India - Old hands at the Wheel

A K Bhattacharya



Virtually the same team that handled India’s crisis in 1991 and then in 1997 is at the helm again.

Now that top government functionaries have realised that necessary steps have to be taken to minimise the impact of the global financial turmoil on the Indian economy and its financial sector, veteran bureaucrats in different central economic ministries have begun reflecting on what all may have gone wrong and what all should be done in the coming months. Of all their comments and deliberations on this subject, four points stand out and deserve enumeration here.

First, most of them are appreciative of the manner in which former RBI Governor, Y Venugopal Reddy oversaw the financial sector in the last five years. There were many detractors of Reddy’s policies in the government as recently as a few months ago.

But now there is a growing realisation that Reddy’s cautious approach to financial sector liberalisation has actually prevented what could have been a catastrophe for the Indian financial markets. The cautious Reddy strategy is now being widely appreciated even in North Block.

Even the fact that the finance ministry now has a “friendly” team in charge of the financial sector is seen as a positive development.

Earlier, many Mint Road observers would moan the fact that North Block had got a Governor who would not be as independent as his predecessor and follow the government line on key monetary policy issues. C B Bhave as the new Sebi chairman was also seen as a regulator who would not be as fiercely independent as his predecessor.

These perceptions may not be true. Both, Subbarao and Bhave are competent regulators and can decide for themselves the best policy in their respective areas of work.

But that both the regulators were IAS officers lent credence to their being in harmony with North Block. That harmony was earlier being frowned upon. Now that the global financial turmoil has hit the Indian economy, that friendly equation between the regulators and the government is seen as a blessing as that has helped the government take prompt remedial measures to fix the problems.

Secondly, it is pointed out, virtually the same team that handled India’s worst balance of payments crisis in 1991 and the Asian meltdown in 1997, is now there at the helm of policy-making in the government. C Rangarajan, Montek Singh Ahluwalia and P Chidambaram were in command in 1991 and 1997. Manmohan Singh may not have been in the government in 1997, but he was the finance minister in 1991. Bimal Jalan, who was the RBI Governor in 1997 is not in the government now, but is certainly available for expert advice. Even Subbarao was in the finance ministry when the 1991 crisis engulfed the Indian economy.

Thirdly, the relevance of a quarterly monetary policy review has come in for serious scrutiny. The October 24 monetary policy review is something no banker is now waiting for. The governor may have to unleash all his weapons to combat the crisis, instead of waiting till October 24 to announce them.

The global financial turmoil has once again underlined the point that a review of the macro-economy can happen on the appointed date, but monetary policy measures should be introduced as and when they are necessary. The hype around these quarterly reviews will certainly get reduced.

Fourthly, the global financial turmoil has rendered almost irrelevant the annual meetings of the International Monetary Fund and the World Bank, which were held last week-end.

The Group of Seven meeting enjoyed greater media coverage and made more meaningful suggestions than the IMF and the World Bank meetings. Many years ago, these meetings would be the centre where important policy makers from all over the world would debate and discuss what measures needed to be taken to tackle a financial crisis.

Today, the IMF and the World Bank have lost that eminent position. This change is not sudden. The importance of the two Bretten Woods institutions has been gradually declining over the years. The current global financial crisis and their reduced role in resolving it have once again underlined that decline in their importance.

The IMF and the World Bank should either reorient themselves or their importance would further decline. The world is changing quite rapidly.