Double mint

Do not devalue the central bank as an institution

Next week the Reserve Bank of India (RBI) will come forward with its quarterly review of the economy and of monetary policy. In less than two months, the tenure of the incumbent RBI governor, Duvvuri Subbarao, comes to an end. Those who have built India’s great institutions have believed for a long time that decisions pertaining to appointment to high offices should always be taken several months ahead of the actual appointment. But the Indian government has become habituated to last-minute announcements. Hopefully, in this case, Prime Minister Manmohan Singh will take a view and make an announcement about Dr Subbarao’s tenure within this week so that the RBI can take a view about the economy and monetary policy with a greater degree of certainty in the week after.

There has been an avoidable and ill-informed public debate on the merits and demerits of giving an incumbent governor an extension. Rather than depending on political whim and ministerial discretion alone, it would be helpful, both for the RBI as an institution and for policy making in the country, if government’s prerogative on such matters is combined with some professional criteria. In fact, such criteria have emerged in the process of selecting RBI governors over the past two decades. With few exceptions, most central bank governors have come from the limited pool of deputy governors or secretaries in the Union finance ministry and have been given a five-year tenure. It is understandable that the government should regard experience on Mint Road or in North Block as the minimum qualification for the job, and would seek policy stability through fixed-term appointments.

At this time, the question is a more limited one of whether the incumbent should get an extension of term or not, rather than who should constitute the pool of potential candidates. On this question, history offers an answer. In the past half century most governors, with few exceptions, have served a five-year term. Indeed, some of the best-known governors who were able to leave their mark on the institution and policy were given five-year appointments. In the more recent past, with the singular exception of S Venkitaramanan, every other governor has been given either a five-year term or an extension of two or three years after an initial three-year term.

Against this background, and in the current context, it is only to be expected that Dr Subbarao would get an extension and be allowed to serve a five-year term. It has been reported that three former RBI governors have taken the view that a central bank governor should have a five-year term. If so, the die is cast. There is no reason the government should ignore such sage advice.

The point has been made in the media that the Union finance ministry has opted for single-term appointments for financial sector regulators like the chairman of the Securities and Exchange Board of India (Sebi) and so on. It is useful to reiterate the point this newspaper has repeatedly made that the RBI governor is not just another financial sector regulator like the Sebi chief. Indeed, the central bank governor in all modern economies occupies a unique position in the policy apparatus and that uniqueness should continue; more so at a time when India needs to preserve and protect institutions of governance against the rising tide of arbitrariness and declining quality of available manpower. The government must do nothing that devalues the institution of the central bank.