A peek into the Indian financial system

Why don’t Indian banks care a fig for their customers? Why does the government take bank depositors for granted when it announces largesse such as farm loan waivers? Why are the tenures of good-looking and outspoken RBI Governors so short?

The last few years have seen noisy media debates around all of these issues. But contemporary journalists and commentators, with their limited knowledge of history, haven’t been able to advance convincing explanations for these strange phenomena.

You will find all the answers in the extremely forthright and readable book Dialogue of the Deaf by TCA Srinivasa Raghavan, a journalist who has assiduously covered the Indian financial system with all its moving parts, for the last three decades, and a columnist of Rotary News.

Though the author has been an official RBI history chronicler in its later years, there’s nothing remotely official about this delightfully witty, and at times, wicked book that never hesitates to call a spade a spade.

The author provides a comprehensive historical context to why the RBI has never been free of the ­Government’s apron strings, the always-fractious relationship between RBI Governors and the Finance ­Ministry and the propensity of public sector banks to get embroiled in bad loan messes every few years.

While it is depressing to find out that the Indian economy has been fire-fighting the same old crises since Independence, it is cheering to know that there are salutary lessons from the past on what should (and should not) be done to resolve them.

Fans of history may enjoy the first few chapters which recount in detail how the reluctant ­British, though persuaded by stalwarts like M Keynes, dilly-dallied
on setting up a much-needed central bank in India. When they did, they tried their best to ensure that the bank would jump at the Empire’s bidding, so that British financial interests could always be protected. This in fact formed the basis of the original RBI Act which still governs the central bank’s functioning.

Hardly surprising therefore, that the much-debated ‘autonomy’ for the RBI remains mostly on paper.

Reforms at gunpoint

To free market proponents, the book offers an insightful account of how India, which was a thoroughly free-market
economy prior to ­Independence, fell prey to socialistic temptations after it. Through sheer political populism and government interference, it then proceeded to systematically ruin both its industry and banking system in the seventies and eighties. Then it struggled to undo all this through the reforms of the nineties.

The book offers a riveting behind-the-scenes account of how India had to ­physically pledge its gold with the Bank of England after its foreign exchange reserves fell below $1 billion. There are amusing anecdotes about how the government was short of the right type of boxes to ship the gold to England (it borrowed them from the British government!) and how the truck that transported them broke down in ­Tardeo, South Mumbai, causing a media leak. Through it all, the government and RBI had to put up a brave face and insist that the balance of payments (BOP) crisis was a “cause for concern, but not panic,” when it was precisely the opposite.

Irreverent peek

For those uninterested in serious economic matters such as the impossible trinity or the conflict between fiscal populism and monetary policy, the book offers juicy glimpse into the personalities of India’s varied Prime Ministers, Finance Ministers and RBI Governors since the early 1930s.

For instance, it lays the BOP crisis squarely at the doors of Rajiv Gandhi and his ‘minions’ in the Finance Ministry. It recounts how Rajiv’s weak decision-making was compounded by the boss-is-always-right attitude of reigning finance secretaries, who refused to listen to the RBI.

The book’s irreverent approach to the powers-that-be and its avoidance of jargon, with many colloquialisms thrown in, make it a breezy read despite its weighty subject.

Sample this gem on RBI ­autonomy — “From 1991 onwards, RBI became a full, if slightly junior, partner of the Finance Ministry instead of being, what in North India is called as, a jhamoora or sidekick”.

An early chapter has this observation on public sector banks, true to this day — “There are Indian public sector banks that straddle the financial system like a band of gorillas. Barring perhaps the SBI, the rest simply aren’t good enough. Their cost structure is perhaps the single most important determinant of monetary policy, because interest rates are kept high to keep them from making bigger losses.”

Overall, the book is a great shortcut to buttress your knowledge and ­understanding if you’re a student of the Indian financial system, or have no stomach for academic tomes on the subject.

The one complaint I have with the book is that it is a little too kind to RBI as an institution. True, it is sometimes described as impotent and there’s pithy criticism reserved for some of its governors. But in chronicling the many battles between the governments of the day and the RBI, the book does convey the impression that RBI is mostly, if not always, the good guy.