Book Summary: "Forks In The Road: My Days At RBI And Beyond" - C. Rangarajan

Brief about the Book:

He is an author with clear thinking, an intellectual bent to solving and analysing economic problems, an understated style and professionalism.

The narrative is contextualised in contemporary debates: Why planning was the only available option post-independence as an economic model for development, how when India finally broke away from planning in the 1990s, it was 20 years too late to reforms, and how the heady India growth story is unravelling. The author presents his views on the criticism of the decisions taken, why the alternatives were rejected and the unfinished agenda.

• In this book, the veteran economist and policymaker provides a captivating account of his professional journey, starting with his purely accidental entry into the RBI in 1982. Rangarajan, regarded as one of the tallest figures in the history of India’s economic reforms, provides crucial insights into his role as part of the team which initiated far-reaching reforms in India’s economy in the early 1990s.
• The path-breaking reforms that he implemented during his tenure as governor of RBI included deregulation of interest rates, strengthening of the banking system by a gradual tightening of prudential norms, creation and nurturing of financial markets, giving them depth and vibrancy, shifting to market-determined exchange rates, making the rupee convertible on the current account and the cessation of automatic monetization of the budget deficit.
• Rangarajan describes the key events between 1982 and 2014, particularly in money and finance, explaining what happened and the motivations and processes behind them. As a public figure and an architect of economic change in India, he also ruminates about his interactions with both political and economic actors. Forks in the Road is not only a memoir of a man who shaped India’s economy and positively impacted the lives of many, but also a fascinating account of India’s growth story. It is a description of what we did and what we did not, and where we succeeded and where we failed.

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Book publication date: November 2022.

Brief about the Author:

Dr. C. Rangarajan is a leading economist in India who has played a key role both as an academic and a policy maker. He has held several important positions including Governor of Reserve Bank of India and Governor of Andhra Pradesh.

Dr. C. Rangarajan was between January 2005 and May 2014 Chairman, of the Economic Advisory Council to the Prime Minister in the rank of Cabinet Minister, except during 2008-09 when he was a Member of Parliament (Rajya Sabha). During 2003 and 2004 he was Chairman of the Twelfth Finance Commission, a constitutional commission set up every five years to determine the sharing of tax revenues between the central and state governments.

Dr. Rangarajan was Governor of the Reserve Bank of India during 1992-97 at a time when India embarked on wide-ranging economic reforms which fundamentally altered the structure of the Indian economy. He was actively involved in the design and implementation of the reform agenda. The path-breaking reforms that he implemented during this period included the deregulation of interest rates, strengthening of the banking system by a gradual tightening of prudential norms, creation and nurturing of financial markets and giving them depth and vibrancy, shifting to market-determined exchange rates, making the rupee convertible on the current account and the cessation of the automatic monetization of the budget deficit. India became a member of the Bank for International Settlements during his time as Governor. After obtaining his Honours Degree from Madras, he obtained his Ph.D. from the University of Pennsylvania. In the United States, he taught at the Wharton School of Finance & Commerce, University of Pennsylvania and the Graduate School of Business Administration, New York University. In India, he taught at Loyola College, Madras, University of Rajasthan, the Indian Statistical Institute, New Delhi, and for well over a decade and a half, at the Indian Institute of Management, Ahmedabad. He was for a time Fellow at the International Food Policy Research Institute, Washington. He was President of the Indian Economic Association in 1988 and President of the Indian Econometric Society in 1994. He was the Conference President of the Indian Economic Association in the centenary year of 2017.

He is the author of several books on the Indian Economy. Among others, these include, “Tracking the Indian Economy: A Collection of Articles”, (2017), “Counting the Poor: where do we stand” (co-author) (2017), “Federalism and Fiscal Transfers in India” (co-author) (2011), “India: Monetary Policy, Financial Stability and Other Essays” (2009), “Selected Essays on Indian Economy” two volumes (2003), “Indian Economy: Essays on Money and Finance” (1998).

Dr. Rangarajan was a recipient of several prestigious awards. Notable among them have been the Honorary Fellow of the Indian Institute of Management, Ahmedabad; the Alumni Award for Outstanding Leadership by the Wharton India Economic  Forum and the `Finance Man of the Decade’ by the Bombay Management Association. In recognition of his distinguished service to the country, the Government honoured him with Padma Vibhushan in 2002 (Second Highest Civilian Honour). He was the recipient of the ‘Prof P. C. Mahalanobis National Award’ in Official Statistics, in the lifetime achievement category in 2020. He was awarded the first “Dr. C.R. Rao Centenary Gold Medal” for lifetime achievement by The Indian Econometric Society in 2021. He has been the recipient of an honorary doctorate from several universities.

He is currently Chairman, of the Madras School of Economics.

Forks In The Road:- Book Review

Exordium:

Book begains with a question on why write one’s own story at all in the first place. But then, subtly indicating to the reader not to expect many personal elements or anecdotes, he says, “I have tried my best not to project myself as the centrepiece.” To him the book is more of a chronicle of the events and a statement of what happened, what triggered the changes and how the changes were introduced.

For those charmed by the drumbeats of digitisation or the unfolding of an era of digital fund transfers and perhaps a future with digital currency, there are reasons to thank the two committees that Dr Rangarajan chaired to lay the foundation for the computerisation of Indian banking and Industry. He talks of a time when computers were so strongly resisted that even the machines installed were not called computers but were described as “Advanced Ledger Posting Machines” or ALPMs!

Dr Rangarajan’s tenure has also been one that saw concrete measures taken on the path to fiscal responsibility. Negotiating a ‘ways and means advance’ limits was one important step in this direction. Or as Dr Rangarajan puts it in the book:

Part: I At RBI between 1982 and 1991:-

Even as we were exploring different possibilities for raising resources, one issue that came up was related to the use of the gold RBI had as part of the reserves. It may be recalled that in August 1990, Governor Malhotra had suggested keeping 15 per cent of gold reserves abroad so that it could be utilized at a time of emergency. We supported exploring this possibility. In fact, this was also a hint given by fund managers and international banks with whom we were negotiating.

Several steps were being taken to activate the RBI’s gold holdings. The first step was to revalue the gold holdings at market price. This was done by the government through an ordinance in October 1990, which was later approved by Parliament to become part of the Reserve Bank of India (Amendment Act), 1991. In January 1991, a proposal was mooted by the State Bank of India (SBI) to raise foreign exchange through the lease of gold held by the government. In April 1991, the government agreed to the proposal to pledge 20 tonnes of confiscated gold to raise a foreign exchange loan by SBI and gold was dispatched in four consignments in May 1991. This was actually executed in the form of sale with a repurchase option. RBI was involved totally in this arrangement.

This was not enough. But the major issue was the use of gold held by RBI. In using RBI’s gold, there were three sets of issues to be faced and cleared. First, at the policy level, a decision was needed. Given the sentimental attachment to gold, it was felt from the beginning that outright sale of gold was not thought of as an option.

Pledging gold and raising a foreign exchange loan was the only thing contemplated. Second, whatever was to be done had to be consistent with the provisions of the RBI Act. Under the Act, RBI could borrow only from other currency authorities. The maturity of the loan had to be only for a month. Third, there were issues connected with the physical task of selecting, packing and sending gold out. It bristled with many problems.

The initiative to pledge gold was taken by RBI. It, of course, needed the permission of the government, which was given. It was a bold decision by a government which at that time was only a caretaker government led by Chandra Shekhar. It showed great wisdom and courage. That was the starting point.

Willing Central banks

Under the RBI Act, RBI can borrow only from a ‘currency authority’, which is the Central Bank of a country. BIS had to be ruled out because it was not strictly a currency authority. It turned out that Bank of England and Bank of Japan were two central banks who would be willing. But both the institutions insisted that the pledged gold must be kept outside India, despite India being a depository country under IMF.

As mentioned earlier, the RBI Act does permit keeping of gold outside India, but with some restrictions. There was also another problem. To conform to the provisions of the Act with respect to borrowing, RBI had to transfer the asset from the issue department to the banking department and this was done before trans-shipping the gold. Since RBI is permitted to borrow only for a month, the borrowing had to be rolled over from month to month. The third set of issues relating to the shipment of gold turned out to be more arduous than expected. The gold stock of RBI was kept in two places. Since the quantity of gold to be pledged was around 50 tonnes, it was decided to use only the gold that was in stock in Mumbai.

Part: II At RBI between 1992 and 1997:-

Transporting gold from any other place to Mumbai would have been another huge task. However, there was another serious problem. The gold that was in stock was in various forms. Not all of them satisfied London Good Delivery (LGD) specifications in terms of fineness, weight and marks. It was decided to send the pure gold bars as they were and Bank of England was entrusted with the responsibility of converting non-LGD bars into LGD bars. The departments concerned had to weigh a sizeable number of bars to complete the job. Packing, insuring and finally sending the gold through the airlines had to be done in a short span of time without attracting much attention.

This was an operation in which various departments of RBI such as External Investments and Operations (DEIO), Issue, Banking Operations and Legal had to come together and act. PB Kulkarni, chief of DEIO, and his band of devoted colleagues did a tremendous job. In all, 46.91 tonnes of gold were dispatched in four consignments by air beginning 4 July. The largest consignment was the second one, which had to be transported through a chartered carrier. It is interesting to note that the actual dispatch happened after the new government of Narasimha Rao and Manmohan Singh had taken over. The new finance minister raised no objection and he, in fact, defended the action in the Parliament

High drama

The entire episode is not without its drama. For example, when any commodity is sent out of the country, the nature of the commodity has to be declared. I spoke with the commissioner of customs and a special authorization from the finance ministry had to be obtained to send gold without such a declaration. I also remember that as one of the consignments had an intermediate stopover, a sudden doubt arose whether this was covered by insurance. On a Sunday, I had the office opened to check the policy and was relieved to find that it was a ‘Vault to Vault’ insurance cover.

Finally, one other incident. When gold was moved from the vault of the Bombay office to the airport, the movement along the road was closely monitored. It so happened in the case of one large consignment, the bullion van had to stop because of a suspected tyre burst of one of the cars in the convoy. 

Fortunately, before much commotion could happen, the convoy resumed its journey. The total loan raised against the pledge of gold was US $405 million. In today’s reckoning it may look small. It is not even equal to what we get sometimes in the form of capital flows on a single day. But that amount was crucial at that time to prevent a default. There was no intention on the part of RBI or the government to hide the transaction from the public. RBI wanted to make it public once the operation was over. Otherwise, there was some operational risk.

The shipment of gold brought out loud and clear the extremely critical situation in which India was placed. It also brought home to everyone the enormity of the crisis. In a sense, it paved the way for the reforms that were to come.

Part: III Beyond RBI:-

The differences and similarities in their backgrounds were reflected in their styles of functioning. Rangarajan believed that there was no practice without theory. He viewed all issues in the light of a deep understanding of theory and a careful analysis of relevant facts and factors. Jalan believed that theory was merely a tool for understanding the reality and so familiarity with the contours of theory as needed was adequate. He was essentially a strategist, with a quick and instinctive grasp of complex realities. Rangarajan believed in deep understanding of systems and liked to drive changes. Jalan addressed the issues on hand and brought about better outcomes as the situations was on warranted and evolved. Rangarajan’s main focus was on improvement of the system and getting over the problems as they arose, while Jalan’s focus was on solutions to problems on hand as well as emerging ones, thus inducing systematic improvement.

Deft debt management

However, his lasting contribution relates to external sector management. The importance of restricting the short-term liabilities and desirability of a judicious mix of debt and non-debt creating flows and avoiding short-term debt have not been recognised by the global economic community. In fact, the Gudotti-Greenspan rule was anticipated by Dr. Rangarajan.

The Gudotti-Greenspan rule states that a country’s reserves should equal short-term external debt (one year less or maturity) implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short-term foreign capital.

The book is divided into three parts. Part one ‘RBI and Planning Commission’. Part two is ‘Governor of RBI’ and part three ‘Beyond RBI’ covers the Governorship of the state, the Finance Commission, and as an advisor to the government. This mix of institutions and subjects called for not only a strong theoretical knowledge but more importantly, a public policy broadly defined.

In my view, the Fourth Volume of the History of the Reserve Bank of India between 1981-1997 released a few years ago has not given adequate credit to Dr. Rangarajan’s enormous contribution. In a way, the detailed analysis in the book Forks in the Road enhances our understanding of the period.

Conclusion:

Today, more and more countries, even developed ones, are confronting the difficult-to-navigate policy space where fiscal and central banking arithmetic are at odds with each other, a challenge that only gets compounded by its impact on markets. It is a low-frequency cycle that keeps repeating itself.

In my assessment, therefore, Forks in the Road deserves to reach the status of a timeless classic in economic history, not just for Indian readership but globally.

Learning:

The Author points out that while the achievement of a $5 trillion economy is a good short-term aspirational goal, it will need a minimum five years of sustained growth of 9 per cent. Even then, he reminds, “at the end of it, India’s per capita income will be only $3472 and we will still be classified as a lower middle income country.” To be classified as a developed country, he says, “the per capita income will have to be at a much higher level and that will take more than two decades of strong growth to achieve it. This is the true challenge we face.”

Dr Rangarajan, 90, though no less cautious and curious even today, credits his son in law Santanu Paul for the book title inspired by the celebrated poem by Robert Frost, ‘The Road Not Taken.” Apparently, the path chosen here has been the high road and that has truly made all the difference.

Penguin Business House