Just A Mercenary? – Notes from My Life and Career set out to be another memoir of a brilliant civil servant. Duvvuri Subbarao had topped the civil service examinations in 1972. Serendipitously the author’s tenure as both finance secretary to the Government of India and Governor of the Reserve Bank of India (RBI) coincided with major turning points in the country’s economic history – the balance of payments crisis of 1990, the heady days of high growth in 2007 (and the 2G scam) and then the economic downturn that followed the global financial crisis of 2008, while he helmed RBI between 2008 and 2013.
Within days of its launch in the capital, the book has evoked strong emotions and critiques. Duvvuri Subbarao talks to BW Businessworld about both his book and its critics. Excerpts of a conversation with Madhumita Chakraborty
Your appointment as Reserve Bank of India (RBI) Governor in 2008 had been perceived in media as a political decision by the then Union Finance Minister P. Chidambaram, perhaps, because (as you write) your “relationship with Governor Reddy hadn’t been entirely smooth” during your tenure as Union finance secretary. Yet you had your own differences with North Block once you were in the RBI Governor’s big boots. To what extent is the RBI Governor truly independent as a central bank, in comparison with say, the US Federal Reserve or the Bank of England?
The RBI as an institution, and the Governor as an individual, are more independent than is commonly perceived. In fact, RBI’s autonomy has improved over time because of several reforms such as the ending of the system of ad-hoc treasury bills, the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, adoption of the inflation targeting framework and the institution of the Monetary Policy Committee. The bottomline: the RBI is as independent as the Governor would like to assert.
The RBI, for sure, has to be open minded and sensitive to the government’s point of view but has to act according to what it considers objectively to be in the best public interest.
In as much as there is no objective measure of central bank independence, international comparisons are difficult and may even be misleading. But as I write in the book, government-central bank tensions are hardwired into the system and are by no means unique to India. We have seen them play out in other countries – Japan, Brazil, the UK, Türkiye and the US. We have seen President Trump go ballistic at the Federal Reserve by saying things like: ‘the Fed has gone crazy’, ‘the Fed, not China, is our number one enemy’. But American markets just brushed off the Trump tantrums. In an emerging market like India, where institutions and governance are not as robust, such public criticism can destabilise markets and impair financial stability. That makes it all the more important to ensure that differences are settled professionally and maturely.
In your first book Who Moved My Interest Rate? published in 2016, you dwell at length on your tenure as RBI Governor between 2008 -2013, battling high inflation and a recessionary trend unleashed by the subprime mortgage crisis in the United States. That saga has been refreshed by former finance secretary Arvind Mayaram in his 11 May article in The Print titled ‘RBI didn’t do heavy lifting under Subbarao. And Finance Ministry didn’t undermine the Governor’.
Mayaram writes, “Was the RBI right to be blindsided in favour of continuously raising policy rates? The RBI’s telescopic action of continuously raising interest rates had no bearing on inflation. By April 2010, the RBI had raised the effective policy rate from 3.5 per cent only 18 months ago, to 8.5 per cent, with no visible impact. However, it did batter the growth rates.” Would you like to comment on his views?
I want to thank Mayaram for joining issues on this important topic of growth inflation balance. I believe this is a healthy debate to have.
First, note that I have been widely criticised, mostly with the benefit of hindsight, for not raising inters rates quickly enough to stem inflation. Curiously, Mayaram is criticising me for the exact opposite – raising interest rates too stridently.
Mayaram claims that RBI’s aggressive raising of interest rates had no visible impact on inflation. There are no counterfactuals in the real world We wouldn’t know what inflation would have been if in the absence of RBI’s ‘telescopic action of continuously raising interest rates’.
Mayaram also claims that RBI’s interest rate actions battered growth. My view is that it was not high interest rates that were standing in the way of growth. What matters in investment decisions is not the nominal interest rate but the real interest rate, which is the interest rate after knocking out the impact of inflation. Even though the Reserve Bank was raising the policy interest rate to control inflation, real interest rates remained lower than in the pre-crisis period when we clocked record investment levels and sizzling growth. If interest rates were the only constraint, there should have been a similar investment boom despite my ‘aggressive interest rate’ action. The fact that there wasn’t shows that it was not interest rates but other policy and implementation bottlenecks that were inhibiting investment.
In the chapter titled ‘Should We Be Sinning Against Our Children? you raise posers on Union Finance Minister Nirmala Sitharaman’s decision to adopt the Keynesian ‘big borrow and spend programme’ in 2021, which entails massive public debt. I wish you would expound the view you express when you say, “We differ from rich countries in terms of public finance dynamics”.
We differ from rich countries in terms of public finance dynamics in many ways. In rich countries, interest payments are just a small proportion of total government spending whereas here at home, both for the Centre and states, because of accumulated debt, interest payments are the largest item of expenditure and eat up more than 40 per cent of revenues, leaving that much less for spending on growth enhancing sectors like education, health and infrastructure. Second, in India the government enjoys an implicit subsidy on its borrowing because of the SLR mandate on the banks which has an economic cost, albeit hidden. In contrast, rich countries borrow in convertible currencies which lowers the cost for them. Also the interest rate that they command reflects the true cost and acts as a signal and a check on fiscal profligacy. Third, in India, our revenues as a proportion of GDP are lower than in rich countries which means that we can get into a debt trap at a lower debt-GDP ratio than rich countries.
You were, as you say so succinctly in your book, in the Union finance ministry when India pledged gold to be able to pay for its imports and then again RBI Governor when India bought 200 tonnes of gold from the International Monetary Fund (IMF) to replenish its reserves. Through that decade-and-a-half, your tenure as a civil servant stretched from your home cadre, Andhra Pradesh, a World Bank assignment and the Union finance ministry and you saw the perception of India transform at home and overseas. Where do you see India today in the path of development?
With expected nominal GDP of $3.9 trillion in FY2025, we are currently the fifth largest economy in the world. Many economists expect that we will surpass Germany and Japan to jump to the third spot in the next two to three years.
That’s cause maybe for cheer but certainly not for celebration. We might be a large economy, mostly by virtue of our large population, but we are still a poor country. With a per capita income of $2700, we rank 136th in the league of nations. We are the poorest country among BRICS, we are the poorest in the G-20 and we have more poor people than any other country in the world.
The prime minister had separately set the goal of India becoming a developed country by the time of the centenary of Independence in 2047. A necessary characteristic of a developed country is high income. To attain high income status (per capita income higher than $21,664 as per IMF classification), our per capita income has to expand more than eight-fold. A research article by the RBI (India@100 – RBI Bulletin, July 2023) argues that the economy will have to grow at 7.6 per cent per annum over the next 25 years to achieve that feat by 2047.
How realistic is that possibility? Resorting to IMF data again, the economy clocked growth higher than 7.6 per cent just seven times since the 1991 reforms. And we could never sustain that pace for more than two consecutive years. For sure, the trend growth rate has been increasing, and many economists estimate the potential growth rate to be seven per cent. Even so, maintaining a consistent growth of 7.6 per cent for the next 25 years is a tall order.
It’s clear that we are not going to become a member of the high-income club under the ‘business as usual’ model. What needs to be done to put the economy on a higher growth trajectory is familiar fare.
Besides, being a developed country is more than just being a rich country. Our institutions of governance have to improve too.
The title of your book provokes thought as it is a statement on the role of the civil servant. You somewhat dwell on the subject in the chapter titled ‘Has the IAS Failed the Nation?’ which was originally published as an article in The Times of India in March 2022. One does hear of bright young Indians opting for careers other than the civil service today. Are reforms imminent in this realm?
Duvvuri Subbarao: The options available to bright young Indians today are much wider than during my time. It’s only appropriate therefore that many of them are choosing careers beyond the civil services. I also don’t concur with the widely held view that the civil services are the only way or even the best way to serve the society. One can serve the society through virtually every career – starting a business, serving in the private sector, going into armed forces, becoming a professor or running an NGO, just to cite a few.
That said, the civil service needs wide ranging reforms in terms of recruitment, career management, induction and in-service training, opportunities for specialisation, and most importantly, by way of a more rigorous system of rewards and penalties. That again is a wide agenda to capture in a short interview.
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