RBI at age 75 (or 96): Old is not gold

Financial Express, 5 April 2010

When a government agency reaches its 75th year, does this call for veneration? In the case of RBI, it is a wake up call for reform.

Age is a problem

In the private sector, the age of an organisation is not a problem. Private firms have to constantly pass the market test. If an organisation fails to reinvent itself in an ever changing world, it bleeds capital and labour. The market economy steadily euthanises the old when they fail to change with the times. For each rejuvenated firm like Tata Motors or Tata Steel that we see today, there are hundreds of firms of their vintage which we do NOT see today, which collapsed when the world changed and the organisation did not.

Arms of government are monopolies and do not face a market test. Creative destruction of laws and government agencies does not happen by itself: it requires a special push called economic reform. A continual and harsh scrutiny is required, of each agency and law, asking whether it has reinvented itself adequately to reflect the needs of today's India. The older an agency is, the bigger the shortcomings are likely to be.

Problems of role and function of RBI

The design of the RBI Act is rooted in British government committee reports of 1914 and 1925. As a consequence, there are two fatal flaws: (a) the designers did not intend a central bank for a free India, and, (b) essentially nothing about monetary economics was known at the time. To some extent, the age of RBI is worse than 75 years: in a few years there will be the 100th anniversary of the 1914 committee.

The role and function of RBI was further distorted in the decades of Indian socialism, and put under great stress with bank nationalisation. Far from maturing into a genuine central bank, it became a central planning agency for finance. When central planning died, the rationale for the existence of this central planner ended.

New thinking in public administration in India

We now do things very differently in India, when compared with the age of colonialism or the age of socialism. SEBI (which is 18 years old) presents a useful comparison of the present ethos of public administration:

Looking forward

The fossil from the days of colonialism and socialism, the old lady of Mint Street, hence draws little veneration from the people who understand her work. Some of her siblings -- ancient organisations such as Tata Motors and Tata Steel - have reinvented themselves for the age of globalisation. In every aspect of their behaviour and functioning, these firms do the opposite when compared with what they did just 20 years ago. Private firms born in 1934, which did not reinvent themselves, were euthanised by the market economy. But being a government organisation, RBI faced no market test.

In this picture, the pompous celebrations of RBI's 75th year are a bit like the May Day parades of Soviet Russia. The showy celebrations symbolise the insecurity of a framework that is hollow inside.

It is now time to reinvent RBI, drawing on what we have learned in recent decades worldwide about central bank reform, and what we have learned in recent decades about law, regulation and public administration through success stories such as SEBI. Such change will, of course, be resisted by the incumbent. The DOT did not support telecom reform; the Ministry of Steel resisted decontrol of steel prices; the EPFO detests pension reform. The RBI is no different. It comes up with many different elaborate arguments but always the same predictable conclusion: the RBI is always right and nothing should be done by way of reform. The views of RBI staff or loyalists are hence not useful in thinking about RBI reform.

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