S. Venkitaramanan, on his solution to the listening to in New Delhi on November 26, 1992
S.Venkitaramanan, an IAS officer who served because the Governor of the Reserve Financial institution of India (RBI) from December 1990 to December 1992 handed away lately. Two occasions wherein he had participated are price recording. Each present him as a statesman who did his finest for his nation, for which he deserves to be remembered.
The start
Beginning in late 1990, India confronted a extreme steadiness of funds stress. This had been precipitated by a slowing of inward remittances and an increase within the value of oil following the invasion of Kuwait by Saddam Hussain. The present account of the steadiness of funds was subjected to a double whammy, a discount of receipts and an increase within the worth of imports. In 1990-91 the present account deficit swelled to three p.c of the GDP, a degree highest by far in 20 years. The import cowl afforded by India’s reserves plummeted to a historic low of three weeks on the peak of the disaster. There was hypothesis that India would default on its exterior fee obligations. It was at that second that the RBI led by Mr. Venkitaramanan performed a sterling function, which in impact got here to pledging its gold to worldwide banks for a tough foreign money mortgage. The small print of those initiatives and their significance are set out within the RBI’s official historical past, “In April 1991, the Authorities raised $200.zero million from the Union Financial institution of Switzerland by way of a sale (with a repurchase choice) of 20 tonnes of gold confiscated from smugglers (sic). Once more, in July 1991, India shipped 47 tonnes of gold to the Financial institution of England to lift one other $405.zero million. This motion helped the nation repay its worldwide donors and collectors, although it was not adequate to utterly absolve the nation of the disaster.” The act of pledging the nation’s gold, which concerned transporting it abroad, had been mocked by some in India. It solely reveals an ignorance of the world. A rustic builds reserves in anticipation of utilizing it on a wet day. For the RBI to have used its gold to stave off a default was an act of braveness. and creativeness. Certainly, it was the neatest financial administration. Not solely India’s status but in addition its status as a dependable counterparty in enterprise had been salvaged. It solely must be recalled that India imports round 80 p.c of its oil to recognise the sensible worth of the manoeuvre. Default would have narrowed India’s entry to the worldwide mortgage markets to finance its imports had been its export earnings to fall quick sooner or later. With the sale and pledging of India’s gold reserves, a respiration house inside the funds disaster had been created.
Financial reforms
Earlier than its efforts to lift worldwide loans, the RBI had begun a programme of import compression, carried out primarily by way of elevating the money margin on imports. Whereas this had commenced earlier than Mr. Venkitaramanan had assumed workplace as Governor, it was underneath him that the coverage assumed better pressure. The money margin was hiked four-fold between October 1990 and April 1991. Supplementary measures that raised the price of imports had been carried out too, collectively constituting a stringent effort to rein them in. This technique turned out to be a winner, and the present account deficit flipped from a excessive of three p.c in 1990-91 to a mere .three p.c of GDP in 1991-92. This nearly eradicated the necessity to increase international trade to finance India’s non-debt funds. Although a authorities led by Narasimha Rao was to take workplace in mid-1991 and set in movement measures, together with a devaluation of the rupee, to enhance the steadiness of funds over the long run there may be motive to consider that the fast enchancment of the steadiness of funds could also be largely attributed to the import compression put in place by the RBI. That is implied by the information, which present that whereas imports contracted considerably in 1991-92 exports didn’t rise, the truth is, they declined barely. The RBI’s official historical past of the interval states “At a essential time and within the thick of the BoP disaster, the principle process of the Reserve Financial institution underneath the management of the Governor, Shri S. Venkitaramanan, turned out to navigate the nation by way of the troubled waters.” It concludes that the disaster was “efficiently resolved”. Nonetheless, it’s the financial reforms that adopted which have acquired far better consideration from the general public on the time, and understandably.
Dr. Manmohan Singh and his group had minimize a splash with their daring reconfiguration of the financial coverage regime. It’s this that’s remembered. As soon as the steadiness of fee disaster had handed, its architects got here to be forgotten and their heroic guarding of India’s worldwide status and monetary credentials was left unsung within the public sphere. And, for Governor Venkitaramanan himself, the ending of his time period was lower than superb attributable to what the RBI’s official historical past phrases “points associated to an sudden breakout of irregularities in securities transactions from April 1992”, identified to the general public as “the Harshad Mehta rip-off”. As public sector industrial banks had been implicated within the improvement, it couldn’t however have been seen as having taken place underneath the RBI’s watch.
‘Outstanding openness’
Lastly, having had the privilege of glimpsing Mr. Venkitaramanan at work, I ought to narrate the expertise. as I consider it to be a matter of public curiosity. Someday in the midst of 1991, I acquired a letter from him saying the RBI had seen an article of mine on a subject associated to the conduct of financial coverage, and that it could be completely happy to listen to from me in individual. This demonstrated a outstanding openness, for I used to be not solely unknown professionally but in addition my paper was essential of analysis that had emerged from the RBI. A comply with up was to come back quickly after, when, in September of the identical 12 months I used to be invited, together with over 20 economists, to satisfy the Governor on the measures taken to cope with the steadiness of funds disaster. Noticeably, each shade of opinion on the Indian economic system, to not point out its geography, was represented on the desk that day.
However what was extra spectacular was that the Governor responded to every presentation made. these having ranged from some arcane facet of macroeconomic principle to the participant remark by considered one of his colleagues on the black marketplace for the rupee in Dubai! The ambiance created was considered one of frank trade of views, absence of hierarchy and a non-partisan deal with India’s nationwide curiosity. What was on show would have led anybody to think about that they had been witnessing Camelot on the Arabian Sea, or, in the event you desire that metaphors stay Indian, what Bharat was meant to be.
So, I used to be not shocked when later I heard these aware of the IMF’s negotiations with the RBI stated that Mr. Venkitaramanan can be fast to parry their arguments with analysis produced by economists based mostly in India. Most likely, it was this perception {that a} nation should depend on its mental sources that led him to ascertain the Improvement Analysis Group inside the RBI. It was meant as a automobile to take impartial economists to India’s central financial institution in order that there can be skilled interplay between its staffers and stakeholders exterior. On this, although, he might not have totally succeeded. At the moment, the RBI’s extremely seen wrestle to regulate inflation reveals that it’s maybe extra desperate to be seen to stick to the present orthodoxy in economics than to grasp how India’s economic system works.
(Pulapre Balakrishnan is visiting Professor, Krea College)