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Viral Acharya needs a 'Bharat Darshan'

By S Muraleedharan
November 02, 2018 09:28 IST
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'Tilting at the government in English in front of India may make him feel like Joan of Arc, but without a feel for Bharat he will merely be Don Quixote,' says S Muraleedharan, former managing director, BNP Paribas.

Reserve Bank of India Deputy Governor Dr Viral Acharya, second from right, with RBI Governor Dr Urjit Patel

IMAGE: Reserve Bank of India Deputy Governor Dr Viral Acharya, second from right, with RBI Governor Dr Urjit Patel.

Recently a deputy governor of the RBI, Viral Acharya, expressed his (strong) views on the need for independence of the RBI. He was airing his views in public in front of a group of businessmen.

In defending his stand, he bordered on fear-mongering, warning of dire consequences in the absence of what he deems 'independence'. Lest there be any misunderstanding that he has gone 'rogue', he added that his boss Urjit Patel encouraged him to explore the issue of 'independence' in the address.

Subsequently the RBI employees have jumped into the fray, needlessly muddying the waters further. Clearly, Dr Acharya chose to address the issue in a manner calculated to get maximum publicity. It also appears calculated to open yet another front against the present dispensation in the run-up to the elections next year and thus exert maximum pressure in favour of the cause he was espousing.

These two factors take his speech out of the realm of monetary management (which is the remit of the RBI) and place it firmly in the minefield of politics which is the domain of political parties.

The presence at the lecture of his peers and the invocation of the Governor's blessings appears intended to suggest that he is not alone and that the entire RBI stands with him.

Is he right in what he said, when he said it, where and how?


Dr Acharya's views were expressed at the A D Shroff memorial lecture in Mumbai at the Forum of Free Enterprise. The lecture was instituted in memory of Mr A D Shroff, an economist who represented India at the Bretton Woods Conference which chalked out the post World War II global economic order. The IMF and World Bank are babies of Bretton Woods.

Mr Shroff himself founded the Forum of Free Enterprise in 1956, no doubt anguished by the definitely pink hue that the political economy of India was taking on at that time with the State controlling the heights of the economy.

It has since being espousing the cause of Free Enterprise, evidently without much success, for it took the reserve crisis of 1991 and the political craftiness of Narasimha Rao that set in motion the liberalisation of the economy.

The annual Shroff Memorial lecture is well-attended by businessmen and bankers of the land, hardly the type of platform one would use to air one's differences with the government of the day especially if it is considered fundamental to the success (or failure) of Indian Democracy.

Dr Acharya might have done well to ponder the fact that while this sort of thing is grist to the Westernised Elites' mill, it is largely a non-issue to the vast majority of Indians looking for their next meal and a roof over their heads.

While the English media have hyperventilated and political opponents have took on a stern holier-than-thou sanctimoniousness, the regional media have ignored the issue altogether.

This should serve as an eye opener to all of us whose socio-political (not to mention historical) sensibilities have been developed in and conditioned by a Western framework -- issues that exercise us are not the ones moving the billions.

Therefore, such issues are best debated between the parties concerned in a spirit of mutual respect and give and take -- isn't that what democracy is all about?

Dr Acharya's speech starts with a masterful summarising of the theory of independence of Institutions as the precondition for the success of a democracy. These institutions do not include the Central Bank, but only the Judiciary, Election Commission and (strangely) property rights which is a right, not an institution.

It is evident that while this is a model of governance, predicated upon a free-market liberal democracy with individual rights at its core, this is not the only model for an economy to succeed.

It is unlikely that an erudite man such as Dr Acharya is unaware of exceptions such as China which has contracted with its people to deliver rapid economic prosperity in return for absolute Party control over politics; much of South Korean economic miracle happened under de facto or near-totalitarian (and certainly authoritarian) governments. Even now South Korean democracy is beholden to business Chaebols and its democracy is at best tentative.

The post-WW II Japanese miracle was not wrought through a clash of competing ideas or the Western paradigm of win-or-lose binary logic; but it was based on their traditional paradigm of social harmony and consensus-building.

Suffice it to say far less gifted intellects than Dr Acharya's can see that there are alternate socio-political and economic paradigms for prosperity.

Dr Acharya making 'Institutions' the starting plank of his discourse is troubling. In his support he does wheel out some real big guns. In my view, it was an attempt to tap into the rich vein of intellectual uproar about the erosion of 'democratic institutions' under the present political dispensation.

If that sounds political, it is. Dr Acharya is young and unlikely to recall that the ideological underpinnings for the systematic subversion of the Institutions were proposed, erected, and defended in the 1970s.

Indira Gandhi was firm in her view that the elected government was supreme compared to any or all institutions. To cut a long story short, he had come to the gathering determined to decisively vanquish those he saw as the enemy.

While expatiating on economic management is his turf, his considerable effort to imply that all institutions are under attack and that democracy is imperilled shows to me he had come ready to execute, not enquire or engage.

The rest of his talk concerned the RBI's Independence to pursue Monetary Policy, Exchange Rate Management, Public Debt Management, and Financial Supervision. Considerable focus was also on how the RBI's surplus should be dealt with.

Dr Acharya contends that since elected governments' time horizons are necessarily short and their inclinations essentially populist, experts should be left free to manage these areas. I would not go further than to quote from Georges Clemenceau, 'War is too serious a matter to entrust to military men'.

Dr Acharya might well respond that Mr Clemenceau would have lost a war, but for the British and the Americans. To arrogate to oneself the highest ability and the noblest motive is arrogance and hubris of the highest order, hardly the characteristics that makes an effective business manager, let alone a successful economic manager at the highest level.

Dr Acharya is absolutely right that the government should not own and control banks. That was the result of a cynical political act perpetrated five decades ago which cannot be unwound overnight.

Political parties aren't about to let go of the privilege conferred by owning and controlling banks, especially considering that their political opponents have enjoyed that privilege for decades.

Letting go of anything is difficult and this sort of control on this scale, million times more so. The answer is to convince the government through persistent and unremitting engagement, dialogue and discussion -- leading the central bank of the largest and probably the most fractious democracy isn't easy.

Dr Acharya is also on the dot when he regrets that large sections of the economy served by unregulated lenders vitiate a central bank's control on creating and expanding credit. He is, however, less right when he appears to suggest that the 'shadow banks' or unregulated/lightly regulated lenders are somehow being 'encouraged'.

Nature abhors a vacuum and when there are sectors which have low or no access to credit, informal lenders step in. He might recall that the government killed the chit funds in the 1960s after one or two highly-publicised failures.

Chit funds were then the most effective and flexible means of saving as well as the most readily available source of credit. They were a lifeline for personal and small-business borrowers. Countless are the families, mine included, which could only send their children to college thanks to the chit funds.

NBFCs admittedly have been flourishing through regulatory arbitrage. Be it credit to real estate, film-making, stock-broking, jewellery and gold trade, they were quick to respond. Banks do not know how to lend to these businesses.

If we create a vacuum, someone is sure to step into it.

It is also not possible to regulate everything. Ever since NBFCs came under the RBI's ambit two decades ago, they have found ever ingenious ways of side-stepping the latter's regulations.

Killing them is no solution; coming up with answers to the conundrum of how to let them flourish without losing control over credit and money supply is.

The serious issue is that a vast majority of small businesses and the informal sector do not have easy -- I would even say any -- access to bank credit. It is no exaggeration to claim that the beating heart of India's economy is such businesses which mostly operate from small towns and villages. They also employ a very large number of people.

They mostly fund themselves through community or group chit funds, private 'hand loans' and the like. The manufacuring-centric banking system cannot and will never be able to meet their demands for credit expeditiously and in required quantities. Local informal lenders (perhaps not even recognised as such) are somehow able to perform that role.

Dr Acharya makes a very valid point about the elephant in the room; he cannot be more explicit but I can be. The bureaucratic interference in the work of the RBI and treating the latter as errand boys of the twice-born IAS staffers is an old issue.

How then does one kill the elephant? Take a lesson from how the early man conquered (and ate) mammoths. Kill them by a thousand cuts.

The RBI will have to take the power of and responsibility for supervision slowly and systematically; perhaps starting with the ones the babus may not want to touch with a barge pole: Bad banks.

Smart men and women in the RBI should be able to work out the ways of doing this. Some of the significant progress in the work of the RBI was during the tenure of Governors who had served the government as bureaucrats: Dr Bimal Jalan, Dr Y V Reddy, Dr D Subba Rao, et al.

Knowing how to work the corridors of power and how the political masters are best handled was no doubt an asset. The relatively youthful top echelons in the present-day RBI stands in contrast to the mandarins of North Block as a result of which the former suffer.

But that is the beast. You deal with the cards you are dealt with. They need to think less like the 'experts' that they no doubt are, and put on the 'smart' cap.

The government must on its part must keep its bureaucracy in check and stop them treating special arms of the government like their minions and serfs.

The time to stop it is now.

There are a number of other issues that Dr Acharya points out none of which one can take exception to. But it is the manner he raised the issues, the forum he used to do that and the style in which he did that, which is disconcerting -- to me at least.

Clearly, he was confrontational, alarmist and speaking to the urban elite perhaps hoping to cash in on the groundswell of urban opinion against the present dispensation. This is not the act of one intending to solve a problem; rather it is that of someone trying to wrestle a pig -- the pig always wins.

Democracies work through 'Advice and Consent'; Advice from the experts and with the Consent of those being governed. Advice is what the likes of Dr Acharya are supposed to give the governments in power and Consent is for the latter to secure through political means.

People's Consent is what the political wing has and experts don't. Engagement with the political wing and careful and lengthy negotiations can achieve what all the expertise in the world cannot.

I dare suggest Dr Acharya might benefit from a 'Bharat Darshan' to the top 100 non-metro towns to understand how Bharat ticks.

Tilting at the government in English in front of India may make him feel like Joan of Arc, but without a feel for Bharat he will merely be Don Quixote.

S Muralidharan retired as the managing director of BNP Paribas after serving the bank for 20 years.

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