Towards A Federal Rbi

Is an exclusion of state's representation on RBI's board justified? India is, after all, a Union of states and is there not a case for them to be associated with the RBI's governance? In this context, a recent news item in the Financial Times of London comes to mind. The president of one of the Land Central Banks of Germany issued a strongly critical attack on the Bundesbank, on whose council he sits. A little bit of enquiry reveals that each of the states of Germany, known as the Land, has a central bank "" a mini Bundesbank "" its President, appointed by the state, has a place on the governing council of the country's central bank "" The Bundesbank itself.

 

In his classic work The Bundesbank - the Bank that rules Europe, David Marsh describes how this council of 18 men is venerated for their independence of kind and devotion to financial stability. While the council concerns itself with weighty issues like interest rates and credit policy, its functioning is in no way diluted as a result of having state representatives on the council. True, the council is guided by the directorate, which consists of the President and his expert aides. But the presidents of the Landzcentral Banks have never been known to quail before the directorate. These Presidents come from different political backgrounds, reflecting the divergent political complexion of their states. They are known to hold and express views that differ from the prevalent orthodoxy. No place for dull uniformity even in Teutonic Germany!

It is remarkable that the efficiency of the Bundesbank has not suffered, in spite of such a disparate governing body. In fact, some scholars feel that this structure itself is the key to its independence. Most often a Landzcentral Bank president is a card carrying member of the party in power in the state. Normally, elected for a period of eight years, he can be re-elected. This structure leads to a broad spectrum of experience and competence, besides a touch of ground reality. At one time, the council included two or three strong trade unionists, a former parachutist, an ex-finance minister and a former city Mayor of Hamburg. There was also a blend of three former professors and an ex-chairman of an insurance firm. Such a wide mixture of backgrounds does make the Bundesbank stronger, although at times its president might have wished for the comfort of a more pliable council.

Views differ about the utility of the regional heavyweights on the Bundesbank, a structure forced on a vanquished Germany by a victorious US. One widely held view says that the broad-based council does help the Bundesbank to retain contact with the ground problems. One of the council members, a president of Hesse Land Central bank is quoted as saying: If you are a member of the directorate (the clique that runs the bank) you are always in international conference and without knowing it, you lose contact with reality. Perhaps, this criticism has wider application to other central banks outside Germany as well. One of the council members even claimed that it is the Land Central banks which confer independence on the Bundesbank. Indeed, this view is supported by some influential members of the directorate who feel that a central bank needs people who reflect different developments in different parts of the country.

There is something to be said for leavening the RBI board with representatives of states, apart from the current practice of bringing in various industry chieftains. India's federal structure is more similar to Germany's. It may be worthwhile for the government of India to consider why India should not have regional central banks so that the monetary policy does not remain an arcane subject discussed only in a rarefied atmosphere by central bankers. After all, its impact is felt in every nook and corner of the country. It is only appropriate that there is a broader choice for the RBI's board. No one will argue that the Bundesbank has suffered because of its having a number of state central bankers on its council. Even the US and the UK look up to the Bundesbank as a model.

It is many years since the RBI Act was passed. It is now a pastiche of many amendments. The basic structure and function of the RBI should be reviewed. When this reviews is done, the possibility of establishing state or regional central banks and having their presidents on the board should be considered. What is good for the Bundesbank should be good enough for the RBI also. If we move quickly towards a Federal Reserve Bank of India, a number of issues of non-acceptance of fiscal prudence will get solved automatically.

There is a need to have national awareness on the basic problems of Budget deficit and the costs of unbridled monetary expansion. At the same time, the central banker has to function in touch with what takes place on the ground. He cannot get this merely by closely interacting only with business, bankers or brokers. They represent only a fractured view of the reality. The economy of India is out in the states although North Block and Mint Street prefer to imagine that they are where the action is. The move for a Federal Reserve bank will be in keeping with the spirit of the times. A continental economy like India deserves a treatment that understands and empathises with the problems of the periphery. The Bundesbank provides a good model. India can do itself a good turn by following Federal Reserve Bank of India.