A review of Dr. Y. V. Reddy’s ‘Advice and Dissent’

I have finished reading ‘Advice and Dissent’ by Dr. Y.V. Reddy. It was, for the most part, breezy reading. I had read plenty of speeches and I had read his previous books which were compilations of his speeches. Hence, it was not difficult to follow the discussions. The periods under discussion is mostly contemporary and hence my own recollection of the events helped me relate to the discussion in the book somewhat easily.

Dr. Reddy has lots to tell. At one place, he says that life had treated him unfairly. In the next sentence, he adds that it had treated him unfairly well. He is right. I cannot think of too many public servants in India who have had the depth and breadth of his experience — at all levels of government. Hence, there is plenty to share.

About the book — a few quibbles

The book is well organized for the most part. Details had been pushed to end-notes and there are not too many of them either. The discussion has been kept at an accessible level throughout. Some issues are repeated in multiple place and that could have been avoided.

Few Examples:

(1) The out-of-court settlement between ANZ Bank (that was later bought by Standard Chartered Bank) and the National Housing Bank.

(2) The discussion on using foreign exchange reserves to fund infrastructure.

(3) Dr. Reddy giving books as gift to RBI Board members based on their personal interests

There are a few others but these two come to mind readily.

On the first issue — ANZ and NHB — Dr. Reddy leaves the intelligent reader with no doubt as to why the matter was settled out-of-court and why the courts too went along with the reader, even though he does not spell things out. It relates to the fact that, later on, in another instance, a Citibanker tells him that he would help the Governor draft the policy on blanket permission for foreign banks to buy into Indian domestic banks.

On the second issue, the end-notes refer to caustic comments by Dr. I.G. Patel who saw in this nothing but deficit financing in disguise. Quite so. It was good that the proposal was not implemented.

The reference to Dr. Reddy awarding ‘Complications’ by Atul Gawande is numbered as the 8th end-note in that chapter but it actually appears as the 7th end-note in the End-Chapter notes. I am proud to note that I was another person to whom he recommended that book for reading. I bought and read it.

I am not sure that this sentence relating to the overhauling of the FERA is worded correctly. May be, it is. May be, it is not:

“The relative roles of the government and the RBI had to be redefined so that the market-oriented approach was replaced by a control-oriented approach.”

These are minor quibbles in an otherwise eminently readable book.

Personal chapters

The first few chapters offer a window into the personal and more human side of Dr. Reddy. We all know him as a formidable central banker. We did not know that he learnt to dance in Holland and also understood the difference between friendly girls and girl-friends, etc. It shows the lighter side of the man and that he did not mind mentioning without thinking about the impact such observations would have on his public image. That was refreshing.

Distinguished economist Joan Robinson missed out on having another illustrious doctoral student after Amartya Sen as Dr. Reddy could not take up her offer, due to family circumstances.

Personal lessons for the readers

What are the lessons that one can draw from such a glorious public innings? One, as he puts it in one place, he had been a man of excruciating detail and he probably still is. Two, he never hesitated to take breaks from his career to spend a few months in academia. Three, even when he did not enjoy the stint in the Commerce Ministry, he made sure that he used the time to study the Indian economy in greater detail and also participated in the IMF missions to Ethiopia, Tanzania and Bahrain. That had given him invaluable insights into other developing countries and their problems. Four, he had also made sure, as the Executive Director in the IMF that he represented the ‘constituency’ (Bangladesh, Sri Lanka and Bhutan) fairly, properly and according them due respect. That is something to keep in mind.

Of course, I have to acknowledge that, in a few places, he offers explicit counsel:

(1) “Never compromise long-term professional credibility while pursuing advocacy that the compulsions of immediate circumstances demand.”

(2) “This idea of drawing from various beliefs and ideologies and arriving at what appears to be an appropriate solution to the context became the guiding principle for me.”

(3) “Respect for people without reference to hierarchy”

(4) One of his seniors used to start meetings at 9:05 AM or 8:55 AM. That conveyed the seriousness of intent about punctuality. That is indeed an important lesson

(5) Speaking a local language (with colleagues and staff) introduced a level of informality and personal connection in discourse.

(6) Economists often advocate the desirable. Bureaucrats focus on what is feasible. It is possible to begin with the search for the desirable, then move towards the feasible, while at the same time assessing the costs and benefits of the distance between the two. This is a way of reconciling and balancing the feasible and desirable, always keeping the desirable in view. Similarly, starting from international best practices, one can assess how the Indian situation is different. The goal should be to move towards policies that are tailored for our requirements, while being consistent with international best practices. Or put another way, match the international best practice, but in our context.

(7) At the end of the day, a key to realising reform is to make the powerful feel the pain of the status quo.

The final one above is a very powerful and intriguing statement. It would have been very useful had he elaborated on it with some illustrations and case studies.

Policy lessons

The paragraph in page 148 (the hard cover version of the book) is a very useful primer for prudent liberalization of the external account for any country. Recognising and establishing the hierarchy of capital flows is very important for ensuring financial stability.

Later, he notes, “low inflation, low non-performing assets of the banking sector, and low fiscal deficit were key to fuller convertibility.” Again, he is quite right and hence, on this basis, India is a long way off from capital account convertibility. The good thing is that, internationally too, the item is no longer on top of the agenda of either the U.S. Treasury department or the International Monetary Fund now.

In one of the end-notes, he notes that Indian imports are more related to the level of economic activity rather than the exchange rate. Folks in NITI-Aayog and in the newly constituted Economic Advisory Council should take note. A weaker exchange rate might push up the import price without discouraging it and encouraging domestic production.

In page 156, he mentions several traits of Chinese officials he had interacted with and that is plenty of food for thought for Indian bureaucrats. They were punctual and they were well prepared for meetings. If a question was asked, without prior notice, they would only answer it the following day without offering any unprepared or half-baked response. Above all, he notes that they were determined to overtake the USA by 2020. Plenty of food for thought there.

What would have been even more useful to readers would have been open ruminations about where India stands, what he feels about its priorities, its failures, its successes and development challenges. Also, it would have been immensely useful for budding public policymakers as to what are his life’s lessons as a public servant. Those are not on offer easily. Perhaps, just as he was a self-made man and with excruciating attention to details, he wants the readers to form his or her own lessons and take-aways.

At one place, he mentions that “the state–market discussion was further complicated by the societal and cultural structures that India inherited…Endemic discrimination (caste, gender, rural– urban, language, etc.), weak trust among people outside immediate social circles, the lack of validity given to contract and transaction-based interactions were some of the many unique issues we faced.”

Personally, I think this is a very accurate portrayal of India even now, although his time period was the Eighties. Indeed, weak trust and the lack of validity given to contract are two of the biggest impediments to scale and scalable solutions to India’s problems and also the reasons behind why much of India’s regulatory architecture is so complicated and yet compliance so poor with the result that both farms and factories are so fragmented in the country.

It would have been useful to know what he thinks of this characterization thirty years later.

Also, in another place, he mentions that Indian enterprises did not have enough size (“Indian enterprises also did not have enough size and, therefore, overseas investments or acquisitions could produce synergies.”). That too, in my opinion, is an important and correct diagnosis and it would have been useful to know whether he thinks that it is a feature that has endured to this day.

Not-so-well-known facts

Some interesting facts that probably were not known that well:

· He privatised Allwyn Nissan, one of the earliest privatisations in the country

· He helped liberalise India’s current account completely

· He liberalized gold imports

· He paved the way for doing away with approvals for release of foreign exchange for import of capital goods

· He proposed a reduction in the stake of the government in banks to 33%. It figured in a Budget speech of Mr. Yashwant Sinha. But, it has not been implemented until now.

· He and Jaswant Singh (when the latter was the Finance Minister) agreed on two far-reaching proposals on liberalising capital account transactions — allowing Indian corporations to acquire overseas assets and remittances by Indian resident individuals in extremely interesting circumstances, rather unexpectedly quickly.

Personalities he encountered

His stint under N.T. Rama Rao makes for interesting reading as are the comments his colleague made about Shri. Narasimha Rao, the former Prime Minister, although Dr. Reddy seems to have a high regard for the former Prime Minister. He calls Chandrasekhar, the former Prime Minister, ‘dynamic’. He avoids commenting on Dr. Manmohan Singh’s performance as the Prime Minister although the former Prime Minister’s name appears in several places. Nor does he have comments on Rajiv Gandhi although he mentions that the pursuit of growth at any cost in the Eighties led to the Balance of Payments crisis.

In the aftermath of the acute shortage of foreign exchange, it is funny that many individuals, with dubious background, came forward to lend foreign exchange to the Government of India. Dr. Reddy makes some cryptic comments about whether Venkitaramanan and Gopi Arora, as Finance Secretaries, injected the right amount of urgency among politicians on the emerging crisis. He does not say anything explicitly but leaves the reader to guess the conclusion. That is Dr. Reddy’s constructive ambiguity which has been evident in most of his public pronouncements even as the RBI Governor. He did not want to offer ‘certainty’ as a free public good. The same spirit pervades the book.

It appears that he enjoyed working with Bimal Jalan and then with Jaswant Singh (briefly) as the Finance Minister. He pays a rather generous tribute to Jaswant Singh and the then Prime Minister Vajpayee for the Market Stabilisation Scheme that explicitly transferred the fiscal cost of intervention in the foreign exchange market to the government.

P. Chidambaram

His interactions with P. Chidambaram were longer since he was the Governor during much of UPA 1 years. The relationship had reached a breaking point such that he offered to leave. Of course, within a few months, his 5-year term ended and he did not appear particularly keen on being reappointed.

One thing stands out in this episode with Chidambaram. As in the Eighties, there was a clear preference to enjoy double-digit growth rates without regard to its sustainability and costs. Hence, Dr. Reddy was deemed to be a ‘spoiler’ with his characterization of the economy as featuring imbalances, as being likely overheated or for his preference for Tobin Tax.

India’s dalliance with high growth rates has always ended in tears — in the Eighties, in the mid-Nineties and between 2003 and 2008. Frankly, the economy is not ready. As to why it is the case, read his comments on the features of the Indian society and economy, mentioned earlier.

Dr. Reddy is rather forthright on the farm loan waiver that the UPA government announced in 2007. He thinks it was against the financial reforms.

On the issue of opening up the domestic banking system to foreign banks, he offered to admit himself into a hospital and then resigning on health grounds, rather than accede to it. He felt that reform of the domestic banking system was a pre-condition for liberalisation of the banking sector for foreign ownership. He is right. It is very insightful to note that, for a government supposedly supported by Communists, the UPA government, principally the Finance Ministry, was keen to pursue financial market reforms including foreign ownership. Dr. Reddy, due to his experience at the International Monetary Fund and from his observations, had become increasingly wary of financial liberalisation and the role of international financial conglomerates. It is not hard to imagine the sources of pressure that were brought to bear on the Indian Finance Ministry.

It is interesting that Axel Weber, former Bundesbank President mentions that regulators were afraid of taking action against financial conglomerates. He went on to become the chairman of UBS. The book does not mention Bernanke even once and Greenspan figures insubstantially in the book.

Unfinished banking reform

In fact, the reform of the domestic banking system is an unfinished task for him. He feels that several public sector banks did not come under the Banking Regulation Act and hence RBI could not regulate them effectively. He also did not want RBI nominees on the Board as it would mean conflict of interest. His recommendations on the procedures for the appointment of members to the Boards of Public Sector Banks and to the positions of the Chief Executive Officers have not been heeded by Governments. Unfortunately, it is still the case. The Bank Boards Bureau has been dormant and ineffective. Governance of Indian public sector banking leaves a lot to be desired and yet, many still want to preserve it as it is, without any reform! Indeed, they think that the problem of bad debts and non-performing assets would not have arisen had the RBI not implemented the Basel norms for recognition of non-performing assets!

Such advisors to the present government would do well to read these observations:

“Borrowers repay their loans more out of moral obligation than due to legal compulsion. So, the risk weights and provisioning requirements for determining adequacy of capital of a bank had to be more stringent than the global standards.”

As for another unfinished work from his point of view, he refers to the use of ‘Participatory Notes’ that allows foreigners to invest in Indian stocks anonymously. It is a conduit for round-tripping and for money laundering. Participatory Notes are still prevalent but I am not sure they are as important a vehicle for participation in the Indian market as they were then.

Central Bank independence

Government ownership of the banking system is one of the reasons why he feels that the so-called independence of the central bank is constrained. He dedicates several pages to the topic of central bank independence. He divides it into three aspects: operational, policy and structural.

Operational independence for the central bank: he favours it

Policy matters: in consultation with the government

Structural matters: in close co-ordination with the government.

He says that he was prepared to ‘irritate’ and ‘frustrate’ the sovereign but not defy it. His only response would have been to resign on health grounds. He offered that in the case of foreign ownership of domestic banks and, if we recall, that would have been his response towards demonetisation, as he told Shekhar Gupta.

As a legal construct of the government, without a constitutional authority, he is clear that RBI cannot be equal to its creator.

In a remark that is rather uncannily similar to what Raghuram Rajan said recently in his book, ‘I do what I do’ that he viewed his role as the risk manager for the economy, Dr. Reddy says the following:

‘Yes,’ I replied. ‘My single objective is to protect the Indian economy from the Government of India.’ In some sense, that is the reason for the existence of the RBI. The government created the Reserve Bank of India to moderate its temptation to take a short-term view on matters relating to money and finance.

He is right that the central bank was a bulwark against government’s inherent short-termism. That is why I had also proposed in one of my columns last year that the government should encourage certain institutions and roles to play the role of ‘Devil’s Advocate’ actively.

This is important:

“The governments in market-oriented economies want central banks to appear to be independent and apolitical. The philosophy is that the authority that creates money should ideally be independent from the authority that borrows and spends money, namely, the government. That is an important rationale for the autonomy of a central bank.” (Page 249).

Raghuram Rajan

Since we have brought up the name of Raghuram Rajan, it is good to mention the two or three instances in which this former RBI Governor appears in the book:

· Dr. Reddy played a role in his becoming the Economic Counsellor at the IMF

· He had invited Raghuram Rajan to become the RBI Deputy Governor which the latter, after some reflection, did not accept.

· Dr. Reddy notes that the Raghuram Rajan headed Committee on the Road Map for Financial Sector Reforms did not have any members from either the Ministry of Finance or the RBI and that it functioned mostly out of the premises of the ICICI Bank in Mumbai

Inflation targeting

On the inflation targeting regime that Raghuram Rajan ushered in, it is interesting to note that Dr. Reddy had already adopted a flexible inflation target of 5.0% and had wanted it to be reduced gradually to between 4.0% and 4.5%.

At the same time, Dr. Reddy did not think that India was ready for an inflation target being the sole monetary policy agenda. We do not know as to whether he thinks that India is ready now than it was when he was the Governor of the RBI.

Ending on a High Note

Dr. Reddy ends the book on a high note with a chapter on his stewardship of the Fourteenth Finance Commission. The book ends with a praise from the former President Pranab Mukherjee that Dr. Reddy had addressed many fundamental issues with the work of the Fourteenth Finance Commission. That is quite an apt note to end the book by a man who has indeed addressed many fundamental issues on monetary policy too — hierarchy of capital flows, capital account liberalisation, financial sector liberalisation, etc.

His career has been a signal contribution to Indian economic policy and it was only appropriate that those who considered his name for the award of ‘Padma Vibushan’ felt honoured to recommend his name.