1991 ushered in many relationship changes; govt-RBI one was the foremost

Attention has been focused, practically exclusively, on one policy change made by the government in 1991 — the abolition of industrial licensing — but now it is important to point out that there were many other invisible changes. Foremost among them, as it would turn out, was the fundamental change in the relationship between the government and the Reserve Bank of India (RBI).
 
From 1991 onwards, the RBI became a full, if slightly junior, partner of the finance ministry, instead of being a “mere subordinate department of the financial ministry” as T T Krishnamachari, finance minister in 1958, had described it. Three successive finance ministers in the 1990s treated the RBI as a professional body. They realised that there was no going back to the old days.

 
The RBI didn’t become independent in the way the term is sometimes defined by western economists so that political considerations ceased to be its concern. But it did become the primus inter pares among regulators, of whom many were to follow to supervise the many new markets that were beginning to slowly take root.
 

Between 1991 and 2004, when the United Progressive Alliance (UPA) came to power for the first time with the peculiar demands it made on the exchequer because of Sonia Gandhi and her National Advisory Council, the RBI was as independent as any legislation for independence was going to make it. But from about mid-2005 onwards, the relationship slowly began to deteriorate. That, however, is another story involving both policies and personalities.

 
Two factors
 
There were two major factors that contributed to the healthier relationship: the finance ministers and the key officials of the finance ministry who, as economists, had a better understanding of the RBI’s role in the economy.
 
Manmohan Singh had been the RBI governor from 1982 to 1985 and had worked closely with C Rangarajan as his deputy governor. They were both economists and had very similar views about the direction the economy needed to take. Other than Montek Singh Ahluwalia, Rangarajan was the only person Singh trusted fully.
 
The relationship between Singh and Rangarajan’s predecessor, S Venkitaramanan, was less cordial. But they worked in perfect unison for the 18 months between July 1991 and December 1992, when Venkitaramanan demitted office. 

 
The officials, on their part, needed the RBI’s technical expertise in an increasingly complex economy as it began to integrate with the world economy. The finance ministry, whose economists came from the Indian Economic Service — barring a few honorable exceptions — were simply not up to the task. Indeed, even the skills of the top economists of the finance ministry had rusted. They were primarily bureaucrats with a superior understanding of economics than the IAS bureaucrats who learnt on the job and flew by the seat of their pants.
 
Their World Bank and the International Monetary Fund (IMF) training told them the destination and which direction to take; but they didn’t know how to get there. For that, they needed the RBI, which understood microeconomics better than most.

 
The transformation
 
The scale of what the RBI achieved in that decade is as staggering as the scale of what the government had in the 1970s. The difference was that the RBI trusted the markets and the government in the 1970s trusted only itself.
 
What was truly extraordinary about the government-RBI relationship in the 1990s was that unlike the constitutionally mandated independence of some of India’s other institutions, the RBI was only as free as the government allowed it to be.
 
But such was the trust between Manmohan Singh and Rangarajan (1992-1996) and Yashwant Sinha and Bimal Jalan, who became governor at the end of 1997 (1998-2003), that neither tried to play boss.

 
Nirmala Sitharaman and Shaktikanta Das have restored that happy state of affairs.