Government thinks of the RBI as a part of itself: Subbarao

You say the IAS is no longer “the steel frame of India” and blame corrupt IAS officers rather than politicians who try to influence IAS officers for this. Why?

The most common view today is that the IAS is not able to perform because of political pressure. But the question is why should IAS officers succumb to the carrots being dangled by politicians? They do that because when they see one person, who is of a weaker moral fabric, succumbing to a politician and moving up the career ladder, they believe they can’t afford to get left behind. There are lots of reasons attributed for the moral and intellectual decline of the IAS, but I think the main reason is a perverted system of incentives and penalties. There is no system of rewarding good officers and penalizing bad officers.

You detail the pressures you faced from ministers in the UPA government during your tenure as the RBI Governor in your book. But isn’t such pressure to be expected as the RBI governor is appointed by politicians? What is the solution?

The government thinks of the RBI as part of the public sector system and treats it as a part of itself. But the RBI performs best when it is independent. The core mandate of the RBI is to maintain price stability and financial stability. Delivering on this requires the central bank to take some decisions keeping in view the long-term sustainability of the economy even if it inflicts short-term pain. But governments are concerned about the short-term pain and therefore tensions between the RBI and the government are inevitable. The question is how we manage these tensions amicably. There has to be consultation between the RBI and the government, but in the end the central bank has to act independently.

You argue that one could actually make the case that the Centre made a presumptive profit rather than a loss through the 2G auctions. How?

The CAG calculated a hypothetical presumptive loss by taking the difference between the revenue that accrued under the price at which the 2G spectrum was given and the revenue that could have accrued under four alternative hypothetical prices. The assumptions underlying those hypothetical prices are questionable. The CAG focused almost entirely on the upfront price without taking into account the recurring revenue that would accrue to the government through spectrum charges. It’s quite possible to argue that when spectrum is given away at a lower price than the market price, the penetration would be deeper. Therefore the spectrum charges that would accrue to the government over time will be higher.

You say investors, when deciding to invest, care more about the rule of law than about free land or electricity offered by state governments as sops. Why?

When you ask investors what matters when they choose between one state and another, they say even more important than sops is the rule of law. Bad rule of law can be quite costly to any business enterprise. For example, if you have tax inspectors or compliance inspectors bothering businesses, corruption, or if there is politicization of labor unions; all this can add to the cost. And what entrepreneurs are saying is that these costs matter to us more than sops. We are already seeing investments go to states that improve the rule of law, not necessarily to states that offer more sops.

Many experts argue that the Indian state is weak and that we need to boost India’s state capacity to promote growth. But you disagree with this assessment. Why?

Generally, when people talk about state capacity, they talk in terms of, for example, the number of employees or policemen or tax inspectors or teachers per unit of population. And then they say in India state capacity is low because we don’t have enough staff. What I’m saying is that inadequate staff is not the main constraint. Our main constraint is inability or callousness to implement the rule of law. To give an example, is the problem of low achievements in education due to inadequate number of teachers or is it incompetent or ill-trained teachers? So, in my view, looking upon state capacity in terms of the number of staff is wrong. We must improve our system of rewards and penalties for government staff and enforce strict accountability.

You say the budget and other government policy documents should be presented in simple language. Why?

Public documents are written in a very technical, user-unfriendly language and most common people cannot understand it. So they give up on them, with the result that the wisdom of crowds that should inform public policy and democracy is not happening in our system. If the government tried to disseminate policy issues in a lighter language to the larger public, the public would join the debate and some wisdom would come out of the larger public discourse.

The Centre’s high fiscal deficit during UPA rule was blamed as the reason behind high inflation. Is there a way the central bank can stop this by refusing to monetize the fiscal deficit?

The RBI does not monetize government debt after the Fiscal Responsibility and Budget Management Act came into place. It does not operate in the primary market, but does operate in the secondary market and so it still can either help the government or make it more costly for the government to borrow. There is also the financial repression that happens today with banks being expected to hold a minimum SLR (Statutory Liquidity Ratio), which makes it cheaper for the government to borrow. We must work towards eliminating it all together, except for a minimum SLR for financial stability purposes, so that the government borrows at the market cost, not at a subsidized cost. Further, the RBI’s liquidity management should be informed entirely by market liquidity considerations and not by the government’s public debt concerns.