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Economy Jan 2, 2013

Chidu shows RBI who’s boss: but is this what he should do?

By R Jagannathan

The decision of the government to decline an extension to Subir Gokarn as Deputy Governor of the Reserve Bank of India (RBI) does not speak well about our politicians' tolerance of regulatory autonomy.

The finance minister has been trying to pressure the RBI into cutting rates, but Governor D Subbarao has resisted these attempts so far. Gokarn, as his deputy in charge of monetary policy, has been a key player in this.

That he is not being given an extension - normally, there is no reason to deny anyone a full five-year term, unless the incumbent has done things to deserve a truncation after three years - means that P Chidambaram wants to send a message on who's boss to the RBI.

No one, of course, will link the RBI's refusal to cut rates to Gokarn's marching orders. But the very fact that he was first given a month's extension, and then, when the monetary policy did not change in December, he was asked to go, enables one to draw one's own conclusions.

This is probably about Chidambaram hitting back at the RBI since the latter will not toe his line.

To be sure, Chidambaram is not the first finance minister to not take kindly to regulatory independence. His predecessor Pranab Mukherjee, aided by his own advisor, Omita Paul, did precisely that in several cases.

It is now Chidambaram's turn, it seems, to deny another regulator his due - the deputy governor whom Subbarao favoured. AFP

For example, the previous Sebi chief CB Bhave was packed off after three years even though the ministry was earlier keen to offer him the option of staying on after his initial three-year appointment.

One of his most talented directors on the Sebi board - KM Abraham, who brought the recalcitrant Sahara group to book - was not given an extension. Nor was MS Sahoo.

In 2011, it seemed as if even Subbarao's extension could be dicey, given the growing distance between his hard money policies and North Block's desire for "out-of-the-box" solutions, but luckily the crisis in Europe and the US (after the S&P rating downgrade) intervened, and the PMO felt there was no need to rock the boat at the RBI at that time.

This government has been at war with independent regulators and institutions ranging from the CAG to the insurance, markets and banking regulators even though all these regulators were appointed by UPA-1.

The problem is simple: even though the government gets to pick who it wants to head the RBI or Sebi or Irda or CAG, it dislikes the incumbents when they choose to become independent.

In Subbarao's case, he was finance secretary when Chidambaram was Finance Minister in UPA-1. Chidambaram chose Subbarao over some better candidates possibly because he thought Subbarao would be more in sync with his thinking.

But the office does things to people. Once ensconced in the chair, no one likes to be thought of as someone's appointee or lapdog. Successive finance ministers have been unable to accept this simple fact.

The need for a stable five-year term for regulators was recognised by the Sixth Pay Commission and the finance ministry at that time was quite keen to go along with the idea.

As an Economic Times story notes, the ministry had even approved a note in July 2009 to change Sebi rules on giving the chairman and directors a full five-year tenure. The changes were even notified. But even while the actual proposal (for giving Bhave an extension) was being studied by the Cabinet's Appointments Committee - which then included not only the PM, but also Home Minister Chidambaram (now FM) - the finance ministry under Pranab Mukherjee withdrew the note seeking to extend Bhave's term.

No one knows what transpired.

It is now Chidambaram's turn, it seems, to deny another regulator his due - the deputy governor whom Subbarao favoured.

It does not set a good precedent.

However, there is another possibility. Maybe the ministry is planning a clean sweep, with Subbarao's own term set to end in September. The government may want new incumbents at both the RBI Governor and Deputy Governor level.

Whether they will do the government's bidding always is another matter altogether.

by R Jagannathan

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