor General (CAG) of India mentioned that the deficits are understated. The critics point out that the dividend from the RBI to the government already exceeds the dividends to government from all public enterprises. Yet, the government has sought and obtained interim dividends recently, obviously to meet cash needs. While a committee is examining the government’s claim on the accumulated reserves of RBI, including those on account of revaluation, it has been reported that the RBI is being asked to pay to government as dividend, the amounts that have been transferred to reserves in the previous two years. Cumulatively, these events are being interpreted by some critics as replacement of “automatic monetisation of pre-reform period” with what may be termed as “coercive monetisation of fiscal needs.”
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