Change needed

The annual report of the Reserve Bank makes two points that have policy implications. One is that the central bank should have a say in determining whether the chiefs of public sector banks appointed by the government are fit and proper, in the manner in which chiefs of private and foreign banks are vetted before their appointment. This is unexceptionable. Clearly, the government cannot say that there is sanctity in the banking regulator perpetually following the extant practice of accepting government-appointed chiefs of public sector banks as a given. No policeman should follow two sets of rules for different parts of the same constituency. But the reality is that the roles of the RBI as the regulator, and the government as the owner, have overlapped historically in the case of public sector banks. It is only now that the law is being changed to let the RBI pass on its holding in State Bank of India to the government, thus ending its dual role as both owner and regulator. The RBI’s point over its lack of voice on the fitness of public sector bank chiefs is a manifestation of its overall lack of autonomy vis-à-vis the public sector banks. The current situation, where the RBI and the finance ministry seem to be sparring in public, is also not one in which the finance ministry will readily give up its powers, or allow the RBI greater say. But the fact is that the banking division in the ministry, set up nominally to answer questions in Parliament relating to the public sector banks and to handle them as the principal shareholder, has often stepped on the toes of the RBI. With the general swing in favour of greater autonomy, the RBI has had more room for manoeuvre on many issues than was the case in the past, but this has not extended to the public sector banks. On the issue of roadmaps, one for achieving capital account convertibility has been laid down by the committee entrusted to do so but the RBI has not yet indicated what that is. Instead, it has declared in its annual report that the calibrated liberalisation of the capital market will continue. This does not make anyone wiser unless it is meant to indicate that the present way of doing things will pretty much continue. As the economy matures and engages more with the rest of the world, and with Indian firms increasingly making acquisitions abroad, a slow relaxation of capital controls is not only desirable but in fact inevitable. The authorities’ role, as in most of the economy, will get restricted to overseeing markets instead of substituting them. But the question remains, what will the central bank do if something like the Asian crisis of the 1990s, or even a lesser version of it, hits global systems? Two countries which managed to emerge unscathed from that trauma were China and India, both of which had till then put a careful lid on capital account convertibility. China is now freeing its exchange rate at a snail’s pace, indicating that there is a political agenda driving the change and nothing is going to happen in a hurry. As for India, it seems the right policy would be to speed up the relaxation of controls, because the present rate of change is inadequate. Meanwhile, the RBI should release the report of the committee and allow public debate. That would help clarify issues and aid decision-making.