Meddling with the independence of Reserve Bank detrimental to economy

Duvvuri Subba Rao, former Governor of Reserve Bank of India, stated in his memoir that finance ministers during Congress-led United Progressive Alliance (UPA) government brought pressure on the apex bank to reduce interest rates and paint a rosy picture of the Indian economy. His successor Raghuram Rajan also did not have cordial relations with the Modi government. However, it’s not wrong for RBI to support the central and State governments in the country in their endeavours to accelerate growth. But that should not come at the cost of the poor in the short term and at the cost of India’s well-being in the long run

The world’s largest democratic process began in India on a positive, but tepid, note as polling in the first of the seven-phase elections ended last week. Incidentally, it was the biggest phase of the 2024 General Elections, with 102 Lok Sabha seats spread across 21 States and Union Territories. The key take away from it is that polling percentage has come down significantly by more than four percentage points from around 70 per cent in the first phase of the 2019 General Elections to 65.5 per cent this time. This decline was across 19 out of 21 States and Union Territories.

Though West Bengal was an exception, the trend is a clear indication that there is no nationwide wave whatsoever in this election. The ruling dispensation, led by Prime Minister Narendra Modi, has been claiming that there is a Modi wave across the country while the opposition INDIA block has pinned its hopes on an anti-incumbency wave against the BJP-led National Democratic Alliance (NDA) government. But it looks like there is no wave whatsoever.

Further, going by the experience in the previous two general elections, the first phase always sets the tone for the subsequent phases. Will this dynamic change this time around? Anyway, the low turnout should worry lovers of democracy, opposition parties and even the Election Commission.

Amidst this din of elections and electioneering, one key element went unnoticed.

Duvvuri Subba Rao, former Governor of Reserve Bank of India (RBI), stated in his memoir that finance ministers during Congress-led United Progressive Alliance (UPA) government brought pressure on the apex bank to reduce interest rates and paint a rosy picture of the Indian economy. Subba Rao was the RBI Governor for five years from September 2008, when the UPA was in power. He mentioned names of Pranab Mukherjee and P. Chidambaram who occupied the hot seat in the Finance Ministry in the North Block.

Mukherjee, who went on to become the President of India, was Finance Minister from January 2009 to June 2012. Chidambaram replaced him and continued till the 2014 General Elections.

Subbarao, who worked as Union Finance Secretary before taking over the reins of RBI, devoted a whole chapter in his book, 'Just A Mercenary?: Notes from My Life and Career', for his experience as an RBI governor with the central government.

Quite interestingly he named the chapter as 'Reserve Bank as the Government’s Cheerleader?' He wrote that the RBI should not be the cheerleader of the government. He also found fault with the then government for seeking projections for higher growth rate and lower inflation from RBI for ‘shoring up sentiment’. He claimed that he did not deviate from the best professional judgment despite pressures from the Centre.

That way, he has taken a right stand as the RBI, which recently celebrated its 90th anniversary, is an independent body though it falls under the Ministry of Finance.

The Modi government was quick to respond to the critical comments made by the former RBI government.

Finance Minister Nirmala Sitharaman, in a post on X, asked whether lecturers from Congress on respecting institutions were only for others. She also raised doubts over GDP growth numbers during the UPA regime. Another vocal leader from BJP and Union Minister Smriti Z Irani also pointed out that the revelations exposed the institutional abuse by the Congress.

That way, comments by Subbarao came as a shot in the arm for the Modi government at a time when it is facing allegations of blatant misuse of central agencies like Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI) to trouble political opponents.

But interestingly, the Modi government also had issues with RBI governors. Foremost among them being economist Raghuram Govid Rajan, who succeeded Subbarao and was the RBI chief for three years from September 2013. He was willing to serve a second term, but the Modi government did not offer him extension. That clearly showed all was not well between Rajan and the Union government. After his tenure ended, Rajan turned into a bitter critic of the Modi government and moved closer to Congress leader Rahul Gandhi.

But the bottom line is simple and clear. It’s not wrong for the Reserve Bank to support the central and State governments in their endeavours to accelerate economic growth. But that should not come at the cost of the poor in the short term and at the cost of India’s well-being in the long run. If the apex bank focuses on economic growth without taking inflation into consideration, it may bring cheers to those in power at the Centre. But such a policy trajectory will harm people both in the short term and the long run. Simply put, meddling with the independence of Reserve Bank is detrimental to economy. Moreover, inflation is the biggest enemy of the poor in India as this deprived section ekes out a living on a shoe-string budget. Any rise in prices of essential commodities will take a big toll on them. So, RBI should always remain an inflation warrior while balancing growth. And the governments should allow RBI to do its mandated duty without fear and favour. That will do well for them as well as for the country as a whole.