Growth & Finance Charting the Way Forward

It is not often that the country’s leading economists and think tanks gather on a platform to discuss the policy and structural changes that India has witnessed since the 1990s and take a look at the way forward. But this is precisely what C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister; Montek Singh Ahluwalia, Deputy Chairman, Planning Commission; Kaushik Basu, Chief Economic Adviser, Department of Economic Affairs; Shankar Acharya, Member, Board of Governors and Honorary Professor, ICRIER; and Bhaskar Pramanik, Managing Director, Oracle India; met recently in New Delhi to debate. Adding colour, albeit from an earlier era, was Union Home Minister P Chidambaram.

The occasion was the Financial Inclusion Day series of roundtables and panel discussions organised by Skoch in New Delhi on January 5. More importantly, it was also a day when one of the lesser talked about champion of reforms and liberalisation—C Rangarajan—turned 79. And honouring him on this eventful day was the release by Chidambaram of a compendium of essays that sought to portray the linkages between ‘Growth and Finance’ since the reform process was initiated in the early 1990s.

Complimenting Rangarajan for being the teacher that he needed when he was heading the Finance Ministry in those tumultuous days, Chidambaram remembered it as a period that saw the government and the Reserve Bank of India—with Rangarajan as the Governor—work collectively in a manner never seen in independent India. While the Home Minister sought to steer clear of current economic issues, he was clear in noting that the country’s financial structure would not have been what it is, were it not for the path-breaking initiatives introduced by Rangarajan. As Chidambaram noted, “Were it not for Rangarajan, the government perhaps would not have agreed on the historic memorandum between the RBI and the government, whereby a cap was put on the automatic finance in the form of ad-hoc treasury bills. Similarly, it was under his tenure that computerisation of banks took on an entirely different meaning.”

Such difference of approach in tackling issues that had both a monetary and fiscal dimension was evident when Rangarajan, in his address to the gathering, sought to disagree with Kaushik Basu on the steps needed to tackle the inflationary cycle that the economy was witnessing. According to him, “when sectoral inflationary trends started impacting overall figures, it was time for the central bank to step in and take recourse to suitable monetary and fiscal measures.” Said Shankar Acharya, it was such timely action by Rangarajan when he was heading the central bank that saw the country take decisive action in moving towards a market-determined foreign exchange rate with a partially controlled regime. “The decisions that the RBI took then helped reduce exchange rate volatility, ensure sufficient reserves; and create an enabling market for foreign exchange.”

Such decisive action, Acharya felt was again needed today when it came to tackling issues like regulatory control over micro-finance institutions (MFIs), role of technology in increasing the spread of banking services in the country, issuance of new set of banking licences as also the terms for funding the various core sector projects being undertaken in the country. Going back into time to recall his association with Rangarajan, Montek Singh Ahluwalia was clear that as Reserve Bank Governor, Rangarajan imparted a new sense of opportunity to the central bank. “It was the introduction of the Liberalised Exchange Rate Management System (LERMS) that in a way saw us tide over our balance of payments crisis in the early 1990s.” This system, he noted, was preceded by a downward adjustment in the value of the Rupee, even as a new currency scheme was introduced to provide a closer alignment between values of exports and imports. This, Ahluwalia pointed out paved the way for the introduction of the unified exchange rate mechanism, a form of full Rupee convertibility, allowing conversions of all foreign exchange at market determined rates on all current account transactions.

Agreeing with him, Basu was of the opinion that markets in the country were yet to be given a free hand in determining the way they should function. Praising Rangarajan as the champion of reforms, Basu highlighted how their career agenda had followed an almost similar path: from lawyers in the making to full-time academics to government servants. On the current high inflationary trends being seen in the economy, Basu felt that these were short-term distortions that supply-side correction would correct. Like Acharya, however, he was more concerned about the tightening norms on the third tier of financial institutions like the MFIs. “While regulatory measures are needed, these should not kill the very institutions that they are seeking to regulate. Some cases of misuse should not lead to death of a sector that is taking the message of financial inclusion to the hinterlands.”

On his part, Rangarajan saw the current period as being right for balancing financial regulation and growth. According to him, prices stability should be the essence of any monetary policy, and he expected that as the liquidity situation improved in the January-March quarter thanks to an expected increase in Government expenditure, inflationary pressures would ease.

Were it not for Rangarajan, the government perhaps would not have agreed on the historic memorandum between the RBI and the government, whereby a cap was put on the automatic finance in the form of ad-hoc treasury bills. Similarly, it was under his tenure that computerisation of banks took on an entirely different meaning

Bringing in the role that technology could play in promoting inclusive growth, Bhaskar Pramanik noted that while Rangarajan had initiated computerisation of the banking industry in the country, technology today had a greater role to play in this process. Here, he pointed out how his company had come up with several products that help reduce the high cost of low value transactions, tackle the problems of lack of adequate infrastructure, and answer the problems of ensuring adequate collateral and credit history.

Earlier, Sameer Kochhar, Chairman of Skoch Group, highlighted the stellar role played by Rangarajan in charting out the financial roadmap for the country’s banking and financial system. He also referred to the essays in the book released on the occasion which highlighted the journey that the national economy has made since the liberalisation and reforms movement was initiated in the early 1990s, to which the former RBI Governor was inherent to.

The festschrift, ‘Growth & Finance: Essays in Honour of C Rangarajan’ edited by Sameer Kochhar contains chapters written by D Subbarao, Governor, RBI; K C Chakrabarty, Deputy Governor, RBI; K G Karmakar, MD, NABARD; Kirit Parikh, Chairman, IRADE; Y V Reddy, Emeritus Professor, University of Hyderabad; Swayam Prava Mishra, Universty of Hyderabad; K Kangasabapathy, Director, EPW Research Foundation; Balamurali Radhakrishnan, Economist; Udaibir S Das, Assistant Director, IMF; Madhu Kannan, MD & CEO, BSE; Nitin Desai, Economist; Kartikeya Desai, Vice President, Lok Capital; Raghbendra Jha, Rajiv Gandhi Professor of Economics & Executive Director, Australia South Asia Research Centre; Ravi Parthasarathy, Chairman, IL&FS; S S Tarapore, Distinguished Fellow, Skoch Development Foundation; Ashima Goyal, Professor, IGIDR; Ravi Narain, MD & CEO, NSE; Joseph Massey, MD & CEO, MCX Stock Exchange; and Shyamala Gopinath, Deputy Governor, RBI. The book spans the main features of the country’s economic development and addresses issues ranging from poverty and inclusion to the capital markets and infrastructure.