Former Finance Secretary Arvind Mayaram has rejected former RBI Governor D Subbarao's charges that the Finance Ministry under Pranab Mukherjee and P Chidambaram pressurised the central bank to paint a rosier picture of economic growth. He also said that the RBI failed in heavy lifting under Subbarao.
Subbarao, who served as Governor from September 2008 to September 2013, in his memoir, writes that the Finance Ministry under Pranab Mukherjee and Chidambaram used to pressurise the RBI to soften interest rates and present a rosier picture of growth to shore up sentiments. He also mentions that Mayaram went to the extent of saying in one meeting that 'whereas everywhere else in the world, governments and central banks are cooperating, here in India, the Reserve Bank is being very recalcitrant'.
Mayaram, however, said that he did not work with either Pranab Mukherjee or Kaushik Basu in the finance ministry. He said the discussion between the finance ministry and the RBI was not to doctor growth numbers but to make a token moderation in the policy rates as the economy was struggling. He also suggested that the central banks are expected to work with the finance ministries to deal with economic crises such as the kind faced by the world in 2008 or the extreme distress experienced by the Indian economy during the 2011-14 period.
"It wasn't a whim when the finance ministry asked the RBI to find a balance between growth and price stability under PM Manmohan Singh's government. As the finance secretary during this phase, what was my remit? In 2011-12, the economy had tanked to 5.1 per cent, the fiscal deficit and Current Account Deficit were out of control, and India faced an imminent sovereign downgrade to junk status," he wrote in ThePrint.
"Quick and effective policy interventions, both conventional and unconventional, were necessary. Shocking the economy back to a growth path required decisive action on the fiscal side and restoring the market’s confidence was crucial to give us some elbow room for policy action."
Mayaram said this situation required the RBI to support the government's efforts and the least the central bank could have done was not to further depress the sentiment with doomsday prophecies. "The discussion was not to doctor growth numbers (the finance ministry did not interfere with data management as would be borne out by the then fiercely independent chief statistician of India) but to make a token moderation in the policy rates, or at the least, temper forward guidance in the governor’s policy announcements to ease the negative pressures," he wrote, adding that the RBI was adamant and decided the expression of autonomy lay in doing neither.
The former finance secretary said the finance ministry was as worried about inflation as the RBI. He said having established the fiscal consolidation roadmap based on the Kelkar committee report, the government desperately needed support in signalling a fair balance between growth and price stability.
"RBI was not willing to relent. The governor stated in several meetings that he needed to see more evidence about how the government would achieve these targets. What evidence could we provide in the middle of the financial year?" he said, adding that 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."
Mayaram said the RBI failed to help with the heavy lifting when the country needed it the most.